Firm Poised to Cash In on Boom in School Spending.

With school spending high on the agenda in Los Angeles, Sacramento and Washington, D.C., few companies stand to benefit from the coming construction boom more than Virco Manufacturing Corp.

The Torrance-based firm, the largest manufacturer of movable classroom furniture in the nation, is aggressively angling to grab a bigger piece of the action as schools outfit those new classrooms and computer labs with tables, chairs and desk systems.

"What we're seeing from the funding end is, it's way up. We're seeing funding for new construction and renovations now. We fit into both those categories," said Larry Wonder, vice president of Virco's education sales group.

Virco, which celebrates its 50th anniversary this year, is somewhat obscure among Los Angeles-area public companies despite its size -- perhaps because about half the stock is owned by the founding family, the Virtues. Only one analyst follows the company closely.

Virco stock experienced an unusual jump two weeks ago, spurting from around $11.40 a share to nearly $45 before settling down to the $12.50 range as of late last week. Company officials were unable to explain the spike. Executive Vice President Douglas Virtue said the stock sometimes jumps up and down at the end of the quarter as mutual funds adjust their positions.

"This is not the first time this has happened to us," he said. "The fundamentals were unchanged before the run-up and are unchanged today. We cannot predict what mutual funds do."

About 65 percent of Virco's business is comprised of education-related sales, primarily to public K-12 schools. The remainder is made up of commercial sales, mainly to churches, convention centers and meeting facilities.

Schools market on the rise

The schools market looks particularly promising, considering that an estimated 75 percent of school buildings across the nation are more than 30 years old, having been built to serve baby boomers. A lot of the furniture in those classrooms may be nearly indestructible, but is equally long in the tooth and a far cry from the ergonomic designs of today.

"Furniture is one of the last items schools spend money on," said Virtue, the son of president and CEO Robert Virtue and grandson of company founder Julian Virtue. "If they've got furniture that's still usable but rough around the edges, they tend to postpone replacing it for as many years as they can."

California schools alone need an estimated $40 billion over the next 10 years to modernize crumbling facilities and build new ones, said Jim Murdoch, a lobbyist for the Sacramento-based Coalition for Adequate School Housing. California ranks among the top states where Virco does business, along with other highly populated or growing states.

Company officials, while optimistic, are cautious about not getting too far ahead of themselves. The lag time between when a school district orders furniture and when the money actually becomes available to buy it is three to five years.

"We think (the government's heavy emphasis on education spending) will translate into more furniture sales, but it's not here yet," Douglas Virtue said.

Virco has been beefing up its infrastructure to capitalize on expected demand. The company invested more than $50 million in a new, 1.2 million-square-foot factory and warehousing facility in Conway, Ark., about three miles from its original factory. The added capacity and efficiency -- resulting from the new factory's extensive use of robotics and other state-of-the-art equipment -- will enable the company to grow annual revenues to $400 million, Virtue said, which would be a substantial increase from $266 million last year.

"That facility is immensely powerful," Virtue said. "It will give us a competitive advantage. It addresses the needs of our customers."

The new warehouse is targeted to increase Virco's summer shipping capacity, because demand spikes around July and August. The company has developed forecasting models to anticipate demand, enabling it to ship furniture at a moment's notice. The new building's 72 dock doors allow a high volume of freight to move out quickly.

Virtue said the added infrastructure will allow Virco to compete effectively. Virco has about half the U.S. market for classroom furniture, with the balance divided between smaller regional companies. It raised prices in 1995, giving up a few points of market share but increasing profits.

"Now we're at the stage where we've made the investment, we've increased our capacity, and we're ready to go back out and take market share," Douglas Virtue said.

The strategy for regrowing market share includes "more aggressive" pricing, selling a fuller range of products to existing accounts and developing new products, he said.

Anticipating future needs

He said the company also has devoted more resources to research and development to satisfy the needs of districts that want to be on the leading edge of technology.

"Sixty to 80 percent of our product development is in creating things districts don't even yet realize they need," Virtue said.

The Conway plant -- and a new computerized operating system to increase Virco's capacity to process information -- cost the company in the short run, however. Net income last year declined to $10.1 million (96 cents a diluted share), still the third-best ever, but down from a peak the year before of $17.6 million ($1.60 per share).

"Last year's performance was disappointing for all of us," Virtue said.

Company officials and analysts believe the sacrifice will pay off in the long run. Michael Gardner, head of capital markets at Wedbush Morgan Securities who follows Virco, predicts a three-to-five-year upswing in sales and earnings.

"The plant's going to position them well," Gardner said. "In this dot-com world, if you really look at what they've been able to do, to still be able to generate the earnings they did, that's not bad."