Business Context and Reporting Period
Company: Virco Mfg. Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: October 31, 2010 (Third Quarter of Fiscal Year 2011)
Business Overview: Virco manufactures educational furniture. The industry is highly seasonal, with over 50% of sales typically occurring between June and September. The company operates with a fiscal year ending January 31.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Oct 31, 2010 |
Nine Months Ended Oct 31, 2010 |
Three Months Ended Oct 31, 2009 |
Nine Months Ended Oct 31, 2009 |
|---|---|---|---|---|
| Net Sales | $60,779 | $158,002 | $62,920 | $164,592 |
| Gross Profit | $17,193 | $46,436 | $21,045 | $55,121 |
| Gross Margin % | 28.3% | 29.4% | 33.4% | 33.5% |
| Net Income (Loss) | $154 | $(890) | $2,905 | $3,964 |
| EPS (Diluted) | $0.01 | $(0.06) | $0.20 | $0.28 |
| Cash from Operations | N/A | $9,135 | N/A | $3,050 |
| Cash and Equivalents | $2,260 | $2,260 | $2,127 | $2,127 |
| Long-Term Debt | $2,243 | $2,243 | $38 | $38 |
| Working Capital | $30,542 | $30,542 | $31,952 | $31,952 |
Note: Working Capital calculated as Total Current Assets minus Total Current Liabilities.
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 3.4% in the quarter and 4.0% year-to-date compared to the prior year. This was driven by reduced volume and aggressive pricing strategies in response to economic conditions affecting school budgets.
- Profitability Deterioration: The company reported a net loss of $890,000 for the nine months ended Oct 31, 2010, compared to a net income of $3,964,000 in the prior year period. Gross margins compressed significantly due to lower selling prices, increased raw material costs, and reduced production volume impacting overhead absorption.
- Order Rates: Incoming orders declined 8.2% in the quarter and 3.4% year-to-date. Backlog decreased approximately 12.7% compared to the prior year.
- Debt Utilization: Long-term debt increased significantly to $2,243,000 from $38,000 in the prior year. The company utilized its revolving credit facility to finance seasonal inventory and receivables build-up, with approximately $2.2 million outstanding at period end.
- Cash Flow Improvement: Despite the net loss, net cash provided by operating activities increased to $9.1 million (nine months) from $3.1 million in the prior year, primarily due to a reduction in inventory levels compared to the prior year's build-up.
Guidance, Outlook, and Risks
- Outlook: Management notes that order rates continue to be adversely impacted by U.S. economic conditions and reduced tax receipts for public schools. While Virco's decline has been less severe than the broader market due to aggressive pricing, operating results have deteriorated.
- Liquidity: The company maintains a $45 million revolving credit facility with Wells Fargo. As of Oct 31, 2010, $18.0 million was available. Management believes cash flows and borrowing capacity are sufficient to fund operations for the next 12 months.
- Dividends: The company declared a quarterly cash dividend of $0.025 per share, payable December 3, 2010. Future dividends depend on balance sheet strength and cash flow.
- Stock Repurchases: Under a $3 million program, the company repurchased 100,000 shares for $344,000 during the nine-month period. No shares were repurchased in the third quarter.
- Risks: Key risks include material availability and cost (especially steel), labor costs, demand fluctuations, and competitive pricing pressures. The company is subject to interest rate risk on its variable-rate borrowings.
- Covenants: The company amended its credit agreement multiple times in 2010 (Amendments 3 through 6) to adjust covenants regarding net income, leverage ratios, and dividends. The company was in compliance with all covenants as of Oct 31, 2010.
Investor Verification Checklist
- Margin Compression: Verify the sustainability of the 28.3% gross margin given the dual pressure of aggressive pricing and rising material costs.
- Order Backlog: Confirm the 12.7% decline in backlog and its potential impact on the fourth quarter and fiscal year 2011 revenue.
- Debt Covenants: Review the specific terms of Amendment No. 6 to the credit agreement regarding minimum net income requirements, given the current pre-tax loss.
- Inventory Management: Assess the efficiency of inventory reduction (down $1.9 million vs. prior year) and whether it aligns with demand forecasts.
- Seasonality: Monitor the fourth quarter results, as the company typically sees a significant portion of annual sales in the summer months, with the fourth quarter often being a slower period.