Business context and reporting period
Virco Mfg. Corporation manufactures and distributes school and office furniture. This unaudited Form 10-Q covers the three months ended April 30, 2019, the first quarter of fiscal 2020. The business is highly seasonal: approximately half of annual sales typically occur from June through August, requiring substantial inventory and working-capital financing ahead of peak season.
Financial results and liquidity
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $26.893 million | $22.569 million |
| Gross profit / margin | $9.084 million / 33.8% | $7.685 million / 34.1% |
| Operating loss | $3.597 million | $4.468 million |
| Net loss | $3.067 million | $3.572 million |
| Basic and diluted loss per share | $0.20 | $0.23 |
| Cash used in operating activities | $18.286 million | $16.992 million |
At April 30, 2019, cash was $0.553 million, inventories were $63.511 million, total assets were $163.308 million, and stockholders’ equity was $54.276 million. Total debt was $40.734 million, including $24.226 million classified as current. Operating lease liabilities totaled $25.160 million following adoption of ASC 842. Approximately $4 million was available to borrow under the PNC facility at quarter-end.
Material changes and management commentary
- Sales increased 19.2%, primarily because beginning order backlog was $4.2 million higher year over year. Management attributed approximately 60% of the sales increase to higher prices and the balance to higher volume.
- Gross margin declined to 33.8% from 34.1%. Management cited higher factory compensation and material costs, including steel and imported components, shipments from orders placed before price increases, and production levels approximately 13% lower than a year earlier, which reduced factory efficiency.
- First-quarter order rates declined approximately 18.2%. Backlog at April 30 fell about 22% year over year to $39.254 million, from $50.136 million. Management reported that orders through March were 27% below the prior year; April and May orders were 2% lower.
- Inventory rose $16.2 million from January 31, as the company prepared for summer shipments. Management said inventory was slightly higher in dollars year over year due to raw-material prices, but lower in unit volume.
- Interest expense increased to $0.700 million from $0.446 million, reflecting higher seasonal borrowing and interest rates.
Outlook, risks, and unusual items
- No specific sales or earnings guidance was provided. Management said it expected higher price increases to have greater impact on second- and third-quarter sales, while identifying slower orders and lower backlog as factors to monitor.
- Management believes operating cash flow and unused PNC borrowing capacity will fund debt service, capital spending, and working-capital needs for at least the next 12 months. This depends in part on continued access to the asset-based credit facility.
- The company had violated its minimum fixed-charge coverage covenant for fiscal 2019. Amendments in April 2019 waived that violation and revised fiscal 2020 covenants, restricted dividends and share repurchases through January 31, 2020, and limited capital expenditures. The company reported compliance with financial covenants at April 30, 2019.
- The PNC facility had approximately $4 million available at quarter-end and a $65 million maximum revolving advance amount subject to seasonal adjustments and borrowing-base limits. The company noted that covenant breaches or reduced borrowing-base availability could restrict access to cash. The facility also requires a period with borrowings at or below $10 million during the fourth quarter.
- Variable-rate borrowing exposes the company to interest-rate risk; a 100-basis-point increase in PNC’s base rate would have added approximately $74,000 of interest expense for the quarter.
- ASC 842 adoption added lease right-of-use assets and liabilities; management said adoption did not materially affect operations or cash flows. Ordinary-course legal matters were not expected to have a material effect. The company was under IRS examination for its fiscal 2016 federal return.
Important facts for investors to verify
- Whether order trends, backlog, and summer shipments support the expected seasonal revenue and cash conversion.
- Whether price increases offset steel, imported-component, labor, and other cost inflation without further margin pressure.
- Available borrowing capacity, borrowing-base availability, covenant compliance, and the fourth-quarter clean-down requirement.
- Inventory levels and cash usage as the company enters peak season, given low reported cash and significant seasonal borrowing.
- Lease obligations, pension and self-insurance liabilities, and the outcome of the IRS examination.