What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-04-28 compared with 2022-04-28 · 133 added, 150 removed, 281 unchanged (50% of the section changed)

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Effects of COVID-19 Pandemic

The COVID-19 pandemic had an immediate impact on the Company’s operating activities during fiscal 2021, and this impact continued through fiscal 2022.

The COVID-19 pandemic had an immediate impact on the Company’s operating activities.

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

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

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.

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.

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

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

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.

As a result, order rates in fiscal year 2021 declined by approximately 20% compared to the prior 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.

The Company experienced severe supply chain issues and dramatically increased commodity costs during this year.

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.

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

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

In October and November of fiscal 2022, 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.

In fiscal 2023, the Company was able to substantially resolve supply chain challenges and labor shortages.

Order rates increased by over 13% and sales increased by 25%, enabling the Company to return to profitable operations.

Executive Overview of Operating Results

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The Company has traditionally met the seasonal needs with significant overtime and by hiring seasonal temporary labor.

During fiscal 2021, the demand for school furniture declined primarily due to the COVID-19 pandemic disruption, and the Company reduced production levels.

During fiscal 2021, the demand for school furniture declined primarily due to the COVID-19 pandemic disruption, order rates declined by 20%, and the Company reduced production levels.

Because of the traditional dependence on temporary seasonal labor, the Company was able to reduce seasonal hiring to match production to demand.

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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 Company was unable to hire adequate new permanent workers or temporary labor to meet the traditional summer delivery needs and supply chain challenges exacerbated deliveries of furniture.

In fiscal 2023, order rates continued to improve, increasing by more than 13%.

The Company was able to substantially resolve most supply chain challenges and sales increase by approximately 25%.

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.

Virco also serves convention centers and arenas;

the hospitality industry, with respect to their banquet and meeting facilities;

the hospitality industry, with respect to their

banquet and meeting facilities;

government facilities at the federal, state, county and municipal levels;

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

The Company primarily sells to schools FOB destination, with more than 75% of sales delivered FOB classroom destination.

The Company primarily sells to schools FOB destination, with nearly 80% of sales delivered FOB classroom destination.

As part of this integrated business model, the Company has developed several competencies to enable superior service to the markets in which Virco competes.

The Company’s direct sales force is supported by interior designers, project managers and field service professionals.

An important element of Virco's business model is the Company's emphasis on developing and maintaining key manufacturing, warehousing, distribution, delivery, project management and service capabilities.

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Virco's product offering consists primarily of items manufactured by Virco, complemented with products sourced from other furniture manufacturers to fill any gaps in product manufactured by the Company.

The Company has served the education industry for over 72 years and over this time developed products to address a variety classroom management trends, from collaborative learning to individual and combination desks facilitating distancing and classroom control.

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

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.

The Company has served the education industry for over 73 years and over this time developed products to address a variety of classroom management trends, from collaborative learning to individual and combination desks facilitating distancing and classroom control.

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

In fiscal 2021 we experienced an increase in the demand for individual desks.

In fiscal 2022, demand began to return to products supporting collaborative learning.

This trend continued through fiscal 2023.

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.

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In fiscal 2023, approximately 47% 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.

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In response to these budgetary pressures, schools typically elect to retain teachers and spend less on repairs, maintenance, and replacement furniture, which in turn reduces the demand for, and sales of, the Company's products.

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

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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Sales priced under national contracts or buying groups are displacing competitive bids administered by professional purchasing departments.

Distribution has become a more meaningful component of our business as most deliveries are to school sites, and often include delivery into the classroom.

Distribution and service has become a more meaningful component of our business as most deliveries are to school sites, and nearly 50% include delivery into the classroom.

This evolution adds to the seasonal challenges of our business, but also creates opportunities to suppliers that can execute during the short summer delivery window.

The Company’s operating results can be impacted significantly by cost and volatility of commodities, especially steel, plastic, wood, and energy.

Because a majority of the Company's sales are generated under annual contracts in which the Company has limited ability to raise the price of its products during the term of the contract, if the costs of the Company's raw materials increase suddenly or unexpectedly, the Company cannot be certain that it will be able to implement immediate corresponding increases in its sales prices in order to offset such increased costs.

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.

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.

The majority of the Company's sales are generated under annual contracts in which the Company can raise the price of its products once every six months and only on future orders.

If the costs of the Company's raw materials increase suddenly or unexpectedly, the Company cannot be certain that it will be able to implement immediate corresponding increases in its sales prices in order to offset such increased costs.

The Company moderates this exposure by building significant

quantities of finished goods and component parts during the first and second quarters.

In fiscal 2023, the cost of commodities was volatile but substantially less volatile compared to fiscal 2022.

Increased selling prices covered increases in commodity prices during fiscal 2023.

Nearly 80% 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.

Significant cost increases in manufacturing or distributing products during a given contract period can adversely impact operating results and have done so during prior years.

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

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.

For the year ending January 31, 2024 ("fiscal 2024"), the Company anticipates continued uncertainty and volatility in commodity costs, particularly with respect to steel, plastic, and other raw materials, transportation, and energy.

The lingering effects of 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.

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

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).

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Meanwhile, Virco has continued to invest in automation at its domestic manufacturing facilities, adding flat metal forming processes to its manufacturing capabilities and bringing production into its factories of items formerly sourced from other suppliers (both domestic and international).

Domestic production facilitates our product development process, enabling the Company to more rapidly develop new products, release extensions of product families and offer customized variants of our product offering.

Domestic production facilitates our product development process, enabling the Company to more rapidly develop new products, release extensions of product families, and offer customized variants of our product offerings.

Virco views its domestic factories as a strategic resource for providing its customers with timely delivery of a broad selection of colors, finishes, laminates, and product styles.

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Certain of these estimates are considered critical accounting estimates.

On an on-going basis, management evaluates such critical estimates, including those related to valuation of inventory and related excess and obsolescence reserves, self-insured retention for workers' compensation insurance, liabilities under defined benefit and other compensation programs, and estimates related to deferred tax assets and liabilities.

On an ongoing basis, management evaluates such critical estimates, including those related to valuation of inventory and related excess and obsolescence reserves, self-insured retention for workers' compensation insurance, liabilities under defined benefit and other compensation programs, and estimates related to deferred tax assets and liabilities.

Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

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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.

Due to reductions in sales volume in the past years, the Company's manufacturing facilities are operating at reduced levels of capacity.

If market conditions are less favorable

than those anticipated by management, additional valuation adjustments may be required.

The Company records the cost of excess capacity as a period expense, not as a component of capitalized inventory valuation.

Self-Insured Retention :

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.

For fiscal 2023 and 2022, the Company was self-insured for product liability losses up to $250,000 per occurrence, workers' compensation losses up to $250,000 per occurrence, and 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.

Product liability, workers' compensation and auto reserves for known and unknown incurred but not reported (“IBNR”) losses are recorded at the net present value of the estimated losses using a risk-free discount rate of 4% for fiscal 2022 and 2021.

Product liability, workers' compensation, and auto reserves for known and unknown incurred but not reported (“IBNR”) losses are recorded at the net present value of the estimated losses using a risk-free discount rate of 4% for fiscal 2023 and fiscal 2022.

Given the relatively short term over which the known losses and IBNR losses are discounted, the sensitivity to the discount rate is not significant.

Estimated workers' compensation losses were funded during the insurance year and subject to retroactive loss adjustments.

Estimated workers' compensation and auto losses (including IBNR) were funded during the insurance year and subject to retroactive loss adjustments.

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

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The Company has two defined benefit plans, the Virco Employees Retirement Plan (“Employee Plan”) and the Virco Important Performers Plan (“VIP Plan”), which provide retirement benefits to employees.

Virco discounted the pension obligations for the various plans using the following discount rates for the fiscal years ended January 31:

Virco discounted the pension obligations for the two plans using the following discount rates for the fiscal years ended January 31:

Employee Plan 4.85% 3.20%

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Because the plans have been frozen for many years, there is no service cost related to the plans.

In prior years, due to a large number of lump-sum benefits paid to retired and terminated employees, the Company has incurred settlement costs for the Employee Plan.

In the current and prior years, due to a large number of lump-sum benefits paid to retired and terminated employees, the Company has incurred settlement costs for the Employee Plan.

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

The Company did not incur settlement costs in fiscal 2021.

The Company incurred settlement costs in the third and fourth quarters of fiscal 2023 and the second, third, and fourth quarters of fiscal 2022.

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 :

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.

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 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.

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.

During the fiscal year ended January 31, 2022, the Company incurred operating losses primarily related to COVID-19 and COVID-19 related supply chain disruptions.

During the fourth quarter of the fiscal year ended January 31, 2022, the Company identified objective and verifiable negative evidence in the form of cumulative losses in the U.S.

and in certain state jurisdictions over the preceding 12 quarters.

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.

During the fiscal year ended January 31, 2023, the Company was profitable and returned to a cumulative 3-year profit in the fourth quarter.

During the fourth quarter of the fiscal year ended January 31, 2023, the Company concluded a fiscal year that

demonstrated strong growth in order rates, revenue, pricing, and gross margin.

In addition, a very strong level of sales orders received in the fourth quarter ended January 31, 2023, for shipment in the fiscal year ending January 31, 2024, resulted in a backlog of unshipped sales orders that was approximately $18 million greater than the prior year ended January 31, 2022 and approximately $40 million more than the average year-end backlog for the prior 5 years.

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 met the more-likely-than-not criteria and the valuation allowance against the majority of the net deferred tax assets was reversed.

The amount of the deferred tax asset considered realizable could be adjusted if the Company’s actual results in the future do not generate taxable income that is sufficient to 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 ($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.

The Company earned a pre-tax profit of $8.0 million on net sales of $231.1 million for fiscal 2023, compared to pre-tax loss of $3.7 million on net sales of $184.8 million in fiscal 2022, an improvement of $11.8 million.

Net income per diluted share increased to $1.02 for fiscal 2023, compared to a loss of $0.95 per diluted share in the prior year.

Cash flow used in operations was $3.8 million in fiscal 2023, compared to cash used in operations of $0.4 million in fiscal 2022.

Virco's net sales increased by 25% in fiscal 2023 to $231.1 million compared to $184.8 million in fiscal 2022.

The increase in net sales was primarily attributable to an increase in selling prices with a minor increase in unit volume.

Virco’s order rates and sales volume were severely impacted by COVID-19.

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

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The Company ended the fiscal year with an order backlog that was approximately $18 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.

In fiscal 2023 the Company continued to benefit from increased order rates, with sales orders increasing by more than 13%.

During the fiscal year 2023, the Company was able to substantially address supply chain issues and sales of furniture increased by approximately 25%.

The Company ended the year with another increase in year-end backlog of sales orders.

This increase was attributable to a 48% increase sales orders in our traditionally slow fourth quarter, much of which is planned for delivery in the second quarter of fiscal 2024.

For fiscal 2024, the lingering effect of the COVID-19 pandemic is continuing to create uncertainty as state and local government budgets 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.

The Company increased selling prices under its largest contracts to recover volatile commodity, energy, freight, and labor costs.

As we have gone through this economic cycle, the Company continues to focus on strategies to develop and strengthen its brand with emphasis on product quality, product selection, and service.

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

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To increase or maintain market share during fiscal 2024, 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 and global events.

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

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.

Estimates of sales volume for the next year may continue to be impacted by global events.

Cost of Sales

Cost of sales was 63.1% of net sales in fiscal 2023 and 67.0% of net sales in fiscal 2022.

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.

The decrease in cost of sales as a percentage of sales was attributable to a variety of factors, but primarily due to increased selling prices.

In fiscal 2022, 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.

These events adversely affected gross margin.

At the beginning of fiscal 2023 the Company increased selling prices for orders received after January 1, 2022, and increased prices again for orders received after July 1, 2022.

The cumulative effect of these

price increases allowed margins to recover from the adverse events of fiscal 2022.

As the Company’s backlog of sales orders at prior year pricing and margins was delivered, new orders at more favorable pricing raised margins for the second, third, and fourth quarters.

In fiscal 2022, 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.

At the beginning of the fourth quarter of fiscal 2022, the Company significantly increased the beginning wage rate for all hourly workers and gave meaningful raises to all other hourly workers.

During fiscal 2023, the increase in wages substantially resolved staffing issue and the Company made significant improvements in supply chain challenges.

As the lower margin sales backlog at January 31, 2022 was delivered, sales orders received after January 1, 2022 enabled the Company to return margins to more profitable levels.

During fiscal 2024, 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 lingering effect of 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 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.

Selling, general and administrative expenses (SG&A) for fiscal 2023 increased by $13,238,000 to $74,503,000 from $61,265,000 but decreased as a percentage of net sales to 32.2% in fiscal 2023 from 33.1% in fiscal 2022.

The increase in SG&A was primarily attributable to variable freight expenses, variable classroom delivery expenses, variable portion of warehousing expense and variable selling expenses.

Pension expense declined due to favorable actuarial changes to AOCI.

An increase in discount rates caused the pension obligation to decline, which had a favorable impact on settlement expenses.

Interest expense was $784,000 higher in fiscal 2023 compared to fiscal 2022 because of increased levels of borrowing and higher interest rates.

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.

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.

During fiscal 2022, the Company incurred net operating losses, due primary to adverse economic conditions due to COVID-19 and related business interruptions while emerging from the effects of the pandemic.

During the fourth quarter of the fiscal 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.

During fiscal 2023, the Company was profitable and benefited from continued growth in order rates, growth in sales volume, and improvements in gross margin.

Strong order activity in the fourth quarter indicates the trends experienced in fiscal 2023 may continue through fiscal 2024.

The Company utilized a material portion of its federal and certain state net operating loss carryforwards ("NOL") in fiscal 2023 and anticipates that all federal NOL may be utilized by the end of fiscal 2024.

During the fourth quarter of the fiscal year ended January 31, 2023, 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 met the more-likely-than-not criteria and a valuation allowance was reversed against the majority of the net deferred tax assets, resulting in a net change in valuation allowance of $10.5 million.

Valuation allowances of $864,000 are needed for 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, 2023, the Company has net operating loss carryforwards of approximately $2,742,000 for U.S.

federal, with no expirations, and $25,074,000 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:

The following table shows summary cash flows information for the fiscal years ended January 31, 2023 and 2022:

Year ended January 31,

(In thousands)

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

Net cash used in operating activities $ (3,788) $ (401)

Net cash used in investing activities $ (3,332) $ (2,371)

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

Net increase (decrease) in cash 957 (748)

Net cash provided by financing activities $ 6,818 $ 3,729

Net (decrease) increase in cash $ (302) $ 957

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 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.

Net cash used in operations increased by $3,387 for the fiscal year ended January 31, 2023.

The increase was substantially due to the timing of order receipt in the fourth quarter of fiscal 2023.

In the fourth quarter of fiscal 2023 orders increased by more than 48%, resulting in a year-end sales order backlog that was more than $58 million.

This is nearly $20 million greater than the prior year and more than $40 million more than the average order backlog for the preceding five years.

The Company increased inventory levels at January 31, 2023 in order to facilitate deliveries of furniture in the first and seasonally higher second quarters of fiscal 2024.

Investing activities.

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

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.

Investing activities include two distinct categories.

Financial transactions are related to the purchase or sale of investments held in the Rabbi Trust which funds and secures employee benefits related to the non-qualified VIP pension and Split Dollar Life Insurance programs.

The net investment activity from these transactions were immaterial.

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

Net investment activities were lower than depreciation expense and lower than typical for the fiscal years ended January 31, 2023 and January 31, 2022 due to reduced business activity related to the COVID-19 pandemic and the related time lag in receiving new machinery.

Capital expenditures have been financed using borrowings under our line of credit with PNC Bank.

There were no material commitments for capital expenditures as of January 31, 2023.

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Inflation and Future Change in Prices

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

We commit to annual contracts that determine selling prices for goods and services for periods of six months 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 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 2022 the cost of sales were volatile compared to prior years.

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

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 commodities, especially steel and plastic were extremely volatile, with the cost of some gauges of steel nearly tripled during the fiscal year.

In fiscal 2023, the cost of commodities continued to be volatile, but not as severe as in fiscal 2022.

The cost of steel and plastic declined during the year, but other commodity and component cost continued to increase.

For fiscal 2024, 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.

Anticipated adverse volatility for fiscal 2024 could be severe in light of global supply chain and economic sanctions, tariffs imposed or threatened on imported commodities and other disruptions affecting 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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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.

Virco expects to incur continued pressure on employee benefit costs.

The Company has renewed health insurance contracts for its employees through December 2022, but costs after that date may be adversely impacted by current legislation, claim costs and industry consolidation.

Virco has aggressively addressed these costs by controlling headcount, freezing pension benefits and passing on a portion of increased medical costs to employees.

Virco expects to incur continued pressure on employee compensation and benefit costs.

The Company has renewed health insurance contracts for its employees through December 2023, but costs after that date may be adversely impacted by current legislation, claim costs and

industry consolidation.

Virco has aggressively addressed these costs by controlling headcount and passing on a portion of increased medical costs to employees.

To recover the cumulative impact of increased costs, the Company has increased published list prices for fiscal 2024.

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.

Due to current economic conditions, the Company anticipates modestly increased price competition in fiscal 2024 and may not be able to raise prices further in response to increased commodity costs without risk of losing market share.

As a 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.

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.

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The Company's working capital requirements during and in anticipation of the peak summer season oblige management to make estimates and judgments that affect Virco's assets, liabilities, revenues and expenses.

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

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

If management underestimates any of these requirements, Virco's ability to fill customer orders on a timely basis 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 affect profitability.

On an on-going basis, management evaluates such estimates, including those related to market demand, labor costs and inventory levels, and continually strives to improve Virco's ability to correctly forecast business requirements during the peak season each year.

On an ongoing basis, management evaluates such estimates, including those related to market demand, labor costs and inventory levels, and continually strives to improve Virco's ability to correctly forecast business requirements during the peak season each year.

As part of Virco's efforts to address seasonality, financial performance, and quality without sacrificing service or market share, management has been refining the Company's ATS operating model.

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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, 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.

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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.

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.

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.

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The Company has identified several opportunities for capital expenditures during the next five years.

The Company anticipates capital spending of no more than $5,000,000 for fiscal 2023.

Our Revolving Credit Facility with PNC Bank provides a line for equipment and covenants allow for anticipated capital expenditures for fiscal 2023.

The Company anticipates capital spending of no more than $5 million for fiscal 2024.

Our Revolving Credit Facility with PNC Bank provides a $2 million line for equipment and covenants allow for anticipated capital expenditures for fiscal 2024.

Retirement Obligations

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With the recent increase in interest rates the Company may purchase annuities from third parties to further de-risk the Plan.

The Company incurred settlement costs in the third and fourth quarters of fiscal 2023.

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.

Contributions to the Qualified Plan Trust and benefit payments under the VIP Plan totaled $595,000 in fiscal 2023 and $654,000 in fiscal 2022.

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The equity section of the balance sheet on January 31, 2023 reflects additional paid-in capital of approximately $121 million and accumulated deficit of approximately $51 million.

Other than the losses incurred during 2004-2006, 2011-2014, 2018-2019, and 2021–2022, the accumulated deficit is a result of the accounting reclassification and is not the result of accumulated losses.

The majority of the accumulated deficit is a result of the accounting reclassification and is not the result of accumulated losses.

Environmental and Contingent Liabilities

Environmental Compliance

Environmental Compliance and Government Regulation

Virco is subject to numerous federal, state and local environmental laws and regulations in the various jurisdictions in which it operates that (a) govern operations that may have adverse environmental effects, such as the discharge of materials into the environment, as well as handling, storage, transportation and disposal practices for solid and hazardous wastes, and (b) impose liability for response costs and certain damages resulting from past and current spills, disposals or other releases of hazardous materials.

In this context, Virco works diligently to remain in compliance with all such environmental laws and regulations as these affect the Company's operations.

In this context, Virco works diligently to remain in compliance with all such environmental laws and regulations as

these affect the Company's operations.

Moreover, Virco has enacted policies for recycling and resource recovery that have earned repeated commendations, including:

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Risk Factors:

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.

We could be required to incur substantial costs to comply with environmental and other legal requirements .” Violations of, and liabilities under, these 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, 2023, 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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In addition, the Company has active safety programs to improve plant safety and control workers' compensation losses.

Under California Workers Compensation law, COVID-19 is subject to workers compensation unless the Company can prove that the employee contracted COVID-19 outside the workplace.

As of January 31, 2023, the Company has incurred no significant workers compensation claims related to COVID-19.

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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 7. Management’s Discussion and Analysis