Virco Mfg. Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended July 31, 2014. Amounts below are in millions of dollars unless otherwise noted. Virco manufactures educational furniture; sales and working-capital needs are highly seasonal, with roughly half of annual sales typically shipped from June through August.
Financial performance
| Metric | Three months ended July 31, 2014 | Prior-year quarter | Six months ended July 31, 2014 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $53.192 | $56.933 | $76.722 | $76.823 |
| Gross profit | $20.846 | $21.586 | $29.023 | $27.995 |
| Gross margin | 39.2% | 37.9% | 37.8% | 36.4% |
| SG&A expense | $14.770 | $14.417 | $26.492 | $24.919 |
| Pre-tax income | $5.509 | $6.285 | $1.635 | $1.801 |
| Net income | $5.203 | $6.210 | $1.348 | $1.763 |
| Diluted EPS | $0.35 | $0.42 | $0.09 | $0.12 |
Quarterly sales declined 6.6%, primarily on lower unit volume, partly offset by slightly higher prices. Six-month sales were essentially unchanged. Gross margin improved in both periods, which management attributed mainly to higher production hours and improved overhead absorption, with stable commodity costs. SG&A rose, reflecting freight and service costs, selling and marketing initiatives, and legal costs management expected to be nonrecurring.
Cash flow, debt, and liquidity
- Six-month operating cash flow was negative $23.184 million, versus negative $21.067 million a year earlier. Seasonal increases in receivables and inventory drove substantial working-capital use.
- Capital expenditures were $1.904 million for the six months. Cash ended July 31 at $1.130 million, compared with $2.443 million a year earlier.
- Total debt was $33.545 million at July 31, including $27.545 million classified as current and $6.000 million long-term. The debt was drawn under the PNC revolving facility; approximately $18.360 million was available to borrow at quarter-end.
- The amended secured facility provides up to $50 million, subject to seasonal limits and borrowing-base restrictions, and matures December 22, 2017. The company reported compliance with its covenants at July 31 and said it expected operating cash flow and unused capacity to meet needs for the next 12 months. A clean-down provision requires borrowings below $6 million for 60 consecutive days annually.
- Current assets were $77.744 million and current liabilities $59.080 million at July 31. Equity was $29.724 million. The filing highlights the seasonal nature of these balances.
Changes, outlook, and notable items
- Management reported six-month order rates 5.5% above the prior-year period and second-quarter order rates 5.6% higher, despite project orders—often bond-funded construction or renovations—declining nearly 20% in the first six months. Other funding sources, including school operating budgets and grants, partly offset the decline.
- Second-quarter backlog was higher than a year earlier; management said substantially all of the additional backlog at July 31 shipped in August. Management also cited greater seasonality and an earlier school opening as reasons for inventory and shipment patterns.
- Inventory was $45.283 million at July 31, up $8.443 million year over year and approximately $17.503 million from January 31. Receivables were $29.414 million, up $20.946 million from January 31, consistent with the seasonal sales cycle.
- No formal earnings or revenue guidance was provided. The company’s stated outlook was that its credit facility and operating cash flows would be sufficient for the next 12 months. Risks cited include school funding, product demand, materials and labor costs, competitive pricing and margins, and general economic conditions.
- A valuation allowance against the majority of deferred tax assets and a discrete item involving uncertain tax positions affected the quarter’s tax expense. The IRS was examining fiscal 2013; specified prior years also remained open to examination.
- The company disclosed immaterial corrections to prior-period pension-related balance-sheet and comprehensive-income presentation. The corrections did not affect previously reported net income or cash flows; management said they would revise specified later-period filings.
- The standard warranty changed to a limited lifetime warranty effective February 1, 2014; management did not anticipate a significant effect on warranty expense. The company also granted 518,626 awards under its 2011 stock plan during the quarter. Its credit agreement generally restricts dividends and stock repurchases.
Facts investors should verify
- Whether August shipments converted the reported higher backlog into sales and whether order growth persists, particularly given the decline in bond-funded projects.
- Seasonal receivable and inventory collection and turnover, cash use, and the company’s ability to meet the annual clean-down requirement.
- Available borrowing capacity under the asset-based facility, covenant headroom, and compliance as seasonal working-capital needs change.
- Whether higher gross margins can be sustained as SG&A costs, legal expenses, and other operating costs affect profitability.
- The impact of the deferred-tax valuation allowance, uncertain tax positions, and the disclosed prior-period corrections in subsequent filings.