Virco Mfg. Corporation — Q3 FY2013 Form 10-Q
Reporting period: Quarter and nine months ended October 31, 2012; fiscal year ends January 31. Financial statements are unaudited. Virco manufactures educational furniture and serves a highly seasonal market, with over half of typical annual sales occurring from June through September.
Financial results
| Metric | Three months ended Oct. 31, 2012 | Three months ended Oct. 31, 2011 | Nine months ended Oct. 31, 2012 | Nine months ended Oct. 31, 2011 |
|---|---|---|---|---|
| Net sales | $56.642 million | $53.074 million | $140.702 million | $140.147 million |
| Gross profit | $19.318 million | $16.041 million | $49.152 million | $42.701 million |
| Gross margin | 34.1% | 30.2% | 34.9% | 30.5% |
| Net income (loss) | $2.908 million | $(3.299) million | $5.128 million | $(5.967) million |
| Diluted earnings (loss) per share | $0.20 | $(0.23) | $0.35 | $(0.42) |
| Interest expense | $0.395 million | $0.298 million | $1.113 million | $0.905 million |
- Cash flow: Nine-month operating cash flow was $9.571 million, versus $3.421 million a year earlier. Capital expenditures were $1.486 million; investing cash outflow was $1.433 million. Financing cash outflow was $9.693 million, and cash declined $1.555 million to $1.342 million.
- Balance sheet at October 31: Total assets were $90.023 million, current assets $43.591 million, current liabilities $23.475 million, and stockholders’ equity $36.495 million. Inventory was $25.544 million. Accrued pension expenses were $24.989 million.
- Debt and liquidity: The balance sheet reported $1.810 million of current debt and no long-term debt at October 31. Revolver borrowings had declined $9.698 million from January 31 and $3.605 million year over year; unused borrowing availability was $11.757 million. The secured, asset-based credit facility has a stated maximum of $60 million, subject to borrowing-base limits and seasonal adjustments.
Changes, management commentary, and outlook
- Quarterly sales rose 6.7%, while nine-month sales increased 0.4%. Management attributed the sales increase to higher selling prices; nine-month unit volume declined. Incoming orders fell 11% in the quarter and 2.6% over nine months; backlog was $7.3 million lower year over year at October 31.
- Gross margin improved in both periods, which management attributed to modest price increases and lower factory spending following the prior-year restructuring. The restructuring, including a voluntary early-retirement program, reduced headcount by about 20%; management reported approximately $7.7 million lower spending in the first nine months. A further reduction brought permanent headcount from 825 at the start of the year to 780. Reduced workweeks, temporary compensation reductions, and holiday closures were also planned for the seasonally slow fourth quarter.
- Management cited weak school budgets, reduced tax receipts, fewer bond-funded project completions, and uncertainty around the election and fiscal-cliff discussions as demand pressures. Management was cautiously hopeful that the third-quarter order decline reflected temporary uncertainty, but provided no numerical sales or earnings guidance.
- Management targeted fiscal-year capital spending below $3 million and said cash flow from operations plus unused PNC borrowing capacity should fund debt service, capital expenditures, and working capital needs for the next 12 months. It also planned to control inventory and pursue sales through GSA, colleges, and universities.
Credit covenants, risks, and other notable items
- At October 31, Virco failed the minimum tangible-net-worth covenant ($36.495 million actual versus $37.008 million required) and minimum EBITDA covenant ($10.206 million actual versus $10.300 million required). It met the fixed-charge coverage covenant, reporting 9.10:1 versus a 1.10:1 minimum. On December 6, 2012, the lender waived the two violations and eliminated the minimum EBITDA covenant at November 30.
- The facility restricts dividends and stock repurchases, among other activities, and requires a 60-day annual reduction of revolver borrowings to below $6 million. Receivables are swept to repay borrowings; the filing warns that covenant or borrowing-base problems could restrict access to liquidity and could lead to acceleration or foreclosure. Future covenant compliance and lender waivers are not assured.
- Virco said it recorded a valuation allowance against the majority of net deferred tax assets because realization no longer met the more-likely-than-not threshold. The IRS was examining the fiscal year ended January 31, 2011; specified federal and state tax years remained open for examination.
- The company’s products carry a 10-year warranty; accrued warranty liability was $1.0 million. Ordinary-course legal proceedings were not considered material by management. No material change in off-balance-sheet arrangements or contractual commitments was reported.
- Management identified risks including school funding and product demand, material availability and costs, labor costs, competition and selling prices, financing availability and terms, and general economic conditions. Disclosure controls were reported effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Review the December 6 credit amendment and subsequent covenant requirements, particularly tangible net worth, fixed-charge coverage, seasonal borrowing limits, and the annual clean-down requirement.
- Track order rates, backlog, school funding conditions, and whether the reported order weakness persists beyond the election and fiscal-cliff uncertainty.
- Assess the sustainability of margin gains and cost savings against lower production, freight and selling costs, and pension expense.
- Monitor revolver availability, seasonal working-capital needs, cash generation, and the ability to meet the lender’s requirements; the filing does not provide a clear total revolver balance at October 31.
- Follow realization of deferred tax assets and outcomes of the IRS and state tax examinations.