VIRCO MFG CORPORATION 10-Q

Item 1. Financial Statements Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 10/31/2024 1/31/2024 10/31/2023 (In thousands) Assets Current assets Cash $ 38,858 $ 5,286 $ 4,887 Trade accounts receivables, net 28,168 23,161 33,029 Inventories 48,948 58,371 58,931 Prepaid expenses and other current assets 3,479 2,208 1,988 Total current assets 119,453 89,026 98,835 Non-current assets Property, plant and equipment Land 3,731 3,731 3,731 Land improvements 697 694 694 Buildings and building improvements 51,950 51,576 51,498 Machinery and equipment 118,324 114,400 116,695 Leasehold improvements 523 523 976 Total property, plant and equipment 175,225 170,924 173,594 Less accumulated depreciation and amortization 139,604 136,356 138,650 Net property, plant and equipment 35,621 34,568 34,944 Operating lease right-of-use assets 36,876 6,508 7,156 Deferred tax assets, net 6,550 6,634 7,031 Other assets, net 11,645 9,709 9,073 Total assets $ 210,145 $ 146,445 $ 157,039 See accompanying notes to unaudited condensed consolidated financial statements. 3 Virco Mfg. Corporation Unaudited Condensed Consolidated Balance Sheets 10/31/2024 1/31/2024 10/31/2023 (In thousands, except share and par value data) Liabilities Current liabilities Accounts payable $ 15,381 $ 12,945 $ 14,351 Accrued compensation and employee benefits 12,439 10,880 11,102 Income tax payable 1,463 145 3,130 Current portion of long-term debt 256 248 245 Current portion of operating lease liability 863 5,744 5,465 Other accrued liabilities 11,142 8,570 7,339 Total current liabilities 41,544 38,532 41,632 Non-current liabilities Accrued self-insurance retention 1,033 650 748 Accrued pension expenses 9,345 9,429 9,334 Income tax payable, less current portion 261 128 — Long-term debt, less current portion 3,943 4,136 7,946 Operating lease liability, less current portion 37,380 1,829 2,933 Other long-term liabilities 780 562 657 Total non-current liabilities 52,742 16,734 21,618 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 16,289,406 shares at 10/31/2024, and 16,347,314 at 1/31/2024 and 10/31/2023 163 164 164 Additional paid-in capital 119,796 121,373 121,201 Accumulated deficit ( 2,734 ) ( 29,048 ) ( 26,379 ) Accumulated other comprehensive loss ( 1,366 ) ( 1,310 ) ( 1,197 ) Total stockholders’ equity 115,859 91,179 93,789 Total liabilities and stockholders’ equity $ 210,145 $ 146,445 $ 157,039 See accompanying notes to unaudited condensed consolidated financial statements. 4 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Three months ended 10/31/2024 10/31/2023 (In thousands, except per share data) Net sales $ 82,620 $ 84,252 Costs of goods sold 45,942 46,041 Gross profit 36,678 38,211 Selling, general and administrative expenses 25,565 23,505 Operating income 11,113 14,706 Unrealized (gain) loss on investment in trust account ( 246 ) 176 Pension expense 106 301 Interest (income) expense, net ( 24 ) 765 Income before income taxes 11,277 13,464 Income tax expense 2,876 3,304 Net income $ 8,401 $ 10,160 Cash dividends declared per common share: $ 0.025 $ — Net income per common share: Basic $ 0.52 $ 0.62 Diluted $ 0.52 $ 0.62 Weighted average shares of common stock outstanding: Basic 16,289 16,347 Diluted 16,296 16,428 See accompanying notes to unaudited condensed consolidated financial statements. 5 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Income Nine months ended 10/31/2024 10/31/2023 (In thousands, except per share data) Net sales $ 237,774 $ 226,516 Costs of goods sold 130,531 126,525 Gross profit 107,243 99,991 Selling, general and administrative expenses 71,265 65,343 Operating income 35,978 34,648 Unrealized gain on investment in trust account ( 1,058 ) ( 448 ) Pension expense 320 623 Interest expense 506 2,560 Income before income taxes 36,210 31,913 Income tax expense 8,836 7,661 Net income $ 27,374 $ 24,252 Cash dividends declared per common share: $ 0.065 $ — Net income per common share: Basic $ 1.67 $ 1.49 Diluted $ 1.67 $ 1.48 Weighted average shares of common stock outstanding: Basic 16,379 16,277 Diluted 16,382 16,334 See accompanying notes to unaudited condensed consolidated financial statements. 6 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Three months ended 10/31/2024 10/31/2023 (In thousands) Net income $ 8,401 $ 10,160 Other comprehensive income: Pension adjustments (net of tax adjustment of $( 29 ) and $ 406 at October 31, 2024 and 2023, respectively) ( 9 ) 1,163 Net comprehensive income $ 8,392 $ 11,323 See accompanying notes to unaudited condensed consolidated financial statements. 7 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Comprehensive Income Nine months ended 10/31/2024 10/31/2023 (In thousands) Net income $ 27,374 $ 24,252 Other comprehensive income: Pension adjustments (net of tax adjustment of $( 57 ) and $ 406 at October 31, 2024 and 2023, respectively) ( 56 ) 1,163 Net comprehensive income $ 27,318 $ 25,415 See accompanying notes to unaudited condensed consolidated financial statements. 8 Virco Mfg. Corporation Unaudited Condensed Consolidated Statements of Cash Flows Nine months ended 10/31/2024 10/31/2023 (In thousands) Operating activities Net income $ 27,374 $ 24,252 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,165 3,763 Non-cash lease expense (benefits) 302 ( 517 ) Provision for credit losses 45 45 Amortization of debt issuance costs 81 85 Deferred income taxes 272 363 Stock-based compensation 333 423 Defined pension plan settlement — 372 Amortization of net actuarial gain (loss) for pension plans ( 113 ) 3 Non-cash unrealized gain on investment ( 1,058 ) ( 448 ) Surrender of life insurance policies ( 719 ) ( 95 ) Changes in operating assets and liabilities: Trade accounts receivable ( 5,052 ) ( 14,639 ) Other receivables ( 266 ) 41 Inventories 9,423 8,475 Income taxes 1,318 3,167 Prepaid expenses and other current assets ( 971 ) 133 Accounts payable and accrued liabilities 6,286 ( 3,150 ) Net cash provided by operating activities 41,420 22,273 Investing activities: Purchases of property, plant and equipment ( 5,365 ) ( 4,605 ) Purchases of marketable securities in trust accounts ( 1,285 ) — Proceeds from sale of fixed assets 4 — Proceeds from sale of marketable securities in trust accounts 1,285 — Proceeds from surrendering life insurance policies 719 — Net cash used in investing activities ( 4,642 ) ( 4,605 ) Financing activities: Borrowing from long-term debt 23,165 36,906 Repayment of long-term debt ( 23,350 ) ( 50,459 ) Common stock repurchased ( 1,499 ) — Tax withholding payments on share-based compensation ( 412 ) ( 110 ) Payment of deferred financing costs ( 50 ) ( 175 ) Cash dividends paid ( 1,060 ) — Net cash used in financing activities ( 3,206 ) ( 13,838 ) Net increase in cash 33,572 3,830 Cash at beginning of period 5,286 1,057 Cash at end of period $ 38,858 $ 4,887 Supplemental disclosures of cash flow information: Property, plant and equipment acquired and not yet paid at end of period $ 350 $ 178 Cash paid during the period for interest, net of interest income $ 506 $ 2,223 Cash paid during the period for income taxes, net of refunds $ 7,291 $ 4,156 Noncash investment in right-of-use assets in exchange for a lease liability $ 32,982 $ — 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 October 31, 2024 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 July 31, 2024 16,289,406 $ 163 $ 119,734 $ ( 10,728 ) $ ( 1,357 ) $ 107,812 Net income — — — 8,401 — 8,401 Cash dividends — — — ( 407 ) — ( 407 ) Pension adjustments — — — — ( 9 ) ( 9 ) Shares vested and others — — ( 1 ) — — ( 1 ) Stock compensation expense — — 63 — — 63 Stock repurchase — — — — — — Balance at October 31, 2024 16,289,406 $ 163 $ 119,796 $ ( 2,734 ) $ ( 1,366 ) $ 115,859 Three-Month Period Ended October 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 July 31, 2023 16,347,314 $ 164 $ 121,030 $ ( 36,539 ) $ ( 2,360 ) $ 82,295 Net income — — — 10,160 — 10,160 Cash dividends — — — — — — Pension adjustments — — — — 1,163 1,163 Shares vested and others — — — — — — Stock compensation expense — — 171 — — 171 Stock repurchase — — — — — — Balance at October 31, 2023 16,347,314 $ 164 $ 121,201 $ ( 26,379 ) $ ( 1,197 ) $ 93,789 Nine-Month Period Ended October 31, 2024 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 January 31, 2024 16,347,314 $ 164 $ 121,373 $ ( 29,048 ) $ ( 1,310 ) $ 91,179 Net income — — — 27,374 — 27,374 Cash dividends — — — ( 1,060 ) — ( 1,060 ) Pension adjustments — — — — ( 56 ) ( 56 ) Shares vested and others 81,794 1 ( 413 ) — — ( 412 ) Stock compensation expense — — 333 — — 333 Stock repurchase ( 139,702 ) ( 2 ) ( 1,497 ) $ — — ( 1,499 ) Balance at October 31, 2024 16,289,406 $ 163 $ 119,796 $ ( 2,734 ) $ ( 1,366 ) $ 115,859 10 Nine-Month Period Ended October 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 January 31, 2023 16,210,985 $ 162 $ 120,890 $ ( 50,631 ) $ ( 2,360 ) $ 68,061 Net income — — — 24,252 — 24,252 Cash dividends — — — — — — Pension adjustments — — — — 1,163 1,163 Shares vested and others 136,329 2 ( 112 ) — — ( 110 ) Stock compensation expense — — 423 — — 423 Stock repurchase — — — — — — Balance at October 31, 2023 16,347,314 $ 164 $ 121,201 $ ( 26,379 ) $ ( 1,197 ) $ 93,789 See accompanying notes to unaudited condensed consolidated financial statements. 11 VIRCO MFG. CORPORATION Notes to unaudited Condensed Consolidated Financial Statements October 31, 2024 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, 2024 (“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 nine months ended October 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending January 31, 2025. The balance sheet at January 31, 2024 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”, “we” and “our” 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 credit losses. Note 3. Recently Issued Accounting Standards ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. In November 2024, the FASB issued this ASU which requires a public entity to disclose additional information about specific expense categories in the notes to financial statements on an annual and interim basis. The amendments are effective for annual periods beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. A public entity should apply the amendments either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the financial statements. We are currently evaluating the impact that this guidance will have on our consolidated financial statements and disclosures. Accounting Standards Updates ("ASUs") 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. In November 2023, the FASB issued this ASU to update reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses and information used to assess segment performance. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. We do not expect that this guidance will have a material impact on our consolidated financial statements and disclosures. 12 ASU 2023-09, Income Taxes (Topic 740): Improvements to Tax Disclosures. In December 2023, the FASB issued this ASU which expands disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. We do not expect that this guidance will have a material impact on our consolidated financial statements and disclosures. The Company evaluates all 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 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 (“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 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. The following table presents a breakdown of the Company’s inventories as of October 31, 2024, January 31, 2024 and October 31, 2023: 13 10/31/2024 1/31/2024 10/31/2023 (In thousands) Finished goods $ 17,793 $ 18,861 $ 20,587 Work in process 18,137 25,047 23,270 Raw materials 13,018 14,463 15,074 Total inventories $ 48,948 $ 58,371 $ 58,931 Note 6. Leases The Company has operating leases on real property, equipment, and automobiles, expiring at various dates through the fiscal year 2031. The Company determines if an arrangement is a lease at inception and assesses classification of the lease at commencement. The Company's lease terms include options to extend or terminate the lease only when it is reasonably certain that we exercise that option. All of the Company’s leases are classified as operating 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, California, currently with a remaining lease term through September 2030. The Company leases equipment under a 5-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. 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 Nine Months Ended 10/31/2024 10/31/2023 10/31/2024 10/31/2023 (In thousands, except lease term and discount rate) Operating lease cost $ 2,341 $ 1,278 $ 5,183 $ 3,828 Short-term lease cost 172 119 406 307 Sublease income ( 10 ) ( 10 ) ( 30 ) ( 30 ) Variable lease cost 4 252 622 673 Total lease cost $ 2,507 $ 1,639 $ 6,181 $ 4,778 Other operating leases information: Cash paid for amounts included in the measurement of lease liabilities $ 4,881 $ 4,345 Right-of-use assets obtained in exchange for new lease liabilities (a) $ 34,309 $ 364 Weighted-average remaining lease term (years) 5.7 1.5 Weighted-average discount rate 9.80 % 6.36 % 14 Minimum future lease payments for operating leases in effect as of October 31, 2024, are as follows: Operating Lease For the year ending January 31, (In thousands) Remaining of 2025 $ 1,641 2026 5,242 2027 9,539 2028 9,308 2029 9,587 Thereafter 16,739 Remaining balance of lease payments 52,056 Short-term lease liabilities 863 Long-term lease liabilities 37,380 Total lease liabilities 38,243 Difference between undiscounted cash flows and discounted cash flows $ 13,813 (a) On July 23, 2024, the Company entered into a new lease agreement (the “ Lease ”) with Starboard Distribution Center, LLC which extends the Company’s tenancy at its 560,000 sq. ft. office, manufacturing and warehouse facility in Torrance, California. The Lease extends the tenancy for 65 months, covering the period from May 1, 2025 through September 30, 2030. Under the Lease, the monthly base rent will be abated for the initial 5-month period from May 1, 2025 to September 30, 2025, then is set at $ 726,700 for October 1, 2025 through April 30, 2026, with subsequent increases of 3.5 % every 12 months thereafter. The Lease also provides for a tenant improvement allowance of up to $ 1.7 million to be used by December 31, 2026. The Landlord has the right to terminate the Lease upon customary events of default. In connection with this lease agreement, in the second quarter ended July 31, 2024, the Company recorded approximately $ 33.0 million (the present value of the future lease commitments) as an operating lease liability, and a corresponding ROU asset. Note 7. Debt Outstanding balances for the Company’s long-term debt were as follows: 10/31/2024 1/31/2024 10/31/2023 (In thousands) Revolving credit line $ — $ — $ 3,747 Other 4,199 4,384 4,444 Total debt 4,199 4,384 8,191 Less current portion 256 248 245 Non-current portion $ 3,943 $ 4,136 $ 7,946 The Company and Virco Inc., its wholly-owned subsidiary (collectively, 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, most recently on November 22, 2024. The Credit Agreement as currently in effect permits the Company to issue cash dividends or make payments with respect to the Company’s capital stock in an aggregate amount up to $ 5.0 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 Credit Agreement also requires the Company to maintain a minimum fixed charge 15 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 addition to the financial covenants, the 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 Credit Agreement upon receipt by the Borrowers. Due to this automatic liquidating nature of the 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 Credit Agreement as currently in effect include the following: (i) a revolving line of credit with a Maximum Revolving Advance Amount of $ 60.0 million (increasing to $ 70.0 million during the months of June through August 2024) 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; (ii) 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 (iii) an equipment loan of $ 2.0 million. The Credit Agreement is secured by substantially all of the Borrowers’ personal property and certain of the Borrowers’ real property. The Credit Agreement is subject to certain prepayment penalties upon early termination of the Credit Agreement. Prior to the maturity date, principal amounts outstanding under the Credit Agreement may be repaid and reborrowed at the option of the Borrowers without premium or penalty, subject to borrowing base limitations, seasonal adjustments and certain other conditions, 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 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 October 31, 2024. The Company's revolving line of credit with PNC is structured to provide seasonal credit availability during the Company's peak summer season. Approximately $ 18.7 million was available for borrowing as of October 31, 2024. The interest rate is determined as a sum of the applicable margin rate, which is 3.00 % from January through July and 2.50 % from August through December, plus the Secured Overnight Financing Rate (SOFR). The Company did not have an outstanding amount under the Credit Agreement as of October 31, 2024. The Company also incurred a fee on the unused portion of the revolving line of credit at a rate of 0.375 % through September 30, 2024 and 0.250 % thereafter. On November 22, 2024, the Company entered into Amendment No. 5 to Amended and Restated Revolving Credit and Security Agreement (“Amendment No. 5”) with PNC, with an effective date of October 1, 2024. Amendment No. 5 amended the Credit Agreement and the secured revolving line of credit provided to the Company by PNC to reflect the following material changes: i. Reduced the facility fee on the unused portion of the revolving line of credit to 0.250 % from 0.375 % per annum, commencing October 1, 2024; ii. Increased limits on permitted acquisitions (as defined in the Credit Agreement) from $ 5 million to $ 8 million during the term of the Credit Agreement; iii. Increased limits on cash dividends and common stock repurchase payments from $ 5 million to $ 8 million in the aggregate during any fiscal year. The Company also carries a mortgage on its manufacturing building in Conway, Arkansas. The original note was dated August 2017 with a principal balance of $ 5.8 million, at a fixed rate of 4.0 % per year and 20 -year term. The outstanding amount under this note was $ 4.2 million as of October 31, 2024. On April 29, 2024, the Company entered into Amendment No. 4 to the Credit Agreement ("Amendment No. 4") with PNC. Amendment No.4 amended the Credit Agreement to reflect the following material changes: i. Maximum size of the PNC line of credit was lowered from $ 72.5 million to $ 70.0 million during the months of June through August, and ii. Maximum amount allowed for the Company to issue dividends or repurchase stock has been increased from $ 3.0 million to $ 5.0 million in the aggregate during any fiscal year. 16 Management believes that the carrying value of debt approximated fair value at October 31, 2024, as all of the long-term debt bears interest at variable rates based on prevailing market conditions, except mortgage on a manufacturing building in Conway Arkansas at a fixed rate of 4.0 % per year. 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 carrybacks, 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 $ 218,000 , $ 251,000 and $ 255,000 as of October 31, 2024, January 31, 2024 and October 31, 2023, 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. The net change in the valuation allowance for the three months and nine months ended October 31, 2024 was $ 0 and a decrease of $ 33,000 , respectively. The net change in the valuation allowance for the three months and nine months ended October 31, 2023 was a decrease of $ 135,000 and a decrease of $ 609,000 , respectively. For the three months ended October 31, 2024 and 2023, the effective income tax rates were 25.5 % and 24.5 %, respectively. For the nine months ended October 31, 2024 and 2023, the effective income tax rates were 24.4 % and 24.0 %, respectively. Our effective tax rate varies from the 21% federal statutory rate primarily due to state taxes. The January 31, 2019 and subsequent fiscal years remain open for examination by the IRS and state tax authorities. The Company is not currently under any state examination. Note 9. Net Income per Share The following table sets forth the computation of basic and diluted net income per share: Three Months Ended Nine Months Ended 10/31/2024 10/31/2023 10/31/2024 10/31/2023 (In thousands, except per share data) Net income $ 8,401 $ 10,160 $ 27,374 $ 24,252 Weighted average shares of common stock outstanding - basic 16,289 16,347 16,379 16,277 Dilutive effect of common stock equivalents from equity incentive plans 7 81 3 57 Weighted average shares of common stock outstanding - diluted 16,296 16,428 16,382 16,334 Net income per share - basic $ 0.52 $ 0.62 $ 1.67 $ 1.49 Net income per share - diluted $ 0.52 $ 0.62 $ 1.67 $ 1.48 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 units and 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 nine-month period ended October 31, 2024, the Company granted 16,066 awards, vested 17 164,110 shares according to their terms and forfeited 0 shares under the 2019 Plan. As of October 31, 2024, there were approximately 521,859 shares available for future issuance under the 2019 Plan. The following table summarizes the stock-based compensation expense related to restricted stock units and awards recognized in the Company's statements of operations for the three and nine months ended October 31, 2024 and 2023: Three Months Ended Nine Months Ended 10/31/2024 10/31/2023 10/31/2024 10/31/2023 (In thousands) Cost of goods sold $ — $ 28 $ 38 $ 84 Selling, general and administrative expenses 63 143 295 339 Total stock-based compensation expense $ 63 $ 171 $ 333 $ 423 As of October 31, 2024, there was $ 146,000 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 one 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 the Pension Plan. 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, 2024, 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 the net periodic pension cost for the Pension Plan and the VIP Plan for the three and nine months ended October 31, 2024 and 2023: Three Months Ended Nine Months Ended 10/31/2024 10/31/2023 10/31/2024 10/31/2023 (In thousands) Service cost $ — $ — $ — $ — Interest cost 311 106 933 826 Expected return on plan assets ( 167 ) ( 203 ) ( 500 ) ( 601 ) Plan settlement — 372 — 372 Amortization of prior service cost — — — — Recognized net actuarial (gain) loss ( 38 ) 26 ( 113 ) 26 Benefit cost $ 106 $ 301 $ 320 $ 623 401(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 October 31, 2024 and 2023, the plan held 1,105,376 shares and 1,404,774 shares of Virco stock, respectively. For the three months ended October 31, 2024 and 2023, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 387,000 and $ 356,000 respectively. For the nine months ended October 31, 2024 and 2023, the compensation costs incurred for employer match, which is paid in the form of Company stock, was $ 1,165,000 and $ 1,078,000 respectively. . 18 Note 12. Warranty Accrual Effective February 1, 2014, the Company modified its warranty to a limited lifetime warranty. The warranty was effective February 1, 2014, and 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 nine months ended October 31, 2024 and 2023: Three Months Ended Nine Months Ended 10/31/2024 10/31/2023 10/31/2024 10/31/2023 (In thousands) Beginning balance $ 500 $ 600 $ 500 $ 600 Provision 60 54 111 145 Costs incurred ( 60 ) ( 54 ) ( 111 ) ( 145 ) Ending balance $ 500 $ 600 $ 500 $ 600 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 deductible up to a limit of $ 30.0 million. 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 October 31, 2024 and 2023, shipping and classroom delivery costs of approximately $ 8.8 million and $ 8.6 million, respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. For the nine months ended October 31, 2024 and 2023, shipping and classroom delivery costs of approximately $ 23.1 million and $ 22.0 million, respectively, were included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations. Note 15. Subsequent Events On November 22, 2024, the Company executed Amendment No. 5 to the Restated Credit Agreement, with an effective date of October 31, 2024. See Note 7 . On December 5, 2024, the Company’s Board of Directors declared a cash dividend for the Company’s fourth fiscal quarter of $ 0.025 on each outstanding share of common stock. The dividend is payable on January 10, 2025 to stockholders of record of the common stock as of the close of business on December 20, 2024. While the Company currently intends to pay future dividends on a quarterly basis, following review and approval by the Board of Directors, the declaration and payment of future dividends, as well as the amounts thereof, are subject to the discretion of the Board as well as restrictive covenants in the Company’s lending agreements. There can be no assurance that the Company will declare and pay dividends in future periods. 19