Business context and reporting period
Virco Mfg. Corporation designs, manufactures and distributes furniture and equipment, primarily for U.S. schools and other education customers. This Form 10-K covers the fiscal year ended January 31, 2018; fiscal 2017 refers to the year ended January 31, 2017. The business is highly seasonal, with about 55% of fiscal 2018 sales delivered in June–August.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $189.3 million | $173.4 million |
| Gross profit / margin | $65.5 million / 34.6% | $62.5 million / 36.1% |
| Operating income / margin | $4.0 million / 2.1% | $5.9 million / 3.4% |
| Income before taxes | $2.4 million | $4.7 million |
| Net income (loss) | ($3.2 million) | $22.8 million |
| Basic earnings (loss) per share | ($0.21) | $1.51 |
| Cash flow from operations | $1.7 million | $5.9 million |
At January 31, 2018, cash was $0.5 million, working capital was $28.0 million and the current ratio was 2.0:1. Total debt was $16.7 million, including $10.1 million drawn on the revolving line and $6.6 million of other debt; total long-term obligations were $30.2 million. The company reported $16.0 million available to borrow under its seasonal credit facility. Net property, plant and equipment was $42.4 million; total assets were $116.6 million and stockholders’ equity was $58.7 million.
Material changes versus the prior comparable period
- Sales rose 9.2%, principally from growth in project business and full-service classroom delivery. Sales of FOB-factory products and lower-service-level business declined nearly 6%.
- Gross margin fell to 34.6% from 36.1%. Management attributed the decline mainly to a larger mix of lower-margin resale products in project sales and higher commodity costs; list prices were not increased during FY2018.
- Operating income declined to $4.0 million from $5.9 million. Interest expense increased by $0.3 million amid higher average borrowing and interest rates.
- Net results were heavily affected by taxes: FY2018 included a $4.4 million unfavorable deferred-tax remeasurement from the Tax Cuts and Jobs Act. FY2017 included a $18.0 million tax benefit following release of most of the deferred-tax valuation allowance. Thus, the reported net-income comparison is not primarily an operating comparison.
- Operating cash flow declined to $1.7 million, while inventory increased $6.4 million. Investing cash outflow included $7.2 million to purchase a Conway manufacturing facility; total capital expenditures were $6.2 million in addition to that purchase.
Outlook, commentary, risks and unusual items
Management anticipated moderate improvement in school-project business for FY2019, supported by recent bond approvals, while noting delays between bond passage and furniture orders and continuing education-budget constraints. The company planned 2019 list-price increases to recover higher input costs but warned that price competition could limit increases or require price reductions to protect market share. Imported component costs were expected to rise 6–8% in 2019.
- Input and delivery costs: Steel prices rose significantly after year-end amid tariff-related volatility; raw materials, transportation, fuel and energy costs could pressure margins. Annual contracts can limit the ability to pass cost increases through promptly. More than 90% of freight is handled by third-party carriers.
- Seasonality and liquidity: Inventory build and customer receivables during the summer peak require bank financing. The PNC facility is asset-based, secured by substantially all borrower personal property and certain real estate, and includes financial covenants and a requirement to reduce borrowings below $8 million for 30 consecutive days each fiscal year. Virco met the stated FY2018 covenants.
- Credit facility update: A March 2018 amendment extended maturity to March 19, 2023, raised maximum availability to $60 million, and permitted up to $2 million annually for dividends and repurchases. The amendment also required a $250,000 extension fee. These terms are subsequent to the fiscal year-end.
- Investment: The $7.2 million facility purchase was financed with a 20% down payment and $5.76 million of seller financing at a fixed 4% rate over 20 years. Management set a FY2019 capital-spending target of approximately $7 million.
- Tax and pension items: The $4.4 million Tax Act adjustment was provisional at year-end. Pension obligations are sensitive to discount rates; pension plans accounted for approximately $9.3 million of accumulated other comprehensive loss, net of tax.
- Contingencies: Management said ordinary-course legal matters were not expected to materially affect results. The filing describes environmental compliance and remediation exposure but does not identify a material recorded environmental contingency. Warranty reserves were $0.9 million at year-end.
FY2018 fourth-quarter revenue was $24.6 million and net loss was $8.6 million; the quarter included the $4.4 million Tax Act deferred-tax remeasurement. The independent auditor issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Whether 2019 price increases and product-cost controls offset steel, component, freight and energy inflation without impairing sales volume or margins.
- Whether project and full-service sales growth continues, given its lower resale margins and greater delivery costs.
- Seasonal borrowing availability, covenant compliance, the clean-down requirement and the effect of the March 2018 credit amendment and seller-financed facility purchase.
- The final accounting for the provisional Tax Act adjustment and the company’s ability to use federal and state net operating loss carryforwards.
- Inventory levels, receivables collection and operating cash generation through the summer delivery cycle.