VIRCO MFG CORPORATION 10-Q

Item 1. Financial Statements Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 7/31/2023 1/31/2023 7/31/2022 (In thousands) Assets Current assets Cash $ 1,600 $ 1,057 $ 2,179 Trade accounts receivables, net 68,592 18,435 44,286 Other receivables 58 68 95 Income tax receivable — 19 111 Inventories 71,853 67,406 61,228 Prepaid expenses and other current assets 2,228 2,083 2,068 Total current assets 144,331 89,068 109,967 Non-current assets Property, plant and equipment Land 3,731 3,731 3,731 Land improvements 686 686 653 Buildings and building improvements 51,441 51,310 51,456 Machinery and equipment 115,899 113,662 115,029 Leasehold improvements 977 983 1,012 Total property, plant and equipment 172,734 170,372 171,881 Less accumulated depreciation and amortization 137,392 135,810 136,973 Net property, plant and equipment 35,342 34,562 34,908 Operating lease right-of-use assets 8,285 10,120 12,115 Deferred tax assets, net 7,100 7,800 488 Other assets, net 9,279 8,576 8,051 Total assets $ 204,337 $ 150,126 $ 165,529 See accompanying notes to unaudited condensed consolidated financial statements. 3 Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 7/31/2023 1/31/2023 7/31/2022 (In thousands, except share and par value data) Liabilities Current liabilities Accounts payable $ 27,854 $ 19,448 $ 27,290 Accrued compensation and employee benefits 10,983 9,554 6,873 Income tax payable 3,325 — — Current portion of long-term debt 32,256 7,360 22,736 Current portion operating lease liability 5,386 5,082 4,909 Other accrued liabilities 11,259 7,081 10,057 Total current liabilities 91,063 48,525 71,865 Non-current liabilities Accrued self-insurance retention 934 1,050 1,436 Accrued pension expenses 10,827 10,676 15,238 Long-term debt, less current portion 14,261 14,384 14,504 Operating lease liability, less current portion 4,317 6,796 9,241 Other long-term liabilities 640 634 740 Total non-current liabilities 30,979 33,540 41,159 Commitments and contingencies (Notes 6, 7 and 13) Stockholders’ equity Preferred stock: Authorized 3,000,000 shares, $ 0.01 par value; none issued or outstanding — — — Common stock: Authorized 25,000,000 shares, $ 0.01 par value; issued and outstanding 16,347,314 shares at 7/31/2023 and 16,210,985 at 1/31/2023 and 7/31/2022 164 162 162 Additional paid-in capital 121,030 120,890 120,684 Accumulated deficit ( 36,539 ) ( 50,631 ) ( 62,582 ) Accumulated other comprehensive loss ( 2,360 ) ( 2,360 ) ( 5,759 ) Total stockholders’ equity 82,295 68,061 52,505 Total liabilities and stockholders’ equity $ 204,337 $ 150,126 $ 165,529 See accompanying notes to unaudited condensed consolidated financial statements. 4 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Three months ended 7/31/2023 7/31/2022 (In thousands, except per share data) Net sales $ 107,321 $ 82,797 Costs of goods sold 58,743 50,952 Gross profit 48,578 31,845 Selling, general and administrative expenses 27,324 20,671 Operating income 21,254 11,174 Unrealized (gain) loss on investment in trust account ( 325 ) 305 Pension expense 161 196 Interest expense 1,083 698 Income before income taxes 20,335 9,975 Income tax expense 4,801 295 Net income $ 15,534 $ 9,680 Net income per common share: Basic $ 0.95 $ 0.60 Diluted $ 0.95 $ 0.60 Weighted average shares of common stock outstanding: Basic 16,272 16,108 Diluted 16,294 16,108 See accompanying notes to unaudited condensed consolidated financial statements. 5 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Six months ended 7/31/2023 7/31/2022 (In thousands, except per share data) Net sales $ 142,264 $ 114,881 Costs of goods sold 80,484 73,329 Gross profit 61,780 41,552 Selling, general and administrative expenses 41,838 35,122 Operating income 19,942 6,430 Unrealized (gain) loss on investment in trust account ( 624 ) 305 Pension expense 322 391 Interest expense 1,795 1,125 Income before income taxes 18,449 4,609 Income tax expense 4,357 13 Net income $ 14,092 $ 4,596 Net income per common share: Basic $ 0.87 $ 0.29 Diluted $ 0.87 $ 0.29 Weighted average shares of common stock outstanding: Basic 16,242 16,071 Diluted 16,257 16,071 See accompanying notes to unaudited condensed consolidated financial statements. 6 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Three months ended 7/31/2023 7/31/2022 (In thousands) Net income $ 15,534 $ 9,680 Other comprehensive income: Pension adjustments — 135 Net comprehensive income $ 15,534 $ 9,815 See accompanying notes to unaudited condensed consolidated financial statements. 7 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Six months ended 7/31/2023 7/31/2022 (In thousands) Net income $ 14,092 $ 4,596 Other comprehensive income: Pension adjustments — 270 Net comprehensive income $ 14,092 $ 4,866 See accompanying notes to unaudited condensed consolidated financial statements. 8 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Cash Flows Six months ended 7/31/2023 7/31/2022 (In thousands) Operating activities Net income $ 14,092 $ 4,596 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,455 2,259 Non-cash lease benefits ( 340 ) ( 265 ) Provision for doubtful accounts 30 35 Amortization of debt issuance costs 55 69 Deferred income taxes 700 ( 89 ) Stock-based compensation 252 406 Amortization of net actuarial loss for pension plans — 270 Non-cash unrealized (gain) loss on investment ( 624 ) 305 Surrender of life insurance policies ( 95 ) — Changes in operating assets and liabilities: Trade accounts receivable ( 50,187 ) ( 26,552 ) Other receivables 10 23 Inventories ( 4,447 ) ( 13,855 ) Income taxes 3,346 43 Prepaid expenses and other current assets ( 134 ) ( 91 ) Accounts payable and accrued liabilities 13,737 12,876 Net cash used in operating activities ( 21,150 ) ( 19,970 ) Investing activities: Capital expenditures ( 2,795 ) ( 1,524 ) Purchases of marketable securities in trust accounts — ( 4,856 ) Proceeds from sale of marketable securities in trust accounts — 2,112 Proceeds from surrendering life insurance policies — 2,744 Net cash used in investing activities ( 2,795 ) ( 1,524 ) Financing activities: Borrowing from long-term debt 35,688 28,352 Repayment of long-term debt ( 10,915 ) ( 5,625 ) Payment on deferred financing costs ( 175 ) ( 200 ) Tax withholding payments on share-based compensation ( 110 ) ( 213 ) Net cash provided by financing activities 24,488 22,314 Net increase in cash 543 820 Cash at beginning of period 1,057 1,359 Cash at end of period $ 1,600 $ 2,179 See accompanying notes to unaudited condensed consolidated financial statements. 9 Virco Mfg. Corporation Unaudited Consolidated Statements of Changes in Stockholders' Equity Three-Month Period Ended July 31, 2023 Common Stock In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholder's Equity Balance at May 1, 2023 16,210,985 $ 162 $ 120,993 $ ( 52,073 ) $ ( 2,360 ) $ 66,722 Net income — — — 15,534 — 15,534 Cash dividends — — — — — — Pension adjustments — — — — — — Shares vested and others 136,329 2 ( 112 ) — — ( 110 ) Stock compensation expense — — 149 — — 149 Balance at July 31, 2023 16,347,314 $ 164 $ 121,030 $ ( 36,539 ) $ ( 2,360 ) $ 82,295 Three-Month Period Ended July 31, 2022 Common Stock In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholder's Equity Balance at May 1, 2022 16,102,023 $ 161 $ 120,745 $ ( 72,262 ) $ ( 5,894 ) $ 42,750 Net income — — — 9,680 — 9,680 Cash dividends — — — — — — Pension adjustments — — — — 135 135 Shares vested and others 108,962 1 ( 214 ) — — ( 213 ) Stock compensation expense — — 153 — — 153 Balance at July 31, 2022 16,210,985 $ 162 $ 120,684 $ ( 62,582 ) $ ( 5,759 ) $ 52,505 Six-Month Period Ended July 31, 2023 Common Stock In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholder's Equity Balance at February 1, 2023 16,210,985 $ 162 $ 120,890 $ ( 50,631 ) $ ( 2,360 ) $ 68,061 Net income — — — $ 14,092 — 14,092 Cash dividends — — — — — — Pension adjustments — — — — — — Shares vested and others 136,329 2 ( 112 ) — — ( 110 ) Stock compensation expense — — 252 — — 252 Balance at July 31, 2023 16,347,314 $ 164 $ 121,030 $ ( 36,539 ) $ ( 2,360 ) $ 82,295 10 Six-Month Period Ended July 31, 2022 Common Stock In thousands, except share data Shares Amount Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Stockholder's Equity Balance at February 1, 2022 16,102,023 $ 161 $ 120,492 $ ( 67,178 ) $ ( 6,029 ) $ 47,446 Net income — — — $ 4,596 — 4,596 Cash dividends — — — — — — Pension adjustments — — — — 270 270 Shares vested and others 108,962 1 ( 214 ) — — ( 213 ) Stock compensation expense — — 406 — — 406 Balance at July 31, 2022 16,210,985 $ 162 $ 120,684 $ ( 62,582 ) $ ( 5,759 ) $ 52,505 See accompanying notes to unaudited condensed consolidated financial statements. 11 VIRCO MFG. CORPORATION Notes to unaudited Condensed Consolidated Financial Statements July 31, 2023 Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and are presented in accordance with the requirements of Form 10-Q and Rule 10-01 of Regulation S-X. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2023 (“Form 10-K”). In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months and six months ended July 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2024. The balance sheet at January 31, 2023 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and notes required by accounting principles generally accepted in the United States for complete financial statements. All references to the “Company” refer to Virco Mfg. Corporation and its subsidiaries. Note 2. Seasonality and Management Use of Estimates The market for educational furniture is marked by extreme seasonality, with approximately 50 % of the Company’s total sales typically occurring from June to August each year, the Company’s peak season. Hence, the Company typically builds and carries significant amounts of inventory during and in anticipation of this peak summer season to facilitate the rapid delivery requirements of customers in the educational market. This requires a large up-front investment in inventory, labor, storage and related costs as inventory is built in anticipation of peak sales during the summer months. As the capital required for this build-up generally exceeds cash available from operations, the Company has generally relied on third-party bank financing to meet cash flow requirements during the build-up period immediately preceding the peak season. In addition, the Company typically is faced with an overall higher accounts receivable balance during the peak season. This occurs for two primary reasons. First, accounts receivable balances typically increase during the peak season as shipments of products increase. Second, many customers during this period are educational institutions and government entities, which tend to pay accounts receivable slower than commercial customers. The Company’s working capital requirements during and in anticipation of the peak summer season require management to make estimates and judgments that affect assets, liabilities, revenues and expenses, and related contingent assets and liabilities. On an ongoing basis, management evaluates its estimates, including those related to market demand, labor costs and stocking inventory. Significant estimates made by management include, but are not limited to, valuation of inventory; deferred tax assets and liabilities; useful lives of property, plant and equipment; liabilities under pension, warranty and self-insurance; and the accounts receivable allowance for doubtful accounts. Note 3. Recently Issued Accounting Standards The Company evaluates all Accounting Standards Updates ("ASUs") issued by the Financial Accounting Standards Board ("FASB") for consideration of their applicability to our condensed consolidated financial statements. We have assessed all ASUs issued but not yet adopted and concluded that those not disclosed are not relevant to the Company or are not expected to have a material impact. Note 4. Revenue Recognition The Company manufactures, markets and distributes a wide variety of school and office furniture to wholesalers, distributors, educational institutions and governmental entities. Revenue is recorded for promised goods or services when control is transferred to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The Company's sales generally involve a single performance obligation to deliver goods pursuant to customer purchase orders. Prices for our products are based on published price lists and customer agreements. The Company has determined that the performance obligations are satisfied at a point in time when the Company completes delivery per the customer contract. The majority of sales are free on board ("FOB") destination where the destination is specified per the customer contract and may 12 include delivering the furniture into the classroom, school site or warehouse. Sales of furniture that are sold FOB factory are typically made to resellers of our product who in turn provide logistics to the ultimate customer. Once a product has been delivered per the shipping terms, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from the asset. The Company considers control to have transferred upon shipment or delivery in accordance with shipping terms because the Company has a present right to payment at that time, the customer has legal title to the asset, the Company has transferred physical possession of the asset, and the customer has significant risks and rewards of ownership of the asset. Sales are recorded net of discounts, sales incentives and rebates, sales taxes and estimated returns and allowances. The Company offers sales incentives and discounts through various regional and national programs to our customers. These programs include product rebates, product returns allowances and trade promotions. Variable consideration for these programs is estimated in the transaction price at contract inception based on current sales levels and historical experience using the expected value method, subject to constraint. The Company generates revenue primarily by manufacturing and distributing products through resellers and direct-to-customers. Control transfers to both resellers and direct customers at a point in time when the delivery process is complete as determined by the corresponding shipping terms. Therefore, we do not consider them to be meaningfully different revenue streams given similarities in the nature of the products, performance obligation and distribution processes. Sales are predominately in the United States and to a similar class of customer. We do not manage or evaluate the business based on product line or any other discernable category. Note 5. Inventories Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis) and includes material, labor, and factory overhead. The Company records valuation adjustments for the excess cost of the inventory over its estimated net realizable value. 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 material obsolescence expenses. 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. The following table presents a breakdown of the Company’s inventories as of July 31, 2023, January 31, 2023 and July 31, 2022: 7/31/2023 1/31/2023 7/31/2022 (In thousands) Finished goods $ 24,995 $ 25,740 $ 26,336 Work in process 29,081 25,303 19,138 Raw materials 17,777 16,363 15,754 Total inventories $ 71,853 $ 67,406 $ 61,228 Note 6. Leases The Company has operating leases on real property, equipment, and automobiles, expiring at various dates through 2026. The Company determines if an arrangement is a lease at inception and assesses classification of the lease at commencement. All of the Company’s leases are classified as operating leases. Pursuant to ASC 842 - Leases , the Company uses the implicit rate when readily determinable, or the incremental borrowing rate. Our incremental borrowing rate is estimated to approximate the interest rate on a collateralized basis with similar terms and payments using Company specific credit spreads. The Company’s lease terms include options to extend or terminate the lease only when it is reasonably certain that we will exercise that option. Lease expense for our operating leases is recognized on a straight-line basis over the lease term. The Company has an operating lease for its corporate office and manufacturing and distribution facility located in Torrance, CA, currently with a remaining lease term through April 2025. The Company's lease terms include options to extend or terminate the lease only when it is reasonably certain that we exercise that option. The Company leases equipment under a 5- 13 year operating lease arrangement. The Company has the option of buying the assets at the end of the lease period at a price that does not result in the Company being reasonably certain of exercising the option. In addition, the Company leases trucks and automobiles under operating leases that include certain fleet management and maintenance services. Certain of the leases contain renewal or purchase options and require payment for property taxes and insurance. The Company records lease expense on a straight-line basis based on the contractual lease payments. In accordance with ASC 842, the Company recognizes the present value of the future lease commitments as an operating lease liability, and a corresponding right-of-use asset (“ROU asset”), net of tenant allowances. Tenant improvements and related tenant allowances are recorded as a reduction to the ROU asset. The Company elected to account for leases with an original term of 12 months or less that do not contain a purchase option as short-term leases. Additionally, certain of the leases provide for variable payment for property taxes, insurance, and common area maintenance payments, among others. The Company recognizes variable lease expenses for these leases in the period incurred. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. The quantitative information regarding our leases is as follows: Three Months Ended Six Months Ended 7/31/2023 7/31/2022 7/31/2023 7/31/2022 (In thousands, except lease term and discount rate) Operating lease cost $ 1,281 $ 1,288 $ 2,550 $ 2,615 Short-term lease cost 80 79 188 176 Sublease income ( 10 ) ( 10 ) ( 20 ) ( 20 ) Variable lease cost 160 278 421 531 Total lease cost $ 1,511 $ 1,635 $ 3,139 $ 3,302 Other operating leases information: Cash paid for amounts included in the measurement of lease liabilities $ 2,890 $ 2,880 Right-of-use assets obtained in exchange for new lease liabilities $ 364 $ 398 Weighted-average remaining lease term (years) 1.7 2.7 Weighted-average discount rate 6.36 % 6.38 % Minimum future lease payments for operating leases in effect as of July 31, 2023, are as follows: Operating Lease For the year ending January 31, (In thousands) Remaining of 2024 $ 2,902 2025 5,825 2026 1,564 2027 8 2028 — Thereafter — Remaining balance of lease payments 10,299 Short-term lease liabilities 5,386 Long-term lease liabilities 4,317 Total lease liabilities 9,703 Difference between undiscounted cash flows and discounted cash flows $ 596 14 Note 7. Debt Outstanding balances for the Company’s long-term debt were as follows: 7/31/2023 1/31/2023 7/31/2022 (In thousands) Revolving credit line $ 42,012 $ 17,122 $ 32,502 Other 4,505 4,622 4,738 Total debt 46,517 21,744 37,240 Less current portion 32,256 7,360 22,736 Non-current portion $ 14,261 $ 14,384 $ 14,504 The Company and Virco Inc., its wholly-owned subsidiary (the “Borrowers”) have a Revolving Credit and Security Agreement (the “Credit Agreement”) with PNC Bank, National Association, as administrative agent and lender (“PNC”). The Credit Agreement was amended numerous times since its origination in December 2011. On September 28, 2021, the Borrowers entered into an Amended and Restated Revolving Credit and Security Agreement (the “Restated Credit Agreement”) with PNC Bank, which amended and restated the prior Credit Agreement and effectively incorporated all of the prior amendments into an amended and restated form of agreement. 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 $ 3.0 million 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 Restated Credit Agreement also requires the Company to maintain a minimum fixed charge coverage ratio, and 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. In connection with the Restated Credit Agreement, the Company also agreed to pay to PNC Bank a non-refundable fee of $ 50,000 . In addition to the financial covenants, the Restated Credit Agreement provides for customary events of default, subject to certain cure periods and other limitations. Substantially all of the Borrowers' accounts receivable are automatically and promptly swept to repay amounts outstanding under the Restated Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the Restated Credit Agreement, 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. The other material terms of the Restated Credit Agreement are substantially the same as those of the original Credit Agreement, consisting of (i) a revolving line of credit with a Maximum Revolving Advance Amount of $ 65.0 million 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 $ 15.0 million from January through July of each year, minus undrawn amounts of letters of credit and reserves and (ii) an equipment loan of $ 2.0 million. The Restated Credit Agreement is secured by substantially all of the Borrowers’ personal property and certain of the Borrowers’ real property. The Restated Credit Agreement is subject to certain prepayment penalties upon early termination of the Restated Credit Agreement. 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, including reduced borrowings under the revolving line to less than or equal $ 10.0 million for a period of 30 consecutive days during the fourth quarter of each fiscal year. The Restated Credit Agreement also contains certain financial covenants, including covenants requiring a minimum fixed charge coverage ratio and limits on capital expenditures. The Company was in compliance with its debt covenants as of July 31, 2023. The Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $ 30.5 million was available for borrowing as of July 31, 2023. The interest rate range for outstanding loan balances during the quarter ended July 31, 2023 was 8.19 % to 10.25 %. The Company also incurs a fee on the unused portion of the revolving line of credit at a rate of 0.375 %. 15 In addition to the outstanding debt balance of $ 42.0 million on the Company's revolving credit line, the Company also carries a mortgage on a manufacturing building in Conway Arkansas. The original note was dated August 2017 for $ 5.8 million, at a fixed rate of 4 % per year and 20 years term. The outstanding amount under this note was $ 4.5 million as of July 31, 2023. On May 19, 2023, the Company entered into Amendment No. 3 to Amended and Restated Revolving Credit and Security Agreement (“Amendment No. 3”) with PNC, with an effective date of May 5, 2023. Amendment No. 3 amended the Restated Credit Agreement and the secured revolving line of credit provided to the Company under the revolving credit facility to reflect the following material changes: i. Maximum size of the PNC line of credit has been increased to $ 72.5 million during the months of June through August of 2023, to provide additional availability for the Company’s forecast through the 2023 peak borrowing period; ii. Increase in the total inventory sublimit under the Credit Agreement to $ 35.0 million and increase in the Assemble-to-ship (ATS) inventory sublimit to $ 15.0 million during the months of May through August of 2023; iii. The Company agreed to pay an amendment fee of $ 50,000 , which is 0.67 % on the incremental line increase of $ 7.5 million; and iv. Increase in the Applicable Margin (as defined in the Credit Agreement) of 25 basis points. Management believes that the carrying value of debt approximated fair value at July 31, 2023, as all of the long-term debt bears interest at variable rates based on prevailing market conditions. Note 8. Income Taxes 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, to determine whether sufficient future taxable income will be generated to realize existing deferred tax assets. Valuation allowances of $ 390,000 , $ 864,000 and $ 9,241,000 as of July 31, 2023, January 31, 2023 and July 31, 2022, respectively, are needed for federal deferred tax assets 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. For the three months ended July 31, 2023 and 2022, the effective income tax rates were 23.6 % and 3.0 %, respectively. For the six months ended July 31, 2023 and 2022, the effective income tax rates were 23.6 % and 0.3 %, respectively. The change in effective tax rates for the three and six months ended July 31, 2023 was primarily due to the change in forecasted mix of income before federal and state income taxes and estimated permanent differences. The effective tax rate for the three and six months ended July 31, 2022 was primarily due to the recording of a valuation allowance needed for federal deferred tax assets and certain state net operating loss carryforwards. The January 31, 2018 and subsequent fiscal years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. 16 Note 9. Net Income per Share The following table sets forth the computation of basic and diluted net income per share: Three Months Ended Six Months Ended 7/31/2023 7/31/2022 7/31/2023 7/31/2022 (In thousands, except per share data) Net income $ 15,534 $ 9,680 $ 14,092 $ 4,596 Weighted average shares of common stock outstanding - basic 16,272 16,108 16,242 16,071 Dilutive effect of common stock equivalents from equity incentive plans 22 — 15 — Weighted average shares of common stock outstanding - diluted 16,294 16,108 16,257 16,071 Net income per share - basic $ 0.95 $ 0.60 $ 0.87 $ 0.29 Net income per share - diluted $ 0.95 $ 0.60 $ 0.87 $ 0.29 Note 10. Stock-Based Compensation Stock Incentive Plan Under the Company's 2019 Omnibus Equity Incentive Plan (the “2019 Plan”), the Company may grant an aggregate of up to 1,000,000 shares to its employees and non-employee directors in the form of restricted stock units, restricted stock awards and stock options. Restricted stock units and awards granted under the 2019 Plan are expensed ratably over the vesting period of the awards. The Company determines the fair value of its restricted stock units or awards and related compensation expense as the difference between the market value of the units or awards on the date of grant less the exercise price of the units or awards granted. During the three-month and six-month periods ended July 31, 2023, the Company granted 70,510 awards, vested 93,600 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of July 31, 2023, there were approximately 537,925 shares available for future issuance under the 2019 Plan. The following table summarizes the stock-based compensation expense related to restricted stock awards recognized in the Company's statements of operations for the three and six months ended July 31, 2023 and 2022: Three Months Ended Six Months Ended 7/31/2023 7/31/2022 7/31/2023 7/31/2022 (In thousands) Cost of goods sold $ 28 $ 37 $ 56 $ 92 Selling, general and administrative expenses 121 116 196 314 Total stock-based compensation expense $ 149 $ 153 $ 252 $ 406 As of July 31, 2023, there was $ 572,000 of unrecognized compensation expense related to unvested restricted stock units and/or awards, which is expected to be recognized over a weighted average period of approximately 1 year. Note 11. Retirement Plans The Company and its subsidiaries cover certain employees under a noncontributory defined benefit retirement plan, entitled the Virco Employees’ Retirement Plan (the “Pension Plan”). As more fully described in the Annual Report on Form 10-K, benefit accruals under the Employees Retirement Plan were frozen effective December 31, 2003. There is no service cost incurred under this plan. 17 The Company also provides a supplementary retirement plan for certain key employees, the VIP Retirement Plan (the “VIP Plan”). As more fully described in the Annual Report on Form 10-K for the year ended January 31, 2023, benefit accruals under the VIP Plan were frozen since December 31, 2003. There is no service cost incurred under the VIP Plan. The following table summarizes t he net periodic pension cost for the Pension Plan and the VIP Plan for the three and six months ended July 31, 2023 and 2022: Three Months Ended Six Months Ended 7/31/2023 7/31/2022 7/31/2023 7/31/2022 (In thousands) Service cost $ — $ — $ — $ — Interest cost 360 299 720 597 Expected return on plan assets ( 199 ) ( 237 ) ( 398 ) ( 474 ) Plan settlement — — — — Amortization of prior service cost — — — — Recognized net actuarial loss — 134 — 268 Benefit cost $ 161 $ 196 $ 322 $ 391 401(k) Retirement Plan The Company’s retirement plan, which covers all U.S. employees, allows participants to defer from 1 % to 75 % of their eligible compensation through a 401(k)-retirement program. The plan includes Virco stock as one of the investment options. At July 31, 2023 and 2022, the plan held 1,415,111 shares and 1,221,095 shares of Virco stock, respectively. For the three-month period ended July 31, 2023 and 2022, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 319,000 and $ 322,000 respectively. For the six-month period ended July 31, 2023 and 2022, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 722,000 and $ 652,000 respectively. . Note 12. Warranty Accrual The Company provides a warranty against all substantial defects in material and workmanship. The standard warranty offered on products sold through January 31, 2013 is ten years . Effective February 1, 2014 the Company modified its warranty to a limited lifetime warranty. The warranty was effective February 1, 2014, is not anticipated to have a significant effect on warranty expense. Effective January 1, 2017, the Company modified the standard warranty offered on products sold after January 1, 2017 to provide specific warranty periods by product component, with no warranty period longer than ten years . The Company’s warranty is not a guarantee of service life, which depends upon events outside the Company’s control and may be different from the warranty period. The Company accrues an estimate of its exposure to warranty claims based upon both product sales data and an analysis of actual warranty claims incurred. The following is a summary of the Company’s warranty-claim activity for the three and six months ended July 31, 2023 and 2022: Three Months Ended Six Months Ended 7/31/2023 7/31/2022 7/31/2023 7/31/2022 (In thousands) Beginning balance $ 600 $ 600 $ 600 $ 600 Provision 50 116 91 150 Costs incurred ( 50 ) ( 66 ) ( 91 ) ( 100 ) Ending balance $ 600 $ 650 $ 600 $ 650 Note 13. Contingencies The Company has a self-insured retention for product losses up to $ 250,000 per occurrence, workers’ compensation liability losses up to $ 250,000 per occurrence, general liability losses up to $ 50,000 per occurrence and automobile liability losses up to $ 50,000 per occurrence. The Company has purchased insurance to cover losses in excess of the self-insurance retention or 18 deductible up to a limit of $ 30,000,000 . The Company has obtained an actuarial estimate of its total expected future losses for liability claims and recorded a liability equal to the net present value. The Company and its subsidiaries are defendants in various legal proceedings resulting from operations in the normal course of business. It is the opinion of management, in consultation with legal counsel, that the ultimate outcome of all such matters will not materially affect the Company’s financial position, results of operations or cash flows. Note 14. Delivery Costs For the three months ended July 31, 2023 and 2022, shipping and classroom delivery costs of approximately $ 9,991,000 and $ 7,129,000 , respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. For the six months ended July 31, 2023 and 2022, shipping and classroom delivery costs of approximately $ 13,334,000 and $ 10,383,000 , respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Note 15. Subsequent Events None. 19