Virco Mfg. Corporation Friday announced financial results and COVID-19 Impacts for the First Quarter ended April 30, 2020, in the following letter to Shareholders:
The effective early end to the 2019-2020 school year in March due to COVID-19 had a severe negative impact on the traditional order and delivery cycle for school furniture. As educators and administrators left campuses and district offices, order activity at this normally busy time of year slowed dramatically. As a result, revenue for the first quarter ended April 30, 2020 declined 35% from the prior year period, from $26,893,000 to $17,599,000. The Company reduced factory output proportionately but other than two brief closures of its Torrance, California, facility, was able to continue operations building key components and shipping those few orders that could be accepted under the terms of local health orders. Other variable cost activities were similarly reduced but not stopped completely. Selling continued remotely as did customer service and administrative functions. This balance between current demand levels and anticipated higher levels after reopening moderated the net loss for the seasonally light first quarter, which nonetheless was up 53% from the prior year to ($4,698,000) from ($3,067,000).
Management’s preferred forward-looking metric of “shipments plus the unshipped backlog,” a non-GAAP measure that has traditionally been an accurate tool for production and delivery planning, was down 16% for the 2021 fiscal year through the end of May compared to 2020. However, due to the high quality of orders in the backlog, the gross profit on this metric was down by a lesser amount during this period. As of this writing Management is hopeful that preliminary signs of a return to “normal” late-spring activity levels will be maintained and accelerate as educators and administrators begin preparations for the next school term. However, especially this year when so much is unpredictable, Management cautions investors not to rely on these observations or treat these figures as guidance.
Despite the obvious slowdown due to COVID-19, key balance sheet items remain in good shape. Inventories have been reduced proportionately while still maintaining 100% in-stock status for orders likely to ship in June. Accounts payable and borrowings under the Company’s seasonal revolver are also down proportionately. Cash availability is slightly better than last year. As reported above, gross profit on the backlog is roughly comparable with last year, and given a return to more normal early-summer business levels, Management anticipates a traditionally busy summer delivery season.
Several other factors make this spring season unusual.
Tariffs and other politically-based supply chain interruptions were already altering the lead times and financing of outsourced furniture and components before the COVID-19 pandemic, but given the additional international concerns caused by the virus these seem likely to intensify. Management is hopeful that the Company’s extensive domestic footprint (over 2,200,000 square feet of manufacturing and distribution space) and highly experienced workforce will provide a competitive advantage under these conditions.
On the reverse side, public schools seem likely to face funding challenges in the near and middle term, which may reduce near-term demand for school furniture. Management envisions a possible “scissor graph” in which market share may grow but overall business activity declines. How these two factors might interact remains unknowable at this time.
The Company maintains direct customer relationships with public and private schools in all 50 states as well as a number of international accounts. This diversity has somewhat lessened the negative impact of COVID-19. Not all regions of the country were impacted as severely as the major urban centers of the Northeast or Midwest. Economic activity and resumption of school already appear to be progressing at differential rates, reflecting these very real differences in severity of and in response to COVID-19. Management believes this diversity of responses is healthy for the institution of public education itself, which may benefit from what is effectively a broad array of recovery strategies from which districts can learn from each other.
Virco CEO and Chairman Robert Virtue commented on the Company’s First Quarter: “Given the unprecedented abruptness of COVID-19 lockdowns, our business held up relatively well. The multiple important functions performed by public and private schools have become more apparent during the lockdown, and we hope this new appreciation for their role in society will lead to additional funding support. We stand ready to help by providing high quality furniture and equipment that’s Made in the USA at our factories in Conway, Arkansas, and Torrance, California.”
Virco President Doug Virtue elaborated: “I’m third generation in what is basically a family furniture company that was started in 1926 in Los Angeles. During our collective 95 years in business, we’ve lived through a number of crises. These include the Great Depression, World War II, The Korean and Vietnam Wars, The Hong Kong Flu of 1968, The Oil Crisis of the 1980s, the stock market crash of 1987, the Dot.com recession of 2001-2002, and the Great Recession of 2008-2009. During none of these events were America’s public schools locked down. We are confronting a completely unprecedented situation. But we believe in the importance of education and our own ability to respond. We approach this summer alert to the risks but also excited by the good work we can do.”