What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-04-12 compared with 2023-04-28 · 95 added, 116 removed, 298 unchanged (41% of the section changed)

18 unchanged sentences

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

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

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

During fiscal 2022, 2023, and 2024 order rates recovered.

Initially, the Company has difficulty sourcing adequate new permanent and temporary workers.

The Company remedied this by providing significant raises to its hourly work force, and for fiscal years 2023 and 2024 our ability to support the seasonal business model returned to pre-COVID capabilities.

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 nearly 80% of sales delivered FOB classroom destination.

The Company primarily sells to schools FOB destination, with approximately 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.

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

This trend continued through fiscal 2023.

This trend continued through fiscal 2023 and 2024.

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.

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In fiscal 2023, approximately 47% of the Company's total sales were delivered in June, July, and August.

In fiscal 2024, approximately 49% of the Company's total sales were delivered in June, July, and August.

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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(1) available funding in a school's general operating fund and (2) the completion of bond-funded projects, which is directly impacted by the amount of bond financing issued to fund new school construction, to renovate older schools, and to fully equip new and renovated schools.

We believe that a significant majority, approximately 80-85%, of a school's operating budget is for the salaries and benefits for school teachers and administrators.

We believe that a significant majority, approximately 80-85%, of a typical school's operating budget is for the salaries and benefits for school teachers and administrators.

Increasing costs for medical insurance, combined with pressures from unfunded post-retirement medical and pension obligations reduces funds available for other purposes .

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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.

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 not as severe as experienced in 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.

In 2024, the Company increased selling prices in anticipation of additional cost increases.

The cost of materials in 2024 were reasonably stable compared to the volatility in prior years – especially the years impacted by COVID.

Approximately 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.

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For the year ending January 31, 2025 ("fiscal 2025"), 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.

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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.

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.

Finally, many of our domestic competitors, especially small dealerships, may be undercapitalized and less capable of supporting the significant seasonal nature of our business.

We believe that our financial strength, which allows us to build material quantities of inventory in advance of the summer delivery season, is a significant competitive advantage.

Critical Accounting Policies and Estimates

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Certain of these estimates are considered critical accounting estimates.

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.

On an ongoing basis, management evaluates estimates, including those related to valuation of inventory and related excess and obsolete inventories, 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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Virco's critical accounting policies and estimates are as follows:

Inventory Valuation :

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.

Slow-Moving and Obsolete Inventories :

Inventory is valued at the lower of cost or net realizable value (determined on a first-in, first-out basis (“FIFO”)) 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 involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations.

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 market for educational 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.

While we believe that adequate adjustments for inventory obsolescence have been made in the consolidated financial statements, our obsolescence adjustments calculations contain estimates that require management to make assumptions based on several factors, including market conditions, the selling environment, historical results, supply-chain environment, current inventory trends and customer behavior.

There have been no changes to our policies for establishing adjustments throughout the year, and we do not expect significant changes to our historical obsolescence levels.

A 10% increase in our year-end inventory adjustments would decrease our net income by approximately $480,000, on an after-tax basis.

The net income would increase by similar amounts if the inventory adjustments was to decrease by a comparable percentage.

As of January 31, 2024 and January 31, 2023, our inventory obsolescence adjustments were $6.0 million and $5.0 million, respectively, representing 10.8% and 7.8%, respectively, of our inventories on a FIFO basis.

Self-Insured Retention :

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

In the current year, the Plan purchased approximately $5.0 million of annuities for retired employees.

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 third and fourth quarters of fiscal 2023 and the second, third, and fourth quarters of fiscal 2022.

The Company incurred settlement costs in the third and fourth quarters of fiscal 2024 and the third, and fourth quarters of fiscal 2023.

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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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.

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.

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 $17.7 million greater than the prior year ended January 31, 2022 and $34.4 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.

At January 31, 2024, the Company recorded a partial valuation allowances of $251,000 on certain state NOL to reduce the carrying amount of deferred tax assets to an amount that is more-likely-than-not to be realized.

The net change in the valuation allowance for the year ended January 31, 2024, was a decrease of $613,000.

At January 31, 2024, the Company has no NOL for U.S.

federal tax purposes and $9.0 million for state income tax purposes, expiring at various dates through January 31, 2042.

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.

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Financial Highlights

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.

The Company earned a pre-tax profit of $29.2 million on net sales of $269.1 million for fiscal 2024, compared to pre-tax profit of $8.0 million on net sales of $231.1 million in fiscal 2023, an improvement of $21.2 million.

Net income per diluted share increased to $1.34 for fiscal 2024, compared to $1.02 per diluted share in the prior year.

Cash flow provided by operations was $27.0 million in fiscal 2024, compared to cash used in operations of $3.8 million in fiscal 2023.

Virco's net sales increased by 16.5% in fiscal 2024 to $269.1 million compared to $231.1 million in fiscal 2023.

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

The increase in net sales was attributable to an increase in selling prices combined with a comparable increase from unit volume.

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

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

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

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

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 to recover volatile commodity, energy, freight, and labor costs.

In fiscal 2024 order rates increased by approximately 6%.

The Company believes that order rates have now substantially recovered from the impact of COVID.

Orders for furniture which included full service classroom delivery increased relative to total sales as schools increasingly rely on Virco to provide logistics and turn key site support.

For fiscal 2025, the lingering effect of the COVID-19 pandemic and related generosity of federal support is continuing to create uncertainty as state and local government budgets may be adversely impacted.

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

The Company does not anticipate material margin growth as recent price increases have restored profitability.

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.

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Cost of sales was 56.9% of net sales in fiscal 2024 and 63.1% of net sales in fiscal 2023.

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.

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 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.

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 combined with an increase in orders requiring full service.

Full service orders typically generate greater margins, but also result in increased service costs which are included in selling, general, and administrative expenses.

The material portion of our costs as a percentage of sales was 34.7% of net sales in fiscal 2024 and 39.2% of net sales in fiscal 2023.

This was primarily due to price increases in 2023 and 2024 combined with relatively stable commodity costs.

Direct labor costs decreased slightly as a percentage of sales.

Overhead costs as a percentage of sales increased, primarily due to reduced levels of production.

The Company reduced production levels in order to control inventory levels and partly due to stabilized supply chain conditions.

During fiscal 2025, 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.

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Selling, General and Administrative and Other Expenses

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.

Selling, general and administrative expenses (SG&A) for fiscal 2024 increased by $9.5 million to $84.2 million from $74.7 million but decreased as a percentage of net sales to 31.3% in fiscal 2024 from 32.3% in fiscal 2023.

The increase in SG&A was primarily attributable to variable service expenses and variable selling expenses.

Pension expense increased due to Plan settlement expenses.

Interest expense was $700,000 higher in fiscal 2024 compared to fiscal 2023 because of increased levels of seasonal borrowing and higher interest rates.

Provision for Income Taxes

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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.

The Company utilized a material portion of its federal and certain state net operating loss carryforwards ("NOL") in fiscal 2023 and anticipated that all federal NOL could 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.

During fiscal 2024 the Company utilized all of its federal NOL’s and a significant portion of its state NOL’s.

The effective tax rate for 2024 is more representative of rates that will affect fiscal 2025.

Valuation allowances of $251,000 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.

At January 31, 2024, the Company has no operating loss carryforwards for U.S.

federal, and $9.0 million for state income tax purposes, expiring at various dates through January 31, 2042.

The following table shows summary cash flows information for the fiscal years ended January 31, 2024 and 2023:

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(In thousands)

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

Net cash provided by (used in) operating activities $ 26,960 $ (3,788)

Net cash used in investing activities $ (4,759) $ (3,332)

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

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

Net cash (used in) provided by financing activities $ (17,972) $ 6,818

Net increase (decrease) in cash $ 4,229 $ (302)

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 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.

Net cash provided in operations increased by $30.7 million for the fiscal year ended January 31, 2024.

This improvement is primarily attributable to improved profitability (pre-tax as prior year income included an adjustment to deferred tax valuation) combined with a reduction in inventory.

The prior year was adversely affected by an increase in inventory due to a large order received in the fourth quarter combined with a recovery from supply chain issues incurred in 2022.

Investing activities.

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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.

The net investing 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.

Net investment activities were lower than typical for the fiscal year ended January 31, 2023 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.

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The Company typically repays the seasonal borrowings at the conclusion of the summer busy season.

In fiscal 2024 the Company materially reduced its year end borrowings under the line of credit, primarily due to cash flows from operations.

Inflation and Future Change in Prices

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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.

In fiscal 2023, the cost of commodities was volatile, but not as severe as years during the peak of COVID.

During fiscal 2024 the cost of commodities was reasonably stable.

For fiscal 2025, 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.

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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.

The Company has renewed health insurance contracts for its employees through December 2024, but costs after that date may be adversely impacted by current legislation, claim costs and industry consolidation.

To recover the cumulative impact of increased costs, the Company has increased published list prices for fiscal 2025.

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.

Due to current economic conditions, the Company anticipates increased price competition in fiscal 2025 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.

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

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

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

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

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

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

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

The Restated Credit Agreement as currently in effect provides the Borrowers with a secured revolving line of credit (“Revolving Credit Facility”) of up to $65.0 million, with seasonal adjustments to the credit limit (up to $70.0 million during the months of June, July and August 2024) and subject to borrowing base limitations and includes a sub-limit of up to $3.0 million for issuances of letters of credit.

In addition, the Restated Credit Agreement provides an inventory sublimit of $35.0 million and Assemble-to-ship (“ATS”) inventory sublimit of $15.0 million during the months of May through August 2024, and an Equipment Line for purchases of equipment of up to $2.0 million.

The Revolving Credit Facility is an asset-based line of credit that is subject to a borrowing base limitation and generally provides for advances of up to 85% of eligible accounts receivable, plus a percentage equal to the lesser of 60% of the value of eligible inventory or 85% of the liquidation value of eligible inventory, plus $15.0 million for the period from December to July of each year minus undrawn amounts of letters of credit and reserves.

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

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

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

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

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The interest rate at January 31, 2024 was 10.5%.

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.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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 contains a clean-down provision that requires the Company to reduce borrowings under the line of credit to less than $10.0 million for a period of 30 consecutive days during the Company’s fourth fiscal quarter of each fiscal year.

The clean-down provision allows the Company to maintain the minimum outstanding balance of $10.0 million to be carried on an uninterrupted period extending beyond one year and ultimately due at the scheduled maturity.

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

Events of default (subject to certain cure periods and other limitations) under the 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.

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

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

Approximately $12,878,000 was available for borrowing as of January 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 $30.0 million and $12.9 million were available for borrowing as of January 31, 2024 and 2023, respectively.

Long-Term Capital Requirements

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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 million for fiscal 2024.

The Company anticipates capital spending of approximately $5.0 million for fiscal 2025.

Our Revolving Credit Facility with PNC Bank provides a $2.0 million line for equipment and covenants allow for anticipated capital expenditures for fiscal 2025.

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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.

With the recent increase in interest rates the Company was able to purchase approximately $5.0 million of annuities in the third quarter ended October 31, 2023, resulting in a settlement charge in that quarter.

In the future, the Company may purchase additional annuities from third parties to further de-risk the Plan.

The Company incurred settlement costs in the third and fourth quarters of fiscal 2024.

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

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

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 and to minimize PBGC related expenses.

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.

Contributions during fiscal 2024 will depend upon actual investment results and benefit payments but are anticipated to be approximately $500,000.

Contributions to the Qualified Plan Trust and benefit payments under the VIP Plan totaled $676,000 and $595,000 in fiscal 2024 and 2023, respectively.

Contributions during fiscal 2025 will depend upon actual investment results and benefit payments but are anticipated to be less than $0.5 million.

At January 31, 2024, accumulated other comprehensive loss of approximately $1.3 million, net of tax, is attributable to the pension plans.

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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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In prior years the Company has been partially self-insured for workers' compensation, automobile, product, and general liability losses.

The Company has purchased insurance to cover losses in excess of the self-insured retention or deductible up to a limit of $30,000,000.

The Company has purchased insurance to cover losses in excess of the self-insured retention or deductible up to a limit of $30.0 million.

For the insurance year beginning April 1, 2024, 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.

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Quantitative and Qualitative Disclosures about Market Risk

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act as of our second quarter of fiscal 2023 and are not required to provide the information under this item.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and as such is not required to provide the information under this item.

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