Virco Mfg. Corporation — Q3 FY2017 Form 10-Q
Reporting period: Three and nine months ended October 31, 2016. Amounts are in millions of dollars unless stated otherwise. Virco manufactures educational furniture and has a highly seasonal business, with approximately half of annual sales typically occurring from June through August.
Financial performance and liquidity
| Metric | Three months ended Oct. 31, 2016 | Prior-year quarter | Nine months ended Oct. 31, 2016 | Prior-year period |
|---|---|---|---|---|
| Net sales | $67.795 | $64.981 | $149.976 | $149.100 |
| Gross profit / gross margin | $24.311 / 35.9% | $23.210 / 35.7% | $56.112 / 37.4% | $55.399 / 37.2% |
| Operating income | $6.532 | $6.519 | $11.199 | $11.619 |
| Income before taxes | $6.206 | $6.140 | $10.123 | $10.490 |
| Net income | $23.998 | $6.003 | $27.745 | $10.276 |
| Diluted EPS | $1.57 | $0.39 | $1.83 | $0.67 |
- Tax item: Net income includes a $17.962 million noncash benefit from releasing most of the valuation allowance on deferred tax assets. The reported income tax benefit was $17.792 million for the quarter and $17.622 million year to date. The large reported earnings increase therefore does not reflect a comparable increase in operating profit.
- Cash flow: Nine-month operating cash flow was $6.967 million, down from $10.294 million. Capital expenditures were $3.239 million; investing cash outflow was $3.237 million. Financing cash outflow was $2.236 million, and cash rose $1.494 million to $2.309 million.
- Debt and liquidity: Total debt was $4.636 million at October 31, 2016, versus $4.083 million a year earlier; the revolving credit line balance was $4.602 million. Approximately $15.020 million remained available under the credit facility. The company reported covenant compliance and said liquidity should cover capital and working-capital needs for at least 12 months.
- Balance sheet: Total assets were $114.581 million, including $31.655 million of inventory and $18.932 million of net trade receivables. Accrued pension expenses were $22.244 million. Stockholders’ equity was $62.225 million.
Material changes and management commentary
- Quarterly sales increased 4.3%, primarily on higher selling volume; nine-month sales increased 0.6%. Year-to-date operating income declined from $11.619 million to $11.199 million despite slightly higher sales.
- Management attributed improved gross margins to stable selling prices and material costs and efficiencies from building inventory earlier. Higher variable selling, technology, and general and administrative expenses partly offset those gains. Factory production hours fell 3.5% year to date, primarily due to production timing.
- Inventory at quarter-end was $4.487 million above the prior-year level. Management said the larger inventory supported its quick-ship program and improved customer service and collections; receivables were lower year over year despite higher quarterly sales.
- Operating cash flow fell mainly because of higher inventory and lower accounts payable and accrued liabilities. Capital spending was $3.239 million against a stated fiscal-year goal of less than $4 million, largely for information systems and technology.
Outlook, risks, and contingencies
- Steel costs rose during the summer shipping season, but most products shipped had been manufactured earlier, limiting the effect on current-period margins. Management warned the higher costs could adversely affect fourth-quarter sales and said it planned pricing strategies beginning in the next fiscal year to recover increased steel costs.
- Management cited educational-institution funding, material availability and cost (especially steel), labor availability and cost, product demand, competition and pricing, capital costs, and general economic conditions as risks. Bond-funded school construction and major renovations remained below pre-recession levels.
- The credit agreement matures December 22, 2019, carries a 4.5% interest rate at quarter-end, and restricts dividends and certain other payments. Management reported compliance with financial covenants.
- Legal actions arising in the ordinary course were assessed as not material; management said business risk factors had not materially changed from the prior annual report. No off-balance-sheet arrangements or material subsequent events were reported.
Important facts for investors to verify
- Whether the deferred-tax-asset valuation allowance release is supportable and how future earnings compare excluding the one-time tax benefit.
- Whether steel-cost increases are passed through successfully and whether they affect fourth-quarter margins or sales.
- Seasonal inventory, receivables, and operating cash flow trends, particularly after the peak shipping period.
- Available borrowing capacity, revolving-credit terms, and continued compliance with covenants.
- The company’s ability to sustain operating profitability amid school-funding, demand, labor, and material-cost risks.