Virco Mfg. Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended January 31, 2016. Virco designs, manufactures, and distributes educational and commercial furniture, with U.S. schools as its primary market. Sales are highly seasonal: approximately half of annual sales were delivered in June through August.
Financial performance and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $168.6 million | $164.1 million |
| Gross profit / gross margin | $59.6 million / 35.4% | $55.4 million / 33.8% |
| Operating income / operating margin | $5.9 million / 3.5% | $2.4 million / 1.4% |
| Net income / diluted EPS | $4.5 million / $0.30 | $0.8 million / $0.06 |
| Cash from operations | $7.5 million | $1.7 million |
| Cash at year-end | $0.8 million | $0.5 million |
| Working capital / current ratio | $24.0 million / 2.1 | $17.6 million / 1.8 |
| Debt at year-end | $6.8 million | $9.5 million |
| Inventory | $34.6 million | $26.7 million |
Sales rose 2.8%. Management attributed the improvement to higher selling prices—about 3.5%—and stronger sales of new and other product lines, partly offset by lower unit volume and fewer project orders. Gross margin improved as selling prices increased and steel and plastic costs declined. Operating cash flow rose year over year, while inventory increased $8.3 million as the company built stock for the coming selling season. Capital expenditures were $4.3 million.
At January 31, 2016, the company reported $12.9 million available under its asset-based revolving facility, which had maximum availability of $49.75 million and matures in December 2019. The line is secured by substantially all borrower personal property and certain real estate, and availability varies with the borrowing base and season. Total non-current liabilities were $33.3 million, including retirement benefits; this is not the same as funded debt. No cash dividends were paid in FY2016.
Material changes versus prior year
- Net income improved to $4.5 million from $0.8 million; operating income increased to $5.9 million from $2.4 million.
- Gross margin rose about 1.6 percentage points. SG&A increased in dollars but declined as a share of sales, to 31.8% from 32.3%.
- Operating cash flow increased to $7.5 million from $1.7 million, while year-end inventory rose substantially.
- Annual sales increased, but fourth-quarter revenue fell to $19.5 million from $25.4 million. The quarter recorded a $5.7 million net loss, compared with a $5.1 million loss in the prior-year quarter; management cited shipment timing and a lower opening backlog.
- Year-end stockholders’ equity increased to $33.3 million from $22.6 million, including a favorable $5.9 million pension-related other-comprehensive-income adjustment.
Outlook, risks, and unusual items
- Outlook: Management expected FY2017 school furniture sales to be slightly above FY2016, while warning that state and local budget pressure and limited growth in bond-funded projects would constrain demand. It did not expect a significant price increase in 2017 and anticipated continued price competition and volatility in material, freight, and energy costs.
- Operating risks: Seasonality drives large inventory, labor, delivery, and receivables requirements. More than 90% of customer freight is handled by third-party carriers. Approximately half of sales were priced under one nationwide purchasing contract, extended through 2018.
- Credit agreement: The company disclosed a capital-expenditure covenant violation for the period ended January 31, 2016; an April 4, 2016 amendment retroactively modified that covenant, after which the company reported compliance. The amendment also permitted up to $1.3 million annually for dividends and stock repurchases. The filing elsewhere describes a minimum-tangible-net-worth covenant violation at January 31, 2016, while its covenant table reports tangible net worth of $33.3 million against a $21.3 million minimum. This inconsistency merits verification.
- Pensions and taxes: Defined-benefit obligations remain sensitive to discount rates and investment performance; the company made $1.6 million of Employee Plan contributions in FY2016 and anticipated approximately $1.4 million in FY2017. A $21.9 million valuation allowance remained against most deferred tax assets, including substantial federal and state net operating loss carryforwards.
- Contingencies and controls: Management said ordinary-course legal proceedings were not expected to be material. Environmental compliance and self-insured claims remain potential cost exposures. Management reported effective internal control over financial reporting and identified no material weakness; the external auditor did not provide an opinion on internal-control effectiveness.
Important facts for investors to verify
- Reconcile the covenant disclosures, including the reported tangible-net-worth violation versus the covenant table and the April 2016 amendments or waivers.
- Track whether the larger inventory build supports FY2017 quick-ship sales and reduces reliance on temporary labor without increasing obsolescence or storage costs.
- Assess summer-season borrowing needs, borrowing-base availability, covenant compliance, and the required 60-day annual reduction of revolver borrowings below $6 million.
- Monitor school funding, bond-project completions, order timing, and sales concentration under the purchasing contract extended through 2018.
- Evaluate pension funding and deferred-tax-asset realizability, given market-sensitive retirement obligations and the valuation allowance.