Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended July 31, 2013; fiscal year ends January 31. Amounts are in millions of dollars unless noted.
Business context and financial performance
Virco manufactures and sells educational furniture. Sales are highly seasonal: the company typically ships about half its annual sales from June through August and finances the related inventory and receivables buildup with its revolving credit facility.
| Metric | Three months ended July 31, 2013 | Three months ended July 31, 2012 | Six months ended July 31, 2013 | Six months ended July 31, 2012 |
|---|---|---|---|---|
| Net sales | $56.933 | $60.392 | $76.823 | $84.060 |
| Gross profit | $21.586 | $22.867 | $27.995 | $29.834 |
| Gross margin | 37.8% | 37.9% | 36.4% | 35.5% |
| Pre-tax income | $6.285 | $7.259 | $1.801 | $2.442 |
| Net income | $6.210 | $7.053 | $1.763 | $2.220 |
| Diluted earnings per share | $0.42 | $0.49 | $0.12 | $0.15 |
Liquidity, debt, and cash flow
- At July 31, cash was $2.443, current assets $73.506, and current liabilities $52.775. Trade receivables were $32.088 and inventory was $36.840.
- Debt totaled $28.668 at July 31 ($22.668 current and $6.000 long-term), versus $4.053 current and no long-term debt at January 31. The filing attributes seasonal working-capital needs to the PNC revolving facility.
- The secured credit facility permits borrowings up to $60.000, subject to seasonal limits and borrowing-base conditions. Approximately $20.192 remained available at July 31. The company reported covenant compliance at that date and believed liquidity would be adequate for the next 12 months.
- Six-month operating cash flow was negative $21.183, compared with negative $14.000 in the prior year. Investing cash flow was negative $1.842; financing cash flow was positive $24.615. Cash increased $1.590 to $2.443.
- Capital expenditures were $1.861 for the first six months. Management’s stated fiscal 2013 goal was to keep capital spending below $3.000.
Changes versus prior comparable periods
- Second-quarter sales fell 5.7%; six-month sales fell 8.6%. Management attributed lower unit volume to economic conditions affecting school tax receipts, budgets, and school construction completions; slightly higher selling prices partly offset the volume decline.
- Six-month gross margin improved to 36.4% from 35.5%, reflecting pricing, stable commodity costs, and lower factory spending, partly offset by reduced overhead absorption. Second-quarter margin was nearly unchanged.
- Six-month pre-tax income declined $0.641 and net income declined $0.457. Interest expense increased about $0.082 for the six-month period, primarily due to higher borrowing costs.
- Orders for the six months were down 5.6%, while second-quarter orders were up 6.1% year over year. Backlog at July 31 was up less than 11.5% year over year.
Management commentary, outlook, and risks
- In May 2013, Virco reduced its workforce by 41 employees, recording $0.412 of second-quarter restructuring charges. Six-month restructuring charges were $0.475. The company had 100 fewer permanent employees than a year earlier and expected workforce reductions to lower costs, with greater use of temporary labor in summer.
- A valuation allowance was recorded against the majority of net deferred tax assets because management determined that realization no longer met the more-likely-than-not threshold. Management expected relatively low tax expense, principally from alternative minimum, state income, and franchise taxes.
- The credit agreement requires a 60-consecutive-day annual reduction of borrowings below $6.000, restricts dividends and most share repurchases, and includes financial covenants. Prior amendments had modified covenants and waived certain earlier violations. A breach or reduced borrowing-base availability could limit access to liquidity.
- Key risks identified include school funding and product demand, material and labor availability and costs, competition and selling prices, capital costs, and general economic conditions. Management cautioned that interim results are not necessarily indicative of full-year results.
- Legal actions arising in the ordinary course were described as not material by management. No material change in reported risk factors, off-balance-sheet arrangements, or contractual obligations was disclosed.
Important facts for investors to verify
- Review the complete credit agreement and amendments, including seasonal borrowing-base availability, covenant thresholds, the clean-down requirement, and the December 22, 2014 maturity.
- Track orders, backlog, school funding conditions, and receivables collections as the peak selling season passes; six-month operating cash use increased year over year.
- Assess the deferred-tax valuation allowance and the company’s evidence supporting future realization of deferred tax assets.
- Reconcile the income statement’s six-month “cash dividend declared” entry of $0.12 per share with disclosures that the credit agreement prohibits dividends and that no dividends would be paid while the restriction applies.
- Monitor restructuring execution, production-hour trends, overhead absorption, and the impact of reduced permanent staffing on seasonal operations.