Virco Mfg. Corporation — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended July 31, 2015. Virco manufactures educational furniture; sales are highly seasonal, with approximately half of annual sales typically shipped from June through August.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $61.1 million, up 15.1% from $53.0 million | $84.1 million, up 10.1% from $76.4 million |
| Gross profit / margin | $24.0 million / 39.3%, versus $20.7 million / 39.0% | $32.2 million / 38.3%, versus $28.7 million / 37.6% |
| Operating income | $7.9 million, versus $6.0 million | $5.1 million, versus $2.5 million |
| Net income | $7.5 million, versus $5.2 million; diluted EPS $0.49 versus $0.35 | $4.3 million, versus $1.3 million; diluted EPS $0.28 versus $0.09 |
Quarterly sales growth reflected roughly $6.5 million of higher volume and the balance from higher selling prices. Six-month growth reflected about $5 million of higher unit volume and the remainder from pricing. Order rates rose approximately 8.5% in the quarter and 7.4% for the six months. July 31 backlog was $39.1 million, compared with $40.1 million a year earlier.
Management attributed improved gross margins to pricing, production rates and stable raw-material costs, partly offset by higher factory costs and temporary labor needed to meet a compressed summer delivery window. SG&A rose $1.4 million in the quarter and about $0.9 million for six months, driven by freight, service and variable compensation, including a $0.7 million performance-bonus provision; lower legal costs partly offset the increase. Interest expense declined with borrowing levels. Income taxes remained low; the valuation allowance on most deferred tax assets and state taxes affected the effective rate.
Cash flow, liquidity and debt
- Operating cash use was $17.7 million for the six months, compared with $23.2 million in 2014. The seasonal build in receivables and inventory was partly funded by higher payables and accrued liabilities.
- Investing cash use was $2.4 million, including $2.4 million of capital expenditures. Financing provided $21.1 million; ending cash was $1.5 million, up from $0.5 million at January 31, 2015.
- At July 31, current assets were $79.1 million and current liabilities $56.6 million. Inventory was $41.8 million, while trade receivables were $33.9 million.
- Total debt was $30.9 million, primarily revolving credit borrowings, versus $9.5 million at January 31, 2015 and $33.5 million a year earlier. The PNC facility has a $50 million maximum; approximately $25.6 million was available. The rate was 4%, and the facility matures December 22, 2017.
- The facility includes financial covenants and requires borrowings to fall below $6 million for 60 consecutive days each fiscal year. Virco reported covenant compliance for the first two quarters. Management said cash flows and unused capacity should cover debt service, capital expenditures and working capital for at least the next 12 months.
Outlook, risks and notable items
No specific revenue or earnings guidance was provided. Management described delivery timing as affected by severe winter weather, extended school calendars and some districts moving back-to-school schedules earlier. The company said prior cost reductions helped limit off-season losses and that lower inventory than a year earlier supported higher shipments and improved customer service.
Key risks cited include educational-institution funding, demand, competition and pricing, material availability and cost (especially steel), labor availability and cost, capital costs and general economic conditions. The company carries a limited lifetime product warranty and reported a $1.0 million warranty accrual. Ordinary-course legal matters were not considered material by management; no off-balance-sheet arrangements were reported. The 2014 comparative sales and expense presentation was revised for customer payments reclassified as reductions to sales; management described the amounts as immaterial.
Important facts for investors to verify
- Whether seasonal shipments convert the $39.1 million backlog into sales and cash collections, given rising receivables and working-capital borrowing.
- Availability under the PNC facility, covenant compliance and the annual 60-day clean-down requirement.
- Whether gross-margin gains persist amid temporary labor costs, delivery-window pressures and changing material costs.
- The impact of the deferred-tax valuation allowance and the company’s ability to realize deferred tax assets.
- Potential warranty and legal exposures, and the effects of the stated market and operating risks.