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.
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.'"