The economic downturn posed one of the toughest tests in Virco Manufacturing Corp.’s 62-year history, but the maker of school furniture has earned a passing grade.

Since taking drastic steps late last year to cut costs, including reducing its work force by more than 20 percent, the Torrance company has improved margins and upped earnings. Virco recently closed one of the most profitable quarters ever, sending its stock surging as much as 150 percent this month.

“They delivered pretty strong margin performance,” said Al Kaschalk, an analyst with Wedbush Securities Inc. in downtown Los Angeles. “It’s the best it’s been in the last 10 quarters.”

On Sept. 14, the company reported second quarter net income of just above $7 million – reversing nearly a year of losses – on $60 million in revenue. Gross profit margin rose sharply to 38 percent from recent quarters of closer to 30 percent.

The results beat analysts’ expectations and sent shares surging; it closed Sept. 19 at $2.40 – up 49 percent so far this year and up 58 percent for the week, making it the top gainer of the week on the LABJ Stock Index. (See page 48.)

Virco, the country’s largest manufacturer of chairs, desks and other institutional furniture for the K-12 market, is still contending with stingy school districts that are saddled with tight budgets. The company has also been hurt by unpredictable commodity costs. Those challenges resulted in more than $31 million in losses over the last two fiscal years.

But investors are encouraged by the way Virco has been able to adapt to this new environment.

To reduce costs, the company instituted furloughs for its employees beginning last year and the chief executive voluntarily took a salary cut of $180,000 – more than 40 percent of his previous pay. More dramatically, management offered early retirement and buyouts to all of Virco’s 1,050 employees, shrinking the staff to 830.

Since then, the company has used temporary workers to fill orders during the busier part of the year, typically in the summer.

“They took out a substantial amount of costs with the personnel (reduction),” Kaschalk said.

Kaschalk said he remains cautious with the stock, but he raised his price target to $2.50 a share, while analysts from TheStreet Ratings upgraded Virco from “sell” to “hold.”

Virco was founded in 1950 by Julian Virtue to supply desks and chairs to schools in the L.A. area. The company expanded its product lines to include folding chairs, office furniture and other equipment, but school products still constitute the majority of its business.

Family business

The company, which went public in 1964, has remained largely a family business. Robert Virtue, the late founder’s son, is chief executive today and his son, Douglas, is executive vice president. Collectively, the father-and-son duo owns more than 7 percent of outstanding shares.

In the late 1990s, Virco went against the trend and closed a manufacturing plant in Mexico in order to bring its production back to the United States. Most of the manufacturing work today is done at a 560,000-square-foot facility at its Torrance headquarters and a 1.75 million-square-foot factory in Conway, Ark.

Robert Virtue did not return calls requesting comment. When the earnings were announced, he said the company has mitigated the costs of manufacturing domestically by investing in automation, and new products and service technologies.

“We believe this approach may finally be yielding the financial performance benefits originally envisioned,” Virtue said. “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.”

Still, Kaschalk noted that because the school furniture business is seasonal Virco will probably be unable to sustain such strong performance in coming quarters.

He projects revenue for this fiscal year to slightly trail last year’s total, mostly because many school districts remain tightfisted due to considerable budget cuts. Even with the economy gradually improving, he noted, there hasn’t been a noticeable rise in spending on schools.

“We’re not seeing any signs that those are snapping back materially. You just don’t have the budget dollars,” he said, adding that most companies in the education arena are facing challenges. “It’s not just Virco; it’s everybody that’s feeling the effect of the downtrodden ways of the fiscal deficits and spending patterns of municipalities.”