Virco Mfg. Corporation (Nasdaq:VIRC) today announced results
for its second quarter and first six months ended July 31,
2018.
A challenging environment of late orders, rapidly escalating raw
material costs, and unexpected shifts in demand led to mixed
results for the second quarter and first six months ended July 31,
2018. Despite these challenges, overall results were
sufficiently positive that Virco’s Board of Directors has declared
a regular quarterly dividend of $0.015 per share, payable on
October 10, 2018 to shareholders of record as of September 26,
2018.
For the quarter ended July 31, 2018, net sales increased 3% to
$74,802,000 from $72,636,000. Through six months, net sales
were up 2% to $97,371,000 from 95,871,000. Operating margins
were negatively impacted by higher steel, plastic and other raw
material costs, although operating margins did show seasonal
improvement as summer deliveries progressed. Management
attributes this mid-season improvement to the operating
efficiencies inherent with higher volume, not higher prices.
Operating income was virtually unchanged in the second quarter
at $8,415,000 vs. $8,406,000 last year. As a percent of net
sales, second quarter operating income declined modestly from 11.6%
last year to 11.2% this year. Through six months, reflecting
the more serious impacts of raw material costs in the first
quarter, operating income declined to $3,827,000 from $5,141,000
last year, or, on a percentage basis, to 3.9% of net sales vs. 5.4%
of net sales.
While order rates had been trending ahead of last year through
spring, they spiked unexpectedly in July, and were focused on
newer, more progressive designs that hadn’t previously represented
the majority of the Company’s midsummer replacement sales.
This late surge and change in product mix combined with a jump in
raw material costs to put significant stress on all aspects of
operations. Nevertheless, both operating margins and margins
on incoming orders improved slightly in the second quarter vs. the
first quarter of this year, reflecting what Management believes is
the inherent flexibility of its U.S. factories and experienced
American workforce.
|
|
Three Months Ended |
|
Six Months Ended |
|
|
7/31/2018 |
|
7/31/2017 |
|
7/31/2018 |
|
7/31/2017 |
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
74,802 |
|
$ |
72,636 |
|
$ |
97,371 |
|
$ |
95,871 |
Cost of sales |
|
|
47,670 |
|
|
45,953 |
|
|
62,554 |
|
|
60,761 |
Gross profit |
|
|
27,132 |
|
|
26,683 |
|
|
34,817 |
|
|
35,110 |
Selling, general administrative & other expense |
|
|
18,717 |
|
|
18,277 |
|
|
30,990 |
|
|
29,969 |
Operating income |
|
|
8,415 |
|
|
8,406 |
|
|
3,827 |
|
|
5,141 |
Interest expense, net |
|
|
822 |
|
|
529 |
|
|
1,268 |
|
|
824 |
Income before income taxes |
|
|
7,593 |
|
|
7,877 |
|
|
2,559 |
|
|
4,317 |
Income tax |
|
|
2,118 |
|
|
2,849 |
|
|
656 |
|
|
1,500 |
Net income |
|
$ |
5,475 |
|
$ |
5,028 |
|
$ |
1,903 |
|
$ |
2,817 |
|
|
|
|
|
|
|
|
|
Dividend declared per share: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
0.015 |
|
$ |
- |
|
$ |
0.030 |
|
$ |
- |
|
|
|
|
|
|
|
|
|
Net income per share - basic |
|
$ |
0.36 |
|
$ |
0.33 |
|
$ |
0.12 |
|
$ |
0.19 |
Net income per share - diluted |
|
$ |
0.35 |
|
$ |
0.33 |
|
$ |
0.12 |
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding - basic |
|
|
15,392 |
|
|
15,211 |
|
|
15,355 |
|
|
15,170 |
Weighted average shares outstanding - diluted |
|
|
15,435 |
|
|
15,285 |
|
|
15,395 |
|
|
15,233 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/2018 |
|
1/31/2018 |
|
7/31/2017 |
Current assets |
|
|
|
$ |
107,967 |
|
$ |
55,713 |
|
$ |
95,945 |
Non-current assets |
|
|
|
|
59,848 |
|
|
60,910 |
|
|
59,502 |
Current liabilities |
|
|
|
|
73,902 |
|
|
27,723 |
|
|
64,848 |
Non-current liabilities |
|
|
|
|
34,938 |
|
|
30,188 |
|
|
27,915 |
Stockholders' equity |
|
|
|
|
58,975 |
|
|
58,712 |
|
|
62,684 |
|
|
|
|
|
|
|
|
|
|
|
|
As described above, order rates had been trending moderately
higher through spring of this year, continuing the growth rates of
the prior few years as funding for public schools stabilized
following the Great Recession. Then, in July, when orders are
typically focused on match-up replacements, a surge of large
project orders came in. These orders often require
progressive or customized configurations.
An additional challenge was the earlier start date for U.S.
public schools. While Labor Day used to be the end point for
“summer vacation” and Virco’s large-order deliveries, this year’s
average start date of August 20 stripped two weeks from the
traditional cycle. Raw material costs also spiked at the same
time, leaving little room to respond with offsetting price
increases.
Management is uncertain at this point whether the surge in
project orders reflects changes in public school funding or
headwinds in the global supply chain. Regardless, and
given the compressed window for satisfactory response, factory
operations were quickly redirected toward filling these orders.
The overall result was a 3% increase in shipments for the second
quarter, and virtually flat operating margins. Management had
hoped that the higher volumes of summer would generate sufficient
efficiencies to offset the slow start to the year, which had also
been impacted by higher costs for key materials like steel,
plastic, and imported components.
Despite being unable to make up for the slow first quarter,
Management is satisfied with the slightly improved results of the
peak season. Although both quarters of this year lag the
results of last year, margins are improving as of this writing and
the Company’s second-half backlog is robust. As of this press
release, Management’s preferred metric for forward planning—actual
year-to-date shipments plus the unshipped backlog-- is up 11% as of
July 31, 2018 compared to the same date last year.
At this point Management is hesitant to speculate about the
possible impacts of tariffs on imports of raw materials in the
second half of the year, because some of the proposed tariffs may
end up offsetting or reinforcing existing ones.
Strategically, the Company’s vertically integrated U.S. factories
may provide advantageous control in the uncertain conditions that
seem possible with respect to tariffs in the second half of
2018.
Commenting on these events, Virco Chairman and CEO Robert Virtue
said: “This was a very tough summer but I’m proud of the way our
company responded. We have a really experienced core of
workers in all areas of operations, sales and distribution.
As they have many times in the past, they rallied this summer to
deliver the range of products and services demanded by progressive
educators.”
Virco President Doug Virtue concurred: “While historic demand is
useful for long-term planning, we always leave some capacity for
last-minute summer orders that might not fit traditional
patterns. Our operating strategies have been built around
this need for flexibility, and this year validated that
approach. We look forward to continuing the recent trend of
improving performance in the second half of this year.”
Contact:
Virco Mfg. Corporation (310) 533-0474Robert A. Virtue, Chairman
and Chief Executive OfficerDoug Virtue, PresidentRobert Dose, Chief
Financial Officer
This news release contains “forward-looking statements” as
defined by the Private Securities Reform Act of 1995. These
statements include, but are not limited to, statements
regarding: business strategies; market demand and product
development; order rates and trends in seasonality; product
relevance; economic conditions and patterns; the educational
furniture industry including the domestic market for classroom
furniture; state and municipal bond and/or tax funding; the rate of
completion of bond funded construction projects; cost control
initiatives; absorption rates; the relative competitiveness of
domestic vs. international supply chains; the impact of tariffs on
our supply chain and the likelihood and impact of new tariffs
on imports; trends in shipping and fuel costs; use of temporary
workers; marketing initiatives; and international or non K-12
markets. Forward-looking statements are based on current
expectations and beliefs about future events or circumstances, and
you should not place undue reliance on these statements. Such
statements involve known and unknown risks, uncertainties,
assumptions and other factors, many of which are out of our control
and difficult to forecast. These factors may cause actual
results to differ materially from those that are anticipated.
Such factors include, but are not limited to: changes in general
economic conditions including raw material, energy and freight
costs; state and municipal bond funding; state, local, and
municipal tax receipts; order rates; the seasonality of our
markets; the markets for school and office furniture generally, the
specific markets and customers with which we conduct our principal
business; the impact of cost-saving initiatives on our business;
the competitive landscape, including responses of our competitors
and customers to changes in our prices; demographics; and the terms
and conditions of available funding sources. See our Annual
Report on Form 10-K for the year ended January 31, 2018, Quarterly
Reports on Form 10-Q, and other material that we file with the
Securities and Exchange Commission for a further description of
these and other risks and uncertainties applicable to our
business. We assume no, and hereby disclaim any, obligation
to update any of our forward-looking statements. We
nonetheless reserve the right to make such updates from time to
time by press release, periodic reports, or other methods of public
disclosure without the need for specific reference to this press
release. No such update shall be deemed to indicate that
other statements which are not addressed by such an update remain
correct or create an obligation to provide any other updates.
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