Virco Mfg. Corporation (Nasdaq: VIRC) reported financial results
for its second quarter ended July 31, 2020 in the following letter
to shareholders:
Negative impacts of the COVID-19 pandemic caused significant
declines in Virco’s second quarter and year-to-date revenues.
For the second fiscal quarter ended July 31, 2020, revenues were
down 16% from $70,359,000 last year to $59,285,000 this year.
Through the first six months of the fiscal year, revenues were down
21%, from $97,252,000 to $76,884,000. Margins remained strong
and variable costs tracked the revenue decline very closely, but
under-absorption of fixed costs led to further erosion of operating
income. For the second fiscal quarter, net income was down
39% from $5,867,000 to $3,553,000. Through six months, the
Company sustained a net loss of $1,145,000 compared to income of
$2,800,000 in the same period last year. The Company’s normal
seasonal pattern typically generates operating profits in the busy
summer months and operating losses in the slower first and fourth
quarters. This year, the pattern appears to be delayed by
approximately one month.
The wave of school closures that began in March and continued
through the traditional center of the Company’s order cycle posed a
severe challenge to revenue generation. During the spring and
summer months, most educators didn’t know if or in what form their
schools would re-open in the fall. Almost all were working
from home with limited or unfamiliar access to normal resources.
The Company’s direct sales force was required to work
remotely, without site visits or in-person calls on educators or
administrators. In Virco’s 70-year history of serving
America’s schools, the uncertainty and fear this spring was
unprecedented.
But the Company’s established relationships generated a
gratifying stream of incoming requests—again via email or phone—for
properly-spaced individual student desks. In a complete
reversal of recent sales trends, collaborative learning was out;
traditional single-pupil desks or combos were in.
The Company’s experienced workforce was able to shift output
back to these traditional designs by using legacy tooling that had
been carefully maintained. Production schedules, staffing,
and material flows were re-directed. Unit volumes for
traditional desk designs were three times higher than recent annual
averages. Without the Company’s domestic factories and know
how this shift would have been physically impossible.
Despite these challenges, deliveries were timely.
Educators were free to design new hybrid schedules for in-person
and remote learning, knowing that enough individual desks were in
place, properly spaced, and positioned for the “new
normal.”
And, as pandemic statistics began to curve downward and full
physical re-opening became more of a possibility, order rates began
to approach traditional seasonal levels. As of this writing,
year-to-date operating results have turned profitable. This
result is about one month later than usual (full summer will be
reported in the Company’s third quarter), but given the year’s many
uncertainties. Management is reasonably satisfied with this
recovery and is now planning aggressively for an expanded wave of
re-openings as more schools move in that direction.
Here are the numbers through July 31, 2020:
|
|
Three Months Ended |
|
Six Months Ended |
In
thousands, except per share data |
|
7/31/2020 |
|
7/31/2019 |
|
7/31/2020 |
|
7/31/2019 |
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
59,285 |
|
|
$ |
70,359 |
|
|
$ |
76,884 |
|
|
|
$ |
97,252 |
|
Cost of
sales |
|
36,082 |
|
|
41,620 |
|
|
48,777 |
|
|
|
59,429 |
|
Gross
Profit |
|
23,203 |
|
|
28,739 |
|
|
28,107 |
|
|
|
37,823 |
|
Selling,
general administrative & other expense |
|
15,488 |
|
|
18,560 |
|
|
27,419 |
|
|
|
31,241 |
|
Operating
income |
|
7,715 |
|
|
10,179 |
|
|
688 |
|
|
|
6,582 |
|
Pension
expense |
|
542 |
|
|
188 |
|
|
1,084 |
|
|
|
376 |
|
Interest
expense, net |
|
494 |
|
|
907 |
|
|
898 |
|
|
|
1,607 |
|
Income
(loss) before income taxes |
|
6,679 |
|
|
9,084 |
|
|
(1,294 |
) |
|
|
4,599 |
|
Income
tax expense (benefit) |
|
3,126 |
|
|
3,217 |
|
|
(149 |
) |
|
|
1,799 |
|
Net
income (loss) |
|
$ |
3,553 |
|
|
$ |
5,867 |
|
|
$ |
(1,145 |
) |
|
|
$ |
2,800 |
|
|
|
|
|
|
|
|
|
|
Net
income (loss) per share - basic |
|
$ |
0.23 |
|
|
$ |
0.38 |
|
|
$ |
(0.07 |
) |
|
|
$ |
0.18 |
|
Net
income (loss) per share - diluted (a) |
|
$ |
0.23 |
|
|
$ |
0.38 |
|
|
$ |
(0.07 |
) |
|
|
$ |
0.18 |
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - basic |
|
15,733 |
|
|
15,561 |
|
|
15,694 |
|
|
|
15,524 |
|
Weighted
average shares outstanding - diluted (a) |
|
15,746 |
|
|
15,568 |
|
|
15,694 |
|
|
|
15,529 |
|
|
(a) Net loss per share was calculated based on basic shares
outstanding due to the anti-dilutive effect on the inclusion of
common stock equivalent shares. |
|
|
|
|
|
|
|
|
|
|
|
|
|
7/31/2020 |
|
1/31/2020 |
|
7/31/2019 |
|
|
|
|
(Unaudited) |
|
|
|
(Unaudited) |
|
|
|
|
|
|
|
|
|
Current
assets |
|
|
|
$ |
85,779 |
|
|
$ |
58,342 |
|
|
|
$ |
104,095 |
|
Non-current assets |
|
|
|
77,590 |
|
|
80,650 |
|
|
|
79,867 |
|
Current
liabilities |
|
|
|
51,744 |
|
|
25,118 |
|
|
|
69,559 |
|
Non-current liabilities |
|
|
|
56,893 |
|
|
59,056 |
|
|
|
54,138 |
|
Stockholders' equity |
|
|
|
54,732 |
|
|
54,818 |
|
|
|
60,265 |
|
|
|
|
|
|
|
|
|
|
Despite these recent positive trends, the early shock to order
rates placed the Company in default of its loan covenant to
maintain a specified fixed charge coverage ratio for the four
quarters ended July 31, 2020. A waiver has been granted by
the Company’s lender and cash availability under the line of credit
remains adequate to finance current levels of demand. All
other balance sheet metrics, including borrowings, inventories,
accounts receivable and accounts payable, are mostly proportional
to business activity and under reasonable control. Management
views the Company’s current position relative to its competitors as
an opportunity to expand market share as the market itself
recovers.
Management is also aggressively seeking new business
opportunities in markets and channels where demand flows may have
been altered by the pandemic in ways that favor the Company’s
shorter and more responsive domestic supply chain. At the
height of the pandemic, the Company was able to keep both of its
U.S. factories operating safely and efficiently by implementing a
number of new protocols including expanded spacing of workstations,
reconfigured material and workflows, temperature checks at all
entrances, additional hand-washing stations, and the use of face
coverings. While the Company experienced several COVID-19
cases, contact tracing suggested that none of these cases were due
to community spread inside the Company’s facilities, and all of the
employees have recovered.
Virco Chairman and CEO Robert Virtue offered these observations:
“This has been, very simply, the most challenging year I’ve ever
experienced in the school furniture business. Virco has been
supplying America’s public schools for over 70 years, and in all
that time we have never seen a nationwide lockdown of this
magnitude. It is simply unprecedented. There was no
roadmap for educators, administrators, teachers, or, most
painfully, for families. By keeping our factories ‘open
for business,’ we offered a semblance of normality in what was
otherwise a completely confusing situation. As schools move
toward more traditional in-person schedules, we look forward to
helping students, families, and teachers recover from this horrible
crisis.”
Virco President Doug Virtue had additional comments:
“There is still a lot of uncertainty about what form school
re-opening will take. As with our own factories, when it was
unclear in March exactly how we were supposed to keep our
’essential business’ fully operational, there may be a period of
trial and error this fall as schools experiment with different
models of hybrid in-person and remote learning. Some of these
experiments may result in long-term changes to the public education
model. I believe the very diversity of America’s locally-run
school districts, combined with the ingenuity of private,
parochial, and home-school alternatives, will generate solutions
that may have been unimaginable before the pandemic. Some of
these solutions may prove beneficial to the country’s equally
diverse K-12 student body, which numbers over 50,000,000
students. We intend to use our know-how in designing, making,
and delivering furniture to support this process, believing that
the work itself is good. We hope that by the New Year several
successful education models will have surfaced, and that the
pandemic itself will be easing or at least that we will have better
methods of dealing with it, and that 2021 will turn out to be a
full year of 'back to school.'"
Contact:
Virco Mfg. Corporation (310) 533-0474
Robert A. Virtue, Chairman and Chief Executive Officer
Doug Virtue, President
Robert Dose, Chief Financial Officer
Statement Concerning Forward-Looking
Information
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: the impact of the COVID-19 pandemic on our business,
customers, competitors, supply chain and workforce; the anticipated
recovery of our customers from COVID-19 and re-opening of school
districts; business strategies; market demand and product
development; estimates of unshipped backlog; 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; trends
in shipping 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: uncertainties surrounding the
severity, duration and effects of the COVID-19 pandemic; 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, 2020, our
Quarterly Reports on Form 10-Q, and other reports and 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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