TORRANCE, Calif. - Virco Mfg. Corporation (Nasdaq:VIRC) today announced second quarter results in the following letter to stockholders from Robert A. Virtue, President and CEO:

While our second quarter revenues continue to reflect an uneven recovery in state and municipal funding for public schools, last year's restructuring led to significantly improved financial results for the second quarter and first half of fiscal 2012 compared to the same periods in fiscal 2011.

Revenues for the second quarter declined 3.9% from $62,817,000 in the three months ended July 31, 2011 to $60,392,000 in the three months ended July 31, 2012. Revenues for the first half of the year declined 3.5% from $87,073,000 in the first six months ended July 31, 2011 to $84,060,000 for the first six months ended July 31, 2012. Despite these modest revenue declines, net operating efficiencies resulted in significantly improved financial results. Gross profit for the second quarter was up 15.0% from $19,882,000 in the three months ended July 31, 2011 to $22,867,000 in the three months ended July 31, 2012, while expenses were down 9%, from $17,107,000 in the three months ended July 31, 2011 to $15,608,000 in the three months ended July 31, 2012. For the first six months, gross profit was up 11.9% from $26,660,000 in the first six months ended July 31, 2011 to $29,834,000 in the first six months ended July 31, 2012. Expenses were down 6.4% from $29,257,000 in the first six months ended July 31, 2011 to $27,392,000 in the first six months ended July 31, 2012.

As a result of the improvement in net operating efficiencies, net income more than doubled (up 257%) from $2,732,000 in the three months ended July 31, 2011 to $7,053,000 in the three months ended July 31, 2012. Through six months ended July 31, 2012, we've earned net income of $2,220,000 compared to last year's net loss of $2,668,000 for the six months ended July 31, 2011.

Here are our results for the second quarter and six months ended July 31, 2012, and the comparable periods last year:

Three Months Ended Six Months Ended
7/31/2012 7/31/2011 7/31/2012 7/31/2011
(In thousands, except share data)
Net sales $60,392 $62,817 $84,060 $87,073
Cost of sales 37,525 42,935 54,226 60,413
Gross profit 22,867 19,882 29,834 26,660
Selling, general administrative & other expense 15,608 17,107 27,392 29,257
Income (loss) before income taxes 7,259 2,775 2,442 (2,597)
Income tax expense 206 43 222 71
Net income (loss) $7,053 $2,732 $2,220 ($2,668)
Net income (loss) per share - basic (a) $0.49 $0.19 $0.15 ($0.19)
Weighted average shares outstanding - basic (a) 14,369 14,274 14,333 14,240
Weighted average shares outstanding - diluted 14,395 14,292 14,358 14,240
(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.
7/31/2012 1/31/2012 7/31/2011
Current assets $75,837 $45,808 $82,024
Non-current assets 46,810 48,417 49,802
Current liabilities 52,331 26,840 60,362
Non-current liabilities 36,870 36,489 24,202
Stockholders' equity 33,446 30,896 47,262

As discussed more fully in our Annual Report on Form 10-K for fiscal 2011 (year ended January 31, 2012), last year we implemented a voluntary early retirement program to bring our cost structure back in line with revenues. When combined with normal attrition, this resulted in a 21% reduction in total headcount as we entered fiscal 2012. The reductions were primarily concentrated in manufacturing, and included both direct labor and indirect support positions.

This reduction in staffing supported a planned reduction in total inventories. At the end of the first quarter of this year, inventories were 22% lower than at the same date last year. However, because incoming orders were roughly even with the prior year, this meant that our factories had to be highly productive and flexible to meet the delivery dates and product mix of our second quarter backlog. It was a significant challenge, but our operations teams performed very well.

Using a combination of automation, overtime and temporary labor, factory output increased 18% in the second quarter of fiscal 2011, enabling us to simultaneously satisfy customer demand, maintain inventory discipline and cut operating expenses. At the end of July 2012, total inventories were $37,684,000 compared to $43,509,000 last year, a reduction of 13%.

During the current year, we have been operating in an environment of relatively stable commodity costs. Last year's results were adversely affected by 25% spikes in two of our most important raw materials—steel and plastic resin—at the beginning of the second quarter of fiscal 2011. This year's more stable costs have enabled us to retain the financial benefits of last year's restructuring. The difference is most visible in the net income comparison for the second quarter, which bears the full weight of our seasonal business cycle.

During the last decade, many other manufacturers moved their operations offshore in an effort to reduce product costs. Over this same period, we elected instead to invest in automation, new products, and new service technologies rather than closing our domestic factories. We believe this approach may finally be yielding the financial performance benefits originally envisioned. Specifically, the shorter, better controlled supply chains of our own domestic factories allow us to offer a wider range of product choices with shorter lead times to support the rapidly-evolving environments of 21st Century campuses and classrooms. This responsiveness is further supported by our own direct sales and service force, which isn't constrained by the short-term concerns and multiple linkages of extended supply chain/distribution models.

Our commitment to produce and deliver outstanding furniture and equipment starts with quality raw materials and includes rigorous regulatory compliance, careful craftsmanship, and dependable warranties. Manufacturers with extended supply chains can be tempted to point the finger and blame shortcomings on one or more links in the chain. At Virco, we take direct responsibility for our own tangible products as well as the less tangible but essential follow-through services.

Labor Day is the traditional end of our summer delivery season. In the four months of June though September, we usually ship more than half our total annual revenue. As this report was being written we had concluded a successful August that mirrored the improvements of the second quarter. Although we won't report officially on August until our third quarter report in December 2012, it seems appropriate during this crucial turnaround year to give stockholders a sense of how the summer's results influence our thinking about the future.

First, we caution that publicly-funded entities continue to suffer serious budget challenges. Reduced tax revenues and structural spending deficits have proven difficult to correct, with the result that many of our largest and most stable public school customers have been forced to reduce their day-to-day expenditures for replacement furniture. As noted in several of our recent Annual Reports, this reduction has been partially offset by highly localized pockets of strength in bond-funded new school construction and the international sector. Despite these shifts in composition, our order rates through late summer 2012 have remained roughly even with order rates over the same period in 2011. We certainly hope this stability will persist through fiscal 2012, but given the many uncertainties of public funding, we can't guarantee it.

Second, this year's stable raw material costs may not be permanent. Along with increased volatility in our own order cycle, the last few years have been marked by unusual volatility in the cost (and supply) of raw materials. Whether or not this volatility was a consequence of the uneven balancing-out of the global supply chain, or whether it's the 'new normal,' we can't say.

Third, the restructuring expenses in last year's third and fourth quarters won't be repeated this year. We therefore believe our year-to-date operating efficiencies as reflected in the first half results should now be relatively fixed. We remind stockholders, however, that due to the intense seasonality of our business, the lower revenues in our first and fourth quarters typically generate operating losses for those periods, so straight-line extrapolations of year-to-date results may be misleading.

Given these cautions, we believe we are well positioned for the foreseeable future. As the risk of extended supply chains become more evident to suppliers and customers alike, our modern but almost-fully-depreciated domestic factories seem likely to offer consistent advantages in quality, choice, and reliability. We intend to emphasize and profit from these advantages as we work with educators to equip the learning environments of the future.

Source: Virco Mfg. Corporation


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