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. On July 4, 2025, the One Big Beautiful Bill (“OBBB”) Act, which includes a broad range of tax reform provisions, was signed into law in the United States. FASB Topic 740, Income Taxes , requires the effects of tax law changes to be recognized in the period of enactment. As the legislation was signed into law before the close of the second quarter, the impacts are contemplated in the Company's operating results for the nine months ended October 31, 2025. Among other provisions, the OBBB repealed the capitalization of domestic research and development expenditures, extended bonus depreciation on fixed assets, and reduced the deduction rate on foreign-derived deduction eligible income and income from non-U.S. subsidiaries. These provisions are not expected to have a material impact to the Company's effective tax rate and deferred tax assets in fiscal year ending January 31, 2026 and future periods. During the three months and nine months ended October 31, 2025, the Company experienced a decrease in net sales of approximately 42.3% and 27.0%, respectively, compared to the same periods in the prior fiscal year. In the same periods last year, the Company benefited from a large series of one-time, disaster recovery counter-seasonal shipments that resulted in approximately $6 million of additional shipments for the three months ended October 31, 2024 and approximately $19 million for the nine months ended October 31, 2024. 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. Excluding this one-time event, net sales for the three months and nine months ended October 31, 2025 decreased approximately 38.3% and 22.1%, respectively. Management believes that the traditional seasonal cycle for school furniture and the Company's ability to service that seasonal cycle have returned to its pre-pandemic normal. The current dynamic macroeconomic environment and uncertainty surrounding the government’s budget and spending levels have adversely affected the demand for the Company's school furniture. Reflecting the absence of last year's unusual disaster recovery counter-seasonal orders as of October 31, 2025, the Company’s shipments plus backlog was approximately 25% lower than as of the same date last year. 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. Order backlog at October 31, 2025 declined slightly to approximately $26 million compared to $27 million in the prior year. The Company believes that the majority of the current backlog will be delivered and recognized as revenue during the fourth quarter 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, supply chain disruptions, and school funding decisions, 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. Management estimates that more than 85% of public school funding and virtually all bond-funded new-school construction derives from state and local sources. 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 20 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 October 31, 2025 For the three months ended October 31, 2025, the Company incurred a net loss of $1.3 million on sales of $47.6 million, compared to net income of $8.4 million on sales of $82.6 million in the same period of the prior year. Sales for the three months ended October 31, 2025 decreased by approximately $35.0 million or 42.3%, compared to the prior year. Third quarter sales in the prior year was boosted by the previously-noted disaster recovery order, which contributed approximately $6 million in shipments. The remaining decrease was driven by the current dynamic macroeconomic environment and uncertainty surrounding the government’s budget and spending levels, which adversely affected the demand for the Company's products. Cost of goods sold was 62.0% of net sales for the quarter ended October 31, 2025, compared to 55.6% for the same quarter ended last year. Gross margin for the third quarter was 38.0% compared to 44.4% in the prior year. Gross margin declined in the current period primarily due to lower sales volume combined with a decline in production levels, partially offset by a slight reduction in manufacturing spending. The Company reduced production levels in order to maintain control over inventory levels. Selling, general and administrative expenses ("SG&A") for the three months ended October 31, 2025 decreased by $5.8 million. The decrease in SG&A expenses was primarily due to lower variable selling expenses related to the overall decline in sales volume. SG&A expenses as a percentage of sales for the three months ended October 31, 2025 were 41.5% compared to 30.9% in the same period last year. This was primarily due to lower sales volume in relation to fixed SG&A costs. Since a significant portion of SG&A expense does not fluctuate with sales volume, SG&A increased as a percentage of sales. The Company holds equity securities in a rabbi trust to fund benefits under its VIP Retirement Plan (the "VIP Plan"). The Company recorded approximately $49,000 of unrealized loss and $246,000 of unrealized gain during the three months ended October 31, 2025 and 2024, respectively. For the three months ended October 31, 2025 and 2024, the effective income tax rates were 26.8% 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. The OBBB did not have a material impact on the Company's effective income tax rate for the three months ended October 31, 2025. Nine Months Ended October 31, 2025 For the nine months ended October 31, 2025, the Company earned a net income of $9.6 million on sales of $173.5 million, compared to net income of $27.4 million on sales of $237.8 million in the same period of the prior year. Sales for the fiscal year decreased by approximately $64.3 million or 27.0% compared to the prior year. Fiscal year to date sales in the prior year was boosted by the previously-noted disaster recovery order, which contributed approximately $19 million in shipments. The remaining decrease was driven by the current dynamic macroeconomic environment and uncertainty surrounding the government’s budget and spending levels, which adversely affected the demand for the Company's products. Cost of goods sold was 56.8% for the nine months ended October 31, 2025, compared to 54.9% for the same period ended last year. Gross margin for the nine months ended October 31, 2025 was 43.2% compared to 45.1% in the prior year. Gross margin declined in the current period primarily due to lower sales volume combined with a decline in production levels, partially offset by a slight reduction in manufacturing spending. The Company reduced production levels in order to maintain control over inventory levels. SG&A for the nine months ended October 31, 2025 decreased by $9.9 million. The decrease in SG&A expenses was primarily due to lower variable selling expenses related to the overall decline in sales volume. SG&A expenses as a percentage of sales for the nine months ended October 31, 2025 were 35.4% compared to 30.0% in the same period last year. This was primarily due to lower sales volume in relation to fixed SG&A costs. Since a significant portion of SG&A expense does not fluctuate with sales volume, SG&A increased as a percentage of sales. The Company holds equity securities in a rabbi trust to fund benefits under its VIP Plan. The Company recorded approximately $0.2 million and $1.1 million of unrealized gain during the nine months ended October 31, 2025 and 2024, respectively. For the nine months ended October 31, 2025 and 2024, the effective income tax rates were 28.2% and 24.4%, 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. The OBBB did not have a material impact on the Company's effective income tax rate for the nine months ended October 31, 2025. 21 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 $14.4 million at October 31, 2025 compared to last year. The change is primarily due to a decrease in shipments (as discussed above under “Overview”). Inventory increased by $4.1 million at October 31, 2025 compared to last year. The increase is primarily driven by increased costs, offset slightly by decreased production levels during the year. Accrual basis capital expenditures for the nine months ended October 31, 2025 were $3.7 million compared to $5.4 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. As a result of materially improved profitability in recent years, the Company had approximately $26.5 million and $38.9 million in cash at October 31, 2025 and 2024, respectively. The Company uses its cash flow generated from operations to fund capital expenditures, quarterly cash dividends and stock repurchases. For the nine months ended October 31,2025, the Company spent $5.1 million in capital expenditures, issued $1.2 million of cash dividends and spent $4.0 million to repurchase 348,944 shares of its common stock. As of October 31, 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, National Association ("PNC"). The Company may elect to opportunistically purchase shares based on excess cash generation and share price considerations. During the quarter ended October 31, 2025, the Company’s Board of Directors approved the termination of the VIP Plan, a supplemental retirement plan for certain key employees. This decision was part of the Company's ongoing efforts to reduce benefit obligations and ongoing administrative costs. The termination is expected to be settled through lump sum distributions to participants funded by the liquidation of assets held in a rabbi trust, which are expected to occur during the fourth quarter of fiscal year 2027. Management anticipates these distributions will not materially impact the Company's current and long-term liquidity and that the termination will not materially impact the Company's consolidated financial statements. On April 9, 2025, the Company entered into Amendment No. 6 to the Credit Agreement with PNC, which established a new category of permitted share repurchases in an amount up to $7.5 million, which was a new category in addition to the share repurchases under the Credit Agreement. The share repurchases under the new category were required to 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 Agreement. The permitted share repurchases under this new category were also not counted as “Restricted Payments” when calculating the Company’s compliance with the Fixed Charge Coverage Ratio ("FCCR") covenants in the Credit Agreement. On December 5, 2025, the Company entered into Amendment No. 7 to the Credit Agreement with PNC. Amendment No. 7 amended the Credit Agreement and the secured revolving line of credit provided to the Company by PNC to reflect the following material changes: i. Modify the repurchase window, originally from February 1, 2025 to January 31, 2026, changed to November 1, 2024 to October 31, 2025 for the $ 7.5 million of permitted share repurchases that are excluded from a) the FCCR testing, b) the Payment Conditions governing stock repurchases, and c) the trailing twelve months ("TTM") $ 8 million aggregate limit on stock repurchases and dividends. ii. Commencing with respect to the fiscal quarter ending October 31, 2025, modify the definition of Earnings Before Interest, Taxes, Depreciation, and Amortization as it relates to the FCCR testing to add back non-cash lease expense or subtract non-cash lease income for each TTM reporting period. iii. Reduce the Revolving Line of Credit limit by $ 10 million, except for the months of October, December, and January. The maximum Revolving Line of Credit limit during June through August was reduced from $ 70 million to $ 60 million. iv. Reduce the $ 15 million seasonal over-advance to $ 10 million and limit to the months of January through June (removing access in the month of July). In connection with this amendment, the Company incurred fees totaling $20,000 which will be capitalized as deferred financing costs when paid. 22 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 did not have an outstanding amount under the Credit Agreement as of October 31, 2025. The Company believes that cash flows from operations and cash on hand, together with the Company's unused borrowing capacity with PNC, will be sufficient to fund the Company's debt service requirements, capital expenditures and working capital needs for the next twelve months. 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 October 31, 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.