Virco Mfg. Corporation — Q3 FY2015 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2014. Virco makes educational furniture; demand and cash needs are highly seasonal, with approximately half of annual sales typically occurring June–August.
Financial performance
| Metric | Three months ended Oct. 31, 2014 | Prior year | Nine months ended Oct. 31, 2014 | Prior year |
|---|---|---|---|---|
| Net sales | $62.652 million | $59.454 million | $139.374 million | $136.277 million |
| Gross profit / margin | $21.051 million / 33.6% | $21.161 million / 35.6% | $50.074 million / 35.9% | $49.156 million / 36.1% |
| Net income | $4.632 million | $3.408 million | $5.980 million | $5.171 million |
| Diluted EPS | $0.31 | $0.23 | $0.40 | $0.35 |
Quarterly sales rose 5.4%; nine-month sales rose 2.3%. Quarter pretax income was $4.400 million versus $3.394 million; nine-month pretax income was $6.035 million versus $5.195 million. Quarter gross margin declined as production was reduced to manage inventory; nine-month margin softened slightly, primarily due to lower selling prices. SG&A decreased in the quarter but increased $1.178 million for the nine-month period.
- Cash flow: Nine-month operating cash flow was $2.954 million, versus $3.442 million. Capital expenditures were $2.584 million; investing cash outflow was $2.582 million. Cash increased $165,000 to $1.216 million.
- Liquidity and debt: October 31 total debt was $8.171 million, including $7.967 million drawn on the revolving line; total debt was $3.777 million a year earlier. Approximately $6.285 million remained available to borrow. Current assets were $46.283 million and current liabilities $23.163 million. The company said its credit facility and operating cash flows should meet its needs for the next 12 months.
- Equity and pension: Stockholders’ equity was $34.797 million. Accrued pension expenses were $22.063 million. Nine-month other comprehensive income included $963,000 of pension adjustments.
Changes, outlook, and risks
- Management reported order rates up more than 13% in the quarter and 7.4% for the first nine months; backlog at October 31 was $3.5 million higher year over year. It attributed some quarterly sales growth to orders and deliveries shifting from Q2 to Q3, cautioning that quarter-to-quarter comparisons may be less representative.
- Management saw signs of recovery in its core market but remained cautious. Educational tax revenues had recovered in many states, while bond-funded school construction and major renovations remained well below pre-recession levels. No specific earnings or revenue guidance was provided.
- Seasonal inventory was $28.426 million, up $3.951 million from a year earlier, supporting higher backlog. Increased borrowing to fund inventory contributed to higher interest expense.
- The PNC facility matures December 22, 2017 and is secured by substantially all personal property and certain real property. It includes financial covenants and a requirement to reduce line borrowings below $6 million for 60 consecutive days annually. Virco reported compliance at October 31, 2014. Management warned that covenant breaches, reduced borrowing-base availability, or lender discretion could constrain liquidity.
- Tax expense was affected by a valuation allowance against most deferred tax assets and an item related to uncertain tax positions; the company was under IRS examination for fiscal 2013. The filing says the timing of resolution is uncertain.
- The company corrected immaterial prior-period pension-accounting errors in the comparative balance sheet and comprehensive-income presentation. The corrections did not affect previously reported operating results or cash flows. The 2013 quarter also included a $791,000 pension-settlement charge; nine-month restructuring expense was $62,000 versus $1.266 million.
- Management cited risks including education funding, demand, competition and selling prices, material and labor availability and costs, and general economic conditions. Ordinary-course legal matters were considered not material by management. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether order growth and the higher backlog convert to sales, particularly given seasonal demand and the timing shift between quarters.
- Whether production, pricing, and inventory levels support gross margins while limiting working-capital borrowing and interest expense.
- Remaining borrowing availability, borrowing-base calculations, covenant compliance, and the annual clean-down requirement.
- Potential effects of the deferred-tax valuation allowance, uncertain tax positions, and open tax examinations.
- Warranty exposure following the change to a limited lifetime warranty effective February 1, 2014; the recorded warranty accrual was $1.0 million.