What changed in this filing

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Item 1A. Risk Factors

2022-04-28 compared with 2021-04-28 · 46 added, 43 removed, 202 unchanged (31% of the section changed)

4 unchanged sentences

RISKS RELATED TO COVID-19

The current health pandemic from COVID-19 has adversely affected our operations and may have material adverse effects on our future business, financial condition and results of operations.

The COVID-19 pandemic had an immediate impact on the Company’s operating activities during fiscal 2021, and this impact is anticipated to continue into fiscal 2022.

The COVID-19 pandemic has adversely affected and may continue to adversely affect our operations and financial performance.

The COVID-19 pandemic and the actions taken by various governments and third parties to combat the spread of COVID-19, including mandatory quarantines and other suspensions of non-essential business operations, caused significant disruptions in our product sales and marketing, manufacturing and distribution operations, and supply chains during fiscal 2021 and 2022, and this impact is anticipated to continue into fiscal 2023.

In March 2020, most school districts that we serve closed their doors to students and initiated remote learning.

During the 2020-2021 academic year many school districts and private schools successfully re-introduced in-class or hybrid learning, but the majority of students in the United States were learning remotely during the Company’s fiscal year ended January 31, 2021.

Virco determined that the Company is considered to be an essential manufacturer under the California public health order issued in March 2020, and with the exception of two brief closures of our Torrance operations, all facilities in California and Arkansas have been operating.

While the Company is considered to be an essential manufacturer, not all of our domestic suppliers meet this criterion, and the Company may experience supply chain challenges from domestic suppliers depending upon the length and severity of state and local orders to shelter in place.

In addition, there can be no assurance that our suppliers in China will not experience material disruptions in the future, whether due to COVID-19 or otherwise.

The Company believes that it is not more subject to supply chain disruptions than our competitors and is substantially less dependent upon a supply chain extending to China than many competitors in the industry.

Our sales force worked remotely from March 2020 through January 31, 2021, and as a general matter only physically called on school sites when specifically invited by the district.

Most school districts in the United States closed campuses to students for the remainder of the 2019-2020 academic year, and district business officials typically operated from home offices.

students returned to class in many locations, districts continued to limit in person sales calls.

Subsequent to fiscal 2021, there are some regions of the country where school districts are entertaining on site visits by Virco sales representatives.

The Company does not know how quickly the balance of the districts will re-open to on-site visits.

The COVID-19 pandemic has materially adversely impacted the U.S.

economy and the education system and is expected to continue to do so for at least the next fiscal year.

As a result, demand for school furniture declined during the Company’s fiscal 2021, and the Company reduced its production levels.

During fiscal 2022 most school districts returned to on site learning and orders and production returned to more normal levels.

While the disruption to demand for our products from the COVID-19 pandemic is currently expected to be temporary, there remains a great deal of uncertainty around the severity and duration of the pandemic, as well as the long-term structural effects of the pandemic on in-person learning in the United States.

In addition, the COVID-19 pandemic has materially adversely impacted the U.S.

economy and the education system and is expected to continue to do so.

The education system and education budgets are typically highly dependent on state and local tax revenues.

The severity of this pandemic may materially adversely impact state and local tax revenues and result in changes in spending priorities for state and local governments, which may have a material adverse effect on future school budgets.

The severity of the pandemic may adversely impact state and local tax revenues in the future and result in changes in spending priorities for state and local governments, which may have a material adverse effect on future school budgets.

The loss of state and local revenues may be substantially or partially offset by federal programs providing assistance to state governments, local governments and schools, although there can be no assurance that any federal funds could be used for capital expenditures or that the level of federal funding, if any, will be sufficient to maintain our historic order rates for school furniture.

In addition, while we expect the majority of schools to be in session, there can be no assurance that school systems in the United States will reopen or resume normal operations for the 2021-2022 academic year.

These events, among others, related to the COVID-19 pandemic have in the last year and possibly in the future cause demand for our products to decline and competitive pricing pressures to increase, any of which would likely have a material adverse effect to our business, operating results, cash flows and financial condition.

The Company has also experienced material disruption in its supply chain related to COVID 19 pandemic, which is expected to continue.

Although we own and operate our own domestic manufacturing facilities, we purchase components used in the fabrication and assembly of furniture from a variety of overseas locations, primarily from China, and certain components from domestic suppliers.

These suppliers have experienced ongoing manufacturing and shipping disruptions due to the COVID-19 pandemic.

These disruptions have increased our costs and negatively impacted the timing and reliability of deliveries to us of these components.

If we are not able to respond to and effectively manage disruptions in the supply chain for components, our business, financial condition and results of operations could be adversely affected.

RISKS RELATED TO SCHOOL FUNDING

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Tax revenues and other state funds may be allocated to underfunded benefit obligations instead of education.

If states in which we do business cut spending for education to address such budgetary shortfalls or for other reasons including the potential impact of COVID-19 funding, our sales in those states will likely decline and our revenue and results of operations will be adversely affected.

If states in which we do business cut spending for education to address such budgetary shortfalls or for other reasons, our sales in those states will likely decline and our revenue and results of operations will be adversely affected.

Reduced levels of spending on education may significantly impact spending on furniture and increase price competition in the furniture market.

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If we are unable to increase or maintain prices for our products, our profit margins could decline.

Such decline will be compounded to

the extent we are unable to maintain or reduce the cost of our products, which may be especially difficult in the current environment given the volatility of the commodities markets.

Such decline will be compounded to the extent we are unable to maintain or reduce the cost of our products, which may be especially difficult in the current environment given the volatility of the commodities markets.

STRATEGIC AND OPERATIONAL RISKS

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Difficulties or delays in introducing new or modified products or lack of customer acceptance of such products could limit our sales growth or cause our sales to decline.

We depend on outside suppliers who may be unable to meet our volume and quality requirements, and we may be unable to obtain alternative sources.

We require substantial amounts of raw materials and components to manufacture our products, which we purchase from outside sources.

We depend on a global network of outside suppliers for raw materials and components, who may be unable to meet our volume and quality requirements on a timely basis, and we may be unable to obtain alternative sources.

We require substantial amounts of raw materials and components to manufacture our products, which we purchase from a global network of third-party suppliers.

Materials comprised our single largest total cost.

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These suppliers may not continue to provide raw materials and components to us at attractive prices, or at all, and we may not be able to obtain the raw materials we need in the future from these or other providers on the scale and within the time frames we require.

In a deteriorating economic environment, including the current economic disruption caused by COVID-19, many of the Company's suppliers may experience difficulty obtaining financing and may go out of business.

In a deteriorating economic environment, including the current economic disruption caused by COVID-19 and global supply chain disruptions, many of the Company's suppliers may experience difficulty obtaining financing and may go out of business.

The Company may have difficulty replacing these suppliers, especially if the supplier fails as the Company is entering the seasonal summer shipping season.

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In addition, because we purchase components from international sources, primarily China, we are subject to tariffs, fluctuations in currency exchange rates as well as the impact of natural disasters, war and other factors that may disrupt the transportation systems, ports, or shipping lines used by our suppliers, and other uncontrollable factors such as changes in foreign regulation or economic conditions.

Any failure to obtain raw materials and components on a timely basis, or any significant delays or interruptions in the supply of raw materials, could prevent us from being able to manufacture products ordered by our customers in a timely fashion, which could have a negative impact on our reputation and could cause our sales to decline.

In fiscal 2022, the cost of raw materials and components, including steel and plastic, was extremely volatile and unfavorably impacted our results of operations.

In addition, the current conflict in Ukraine and global sanctions recently placed on Russia have increased the cost and negatively impacted the availability of fuel, plastic and nickel, a required material for chrome plating used in our steel furniture.

Any failure to obtain raw materials and components on a timely basis, or any significant delays or interruptions in the supply of raw materials, could prevent us from being able to manufacture and deliver products ordered by our customers in a timely fashion and increase our cost of obtaining raw materials and components in excess of our ability to pass along such costs to customers, any of which could have a negative impact on our reputation, sales and profitability.

Cost and availability of third-party freight can adversely affect our profitability and results of operations.

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The Company imports component parts from international sources (primarily China).

Disruptions in the cost or availability of ocean freight or disruptions in port operations, may adversely impact the Company’s ability to obtain adequate component parts to support sales, particularly in the busy summer season.

Approximately 67% of our sales are priced through one contract, under which we are the exclusive supplier of classroom furniture.

During fiscal 2022, freight costs for containers from China increased by a factor of nearly eight.

Ongoing disruptions in the cost or availability of ocean freight or disruptions in port operations, may adversely impact the Company’s ability to obtain adequate component parts on a cost effective basis to support sales, particularly in the busy summer season, which could have an adverse effect on our sales and profitability.

There can be no assurance that our suppliers in China will not experience material disruptions in the future, whether due to COVID-19 or otherwise.

The majority of our sales are priced through one contract, under which we are the exclusive supplier of classroom furniture.

We utilize a nationwide contract/price list for the pricing of a significant portion of our sales.

This contract/price list allows schools and school districts to purchase furniture without bidding, and is sponsored by a nationwide purchasing organization that does not purchase products from the Company.

By providing a public bid specification and authorization service to publicly funded agencies, the organization's contract/price list enables such agencies to make authorized expenditures of

taxpayer funds.

By providing a public bid specification and authorization service to publicly funded agencies, the organization's contract/price list enables such agencies to make authorized expenditures of taxpayer funds.

For all sales under this contract/price list, Virco has a direct selling relationship with the purchaser, whether it is a school, a district, or another publicly funded agency.

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In addition, this contract/price list determines selling prices for goods and services for periods of one year and occasionally longer.

Though the Company has negotiated increased flexibility under many of these contracts that may allow the Company to increase prices on future orders, the Company does not have the ability to raise prices on orders received prior to any announced price increase.

Though the Company has negotiated increased flexibility under many of these contracts that may allow the Company to increase prices on future orders, the Company has limited ability to raise prices on orders received prior to any announced price increase.

Due to the intensely seasonal nature of our business, the Company may receive significant orders during the first and second quarters for delivery in the second and third quarters.

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Our credit facility with PNC, among other things, largely prevents us from incurring any additional indebtedness, limits capital expenditures, limits dividends and stock repurchases, and provides for seasonal variations in the maximum borrowing amount, including a reduced maximum level of borrowing during the fourth fiscal quarter.

Our credit facility also provides for periodic financial covenants, which currently include a minimum fixed charge coverage ratio requirement.

Our credit facility also provides for periodic financial covenants, which currently include a minimum EBITDA or minimum fixed charge coverage ratio requirement.

As a result of the foregoing, our operational and financial flexibility may be limited, which may prevent us from engaging in transactions that might further our growth strategy or otherwise be considered beneficial to us.

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Any such acceleration could also result in a foreclosure on all or substantially all of our assets, which would have a negative impact on the value of our common stock and jeopardize our ability to continue as a going concern.

In addition, certain of the covenants and representations and warranties set forth in our credit facility contain limited or no materiality thresholds, and many of the representations and warranties must be true and correct in all material respects upon each borrowing, which we expect to occur on an ongoing basis.

In addition, certain of the covenants and representations and warranties set forth in our credit facility contain limited or no materiality thresholds, and all of the representations and warranties must be true and correct in all material respects upon each borrowing, which we expect to occur on an ongoing basis.

There can be no assurance that we will be able to comply with all such covenants and be able to continue to make such representations and warranties on an ongoing basis.

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Fluctuations in the price, availability and quality of the commodities, raw materials and components used in manufacturing our products could have an adverse effect on our costs of sales, profitability and our ability to meet customers' demand.

The price of commodities, raw materials and components, including steel and plastics, our largest raw material categories, have been

volatile in prior years, and the cost, quality and availability of such commodities have been significantly affected in recent years by, among other things, changes in global supply and demand, changes in laws and regulations (including tariffs and duties), changes in exchange rates and worldwide price levels, natural disasters, public health issues such as the current COVID-19 pandemic (or other future pandemics), labor disputes, terrorism and political unrest or instability.

The price of commodities, raw materials and components, including steel and plastics, our largest raw material categories, have been volatile in prior years, and the cost, quality and availability of such commodities have been significantly affected in recent years by, among other things, changes in global supply and demand, changes in laws and regulations (including tariffs and duties), changes in exchange rates and worldwide price levels, natural disasters, public health issues such as the current COVID-19 pandemic (or other future pandemics), labor disputes, terrorism and political unrest or instability.

These factors could lead to further price increases or supply interruptions in the future.

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Our profit margins could be adversely affected if commodity, raw material and component costs remain high or escalate further, and we are unable to pass along a portion of the higher costs to our customers.

In fiscal 2020, the Company incurred a 15% increase in tariffs on product imported from China.

Other than the increased tariffs, commodity costs were stable, and in some cases slightly reduced.

The Company has increased list prices for its products in fiscal 2022 in an effort to recover all reasonable anticipated increases in material costs.

In fiscal 2022 the Company incurred material increases in commodity costs and shortages in commodity availability that were material and adversely impacted the results of operations.

Total material costs for fiscal 2023, as a percentage of sales, could be higher than in fiscal 2022.

The Company has increased list prices for its products in fiscal 2023 in an effort to recover anticipated increases in material costs.

We are affected by the cost of petroleum-based products and increases in petroleum prices could reduce our margins and profits.

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We have historically relied on third-party bank financing to meet our seasonal cash flow requirements.

Our current credit facility with PNC Bank matures on March 19, 2023.

On an annual basis, we prepare a lender-approved forecast of seasonal working capital requirements and use borrowings under our credit facility with PNC Bank to help meet these seasonal cash flow and working capital requirements.

Uncertainty in the credit markets may negatively impact our ability to obtain approval of our annual forecast, make changes in our forecast or renew our credit facility upon its maturity in 2023 on favorable terms or at all.

If we are unable to access or renew our credit facility on favorable terms (including available borrowing line and the rate of interest charged thereunder), or at all, our ability to fund our operations would be impaired, which would have a material adverse effect on our results of operations.

Our current credit facility with PNC Bank was originally scheduled to mature on March 19, 2023.

Subsequent to fiscal 2022, the Company extended the final maturity date of the credit line with PNC Bank to April 2027.

At various times during the COVID-19 pandemic, we were in non-compliance with certain financial covenants under our credit facility with PNC Bank, and in each case, we received a waiver of such violations from PNC Bank.

In addition, on an annual basis, we prepare a lender-approved forecast of seasonal working capital requirements and use borrowings under our credit facility with PNC Bank to help meet these seasonal cash flow and working capital requirements.

Uncertainty in the credit markets may negatively impact our ability to obtain approval of our annual forecast, make changes in our forecast or renew our credit facility upon its maturity in 2027

on favorable terms or at all.

If we are unable to access or renew our credit facility on favorable terms (including available borrowing line and the rate of interest charged thereunder), or at all, or we are in violation of our financial covenants in the future and do not receive a waiver, our ability to fund our operations would be impaired, which would have a material adverse effect on our results of operations.

If management does not accurately forecast the Company's requirements for the peak summer season, the Company's results of operations could be adversely affected.

The Company's business is highly seasonal and requires significant working capital in anticipation of and during the peak summer season.

This requires management to make estimates and judgments with respect to the Company's working capital requirements during, and in anticipation of, the peak summer season.

This requires management to make estimates and judgments with respect to the Company's working capital

requirements during, and in anticipation of, the peak summer season.

These estimates are complicated by the economic impact of the COVID-19 pandemic, particularly with respect to anticipated future demand and the ability to maintain our supply chain.

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Companies operating in the furniture industry routinely seek protection of the intellectual property for their product designs, and our principal competitors may have large intellectual property portfolios.

Our efforts to identify and avoid infringing third parties' intellectual property rights may not be successful.

Our efforts to identify and avoid infringing third parties' intellectual property rights may

not be successful.

Any claims of intellectual property infringement, even those without merit, could (i) be expensive and time-consuming to defend;

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Having a staggered board will make it more difficult for a third party to obtain control of our board of directors through a proxy contest, which may be a necessary step in an acquisition of us that is not favored by our board of directors.

In addition, provisions in our certificate of incorporation require the affirmative vote of the holders of at least 75% of our outstanding shares for any business combination with a shareholder who beneficially holds, directly or indirectly, 5% or more of our outstanding stock, except where such transaction is approved by the Board of Directors of the Company prior to the acquisition of the 5% ownership position.

We are also subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law.

Under these provisions, if anyone becomes an “interested stockholder,” we may not enter into a “business combination” with that person for three years without special approval, which could discourage a third party from making a takeover offer and could delay or prevent a change of control.

For purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or

more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.

For purposes of Section 203, “interested stockholder” means, generally, someone owning 15% or more of our outstanding voting stock or an affiliate of ours that owned 15% or more of our outstanding voting stock during the past three years, subject to certain exceptions as described in Section 203.

GENERAL RISK FACTORS

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors