Virco Mfg. Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended April 30, 2018. Virco manufactures and distributes school and office furniture. Its business is highly seasonal, with approximately half of annual sales typically occurring from June through August; the quarter’s results are therefore not necessarily indicative of the full year.
Financial results and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $22.569 million | $23.235 million |
| Gross profit / margin | $7.685 million / 34.1% | $8.427 million / 36.3% |
| Operating loss | $4.588 million | $3.265 million |
| Net loss | $3.572 million; $0.23 per share | $2.211 million; $0.15 per share |
| Net cash used in operations | $16.992 million | $17.543 million |
| Capital expenditures | $1.144 million | $1.896 million |
At April 30, 2018, cash was $3.372 million, total debt was $38.256 million, and total stockholders’ equity was $55.264 million. Cash was $0.685 million and debt was $24.347 million at April 30, 2017. Debt included $31.432 million drawn on the revolving credit line. The company reported approximately $5.790 million available to borrow under its PNC facility. Inventory was $62.498 million, up $7.710 million year over year and $20.441 million from January 31, 2018.
Financing activities provided $20.971 million, largely reflecting $38.006 million of debt proceeds and $16.681 million of repayments; cash increased by $2.838 million during the quarter. The credit facility’s interest rate was 6.25% at quarter-end. A 100-basis-point increase in PNC’s base rate would have added approximately $61,000 in interest expense for the quarter.
Changes versus the prior-year quarter
- Sales declined $0.666 million, or 2.9%; management attributed this to a roughly 6% decrease in volume, partly offset by higher prices.
- Gross margin fell 2.2 percentage points. Management cited higher factory compensation, increased commodity costs—particularly steel—and shipments from orders placed before price increases.
- SG&A rose to $12.274 million from $11.692 million, reflecting employee raises and staffing in preparation for expected summer deliveries.
- Interest expense increased to $0.446 million from $0.295 million. Management cited higher borrowings, higher rates, and interest on a mortgage for the Conway, Arkansas building.
- Order rates increased approximately 12.8%, and backlog rose approximately 27% to $50.136 million from $39.553 million. Management said larger, typically bond-funded orders contributed to volatility and were more likely to ship during summer.
Outlook, risks and notable items
- Liquidity and seasonality: Inventory investment ahead of peak-season shipments is typically funded with bank borrowing. Management expects operating cash flow and unused PNC borrowing capacity to cover debt service, capital expenditures and working capital needs for at least the next 12 months.
- Credit agreement: The March 2018 amendment extended facility maturity to March 19, 2023, increased the maximum revolving amount to $60 million, and permits dividends and stock repurchases up to $2 million annually, subject to covenants. The company said it was in compliance with its financial covenants at April 30, 2018. It reported quarterly EBITDA of negative $2.960 million against a required minimum of negative $3.767 million. A minimum fixed-charge coverage ratio of 1.10 to 1.00 begins with the four-quarter period ending October 31, 2018. The facility also includes a clean-down requirement in the fourth quarter of 2019.
- Key operating risks: Management identified educational-institution funding, demand, steel and other material costs, labor availability and costs, competition and pricing, capital costs, and general economic conditions. It also warned that larger orders can increase delivery complexity and seasonal workload.
- Tax and accounting: The quarter included a $1.462 million income tax benefit. The company said its tax benefit is not comparable with the prior year, reflecting the lower federal tax rate effective January 1, 2018. A $4.438 million deferred-tax remeasurement recorded in the prior fiscal year remained provisional pending further analysis. Adoption of the new revenue standard had no material impact. The company expected the new lease standard to materially affect its balance sheet through recognition of lease assets and liabilities.
- Other items: A quarterly dividend of $0.015 per share was declared in March 2018 and paid April 10. Management said ordinary-course legal proceedings were not expected to materially affect the company. No subsequent events were reported.
Important facts for investors to verify
- Whether the higher backlog converts into summer shipments, sales and collections, given the company’s stated order volatility and seasonal delivery concentration.
- Whether gross margins recover as price increases flow through shipments and how steel, labor and other costs develop.
- Whether seasonal inventory can be sold and collected as expected, and whether borrowing availability remains adequate under the asset-based facility.
- Compliance with the credit agreement’s current and upcoming EBITDA and fixed-charge coverage requirements, and the 2019 clean-down provision.
- The final tax accounting for the provisional deferred-tax remeasurement and the balance-sheet impact of lease-standard adoption.