Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended April 30, 2016. The company manufactures educational furniture. Results are unaudited and the business is highly seasonal, with about half of annual sales typically occurring from June through August.
Financial results and position
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $20.827 million | $23.048 million |
| Gross profit / margin | $8.063 million / 38.7% | $8.194 million / 35.6% |
| Operating loss | $2.845 million | $2.841 million |
| Net loss | $3.138 million; $0.21 per share | $3.178 million; $0.21 per share |
| Net cash used in operating activities | $16.526 million | $10.023 million |
- Sales fell 9.6% year over year, while gross margin improved by 3.1 percentage points. Management attributed the margin improvement mainly to increased production, better manufacturing efficiency, and overhead absorption.
- SG&A was $10.909 million, down $0.134 million year over year. Interest expense was $0.264 million, compared with $0.298 million.
- Cash was $1.033 million at April 30, 2016, versus $0.580 million a year earlier and $0.815 million at January 31, 2016. Capital expenditures were $1.097 million.
- Inventory rose to $53.924 million from $34.603 million at January 31, 2016, reflecting seasonal preparation and a deliberate increase in production and stocked items. Inventory was $42.250 million a year earlier.
- Total debt was $24.220 million, including $24.140 million drawn on the revolving credit line, versus total debt of $20.622 million a year earlier. The balance sheet classified $18.416 million as current. The credit line had approximately $8.860 million of availability and a 4% interest rate at quarter-end.
- Total current assets were $66.070 million and current liabilities were $44.317 million at April 30, 2016. Current debt classification increased substantially from January 31, 2016; the filing does not explain this balance-sheet presentation as a maturity change, and separately reports the revolving facility’s December 22, 2017 maturity.
- Comprehensive loss was $2.808 million, compared with $2.683 million in the prior-year quarter.
Changes, outlook and risks
- Order rates increased about 15% year over year, and backlog at April 30 rose nearly 33% to $31.843 million from $23.855 million. Management said the sales decline was primarily due to shipment timing rather than lower business activity; project orders and deliveries contribute to monthly volatility and seasonality.
- Management said it produced nearly 10% more in the quarter, building inventory to improve efficiency and on-time delivery ahead of the summer season. The company expects to use temporary labor during peak months, with usage dependent on sales volume.
- Management expects operating cash flows and unused credit capacity to fund debt service, capital spending, and working-capital needs for at least 12 months. The company was in compliance with credit covenants during the quarter. The facility requires a 60-consecutive-day annual reduction in borrowings to below $6 million.
- Steel and other commodity costs were rising; other stated risks include educational-institution funding, labor availability and cost, product demand, competition and selling prices, capital costs, and general economic conditions.
- A valuation allowance covers the majority of deferred tax assets. Management said a reassessment within 12 months could result in a tax benefit if some or all of the allowance is no longer required.
- The company reported no off-balance-sheet arrangements. Ordinary-course legal matters were not considered material by management, and risk factors were reported as not materially changed from the latest Form 10-K.
- An inventory-reserve presentation error was identified and prior-period inventory-category disclosures were revised; management said the error was immaterial and the revisions did not change total inventory.
Important facts for investors to verify
- Whether higher orders and backlog convert into summer shipments and sales, given timing volatility and seasonality.
- Inventory levels, sell-through, delivery performance, and the risk of excess or obsolete inventory as production is brought forward.
- Revolving-credit availability, covenant compliance, seasonal borrowing needs, and the annual clean-down requirement.
- The effects of rising steel and other input costs, temporary-labor availability, and resulting gross margins.
- Any change in the deferred-tax valuation allowance and the basis for recognizing deferred tax assets.