Virco Mfg. Corporation — Form 10-Q summary
Reporting period: Quarter and six months ended July 31, 2011; financial statements are unaudited. Virco manufactures educational furniture. Its business is highly seasonal, with more than half of typical annual sales occurring from June through September.
Financial performance
| Metric | Three months ended July 31 | Six months ended July 31 |
|---|---|---|
| Net sales | $62.817 million, down 13.2% from 2010 | $87.073 million, down 10.4% |
| Gross profit / margin | $19.882 million / 31.7%; margin unchanged | $26.660 million / 30.6%, versus 30.1% |
| Income (loss) before taxes | $2.775 million, versus $4.978 million | Loss of $2.597 million, versus loss of $1.516 million |
| Net income (loss) | $2.732 million, versus $4.037 million | Loss of $2.668 million, versus loss of $1.044 million |
| EPS | $0.19, versus $0.28 | Loss per share of $0.19, versus $0.07 |
| Interest expense | $0.393 million, versus $0.395 million | $0.607 million, versus $0.628 million |
For the six-month period, operating cash flow was negative $19.749 million (versus negative $18.888 million); investing cash flow was negative $1.339 million; financing provided $21.080 million. Cash ended at $1.521 million. Capital expenditures were $1.340 million. The company paid $0.710 million in dividends; the declared dividend was $0.05 per share.
At July 31, 2011, cash was $1.521 million, current assets $82.024 million, and current liabilities $60.362 million. Total assets were $131.826 million and stockholders’ equity $47.262 million. Revolving-credit borrowings were $28.292 million, with $16.996 million of availability. Total debt was classified as current, and no long-term debt remained on the balance sheet.
Changes and management commentary
- Sales declined as lower unit volume outweighed modest price increases. Management attributed weaker demand to economic conditions affecting public-school tax receipts and budgets.
- Incoming orders fell approximately 8.9% in the quarter and 14.2% for the six months; backlog at July 31 was down approximately 7.1% year over year.
- Production hours fell 23% in the quarter and 11.1% year to date. Lower production and higher steel and plastic costs pressured margins; price increases and reduced factory spending partly offset these effects.
- SG&A declined in dollars but rose as a share of sales because fixed costs did not fall as quickly as revenue. A valuation allowance against most deferred tax assets limited the tax benefit from the six-month loss.
- After the quarter, Virco began a voluntary early-retirement/severance program, scheduled additional non-peak-season furloughs, and planned department consolidation and reorganization. A possible involuntary reduction in force was also noted. The financial impact was not estimable.
Liquidity, risks, and outlook
The seasonal working-capital build requires bank financing; receivables and inventory are typically high during peak season. The Wells Fargo revolving facility had a $45 million stated limit, subject to borrowing-base restrictions, and was extended to June 30, 2012. Its rate was prime plus 1.25%, with a 0.375% unused commitment fee.
Material financing risk: Virco was not in compliance with both its minimum-net-income and leverage covenants at July 31. It was seeking a lender waiver, but none was assured. Wells Fargo could accelerate repayment, terminate further credit, and pursue remedies against substantially all company assets. The filing gives no formal earnings guidance. Management cited school funding, materials availability and costs, labor, demand, competition, financing, and general economic conditions as risks.
Management stated that ordinary-course legal matters were not expected to be material. The filing reported no material change in internal control over financial reporting and no new applicable accounting pronouncements for the quarter.
Investor facts to verify
- Whether Wells Fargo granted a covenant waiver and whether the facility remains available on its stated terms.
- Borrowing-base availability and the company’s ability to fund seasonal receivables, inventory, and debt service.
- Subsequent order trends, backlog, school funding conditions, and the effect of raw-material costs on margins.
- The eventual costs and savings from the retirement/severance, furlough, and restructuring actions.
- Future earnings and tax effects, including the realization of deferred tax assets subject to the valuation allowance.