VIRCO MFG CORPORATION 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Overview The Company’s core market for education furniture, fixtures, and equipment (FF&E) is marked by extreme seasonality. Typically, the Company recognizes approximately 50% of its total annual revenue in the months of June, July, and August. Incoming orders follow a similar cycle, with the bulk of orders arriving approximately 4-6 weeks preceding the summer delivery season. During the three-month period ended April 30, 2025, the Company experienced approximately a 27.8% decrease in net revenue compared to the same period last year. In the same period last year, the Company benefited from a large series of one-time, disaster recovery orders that resulted in approximately $9 million of additional counter-seasonal shipments. These deliveries positively affected the Company’s traditional cycle in the prior year, with positive impacts on production, overhead absorption, accounts receivable, collections, and reductions in inventory, as well as lower borrowings to support that inventory. Reflecting the absence of these unusual orders, as of April 30, 2025 the Company’s backlog was $70.4 million compared to $88.5 million on April 30, 2024. Management has moderated production levels and will continue to monitor incoming order rates in pursuit of an appropriate balance between on-time summer deliveries and inventory investment. The Company believes that the majority of the current backlog will be delivered and recognized as revenue during June, July and August of the current fiscal year. As discussed in the Risk Factors section of the Company’s Form 10-K for the fiscal year ended January 31, 2025, the Company’s recent revenue growth in fiscal 2025 and 2024 was partly a result of the delayed recovery from Covid-related school closures and subsequent supply-chain disruptions. Management cautions that future growth rates are unlikely to match those of the past several years. As with the unpredictable outcomes of school closures and supply chain disruptions, future events beyond the Company’s control—such as tariffs and trade realignments—may have both negative and positive impacts on the Company’s revenue and operating margins. Management intends to position the Company to respond to these uncertainties by continuing to reinvest in operating systems, employee training, and customer development and retention. The recent shift in political direction nationally may also cause uncertainty regarding specific funding for school furniture, although Management estimates that more than 85% of public school funding and virtually all bond-funded new-school construction derives from state and local sources, which are less dependent on federal funding. For example, the Company’s two largest states by revenue are California and Florida, which occupy opposite ends of the political spectrum, but both states continue to invest heavily in public education. In recent months there have been significant changes and proposed changes to U.S. trade policies, including significant tariffs on imports from China, Canada, and other countries. These actions, and potential retaliatory responses, could result in revenue reduction, cost increases, and disruptions to supply chains and Company logistics. The Company is responding to these uncertainties in a similar way as it did with Covid-related school closures and supply chain disruptions. The Company is reinforcing its domestic capabilities and relationships in the belief that strong domestic suppliers to robustly funded, essential domestic institutions like schools, will ultimately benefit as these macro-level forces move toward a new equilibrium. This was the pattern of the post-Covid recovery, which lagged the triggering events by about two years. Management is not predicting this result but noting that global uncertainties can offer opportunities as well as challenges for domestically-focused suppliers like Virco. The short- and mid-term impacts of trade uncertainties could adversely affect the Company’s operating results and financial condition. For more information on risks to the Company’s business caused by the recent changes in macro-economic conditions, please see Part 1, Item 1A. “Risk Factors—Industry and Economic Risks” included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2025. Three Months Ended April 30, 2025 For the three months ended April 30, 2025, the Company earned a net income of $0.7 million on sales of $33.8 million, compared to net income of $2.1 million on sales of $46.7 million in the same period of the prior year. Sales for the first quarter decreased by approximately $13.0 million or 27.8%, compared to the prior year. First quarter revenue in the prior year was boosted by the previously-noted disaster recovery order, which contributed approximately $9 million in counter-seasonal shipments to the seasonally light quarter in the prior year. 18 Cost of sales was 52.5% for the quarter ended April 30, 2025, compared to 56.5% for the period ended April 30, 2024. Gross margin for first quarter was 47.5% compared to 43.5% in the prior year. The increase in gross margin was attributable to an increase in the proportion of orders delivered with full service. These orders carry higher margins than orders with simple delivery. Selling, general and administrative expenses for the three months ended April 30, 2025 decreased slightly by approximately $1.3 million compared to the same period last year. The decrease in SG&A was primarily due to lower variable selling expenses related to overall lower revenue. The Company holds equity securities in a Rabbi Trust to fund benefits under its VIP Pension Plan. The Company benefited from $1.2 and $0.2 million of unrealized gains during the three months ended April 30, 2025 and 2024, respectively. These non-operating gains provided a partial offset to the operating impacts of the overall lower revenue in the first quarter. Net interest expense was $60,000 for the three months ended April 30, 2025, compared to net interest expense of $208,000 for the same period last year. The decrease was attributable to less demand for seasonal working capital and related lower borrowings under the Company’s credit facility with PNC National Bank. For the three months ended April 30, 2025 and 2024, the effective income tax rates were 26.4% and 25.5%, respectively. The change in effective tax rates was due to a change in the forecasted mix of income before actual federal and state income taxes and estimated permanent differences. Liquidity and Capital Resources The market for education furniture is extremely seasonal and approximately 50% of the Company's annual sales volume is shipped in the months of June through August of each year. The Company traditionally manufactures large quantities of inventory during the first and second quarters of each fiscal year in anticipation of seasonally high summer shipments. In addition, the Company finances a large balance of accounts receivable during the peak season. Accounts Receivable decreased by $7.5 million at April 30, 2025 compared to the same period last year. The decrease is attributable to decreased shipments (as discussed above under “Overview”) and improved collections. Inventory increased by $2.7 million at April 30, 2025 compared to April 30, 2024. The slight increase is primarily attributable to increased material costs during the quarter. Accrual basis capital expenditures for the three months ended April 30, 2025 were $1.6 million compared to $0.8 million for the same period last year. Capital expenditures are being financed through the Company's operating cash flow and restricted to not exceed $8.0 million per year by covenant. On April 9, 2025, the Company entered into Amendment No. 6 to the Credit Agreement with PNC Bank, which established a new category of permitted share repurchases in an amount up to $7.5 million, which is in addition to the dollar limits on permitted share repurchases under the Credit Agreement discussed above. The share repurchases under the new category must occur during the fiscal year ending January 31, 2026, may not occur while any Default or Event of Default exists or would result from such repurchases, and must be made solely from cash on hand and not from the proceeds of advances under the Credit Facility. The permitted share repurchases under this new category are also not counted as “Restricted Payments” when calculating the Company’s compliance with the Fixed Charge Coverage Ratio covenants in the Credit Agreement. See Note 7 . For the three months ended April 30, 2025, the Company spent $4.0 million to repurchase 348,944 shares of its common stock. As of April 30, 2025, $7.2 million was authorized by the Board and available for repurchase of shares by the Company, subject to the restrictions on repurchases under its Credit Agreement with PNC Bank. The Company may elect to opportunistically purchase shares based on excess cash generation and share price considerations. Based on the Company’s current projections, raw material costs and its ability to introduce price increases, management believes it will maintain compliance with its financial covenants under the Credit Agreement, although risks and uncertainties remain, such as changes in economic conditions, changing raw material costs and supply chain challenges. The Company was in compliance with its debt covenants as of April 30, 2025. The Company believes that cash flows from operations, together with the Company's unused borrowing capacity with PNC Bank will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months. 19 Off Balance Sheet Arrangements None. Critical Accounting Policies and Estimates The Company's critical accounting policies and estimates are outlined in its Annual Report on Form 10-K for the fiscal year ended January 31, 2025. Forward-Looking Statements From time to time, including in this Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2025, the Company or its representatives have made and may make forward-looking statements, orally or in writing. Such forward-looking statements may be included in, without limitation, reports to stockholders, press releases, oral statements made with the approval of an authorized executive officer of the Company and filings with the Securities and Exchange Commission ("SEC"). The words or phrases “anticipates,” “expects,” “will continue,” “believes,” “estimates,” “projects,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The results contemplated by the Company's forward-looking statements are subject to certain risks and uncertainties that could cause actual results to vary materially from anticipated results, including without limitation, availability of funding for educational institutions, availability and cost of materials, availability and cost of labor, demand for the Company's products, competitive conditions affecting selling prices and margins, capital costs and general economic conditions. Such risks and uncertainties are discussed in more detail in the Company's Form 10-K for the fiscal year ended January 31, 2025, including under the caption "Risk Factors". The Company's forward-looking statements represent its judgment only on the dates such statements were made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changed or unanticipated events or circumstances. Item 3. Quantitative and Qualitative Disclosures about Market Risk The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act, and is therefore not required to provide the information under this item.