What changed in this filing

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Item 1A. Risk Factors

2023-04-28 compared with 2022-04-28 · 50 added, 46 removed, 202 unchanged (32% of the section changed)

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If any of the following risks actually occur, our business, operating results, cash flows and financial condition could be materially adversely affected.

RISKS RELATED TO COVID-19

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.

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 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.

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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Our sales are significantly impacted by the level of education funding primarily in North America, which, in turn is a function of the general economic environment.

In a weak economy, state and local tax revenues for many of our customers are flat or decline, restricting funding for K-12 education spending, which typically leads to a decrease in demand for school furniture.

In a weak economy, state and local tax revenues for many of our customers are flat or

decline, restricting funding for K-12 education spending, which typically leads to a decrease in demand for school furniture.

Sustained declines in the per-student funding levels provided for in state and local budgets in the future could have a materially adverse impact on our business, financial condition, and results of operations as they have in the past.

In addition, medical pandemics including COVID-19, geopolitical uncertainties, terrorist attacks, acts of war, natural disasters, increases in energy and other costs or combinations of such factors and other factors that are outside of our control could at any time have a significant effect on the economy, which in turn would affect government revenues and allocations of government spending.

In addition, public health emergencies such as COVID-19, geopolitical uncertainties, terrorist attacks, acts of war, natural disasters, increases in energy and other costs or combinations of such factors and other factors that are outside of our control could at any time have a significant effect on the economy, which in turn would affect government revenues and allocations of government spending.

The occurrence of any of these or similar events in the future could cause demand for our products to decline or competitive pricing pressures to increase, any of which would likely adversely affect our business, operating results, cash flows and financial condition.

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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 and global supply chain disruptions, many of the Company's suppliers may experience difficulty obtaining financing and may go out of business.

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 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.

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 other materials.

In fiscal 2023, the cost of commodities remained volatile, but the volatility dampened noticeably compared to fiscal 2022.

Some commodities decreased in cost, but others increased, resulting in a net modest increase in costs.

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.

The majority of our sales are FOB destination and include freight from Virco’s facilities to the customer location.

Approximately 80% our sales are FOB destination and include freight from Virco’s facilities to the customer location.

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

The size of many carriers’ fleets varies due to economic conditions.

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

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

The cost of ocean freight declined during fiscal 2023, nearly returning to more typical levels.

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.

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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 will likely not be able to implement corresponding increases in our sales prices for such products or services to offset the related increased costs.

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 will likely not be able to implement corresponding increases in our sales prices for such products or services to offset the related increased costs.

Significant cost increases in providing either the services or products during a given contract period could therefore lower our profit margins.

We operate in a seasonal business and require significant amounts of working capital through our existing credit facility to fund acquisitions of inventory, fund expenses for freight and classroom delivery and finance receivables during the summer delivery season.

Restrictions imposed by the terms of our existing credit facility may limit our operating and financial flexibility.

The Company may not meet the requirements of its financial covenants on an ongoing basis or that should it fail to meet such covenants in the future, the agent and lender under the Credit Agreement will agree to waivers or amendments with respect thereto.

Restrictions imposed by the terms of our existing credit facility may limit our operating and financial flexibility, and we are required to meet financial covenants under our credit facility.

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 EBITDA or minimum fixed charge coverage ratio requirement.

Our credit facility also provides for periodic financial covenants, which currently includes a 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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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.

There can be no assurance that the Company will meet the requirements of its financial covenants on an ongoing basis or that, should it fail to meet such covenants, the Agent and Lender under our credit facility will agree to waivers or amendments with respect thereto.

There can be no assurance that the Company will meet the requirements of its financial covenants on an ongoing basis or that, should we fail to meet such covenants, the Agent and Lender under our credit facility will agree to waivers or amendments with respect thereto.

If we breach any of our financial covenants without receiving a corresponding waiver or amendment, the Agent and Lender may accelerate our credit facility and impose default interest and other fees, any of which could have a material adverse effect on our financial condition and results of operations.

INDUSTRY AND ECONOMIC RISKS

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

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 long-term structural effects of the pandemic on in-person learning in the United States.

In addition, the resurgence of COVID-19 or its variants, as well as an outbreak of other widespread public health epidemics or pandemics, could cause new disruptions to our product sales, manufacturing and distribution operations, supply chains and demand for our products by our customers, which could adversely affect our business, financial condition, and results of operations.

Increases in basic commodity, raw material and component costs could adversely affect our profitability.

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.

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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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.

Both availability and volatility in cost moderated in fiscal 2023.

Total material costs for fiscal 2024, as a percentage of sales, could be higher than in fiscal 2023.

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

The Company has increased list prices for its products in fiscal 2023 and 2024 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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If such prices increase, our transportation costs may be adversely affected in the form of increased operation costs for our fleet and surcharges on freight paid to third-party carriers.

If our transportation costs increase, and/or the price of petroleum-based products and cost of operating our manufacturing facilities increase, these increases could have a negative impact on our gross margins and profitability.

If our transportation costs increase or, the price of petroleum-based products and cost of operating our manufacturing facilities increase and we are unable to pass a material portion of these increased costs to our customers, our gross margins and profitability would be adversely affected.

FINANCING RISKS

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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.

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.

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 lingering economic impact of the COVID-19 pandemic, particularly with respect to anticipated future demand and the ability to maintain our supply chain.

Management expends a significant amount of time in the fourth quarter of the prior year and the first quarter of each year developing a stocking plan and estimating the number of temporary summer employees, the amount of raw materials and the types of components and products that will be required during the peak season.

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

For example, if management underestimates any of these requirements, Virco's ability to meet customer orders in a timely manner or to provide adequate customer service may be diminished.

For example, if management underestimates any of these requirements, Virco's ability to meet customer orders in a timely manner or to provide adequate

customer service may be diminished.

If management overestimates any of these requirements, the Company may be required to absorb higher storage, labor and related costs, each of which may negatively affect the Company's results of operations.

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If our need for capital arises because of significant losses, the occurrence of these losses may make it more difficult for us to raise the necessary capital.

Volatility in the equity markets or interest rates could substantially increase our pension costs and have a negative impact on our operating results.

Volatility in the equity markets or interest rates could substantially increase our pension costs and have an adverse effect on our operating results.

We sponsor one qualified defined benefit pension plan, the Virco Employee Retirement Plan (“Employee Plan”), and one nonqualified pension plan.

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and (iii) increase our future contribution requirements.

Because the current economic environment is characterized by historically low interest rates, we may be required to make additional cash contributions to the Employee Plan and recognize further increases in our net pension cost to satisfy our funding requirements.

Because the recent economic environment was characterized by historically low interest rates, we may be required to make additional cash contributions to the Employee Plan and recognize further increases in our net pension cost to satisfy our funding requirements.

A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations.

These factors are further complicated by the substantial intervention in the U.S.

credit markets by the Federal Reserve Board and Treasury Department in response to the COVID-19 pandemic, which could have the effect of artificially reducing market interest rates.

credit markets by the Federal Reserve Board and Treasury Department in response to the COVID-19 pandemic, which could have the effect of artificially affecting market interest rates.

LEGAL AND REGULATORY RISKS

An inability to protect our intellectual property could have a significant impact on our business.

An inability to protect our intellectual property could have an adverse effect on our business.

We attempt to protect our intellectual property rights through a combination of patent, trademark, copyright, and trade secret laws.

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If we are unable to maintain the proprietary nature of our intellectual property with respect to our significant current or proposed products, our competitors may be able to sell copies of our products, which could adversely affect our ability to sell our original products and could also result in competitive pricing pressures.

If third parties claim that we infringe upon their intellectual property rights, we may incur liability and costs and may have to redesign or discontinue an infringing product.

If third parties claim that we infringe upon their intellectual property rights, we may incur liability and costs and may have to redesign or discontinue the infringing products.

We face the risk of claims that we have infringed third parties' intellectual property rights.

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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The Company sells products that are subject to the Consumer Product Safety Improvement Act of 2008 and the California Air Resources Board rule and Toxic Control Substances Act rule, concerning formaldehyde emissions from composite wood products.

We are subject to potential labor disruptions, which could have a significant impact on our business.

We are subject to potential labor disruptions, which could have an adverse effect on our business.

None of our work force is represented by unions, and while we believe that we have good relations with our work force, we may experience work stoppages or other labor problems in the future.

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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.

We may be affected by climate change and new regulations and requirements relating to climate issues.

Various aspects of our business, including our manufacturing operations, suppliers, and customers, may be negatively affected by severe weather events tied to climate change, including extreme storms, flooding, wildfires, extreme temperatures, and chronic changes in meteorological patterns.

The frequency and severity of severe weather conditions affecting our business may be impacted by climate change, although it is currently impossible to predict with accuracy the scale of such impact.

These impacts could have a material adverse effect on our business, results of operations and financial condition.

In addition, a number of state, federal and municipal governments are considering a variety of mandatory legal or regulatory requirements or voluntary initiatives in relation to climate change or environmental issues.

Many entities in private industry are also considering and introducing climate change and environmental criteria as a factor or commercial term in decisions relating to activities, including purchasing, lending, insurance and investing.

The Company is unable to predict what climate change or environmental criteria, or requirements may be adopted or supported by governments and private sector entities in the future, or the impacts of such initiatives on its financial condition, results of operations, access to and cost of capital and cash flows.

In addition, the SEC has published proposed rules that would require companies to provide significantly expanded climate-related disclosures in their periodic reporting, which may require us to incur significant additional costs to comply, including the implementation of significant additional internal controls processes and procedures regarding matters that have not been subject to such controls in the past, and impose increased oversight obligations on our management and Board of Directors.

GENERAL RISK FACTORS

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The loss of the services of key members of our management team could seriously harm our efforts to successfully implement our business strategy.

Failure in our information technology and storage systems could significantly disrupt the operation of our business.

Failure in our information technology and storage systems or cybersecurity incidents could adversely affect our business.

Our ability to execute our business plan and maintain operations depends on the continued and uninterrupted performance of our information technology systems.

These systems are vulnerable to risks and damages from a variety of sources, including telecommunications or network failures, malicious human acts, and natural disasters.

Moreover, despite network security and backup measures, some of our computer servers and those of our vendors are potentially vulnerable to physical or electronic break-ins, including cyber-attacks, ransomware attacks, computer viruses and similar disruptive problems.

Moreover, despite network security and backup measures, some of our computer servers and those of our vendors are potentially vulnerable to physical or electronic break-ins, including cyberattacks, ransomware attacks, computer viruses and similar disruptive problems.

These events could lead to the unauthorized access, disclosure and use of non-public information and disruption of our accounting, sales and purchasing systems and overall operations.

Cybersecurity incidents or other unauthorized access to systems may result in disruption to our operations, corruption or theft of critical data, confidential information, or intellectual property.

As reliance on technology continues to grow and more business activities have shifted online, the risk associated with any cybersecurity incidents have grown.

While we and our third-party vendors have implemented security systems and infrastructure to prevent, detect and/or mitigate the risk of unauthorized access to technology systems or platforms, there can be no assurance that these measures will be effective.

The techniques used by criminal elements to attack computer systems are sophisticated, change frequently and may originate from less regulated and remote areas of the world.

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If any of our computer systems are compromised, our business could be interrupted and we could be subject to fines, damages, litigation and enforcement actions and we could lose trade secrets, the occurrence of which could harm our business.

In addition, any cybersecurity or data breach involving confidential information of our business, or our customers could result in negative publicity, damage to our reputation, loss of revenues, disruption of our business, litigation, and regulatory actions.

Additional capital investments or expenditures may also be required to remediate any problems, infringements, misappropriations, or other third-party claims.

Any failure by us to comply with a variety of privacy and consumer protection laws may harm us.

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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