Virco Mfg. Corporation — Q2 FY2013 Form 10-Q
Reporting period: Three and six months ended July 31, 2012. Unaudited interim results; dollars below are in millions unless stated otherwise. Virco manufactures educational furniture. More than half of annual sales typically occur from June through September, creating substantial seasonal inventory and receivables needs.
Financial performance
| Metric | Three months ended July 31, 2012 | Prior-year quarter | Six months ended July 31, 2012 | Prior-year half-year |
|---|---|---|---|---|
| Net sales | $60.392 | $62.817 | $84.060 | $87.073 |
| Gross profit / margin | $22.867 / 37.9% | $19.882 / 31.7% | $29.834 / 35.5% | $26.660 / 30.6% |
| SG&A | $15.145 | $16.714 | $26.674 | $28.650 |
| Income (loss) before taxes | $7.259 | $2.775 | $2.442 | $(2.597) |
| Net income (loss) | $7.053 | $2.732 | $2.220 | $(2.668) |
| Diluted earnings (loss) per share | $0.49 | $0.19 | $0.15 | $(0.19) |
Quarterly sales declined 3.9%; six-month sales declined 3.5%, mainly from lower unit volume, partly offset by modest price increases. Management attributed improved gross margins to stable commodity costs, pricing, increased production and lower factory spending following 2011 restructuring. Six-month production hours were down 4.6%, partly offsetting those benefits. SG&A declined in both periods due to lower variable selling and service costs and prior restructuring.
Cash flow, liquidity and debt
- Operating cash flow was negative $14.0 million for the six months, compared with negative $19.749 million a year earlier. Seasonal receivables and inventory consumed cash; financing activities provided $15.350 million, and cash increased by $0.450 million to $3.347 million.
- At July 31, current assets were $75.837 million and current liabilities $52.331 million (working capital $23.506 million; current ratio approximately 1.45). Receivables were $32.570 million and inventory $37.684 million.
- Reported debt was $26.843 million, including $20.843 million current and $6.000 million long-term, versus $11.508 million at January 31, 2012. The filing describes a secured, asset-based revolving facility of up to $60 million; borrowing availability at July 31 was $20.851 million.
- Capital expenditures were $0.902 million in the first half. Management set a fiscal-year capital spending goal below $3 million, less than expected depreciation.
Material developments, outlook and risks
- Weak education-sector demand, constrained school budgets and fewer school construction completions pressured sales. First-half incoming orders were slightly higher (less than 1%) year over year; quarterly orders were down less than 2%, and backlog at July 31 was up less than 1%.
- Virco failed to meet minimum EBITDA covenants for June and July under the original terms. Amendments in July and September revised covenant requirements; the September 12 amendment also reduced tangible-net-worth requirements for specified measurement dates. The filing says the company was compliant with the amended covenant at July 31 and expected to comply through the rest of the year, but gave no assurance.
- Management believed operating cash flow plus unused PNC borrowing capacity would cover debt service, capital spending and working capital for the next 12 months. Liquidity remains exposed to borrowing-base limits, covenant compliance and the lender’s discretion; substantially all receivables are swept to repay the facility. Debt is variable-rate and matures December 22, 2014.
- The credit agreement restricts dividends and stock repurchases and requires a seasonal “clean down” of borrowings below $6 million for 60 days each fiscal year. No dividend or share repurchase occurred in the first half. The filing states that no dividends will be paid while the restriction remains in effect.
- A valuation allowance was recorded against the majority of deferred tax assets because management concluded realization was no longer more likely than not. The company was under IRS examination for fiscal 2011; certain federal and state tax years remained open.
- Management cited risks from school funding and demand, material and labor costs, competition and pricing, and general economic conditions. Ordinary-course legal matters were judged not material. No material changes to off-balance-sheet arrangements or contractual commitments were reported.
Important facts for investors to verify
- Current borrowing availability, borrowing-base capacity and compliance with each amended credit-facility covenant, including the clean-down requirement.
- Whether Virco achieves the expected covenant compliance and maintains sufficient seasonal liquidity as receivables and inventory convert to cash.
- Order, backlog and shipment trends, and whether improved margins persist despite lower sales volume and production hours.
- Inventory levels, receivable collections, operating cash flow and the amount and classification of debt in subsequent filings.
- Developments in the deferred-tax-asset valuation allowance and ongoing tax examinations.