Virco (VIRC) today announced second quarter and YTD financial results for the period ended July 31, 2016. The Company also provided preliminary revenue figures for the month of August 2016, which from a technical reporting standpoint falls within the Company’s third quarter concluding October 31, 2016. Because August is part of the Company’s important summer delivery season, Management believes a discussion of these preliminary, unaudited figures may help investors form a more complete picture of the Company’s performance in a shifting marketplace.
Reflecting stabilization of funding in its core public school furniture market, Virco’s revenue in the seasonally important second quarter (May, June and July) was virtually flat compared to the same period last year at $61,354,000 vs. $61,072,000. Through six months, revenue declined 2% from $84,120,000 last year to $82,181,000 this year, due to a previously-reported slower first quarter. This pattern is not uncommon, especially when construction-related shipments are delayed at the schools’ request. Because the Company’s backlog was more heavily weighted towards construction-related projects in the current year (FYE 1.31.17), this shift was not unexpected. By including preliminary, unaudited revenue figures from August, which completes the traditional “back-to-school” summer delivery cycle, revenue was actually up 1% year over year.
Operating efficiencies remain strong but also reflect the impacts of these seasonal pattern shifts. Gross profit for the second quarter of FY 2017 was $23,738,000 vs. $23,996,000 for the same period last year. Gross Profit through six months is down slightly from $32,190,000 last year to $31,801,000 this year.
Operating income reflected these same timing shifts but was also impacted by slightly higher administrative expenses. For the second quarter, operating income declined 5% from $7,941,000 last year to $7,512,000 this year. Year-to-date, operating income is down 9% from $5,101,000 last year to $4,667,000 this year.
Due to the scheduling impacts of nationally-mandated standardized testing, many public school districts have been progressively moving to earlier and earlier start dates for the school year, which now begins in August for most states. This trend may finally have reached a social and administrative tipping point, with many parents and educators struggling to adapt to a meaningfully shorter summer. Some observers are calling August the “new September.”
For parents and students this means altering vacation, summer school, and camp schedules. For educators, it means an even more compressed summer prep season, when campuses are cleaned and reorganized, curricula updated, and school furniture ordered and installed.
Based on order composition and timing, Virco management speculates that the impact of this calendar change on furniture has actually delayed smaller scale fill-in and replacement orders. Incoming order rates for these products remained unusually strong as of this report, suggesting that educators may still be addressing their last-minute furniture needs.
When reviewing the preliminary, unaudited revenue figures through August, revenue plus unshipped backlog (the Company’s preferred measure of year-over-year business momentum) increased slightly from $144,100,000 last year to $145,290,000 this year. Actual shipments for the month of August were 12% higher compared to last year, more than offsetting slower shipments in the first quarter. For the peak summer shipping months of June, July, and August, which collectively bridge the Company’s second and third quarters, shipments were $94,355,000 this year vs. $90,697,000 last year, an increase of 4%.
The Company may also have gained a small amount of additional fill-in business thanks to this year’s aggressive stocking plan, which was designed to take advantage of anticipated challenges for import-based supply chains. A more complete picture of the full-year order cycle should become apparent by the end of the Company’s third quarter in October 2016 and will be addressed in detail in that quarter’s report due to be released in early December, 2016.
Commenting on these trends, Virco Chairman and CEO Robert Virtue said: “We’re pleased that despite this year’s challenging order environment we were able to support our education customers with quality American-made furniture delivered on-time, even when that meant accelerating some shipments while holding others. Our service and distribution teams performed exceptionally well, highlighting the fact that logistical responsiveness is becoming a more valuable component of our furniture.”
Virco President Doug Virtue elaborated: “In a compressed and constantly shifting delivery environment like ours, there’s no substitute for inventory and operational agility. This is the second summer in a row where we believe our domestic factories and warehouses allowed us to serve educators better than a business model based on imports. We’re also happy that we were finally able to give cost of living raises to our skilled U.S. employees, and that their improved operating efficiencies offset the cost of the raises without passing on price increases to our taxpayer-supported public school customers.”