Virco Mfg. Corporation — Form 10-K Summary
Business context and reporting period
Virco designs, manufactures and distributes furniture and related services, primarily for U.S. schools. Its fiscal 2011 year ended January 31, 2012; the filing also reports fourth-quarter results. The business is highly seasonal, with about half of annual sales delivered in June through August. Unless otherwise stated, financial figures below are in millions of dollars.
Financial performance and liquidity
| Metric | FY ended Jan. 31, 2012 | Prior year |
|---|---|---|
| Revenue | $166.4 | $181.0 |
| Gross profit | $48.2 | $51.4 |
| Gross margin | 28.9% | 28.4% |
| Loss before tax | $(13.7) | $(8.6) |
| Net loss | $(13.8) | $(17.6) |
| Loss per share | $(0.97) | $(1.25) |
| Cash from operations | $(0.9) | $5.5 |
Fourth-quarter revenue was $26.3 million and net loss was $7.8 million. FY 2012 year-end cash was $2.9 million; working capital was $19.0 million and the current ratio was 1.7, down from 2.5. Total debt was $11.5 million, primarily revolving borrowings, versus $6.5 million a year earlier. The company reported $2.8 million available to borrow at year-end under its asset-based facility, subject to borrowing-base limits. Stockholders’ equity was $30.9 million, compared with $50.4 million.
Material changes versus the prior year
- Revenue fell 8.0%; management attributed the decline to weak school budgets and fewer bond-funded project completions. Lower sales volume was partly offset by higher prices.
- Gross margin improved from 28.4% to 28.9%, but the pretax loss widened. Steel costs rose about 30% in the second quarter and certain plastics costs nearly 30% during the second and third quarters; reduced factory utilization also weighed on results.
- Net loss narrowed from $17.6 million to $13.8 million, while pretax loss worsened. The prior year included a $9.0 million income-tax expense, largely from a deferred-tax valuation allowance; the FY 2012 tax expense was $0.1 million.
- Operating cash flow moved from $5.5 million provided to $0.9 million used. Inventory declined $7.6 million to $27.8 million.
- The company recorded $4.6 million in restructuring expense after a voluntary separation and early-retirement program. About 205 employees, or 20% of the prior-year workforce, left; management estimated annual savings of $9–10 million before temporary-labor offsets. The program also resulted in a roughly $2.0 million pension settlement charge.
Outlook, risks and unusual items
- Management expected school-furniture demand in 2012 to be comparable to or below 2011. It projected K-12 bond-funded project completions to decline about 15%, with college completions potentially similar to the prior year.
- Virco raised list prices for 2012 but warned that competitive bidding could constrain further increases or require price cuts. Commodity, transport and energy costs remained uncertain; management did not expect volatility to match 2011 but gave no assurance of stability.
- The $60 million PNC revolving facility, entered into in December 2011 and maturing December 2014, has seasonal borrowing limits, a borrowing base, financial covenants and a requirement to reduce borrowings below $6 million for 60 days annually. The company reported covenant compliance at January 31, 2012. Receipts are swept against borrowings, making access to liquidity sensitive to covenant compliance and borrowing-base availability. Dividends and stock repurchases are restricted under the agreement; the quarterly dividend was suspended.
- Other key exposures include dependence on education funding, a nationwide purchasing contract that priced about 50% of 2011 sales, raw-material supply and price risks, seasonal working-capital needs, pension funding and environmental obligations. Management said no material off-balance-sheet arrangements existed and considered pending ordinary-course litigation immaterial.
- A $22.9 million valuation allowance was recorded against deferred tax assets at year-end. The company reported federal and state net operating loss carryforwards of approximately $22.0 million and $45.8 million, respectively.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal control over financial reporting was effective and reported no material weakness.
Important facts for investors to verify
- Whether the projected $9–10 million annual workforce savings are realized and how temporary labor affects them.
- Seasonal borrowing availability, covenant headroom and compliance under the PNC facility as receivables and inventory fluctuate.
- Whether demand, bond-funded project activity and pricing develop in line with management’s 2012 expectations.
- The effect of steel, plastics, freight and energy costs on margins, and the extent to which price increases offset them.
- Future pension contributions and the assumptions behind pension liabilities and deferred-tax-asset realizability.