Virco Mfg. Corporation this week announced results for its first fiscal quarter ended April 30, 2017.
Revenue for the three months ended April 30, 2017 increased 12% to $23,235,000 from $20,827,000 for the same quarter in 2016. The Company’s preferred early-season indicator of overall demand—actual YTD shipments through May plus backlog—was up 25% compared to the prior year. Management believes that the recovery in public school funding seems to be accelerating through the first quarter and into summer, but cautions investors not to read too much into these early-season indicators. The company also reported a loss of $2.211 million for the quarter, amounting to $0.15 per share.
Due to advance preparations for a busy summer delivery season, the Company incurred greater operating and selling costs in the first quarter, impacting gross margin and operating profit. Management considers these preparations to be essential in order for the Company to make timely deliveries before schools open in the fall.
Public school funding has mirrored the choppy pattern of the overall economy since the Great Recession ended in 2010. As one of the final downstream recipients of tax flows, public school budgets tend to lag the overall economy both going into and coming out of recession. In Virco’s 67-year history of providing furniture to America’s public schools, the lag for this recovery has been the longest and most erratic. Although no assurances can be given, the strength and persistence of this year’s order cycle may indicate a return to historic levels of public school funding and predictability.
The Company’s annual order cycle typically has two components: the so-called “project season” in spring and early summer, followed by “fill-in season” as summer concludes and schools have both their new budgets and a better idea of what actual enrollment will be.
This year’s project season has been strong, with large-scale orders tied to new construction and major refurbishments returning the levels last seen in 2006. But because these orders are linked closely to construction and therefore tend to be planned well in advance, their impact on the year’s overall order rate may have a front-loading effect. That is why Management cautions investors not to expect a continuation of what is, as of this report, a 25% YTD increase in order rates. On the other hand, if robust project orders are a proxy for more widespread financial health in public school funding, fill-in season could possibly continue this early season trend.
Management believes the Company has sufficient capacity and liquidity to provide timely deliveries on this higher level of demand. With over 2,000,000 square feet of domestic manufacturing and distribution infrastructure, response times for last-minute or custom orders are shorter than with extended supply chains. The Company’s direct sales force has been actively promoting these capabilities for the past few years, and now that funding has improved, schools are taking advantage of the opportunity to customize the furniture in their new or refurbished facilities. Order rates for non-standard configurations and colors have been especially strong through the spring project season.
Preparations are also being made for a busy fill-in season. Furniture typically ordered as last-minute match ups or replacements is being built and inventoried at moderately higher rates than usual, with significant remaining surge capacity should fill-in order rates match those for projects.
Virco Chairman and CEO Robert Virtue said: “We’re very happy to finally see a recovery of this magnitude. Our hope and expectation that this would happen is the reason we struggled so hard to hang on to all of our productive assets and highly skilled employees. This summer will test all of our resources, but this is what we’ve waited for and we’re excited by the challenge.”
Virco President Doug Virtue concurred: “It’s been satisfying to see our staff respond so smoothly to this year’s big increase in demand. We’re happiest and most productive when we’re busy. We hope as the summer progresses that we can turn higher levels of output into even higher levels of efficiency, and confirm the trust our customers and shareholders have shown in us.”