Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 31, 2011. Virco manufactures and sells educational furniture; sales are highly seasonal, with more than half typically occurring from June through September. Amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Three months ended Oct. 31, 2011 | Prior-year quarter | Nine months ended Oct. 31, 2011 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $53.074 | $60.779 | $140.147 | $158.002 |
| Gross profit / margin | $16.041 / 30.2% | $17.193 / 28.3% | $42.701 / 30.5% | $46.436 / 29.4% |
| SG&A and other expenses | $14.966 | $17.063 | $43.616 | $47.194 |
| Restructuring expense | $3.901 | — | $3.901 | — |
| Loss before taxes | $(3.124) | $(0.123) | $(5.721) | $(1.639) |
| Net income (loss) | $(3.299) | $0.154 | $(5.967) | $(0.890) |
| Basic and diluted EPS | $(0.23) | $0.01 | $(0.42) | $(0.06) |
Quarterly sales fell 12.7%; nine-month sales fell 11.3%. Gross margin improved year over year in both periods, but lower production and higher steel and plastic costs weighed on results. Management attributed the deeper losses primarily to the voluntary retirement program: excluding its $3.901 million expense, pretax results were a $0.777 million profit for the quarter and a $1.820 million loss for nine months.
Cash flow, liquidity and debt
- Operating cash flow: $3.421 million for the nine months, versus $9.135 million a year earlier. Capital expenditures were $1.689 million; cash dividends paid were $0.710 million. Cash declined $0.080 million to $1.449 million.
- Balance sheet at October 31: Current assets were $46.968 million and current liabilities $26.214 million. Total assets were $95.694 million, versus $116.313 million a year earlier; stockholders’ equity was $41.768 million, versus $67.080 million.
- Debt and credit availability: Wells Fargo revolving-credit borrowings were $5.403 million, with $12.998 million of availability. The facility had a $45 million stated limit, subject to seasonal limits and borrowing-base restrictions, and was scheduled to mature June 30, 2012.
- Covenant default: Virco was in default of minimum-net-income and leverage covenants for the periods ended July 31 and October 31, 2011. Wells Fargo had reserved its rights and could accelerate repayment, terminate further credit, or pursue remedies against substantially all company assets. The filing reports $5.415 million as current debt on the balance sheet.
- Pension and taxes: Accrued pension expenses were $21.135 million, up from $17.645 million a year earlier. The company recorded a valuation allowance against the majority of deferred tax assets and recorded no nine-month income tax benefit.
Changes, outlook and risks
- Management said nine-month order rates declined approximately 11% year over year. Third-quarter orders were slightly higher (less than 1%) than the prior-year quarter, while backlog at October 31 was approximately $5 million higher year over year. Management cautioned that the third quarter is normally a slow period for orders.
- Production hours declined 17% in the quarter and 12.9% year to date. Virco reduced inventory by $5.259 million from fiscal year-end; inventory was also more than $2.5 million below the prior-year level.
- Approximately 150 employees accepted a voluntary early-retirement offer. Headcount fell from about 1,045 at fiscal-year start to about 830 at October 31, including attrition. The company also planned department consolidation, reorganization and unpaid furlough days.
- Management anticipated approximately $1.250 million of additional severance and pension-settlement costs in the fourth quarter; the actual amount depended on employees’ benefit elections. A pension settlement charge of $1.435 million was recorded in the quarter.
- Quarterly other comprehensive loss included $4.6 million related to the pension plan, reflecting investment performance and a reduction in the pension discount rate from 5.5% to 4.25%.
- Management expected to close and fund a new secured revolving credit facility in December 2011, using proceeds to repay and terminate the Wells Fargo facility and for working capital and general corporate purposes. Completion and terms were not assured. Management’s stated objective for cost initiatives was to return to profitability at the current sales volume; no quantified earnings or revenue guidance was provided.
- Key risks identified include school funding and demand, raw-material availability and cost, labor costs, competition and pricing, general economic conditions, financing availability and terms, and potential acceleration of existing debt. Ordinary-course legal matters were described as not material in management’s view.
Important facts for investors to verify
- Whether the anticipated replacement credit facility closed and funded, and its borrowing capacity, pricing, maturity and covenant terms.
- Whether Wells Fargo exercised any rights related to the covenant defaults, and whether Virco remained in compliance with any replacement facility.
- The realized fourth-quarter severance and pension-settlement costs and the resulting effects on earnings, cash flow and pension liabilities.
- Subsequent order trends, backlog conversion, school-district funding conditions and the ability to restore profitable production levels.
- The company’s seasonal working-capital needs, borrowing availability and ability to generate operating cash through the next peak season.