Virco Mfg. Corporation — FY2019 Form 10-K
Reporting period: Fiscal year ended January 31, 2019. Although the request references Q4, this filing reports full-year results, not standalone quarterly results. Virco designs, manufactures and distributes furniture, primarily for U.S. schools; its business is highly seasonal, with 52% of FY2019 sales delivered in June–August.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $200.7 million | $189.3 million |
| Gross profit / gross margin | $67.1 million / 33.4% | $65.5 million / 34.6% |
| Operating income | $2.3 million | $5.1 million |
| Pre-tax income (loss) | $(1.1) million | $2.4 million |
| Net loss / loss per share | $(1.6) million / $(0.10) | $(3.2) million / $(0.21) |
| Cash flow from operations | $2.4 million | $1.7 million |
Sales grew 6.0%, mainly from larger, more complex project orders. Higher material, component and labor costs reduced gross margin; operating income fell as cost of sales and SG&A increased. Interest expense rose $0.6 million to $2.2 million. FY2019 net loss narrowed despite the pre-tax swing, as FY2018 income tax expense included a $4.4 million unfavorable Tax Cuts and Jobs Act adjustment. FY2019 tax expense was $0.5 million, with a negative effective tax rate driven principally by a valuation allowance.
Financial position and liquidity
- At January 31, 2019, cash was $0.7 million, current assets $63.1 million and current liabilities $32.1 million; current ratio was approximately 2.0.
- Total debt was $21.4 million, up from $16.7 million; the revolving credit line balance was $14.9 million. The company reported $11.2 million available to borrow at year-end. Revolver interest was 6.25% at January 31, 2019.
- Inventory increased to $47.3 million from $42.1 million, and trade receivables rose to $13.3 million from $11.4 million. Operating cash flow was positive, but capital expenditures of $5.4 million exceeded it.
- Virco reported a breach of its minimum fixed-charge coverage covenant at year-end: actual coverage was greater than 0.96:1.00 versus a required 1.10:1.00. An April 2019 credit amendment waived the default and revised covenants; it also suspended dividends and stock repurchases through January 31, 2020.
Changes, outlook and risks
- FY2019 costs were pressured by a 25% tariff on imported steel, rising domestic steel prices, a 10% tariff on certain Chinese components, higher purchased-component and plastic costs, and an 8% increase in carton costs. Price increases during FY2019 did not fully offset these pressures.
- Management anticipated continued volatility in materials, freight, energy and tariffs in FY2020, and increased published list prices to recover some or all of accumulated cost increases. It cautioned that price increases could hurt volume amid strong price competition. Management expected a FY2020 effective tax rate of approximately 27%.
- Management cited improved bond passages and expected bond-funded projects to support FY2020 sales, while noting budget pressures and a typical one-to-three-year lag between bond passage and furniture orders. Backlog was $21.4 million at year-end, up from $17.2 million, with substantially all expected to ship in FY2020. The filing does not provide a specific revenue or earnings forecast.
- Seasonality creates substantial inventory, delivery and receivables funding needs. Virco depends on third-party carriers for over 90% of freight and sources components internationally, primarily from China. About 61% of FY2019 sales were priced under one nationwide purchasing contract; the current five-year award runs through December 2022, with two possible two-year extensions.
- The company anticipated approximately $4.5 million of FY2020 contributions to its qualified pension plan. FY2019 included $0.5 million of pension settlement costs. Environmental, product-liability and other ordinary-course legal contingencies were disclosed; management did not expect pending legal matters or insured/self-insured claims to have a material adverse effect.
- Independent auditors issued an unqualified opinion on the financial statements. Management reported effective disclosure controls and internal control over financial reporting, with no material weakness identified; the company was not required to obtain an auditor opinion on internal controls.
Investor verification priorities
- Review the April 2019 credit amendments, covenant tests and subsequent compliance, including borrowing availability, clean-down requirements and capital-spending limits.
- Track whether FY2020 pricing recovers tariffs and input-cost increases without materially reducing sales volume or margins.
- Monitor seasonal inventory build, receivables collection and operating cash flow against the company’s financing needs.
- Assess the concentration of sales under the nationwide purchasing contract and the timing and conversion of project backlog and bond-funded demand.
- Verify pension funding needs, including the anticipated FY2020 contribution, and the effect of pension settlement activity on earnings and cash.