What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-04-28 compared with 2021-04-28 · 163 added, 140 removed, 268 unchanged (53% of the section changed)

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Effects of COVID-19 Pandemic

To the best of management’s knowledge, the United States has never closed schools en masse to classroom instruction until the COVID-19 pandemic.

the Spanish Flu of 1918-1919;

The Great Depression;

The Hong Kong Flu of 1968;

or any other crisis in the past 50 years.

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 had an immediate impact on the Company’s operating activities during fiscal 2021, and this impact continued through fiscal 2022.

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

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These mass closures impacted more than ten of the twelve months included in this fiscal year, including all of the traditionally busy summer season.

The demand for school furniture was adversely impacted by COVID-19 in fiscal year 2021.

School administrators were challenged by COVID-19, and purchases of furniture for empty classrooms were not a priority.

As a result, order rates declined by approximately 20% compared to the prior year.

The Company adopted a number of measures in response to the COVID-19 pandemic.

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While 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.

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 a 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 and international suppliers meet this criterion, and the Company experienced supply chain challenges from 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 domestic suppliers or supply chain from China (including freight costs and availability) 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.

For the period from March 2020 through January 31, 2021, and as of the date of this Annual Report, the Company is operating its Torrance manufacturing and distribution facility on a voluntary basis to give employees the flexibility to remain at home with children who are out of school or for other personal reasons as they deem necessary.

Office employees and others who can work from home continue to do so.

Additional measures have been taken to insure adequate social distancing among employees performing essential on-site operations.

The demand for school furniture was adversely impacted by COVID-19 in fiscal year 2021.

School administrators were challenged by COVID-19, and purchases of furniture for empty classrooms may not have been a priority.

Subsequent to year end, there is a new U.S.

President and administration that has placed a priority on returning children to schools.

The Company anticipates that there will be continued disruption for the balance of the 2020-2021 academic year but that the majority of schools will resume substantially normal operations for the summer of 2021 and 2021-2022 academic year.

During the first quarter of fiscal 2022 many schools reopened and virtually all schools were reopened for the beginning of academic year beginning August 2021.

The Company received a 26.7% increase in orders in the first quarter of fiscal 2022, substantially all for immediate delivery, to support the back-to-school endeavors.

The strong rebound in order rates continued through fiscal 2022 as schools reopened.

Order rates for fiscal year 2022 increased by nearly 40% compared to the prior year.

Going into fiscal 2022, the Company was cautious about building inventory and began the year with a reduced level of product.

The Company was able to support the first quarter increase in orders as the first quarter is a traditionally slow time of the year.

The Company experienced severe supply chain issues throughout the rest of the year.

The cost and availability of container freight adversely impacted the cost and timely delivery of components imported from China.

Domestic suppliers raised prices dramatically, with the cost of steel nearly tripling and the cost of plastic nearly doubling.

In addition to increased costs, many domestic suppliers put the Company on allocation as they did not have the production capacity to service all of their customers.

When this occurs, the supplier allocates their available capacity to existing customers based upon the customers historic purchase activity.

In addition to severe shortages of materials, the Company incurred a severe shortfall of both temporary and full-time labor.

This shortfall was exacerbated by COVID-19 related absences that caused as much as 15% of our workforce to be out at any time.

In order to meet required levels of production, the Company made a decision to reward our full-time workforce by paying them double-time in lieu of time and one-half for all overtime hours worked.

This successfully motivated our employees to work extended hours but cost the Company approximately $2 million.

Inability to hire production workers continued through the year, and in October and November the Company significantly increased the starting wages for production workers followed by raises for all hourly workers.

With these raises the Company was able to attract and retain additional workers, and as of the date of this report, the Company has an adequate workforce to support anticipated levels of business.

Factory efficiencies deteriorated as a result of these events.

Rather than execute efficient production runs, factories ran smaller less efficient production runs to utilize whatever materials were available and to fulfill urgent orders.

Customers were asked to substitute products requested for products for which materials were available.

Labor shortages and absences contributed to the inefficiencies.

The cost of materials, unavailability of materials, and labor issues adversely affected gross margins for the year.

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

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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.

Executive Overview

Executive Overview of Operating Results

The market for school furniture is traditionally seasonal, with approximately 50% of annual sales occurring in the months of June, July, and August.

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The Company did not sever any of its full-time employees during the pandemic.

During fiscal 2022 order rates recovered, increasing by nearly 40% compared to fiscal 2021.

The Company was unable to hire adequate new permanent workers or temporary labor to meet the traditional summer delivery needs.

The markets that Virco serves include the education market (the Company's primary market), which is made up of public and private schools (preschool through 12th grade), junior and community colleges, four-year colleges and universities and trade, technical and vocational schools.

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The Company's business model, which is designed to support this strategy, is highly integrated.

The Company purchases coils of steel, plastic resin, particle board, and other raw materials and fabricated finished goods for education market.

The Company purchases coils of steel, plastic resin, particle board, and other raw materials and fabricated finished goods for the education market.

The Company markets and sells direct to the schools and provides project management and logistics.

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The pandemic caused a noticeable change in the types of product requested by educators.

Although total sales were lower than last year, we experienced a significant increase in the demand for individual desks.

Our product offerings are continually enhanced with an ongoing new product development program that incorporates internally developed products as well as product lines developed with accomplished designers.

In fiscal 2021, although total sales were lower than last year, we experienced an increase in the demand for individual desks.

Our product offerings are continually enhanced with an ongoing new product development program that incorporates internally developed products as well as product lines developed

with accomplished designers.

Finally, management continues to hone Virco's ability to forecast, finance, manufacture, warehouse, deliver and install furniture within the relatively narrow delivery window associated with the highly seasonal demand for education sales.

In fiscal 2021 and 2020, approximately 52% and 49% respectively of the Company's total sales were delivered in June, July and August.

Average weekly shipments during July and August can be as great as six times the level of average weekly shipments in the winter months.

The educational sales market is extremely seasonal.

Historically Virco ships approximately 50% of its annual revenue in the months of June, July, and August.

In fiscal 2022 the seasonal peak was distorted due to severe supply chain interruptions, labor shortages, and COVID-19 related employee absences and the Company delivered slightly less than 40% of sales during June, July, and August.

In fiscal 2021, approximately 52% of the Company's total sales were delivered in June, July, and August.

The Company anticipates that the traditional seasonal peak will return when COVID and supply chain disruptions normalize.

During periods of traditional seasonality, average weekly shipments during July and August can be as great as six times the level of average weekly shipments in the winter months.

Virco's substantial warehouse space allows the Company to build and ship adequate inventories to service this narrow delivery window for the education market.

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Prior to COVID-19, there had been an improvement in state and local tax collections.

The impact of COVID-19 combined with potential federal relief is not clear at this time.

The long-term impact of COVID-19 combined with potential federal relief is not clear at this time.

The significant budgetary challenges faced by the education industry have had an impact on the Company’s business model over this time frame and have created opportunities as well.

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The Company moderates this exposure by building significant quantities of finished goods and component parts during the first and second quarters.

In fiscal 2022, the cost of commodities was extremely volatile and unfavorably impacted the results of operations.

The cost of steel nearly tripled and the cost of plastic doubled.

Other material costs increased, but not as severely.

During fiscal 2021 commodities were reasonably stable.

During the year ended January 31, 2020 ("fiscal 2020"), the Company incurred an additional 15% increase tariffs on components sourced from China, but other commodities were stable, and in some cases slightly lower.

The majority of Virco’s sales include freight to the customer facility and the cost or availability of transportation equipment can adversely impact both profitability and customer service.

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The Company typically benefits from any decreases in raw material or distribution costs under the contracts described above.

During the year ending January 31, 2022 ("fiscal 2022"), the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to steel and other raw materials, transportation and energy.

The global pandemic related to COVID-19 is expected to continue to disrupt global and domestic supply chains.

During the year ending January 31, 2023 ("fiscal 2023"), the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to steel, plastic, and other raw materials, transportation and energy.

The global pandemic related to COVID-19 and global sanctions are expected to continue to disrupt global and domestic supply chains.

While the Company anticipates challenging economic conditions to continue to impact its core customer base in the near term, there are certain underlying demographics, customer responses and changes in the competitive landscape that provide opportunities.

First, the underlying demographics of the student population are stable compared to the volatility of school budgets and the related level of furniture and equipment purchases.

This volatility is attributable to the financial health of the school systems.

This volatility is attributable to the financial health of the

school systems.

Virco management believes that there is a pent-up demand for quality school furniture (though it is unclear when and to what extent that pent-up demand will be converted into a meaningful increase in purchases).

Second, management believes that parents and voters will make quality education an ongoing priority for future government spending.

The disruption related to COVID-19 school closures reinforced the need for learning in classroom settings.

Third, many schools have responded to the budget strains by reducing their support infrastructure.

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Valuation adjustments for slow-moving and obsolete inventory are calculated using an estimated percentage applied to inventories based on a physical inspection of the product in connection with a physical inventory, a review of slow-moving products and component stage, inventory category, historical and forecasted consumption of sales, and consideration of active marketing programs.

The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred significant obsolescence expenses.

The market for education furniture is traditionally driven by value, not style, and the Company has not typically incurred material obsolescence expenses.

If market conditions are less favorable than those anticipated by management, additional valuation adjustments may be required.

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Self-Insured Retention :

For fiscal 2021 and 2020 the Company was self-insured for product and general liability losses ranging up to $250,000 per occurrence, workers' compensation losses up to $250,000 per occurrence and auto liability up to $50,000 per occurrence.

For fiscal 2022 and 2021 the Company was self-insured for product liability losses up to $250,000 per occurrence, workers' compensation losses up to $250,000 per occurrence, auto and general liability losses up to $50,000 per occurrence.

The Company obtains quarterly or semi-annual actuarial valuations for the self-insured retentions.

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In effort to “de-risk” the Employee Plan, the Company intends to continue to reach out to and offer lump sum benefits to terminated and retired employees, which may result in settlement costs in the future.

The Company did not incur settlement costs in fiscal 2021 or 2020.

The Company incurred settlement costs in the second, third, and fourth quarters of fiscal 2022.

The Company did not incur settlement costs in fiscal 2021.

Due to the size of the Company's pension obligations, a one percent change in discount rates can cause a material change in the pension obligations.

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Deferred Tax Assets and Liabilities :

The Company recognizes deferred tax assets to the extent that it is expected that these assets are more likely than not to be realized.

The Company evaluates the realizability of its deferred tax assets, and to the extent that the Company estimates that it is more likely than not that a benefit will not be realized, the carrying amounts of its deferred tax assets are reduced with a valuation allowance.

As a part of this evaluation, the Company assesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, the availability of tax carrybacks, tax-planning strategies, and results of recent operations (including cumulative losses in recent years), to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets.

The Company has identified objective and verifiable negative evidence in the form of cumulative losses on an unadjusted basis in the U.S.

In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all of its deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income or reversal of deferred tax liabilities during the periods in which those temporary differences become deductible.

As a part of this evaluation, the Company assesses all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, the availability of tax carry backs, tax-planning strategies, and results of recent operations (including cumulative losses in recent years), to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets.

The Company has identified objective and verifiable negative evidence in the form of cumulative losses in the U.S.

and in certain state jurisdictions over the preceding twelve quarters ended January 31, 2022.

Additionally, the Company has noted a decline in the volume of net sales processed for the twelve months ended January 31, 2021 compared to the prior year period, due to the impact of the COVID-19 pandemic.

The Company evaluated both its actual forecasts of future taxable income and its historical earnings over the prior twelve quarters, adjusted for certain nonrecurring items.

On the basis of this assessment, and after considering future reversals of existing taxable temporary differences and the effects of seasonality on the Company’s business, the Company determined that it is more likely than not that its U.S.

federal deferred tax assets will be realizable, but that valuation allowances are needed for certain state NOL’s to reduce the carrying amount of those state deferred tax assets to an amount that is more likely than not to be realized.

The amount of the deferred tax asset considered realizable, however, could be adjusted if the Company’s actual results vary from its forecasts of future taxable income or if the Company’s estimates of the projected future profitability of its operations change.

During the fourth quarter of the year ended January 31, 2022, based on this evaluation, and after considering future reversals of existing taxable temporary differences and the effects of seasonality on the Company’s business, the Company determined the realization of a majority of the net deferred tax assets no longer met the more likely than not criteria and a valuation allowance was recorded against the majority of the net deferred tax assets.

The amount of the deferred tax asset considered realizable could be adjusted if the Company’s actual results in the future generate taxable income that will allow the Company to utilize its deferred tax assets.

The Company’s future taxable income projections are subject to a high degree of uncertainty and could be impacted, both positively and negatively, by changes in our business or the markets in which we operate.

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Financial Highlights

The Company incurred a pre-tax loss of ($2,976,000) on net sales of $152,795,000 for fiscal 2021, compared to pre-tax profit of $2,727,000 on net sales of $193,001,000 in fiscal 2020.

Pre-tax profit/(loss) deteriorated by $5,703,000.

Net income / (loss) per diluted share decreased to a loss of ($0.14) for fiscal 2021, compared to a profit of $0.15 per diluted share in the prior year.

Cash flow provided by operations was $7,799,000 in fiscal 2021, compared to $9,759,000 in fiscal 2020.

Virco's net sales decreased by 20.8% in fiscal 2021 to $152,795,000 compared to $193,001,000 in fiscal 2020.

The decrease in net sales was primarily attributable to a reduction in volume partially offset by a 5% increase in list selling prices.

In fiscal 2021 and 2020, Virco increased list selling prices by approximately 5% each year to recover significant cost increases incurred in fiscal 2019 related to increased raw material costs, primarily driven by tariffs on steel and imported components sourced from China.

In addition, the Company increased compensation for factory employees in response to minimum wage and other market conditions.

During 2021 the Company suffered a significant reduction in demand related to the COVID-19 pandemic.

Despite a reduction in industry demand, the Company did not reduce selling prices.

Short lead times, urgent orders, disciplined pricing, and general supply chain disruption in the industry (especially imported items) allowed the Company to realize the price increase announced at the beginning of the year.

For fiscal 2022, the COVID-19 pandemic is continuing to create uncertainty as state and local government revenues may be severely impacted and spending priorities may be re-evaluated.

The anticipated government revenue shortfall may be offset significantly or in part by a variety of federal government programs.

The Company anticipates that the budgetary challenges for state and local governments will continue to affect our growth in net sales.

The Company intends to increase selling prices to recover volatile and increasing commodity and freight costs.

As we have throughout this economic cycle, the Company

continues to focus on strategies to develop and strengthen its brand with an aggressive product development campaign.

The Company incurred a pre-tax loss of ($3,728,000) on net sales of $184,828,000 for fiscal 2022, compared to pre-tax loss of ($2,976,000) on net sales of $152,795,000 in fiscal 2021.

Pre-tax loss deteriorated by $752,000.

Net loss per diluted share increased to a loss of ($0.95) for fiscal 2022, compared to a loss of ($0.14) per diluted share in the prior year.

Cash flow used in operations was $401,000 in fiscal 2022, compared to cash provided by operations of $7,799,000 in fiscal 2021.

Virco's net sales increased by 21% in fiscal 2022 to $184,828,000 compared to $152,795,000 in fiscal 2021.

The increase in net sales was primarily attributable to an increase in volume in addition to a 5% increase in list selling prices.

Virco’s order rates and sales volume have been severely impacted during the last two years by COVID-19, but the impact has been markedly different each year.

In fiscal 2021, the Company incurred approximately a 20% reduction in sales orders and sales volume.

This reduction was in large part due to the closure of schools throughout the nation.

In fiscal year 2022 many schools reopened during the Company’s first quarter, and virtually all schools reopened by the beginning of the Company’s third quarter.

During fiscal 2022 order rates increased by approximately 40% compared to the prior year.

However, due to severe supply chain issues and labor shortages, we were not able to increase deliveries at the same rate and net sales increased by only 21%.

The Company ended the fiscal year with an order backlog that was approximately $20 million higher than the prior year.

For fiscal 2023, the COVID-19 pandemic is continuing to create uncertainty as state and local government revenues may be adversely impacted.

The potential government revenue shortfall may be offset significantly or in part by a variety of federal government programs.

The Company increased selling prices under its largest contracts for orders received after January 1, 2022 to recover volatile and increasing commodity, energy, freight and labor costs.

As we have throughout this economic cycle, the Company continues to focus on strategies to develop and strengthen its brand with an aggressive product development campaign.

We will continue to use our domestic factories to provide greater flexibility for custom specifications such as laminates, colors and on-time delivery.

The Company will continue to emphasize the value, design, variety of its products, the value of its distribution, delivery, classroom delivery and project management capabilities, and the importance of timely deliveries during the peak-seasonal delivery period.

The Company plans to increase selling prices to recover increased costs of commodities and to improve gross margins.

To increase or maintain market share during fiscal 2023, when market conditions warrant, the Company may selectively compete based on direct prices to build or maintain its market share.

Estimates of sales volume for the next year may continue to be impacted by the COVID-19 pandemic.

Estimates of sales volume for the next year may continue to be impacted by the COVID-19 pandemic and global events.

Demand for project business is anticipated to be stable compared to pre-COVID-19 levels.

Short term transactional business may increase when schools re-open.

Short term transactional business increased in fiscal 2022 when schools re-opened and is anticipated to continue.

The potential impact of Government stimulus programs and possible failures of competitors cannot be reasonably estimated as of the date of this report.

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Cost of sales was 67.0% of net sales in fiscal 2022 and 64.1% of net sales in fiscal 2021.

The increase in cost of sales as a percentage of sales was primarily attributable to an increase in manufacturing overhead variances related to reduced levels of production.

In the first quarter of fiscal 2021, the Company increased selling prices to recover increased costs incurred in fiscal 2021 and 2020.

In fiscal 2021, the cost of commodities was reasonably stable.

The Company incurred a reduction in unit sales volume which increased manufacturing overhead variances offset in part by the selling price increases.

During fiscal 2022, the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to certain raw materials, transportation, energy and tariffs due to potential macroeconomic events, including the global pandemic caused by COVID-19.

The increase in cost of sales as a percentage of sales was primarily attributable to an increase in the cost and availability of raw materials.

The Company incurred severe increases in the cost of steel, plastic, and ocean freight.

Other costs increased but not as severely.

In addition to increased costs the Company was unable to obtain desired quantities of many materials on a timely basis.

Finally, the Company experienced labor shortages, both due to COVID-19 related absences and a lack of available temporary labor.

The Company incurred material overtime expenses for its existing employees in effort to meet demand.

At the beginning of the fourth quarter, the Company significantly increased the beginning wage rate for all hourly workers and gave meaningful raises to all other hourly workers.

This adversely impacted margins in the fourth quarter as selling prices were not increased until January 1, 2022.

Direct labor and manufacturing overhead expenses as a percentage of sales were comparable to the prior year, but the Company did not benefit from volume related efficiencies or yield a benefit from the price increase put in place at the beginning of the year.

In fiscal 2021, the cost of commodities and labor was reasonably stable.

During fiscal 2023, the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to certain raw materials, transportation, energy and tariffs due to potential macroeconomic events, including global economic sanctions and the global pandemic caused by COVID-19.

The Company also anticipates continued and possibly increased supply chain disruptions from both domestic and international suppliers.

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Selling, General and Administrative and Other Expenses

Selling, general and administrative expenses for fiscal 2021, decreased by $11.5 million to $54,197,000 from $65,726,000 but increased as a percentage of net sales by approximately 1.4% to 35.5% in fiscal 2021 from 34.1% in fiscal 2020.

Service costs, including warehousing, freight and classroom delivery costs decreased $5,883,000 and decreased by 0.1% as a percentage of net sales.

Selling costs decreased by $4,899,000 and were flat as a percentage of sales compared to the prior year.

Decreased selling costs were attributable to reduced variable expenses.

G&A spending decreased in terms of dollars and increased as a percentage of net sales.

Interest expense was $924,000 lower in fiscal 2021 compared to fiscal 2020 because of reduced levels of borrowing and decreased interest rates.

Selling, general and administrative expenses for fiscal 2022, increased by $7.1 million to $61,265,000 from $54,197,000 but decreased as a percentage of net sales by approximately 2.4% to 33.1% in fiscal 2022 from 35.5% in fiscal 2021.

Service costs, including warehousing, freight and classroom delivery costs increased by $3,856,000 and decreased by 0.4% as a percentage of net sales.

Selling costs increased by $2,365,000 and decreased as a percentage of sales by 0.9% compared to the prior year.

Increased selling costs were attributable to increased variable expenses and because the sales force was able to return to traditional selling practices.

G&A spending increased in terms of dollars but decreased as a percentage of net sales by 1.3%.

Interest expense was $343,000 lower in fiscal 2022 compared to fiscal 2021 because of reduced levels of borrowing.

Provision for Income Taxes

Our effective tax rate is based on recurring factors, including the forecasted mix of income before taxes in various jurisdictions, estimated permanent differences and the recording of a partial valuation allowance on net deferred tax asset.

For fiscal 2021, the effective tax rate was 25.0%.

The Company has a partial valuation allowance of $1,064,000 against certain state deferred tax assets that the Company does not believe is more-likely-than-not to be realized.

At January 31, 2021, the Company has net operating loss carryforwards of approximately $12,897,000 for federal, that do not expire, and $29,891,000 for state income tax purposes, expiring at various dates through January 31, 2039.

For fiscal 2020, the effective tax rate was 12.7%.

The Company has a partial valuation allowance of $1,183,000 against certain state deferred tax assets that the Company does not believe is more-likely-than-not to be realized.

At January 31, 2020, the Company has net operating loss carryforwards of approximately $9,499,000 for federal, that do not expire, and $26,098,000 for state income tax purposes, expiring at various dates through January 31, 2040.

During 2022 and 2021 the Company incurred operating losses.

When combined with operating results from 2020 the Company has incurred a cumulative operating loss for the last three years.

While the Company has taken significant measures to return to profitability, and order rates at the beginning of the year are favorable, the short-term outlook for the school furniture market is challenging, particularly relating to ongoing supply chain difficulties.

Valuation allowances of $11,412,000 are needed for federal and certain state net operating loss carryforwards to reduce the carrying amount of deferred tax assets to an amount that is more likely than not to be realized.

At January 31, 2022, the Company has net operating loss carryforwards of approximately $12,513,000 for U.S.

federal, with no expirations, and $31,222,000 for state income tax purposes, expiring at various dates through January 31, 2041.

The following table shows summary cash flows information for the years ended January 31, 2022 and 2021, respectively:

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(In thousands)

Net cash provided by operating activities $ 7,799 $ 9,759

Net cash (used in) provided by operating activities $ (401) $ 7,799

Net cash used in investing activities (2,371) (2,135)

Net cash used in financing activities ( 6,412 ) ( 5,089 )

Net (decrease) increase in cash ( 748 ) 412

Net cash provided by (used in) financing activities 3,729 (6,412)

Net increase (decrease) in cash 957 (748)

Operating activities.

Our cash flows from operating activities are primarily collections from the sale and distribution of furniture to our customers in the education market.

Net cash provided by operating activities was $7.80 million for the year ended January 31, 2021, a decrease of $1.96 million compared to the prior year.

The decrease was primarily due to a reduction net income.

Net cash used in operating activities was $(0.4) million for the year ended January 31, 2022, a decrease of $8.2 million compared to the prior year.

The decrease was primarily due to the timing of sales.

Due to the seasonal nature of our business, the Company traditionally has low levels of sales in the fourth quarter.

In the current year the Company experienced severe supply chain issues which delayed shipping activity.

Fourth quarter sales more than doubled compared to the prior year, driving an $8 million increase in accounts receivable and contributing to a $9 million increase in inventory at fiscal year-end.

In addition, the Company incurred increased material costs, which increased the dollar value of inventory at fiscal year end.

Investing activities.

Our investments primarily consist of investments in our factories and technology to support our business activities.

Investment activities decreased for the year ended January 31, 2021 due to reduced business activity related to the COVID pandemic.

Net investment activities were lower than typical for the years ended January 31, 2022 and January 31, 2021 due to reduced business activity related to the COVID pandemic.

Capital expenditures have been financed using cash provided by operating activities and borrowings under our line of credit with PNC Bank.

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We commit to annual contracts that determine selling prices for goods and services for periods of one year and occasionally longer.

Though the Company has negotiated 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 flexibility under many of these contracts that may allow the Company to increase prices on future orders, the Company may not have the 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.

With respect to any of the contracts described above, if the costs of providing our products or services increase between the date the orders are received and the shipping date, we may not be able to implement corresponding increases in our sales prices for such products or services to offset the related increased costs.

In fiscal 2021 the cost of sales were relatively stable compared to prior years, which were impacted by tariffs on steel and Chinese imports.

For fiscal 2022, the Company anticipates continued volatility in costs, particularly with respect to imported components from China, freight from China, certain raw materials including steel, transportation, energy, and potential impacts of legislation increasing minimum wages.

Anticipated adverse volatility for fiscal 2022 could be severe in light of tariffs imposed or threatened on imported commodities and disruptions caused by COVID-19 upon our suppliers.

With respect to any of the contracts described above, if the costs

of providing our products or services increase between the date the orders are received and the shipping date, we may not be able to implement corresponding increases in our sales prices for such products or services to offset the related increased costs.

In fiscal 2022 the cost of sales were volatile compared to prior years.

The Company incurred material increases in steel, plastic and other materials.

For fiscal 2023, the Company anticipates continued volatility in costs, particularly with respect to imported components from China, freight from China, certain raw materials including steel, transportation, energy, and potential impacts of escalating labor costs.

Anticipated adverse volatility for fiscal 2023 could be severe in light of global supply chain and economic sanctions, tariffs imposed or threatened on imported commodities and disruptions caused by COVID-19 upon our suppliers.

There is continued uncertainty with respect to steel and other raw material costs, including plastics, that are affected by the price of oil.

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Virco depends upon third-party carriers for more than 90% of customer deliveries.

Subsequent to 2010, many carriers went out of business or were required to reduce the size of their fleets due to economic conditions and have not increased their fleets as the economy has improved.

Recent regulation and more stringent enforcement of federal regulations governing the transportation industry (especially regarding drivers) have adversely impacted the cost and availability of freight services.

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To recover the cumulative impact of increased costs, the Company has increased published list prices for fiscal 2023.

Due to current economic conditions, the Company anticipates continued significant price competition in fiscal 2022 and may not be able to raise prices without risk of losing market share.

Due to current economic conditions, the Company anticipates modestly increased price competition in fiscal 2023 and may not be able to raise prices in response to increased commodity costs without risk of losing market share.

As a significant portion of Virco's business is obtained through competitive bids, the Company is carefully considering material and transportation costs as part of the bidding process.

Total material costs for fiscal 2022, as a percentage of sales, could be higher than in fiscal 2021.

The Company is working to control

and reduce costs by improving production and distribution methodologies, investigating new packaging and shipping materials and searching for new sources of purchased components and raw materials.

The Company is working to control and reduce costs by improving production and distribution methodologies, investigating new packaging and shipping materials and searching for new sources of purchased components and raw materials.

Liquidity and Capital Resources

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As the capital required for the summer season generally exceeds cash available from operations, Virco has historically relied on third-party bank financing to meet seasonal cash flow requirements.

On December 22, 2011 (“Closing Date”), the Company and Virco Inc., a wholly owned subsidiary of the Company (“Virco” and, together with the Company, the “Borrowers”) entered into a Revolving Credit and Security Agreement (“Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”).

The credit agreement has been amended a number of times.

The Credit Agreement provides the Borrowers with a secured revolving line of credit (“Revolving Credit Facility”) of up to $65,000,000, with seasonal adjustments to the credit limit and subject to borrowing base limitations and includes a sub-limit of up to $3,000,000 for issuances of letters of credit.

In addition, the Credit Agreement provides an Equipment Line for purchases of equipment up to $2,000,000.

On December 22, 2011, the Company and Virco Inc., a wholly owned subsidiary of the Company (“Virco” and, together with the Company, the “Borrowers”) entered into a Revolving Credit and Security Agreement (“Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”).

On September 28, 2021, the Borrowers entered into an Amended and Restated Credit Agreement (the “Restated Credit Agreement”) with PNC that effectively incorporated all of the prior amendments to the Credit Agreement into an amended and restated form of agreement.

The Restated Credit Agreement provides the Borrowers with a secured revolving line of credit (“Revolving Credit Facility”) of up to $65,000,000, with seasonal adjustments to the credit limit and subject to borrowing base limitations and includes a sub-limit of up to $3,000,000 for issuances of letters of credit.

In addition, the Restated Credit Agreement provides an Equipment Line for purchases of equipment up to $2,000,000.

The Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory, plus $15,000,000 for the period from December to July of each year minus undrawn amounts of letters of credit and reserves.

The Revolving Credit Facility is secured by substantially all of the Borrowers' personal property and certain of the Borrowers' real property.

The principal amount outstanding under the Credit Agreement and any accrued and unpaid interest is due no later than March 19, 2023, and the Revolving Credit Facility is subject to certain prepayment penalties upon earlier termination of the Revolving Credit Facility.

Prior to the maturity date, principal amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.

The Revolving Credit Facility bears interest, at the Borrowers' option, at either the Alternate Base Rate (as defined in the Credit Agreement) or the Eurodollar Currency Rate (as defined in the Credit Agreement), in each case plus an applicable margin.

The applicable margin for Alternate Base Rate loans is a percentage within a range of 1.25% to 1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 2.25% to 2.75%, in each case based on the adjusted EBITDA (as defined in the Credit Agreement, “EBITDA”) of the Borrowers at the end of each fiscal quarter and may be increased at PNC's option by 2.0% during the continuance of an event of default.

Accrued interest with respect to principal amounts outstanding under the Credit Agreement is payable in arrears on a monthly basis for Alternative Base Rate loans, and at the end of the applicable interest period but at most every three months for Eurodollar Currency Rate loans.

The original termination date of the Restated Credit Agreement was March 19, 2023, which date was extended to April 15, 2027, at which point the principal amount outstanding under the Restated Credit Agreement and any accrued and unpaid interest is due and payable, subject to certain prepayment penalties upon earlier termination.

Prior to the maturity date, principal amounts outstanding under the Restated Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions.

The Revolving Credit Facility bears interest, at the Borrowers' option, at either the Alternate Base Rate (as defined in the Restated Credit Agreement) or the Eurodollar Currency Rate (as defined in the Restated Credit Agreement), in each case plus an applicable margin.

The applicable margin for Alternate Base Rate loans is a percentage within a range of 1.25% to 1.75%, and the applicable margin for Eurodollar Currency Rate loans is a percentage within a range of 2.25% to 2.75%, in each case based on the adjusted EBITDA (as defined in the Restated Credit Agreement, “EBITDA”) of the Borrowers at the end of each fiscal quarter and may be increased at PNC's option by 2.0% during the continuance of an event of default.

Accrued interest with respect to principal amounts outstanding under the Restated Credit Agreement is payable in arrears on a monthly basis for Alternative Base Rate loans, and at the end of the applicable interest period but at most every three months for Eurodollar Currency Rate loans.

The interest rate at January 31, 2022 was 5.0%.

As the result of the Company’s non-compliance with certain covenants of the Credit Agreement at January 31, 2019, described below, the Company entered into Amendment No.

20 in April 2019 that suspended the Company’s ability to pay dividends or repurchase stock from February 1, 2019 through January 31, 2020.

The Credit Agreement contains numerous other covenants that limit under certain circumstances the ability of the Borrowers and their subsidiaries to, among other things, merge with or acquire other entities, incur new liens, incur additional indebtedness, sell assets outside of the ordinary course of business, enter into transactions with affiliates, or substantially change the general nature of the business of the Borrowers, taken as a whole.

In September 2020 the Company entered into Amendment No.

21 which waived a violation of the fixed charge covenant for the second quarter ended July 31, 2020, modified the fixed charge ratio for the quarter ended October 31, 2020 to 1.00 to 1.00 and updated the definition of Base Rate, Eurodollar Rate and eliminated references to LIBOR.

In December 2020 the Company entered into Amendment No.

22 which waived a violation of the fixed charge covenant for the quarter ended October 31, 2020 and modified the fixed charge covenant to allow up to a $2 million COVID “addback” for purposes of calculating the fixed charge covenant for quarters ending through April 30, 2021.

The Credit Agreement requires the Company to maintain compliance with a minimum fixed charge coverage ratio.

The Restated Credit Agreement permits the Company to issue dividends or make payments with respect to the Company’s capital stock in an aggregate amount up to $3,000,000 during any fiscal year, provided that no default shall have occurred or is continuing or would result from any such payment, and the Company must demonstrate pro forma compliance with a 12-month trailing fixed charge coverage ratio of not less than 1.20:1.00 as of the fiscal quarter immediately preceding the date of any such dividend or payment.

The original Credit Agreement required the Company to maintain compliance with a minimum fixed charge coverage ratio.

The Company was in compliance with all quarterly debt covenants for the fiscal year ended January 31, 2020.

In July 2020, the Company violated the fixed charge covenant of 1.1 to 1.0.

Amendment No.

21 waived the violation and amended the covenant for the quarter ended October 31, 2020 to 1.0 to 1.0.

In October 2020, the Company violated the fixed charge covenant of 1.0 to 1.0.

The Company entered into Amendment No.

22 which waived the violation and amended the fixed charge covenant to allow for a COVID addback of up to $2.0 million for costs incurred through April 30, 2021.

In addition, the Credit Agreement also permits the Company to pay dividends or conduct stock repurchases subject to certain requirements.

The Company was in compliance with its covenants, including the fixed charge covenant with the inclusion of the COVID addback as of January 31, 2021.

In addition, the Credit Agreement, in effect as of January 31, 2021, contains a clean-down provision that requires the Company to reduce borrowings under the line of credit to less than $10,000,000 for a period of 30 consecutive days during the Company’s fourth fiscal quarter of each fiscal year.

The clean-down provision allows the Company to maintain the minimum outstanding balance of $10,000,000 to be carried on an uninterrupted period extending beyond one year and ultimately due at

the schedule maturity date in March 2023.

In July 2020, the Company violated the fixed charge covenant of 1.1 to 1.0, but an amendment waived the violation and amended the covenant for the quarter ended October 31, 2020 to 1.0 to 1.0.

In October 2020, the Company violated the fixed charge covenant of 1.0 to 1.0, but an amendment waived the violation and amended the fixed charge covenant to allow for a COVID addback of up to $2.0 million for costs incurred through April 30, 2021.

After execution of the Restated Credit Agreement in September 2021, on December 7, 2021 the Company entered into Amendment No.

1 to the Restated Credit Agreement, which provided a limited waiver of the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.10 to 1.00 for the four fiscal quarter periods ended October 31, 2021, and amended the fixed charge coverage ratio as follows:

(i) 1.00 to 1.00 for each of the consecutive four fiscal quarter periods of Borrowers ending January 31, 2022 and April 30, 2022, and (ii) 1.10 to 1.00 for each consecutive four fiscal quarter periods of Borrowers ending thereafter.

The Company was in violation of its financial covenants under the Restated Credit Agreement as of January 31, 2022, due to a decline in the Company’s net income primarily attributable to the effects of supply chain disruptions and labor shortages.

On April 15, 2022, the Company entered into Amendment No.

2 to the Credit Agreement, which implemented the following changes to the Restated Credit Agreement and Revolving Credit Facility:

extended the final maturity date of the Revolving Credit Facility from March 19, 2023 to April 15, 2027;

increased the borrowing limit from $65,000,000 to $70,000,000 in July 2022 and August 2022, and increased the borrowing limit from $40,000,000 to $45,000,000 in October 2022;

waived the Company’s violation of the covenant to maintain a fixed charge coverage ratio of at least 1.00 for the period ending January 31, 2022;

for the first and second quarters of fiscal 2023, implemented a temporary year-to-date adjusted EBITDA covenant in lieu of testing the fixed charge coverage ratio covenant as of such quarters, with quarterly testing of the fixed charge coverage ratio to resume for the third fiscal quarter and thereafter;

permits a sale and leaseback transaction of the Company’s property at 1655 Amity Road and release of the lender’s pledge on the property, with the net proceeds to be used for a proposed share repurchase;

retired LIBOR pricing on the Revolving Credit Facility and replace with BSBY index, with pricing tiers and spreads to remain the same;

extended the P-card, ACH Credit, and ACH debit facilities for an additional year beyond their current maturities;

Borrowers to pay a $250,000 extension fee and $75,000 waiver and amendment fee, with $200,000 due at closing and $125,000 due on the first anniversary of closing.

The Restated Credit Agreement contains a clean-down provision that requires the Company to reduce borrowings under the line of credit to less than $10,000,000 for a period of 30 consecutive days during the Company’s fourth fiscal quarter of each fiscal year.

The clean-down provision allows the Company to maintain the minimum outstanding balance of $10,000,000 to be carried on an uninterrupted period extending beyond one year and ultimately due at the scheduled maturity.

The Company believes that normal operating cash flow will continue to allow it to meet the clean-down requirement with no adverse impact on the Company's liquidity.

Events of default (subject to certain cure periods and other limitations) under the Credit Agreement include, but are not limited to, (i) non-payment of principal, interest or other amounts due under the Credit Agreement, (ii) the violation of terms, covenants, representations or warranties in the Credit Agreement or related loan documents, (iii) any event of default under agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers under other agreements that would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the Borrowers in excess of $250,000,subject to certain conditions, (vi) the failure of the Company to comply with Pension Benefit Plans (as defined in the Credit Agreement), (vii) the invalidity of loan documents pertaining to the Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or 15 consecutive days during any other time, subject to certain conditions.

Pursuant to the Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers.

Events of default (subject to certain cure periods and other limitations) under the Restated Credit Agreement include, but are not limited to, (i) non-payment of principal, interest or other amounts due under the Restated Credit Agreement, (ii) the violation of terms, covenants, representations or warranties in the Restated Credit Agreement or related loan documents, (iii) any event of default under agreements governing certain indebtedness of the Borrowers and certain defaults by the Borrowers

under other agreements that would materially adversely affect the Borrowers, (iv) certain events of bankruptcy, insolvency or liquidation involving the Borrowers, (v) judgments or judicial actions against the Borrowers in excess of $250,000, subject to certain conditions, (vi) the failure of the Company to comply with Pension Benefit Plans (as defined in the Restated Credit Agreement), (vii) the invalidity of loan documents pertaining to the Restated Credit Agreement, (viii) a change of control of the Borrowers and (ix) the interruption of operations of any of the Borrowers' manufacturing facilities for five consecutive days during the peak season or 15 consecutive days during any other time, subject to certain conditions.

Pursuant to the Restated Credit Agreement, substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Revolving Credit Facility upon receipt by the Borrowers.

Due to this automatic liquidating nature of the Revolving Credit Facility, if the Borrowers breach any covenant, violate any representation or warranty or suffer a deterioration in their ability to borrow pursuant to the borrowing base calculation, the Borrowers may not have access to cash liquidity unless provided by PNC at its discretion.

In addition, certain of the covenants and representations and warranties set forth in the Credit Agreement 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 the Borrowers expect to occur on an ongoing basis.

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

In addition, certain of the covenants and representations and warranties set forth in the Restated Credit Agreement 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 the Borrowers expect to occur on an ongoing basis.

Based on the Company’s current projections, including COVID-19 related costs, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with the financial covenants within Amendment No.

2, although there are uncertainties therewithin, such as raw material costs and supply chain challenges.

The Company's line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season.

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The other plan is non-qualified retirement plan.

Benefits payable under the VIP Plan are secured by life insurance policies and securities held in a rabbi trust.

Benefits payable under the VIP Plan are secured by life insurance policies and marketable securities held in a rabbi trust.

The Company obtains annual actuarial valuations for both retirement plans.

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The Company did not incur settlement costs in fiscal 2021 or 2020.

The Company incurred settlement costs in the second, third, and fourth quarters of fiscal 2022.

The Company did not incur settlement costs in fiscal 2021.

It is the Company's policy to contribute adequate funds to the trust accounts to cover benefit payments under the VIP Plan and to maintain the funded status of the Employee Plan at a level which is adequate to avoid significant restrictions to the Employee Plan under the Pension Protection Act of 2006.

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The Company does not anticipate making any significant changes to the pension assumptions in the near future.

If the Company were to have used different assumptions in the fiscal year ended January 31, 2021, a 1% reduction in investment

return would have increased expense by approximately $210,000, a 1% change in the rate of compensation increase would have no impact, and a 1% reduction in the discount rate would have increased expense by $800,000.

If the Company were to have used different assumptions in the fiscal year ended January 31, 2022, a 1% reduction in investment return would have increased expense by approximately $210,000, a 1% change in the rate of compensation increase would have no impact, and a 1% reduction in discount rates would cause obligations under the Plans to increase by approximately $7.6 million and increase pension expense by approximately $801,000.

Stockholders' Equity

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The Company paid four quarterly cash dividends of $0.015 per share in 2018.

The Company entered into a credit facility with PNC Bank in December 2011 that prohibited the Company from paying dividends and repurchasing any shares of its stock except in cases where a repurchase is financed by a substantially concurrent issuance of new shares of the Company's common stock.

In March 2018, the Company entered into Amendment No.

17 which allows the Company to pay dividends or conduct stock repurchases in an amount up to $2.0 million.

In fiscal 2020, the Company entered into Amendment No.

20 suspending the Company’s ability to pay cash dividends or repurchase stock through January 31, 2020.

Virco issued a 10% stock dividend or 3/2 stock split every year beginning in 1983 through 2003.

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Risk Factors:

We could be required to incur substantial

costs to comply with environmental requirements .” Violations of, and liabilities under, environmental laws and regulations may increase our costs or require us to change our business practices.

We could be required to incur substantial costs to comply with environmental and other legal requirements .” Violations of, and liabilities under, environmental laws and regulations may increase our costs or require us to change our business practices.

Contingent Liabilities

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For the insurance year beginning April 1, 2022, the Company will be self-insured for product liability losses up to $250,000 per occurrence, general liability losses up to $50,000 per occurrence, workers' compensation losses up to $250,000 per occurrence, and auto liability up to $50,000 per occurrence.

In future years, the Company's exposure to self-insured retentions will vary depending upon the market conditions in the insurance industry and the availability of cost-effective insurance coverage.

In future years,

the Company's exposure to self-insured retentions will vary depending upon the market conditions in the insurance industry and the availability of cost-effective insurance coverage.

The Company has aggressively pursued a program to improve product quality, reduce product liability claims and losses and to aggressively defend product liability cases.

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Management does not anticipate that any related settlement, after consideration of the existing reserves for claims and potential insurance recovery, would have a material adverse effect on the Company's financial position, results of operations or cash flows.

Off-Balance Sheet Arrangements & Contractual Obligations

Off-Balance Sheet Arrangements

The Company did not enter into any material off-balance sheet arrangements during fiscal 2022, nor did the Company have any material off-balance sheet arrangements outstanding at January 31, 2022.

5 unchanged sentences

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 7. Management’s Discussion and Analysis