I enjoy writing about businesses that don’t receive enough attention, and now I’m focusing on Virco Mfg. Corporation (NASDAQ:VIRC). It is a company that produces portable furniture and equipment with an emphasis on the educational market. After a number of difficult years, the company has seen a considerable improvement in its financial results, and I believe this is due to increased competitiveness. Revenues increased by 32.9% year over year during the first nine months of FY23, but net income rocketed by almost 900% to $12.5 million. Also, Virco has a solid balance sheet, and I believe the business may soon restart its dividend.

An Overview of the Company’s Finances

Julian Virtue established Virco in 1950, a company that specializes in producing and selling furniture for offices and schools. The company claims to be the leading manufacturer of mobile furniture and equipment for the education sector in the USA. Its goods include student desks and activity tables, school and office seating, lightweight folding tables, and upholstered chairs, among others. Family members of the Virtues still run Virco, and they hold more than 30% of the company’s equity.

In many classrooms, cafeterias, and science labs in schools across the Country, you can find Virco seats, desks, and tables. Since its founding, the business has sold more than 65 million of its 9000 Series School Chairs alone. Virco now operates two buildings totaling 2.3 million square feet of manufacturing and distribution space, and it employs over 800 people. The fact that 40% of them have worked at Virco for more than 20 years indicates, in my opinion, that the workplace atmosphere there is favorable.

Historical financial data reveal that Virco’s sales peaked in 2001, right around the time that China joined the WTO. Net income peaked in 1999, though, as local furniture suppliers began to challenge Virco for government and educational contracting. Virco paid out a total of five quarterly dividends in 2017 and 2018 and witnessed sales and profitability improvements over the course of the following 20 years during times of rising education spending and industry consolidation. Nonetheless, COVID-19 lockdowns adversely impacted the company’s financial results during the previous few years.

Yet, recent global supply chain interruptions turned out to be a blessing in disguise because high shipping costs made US school furniture manufacturers more competitive in 2022, just in time for the summer peak season. Virco’s vertical business model enabled it to fully capitalize on the circumstances. The greatest quarters for the company’s fiscal year are often Q2 and Q3 since over half of its yearly sales are typically recognized between June and August. In Q1 and Q4, the company often records losses.

According to the most recent financial data, net sales increased by 32.9% to $192.3 million during the first nine months of FY23, and the operating income margin increased as a result of increasing volumes and price hikes from 3% to 7.9%. During June and August, the company delivered and installed more than 21 million pounds of school furniture, thus it appears that it was successful in passing cost hikes on to clients.

Higher interest rates resulted in a large increase in interest payments while increasing receivables and inventories caused the net debt to rise from $13.2 million in January 2022 to $14.7 million in October 2022. Due to supply chain challenges affecting the supply of raw materials, rising receivables as a result of increasing revenues necessitated an increase in inventory, and the company’s cash flow from operations was insufficient to fund this rise. As inventory decreases by around $15 million over the next few months, I anticipate the debt situation to get better.

Virco’s company, as you can see, doesn’t require much CAPEX, and the order backlog appears to be healthy. Only $2.6 million was spent on capital expenses in the first nine months of FY23, and the company had its highest-ever YTD shipments and backlog.

While I anticipate a gradual decline in sales volumes and profit margins as transportation costs revert to their historical averages, I believe that Virco will ultimately benefit from the rising trend of nearshoring of supply chains. My prediction is that the business will continue to be profitable in FY24 and that it will be debt-free by the end of August or the beginning of September. In addition, I anticipate that the increased profitability will lead to the quarterly dividend being reinstated in the upcoming months, which could increase the share price. If the share price stays the same until Virco reports its FY23 results at the end of April, I anticipate the business to be trading at a P/E ratio of under 7x.

I believe there are two key dangers when considering the bull case. First off, California is Virco’s largest revenue market, and possible reductions in school funding there might significantly worsen sales for FY24. In his proposed budget for 2023–24, Governor Gavin Newsom hinted at a minor reduction in financing for the state’s K–12 schools and community institutions in January. The first cut in ten years would be this one. Second, because the daily trading volume rarely exceeds 20,000 shares, there is frequently considerable share price fluctuation. I believe that opening a sizable position in Virco stock could be risky because it would be difficult to close it out without putting pressure on the share price.

Bottom Line

For most of the last 20 years, Virco had struggled to remain profitable, but it appears that nearshoring could give the business an advantage over Chinese rivals because of problems with the global supply chain. Since last year, Virco’s balance sheet has improved significantly. The company had a fantastic summer. This, in my opinion, opens the door for the reintroduction of quarterly dividends, and on a decline below $4 per share, I intend to open a small position. But, I believe that given the limited trading volume, opening a sizable position could be risky. I think buying Virco stock is a good investment.

Featured Image: Pexels @ Vecislavas Popa

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