VIRCO MFG CORPORATION (VIRC)

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 months ended April 30, 2026, the Company experienced a decrease in net sales of 9.1% compared to the same period in the prior fiscal year. Net sales for the three months ended April 30, 2025 were favorably impacted by a series of disaster recovery and counter-seasonal shipments totaling approximately $2.7 million, compared to approximately $190,000 of such shipments in the three months ended April 30, 2026. Excluding this series of shipments, net sales for the three months ended April 30, 2026 decreased by 1.7%.

The current dynamic macroeconomic environment and uncertainty surrounding state and local governments' budget and spending levels have adversely affected the demand for the Company's school furniture. As of April 30, 2026, the Company’s shipments plus backlog was approximately 2% lower than as of the same date last year. Despite these macroeconomic headwinds, incoming order rates have begun to normalize, with the Company's order backlog at April 30, 2026 comparable to the backlog at April 30, 2025. 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, 2026, the Company’s revenue growth since 2023 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, trade realignments and geopolitical conflicts—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.

Ongoing conflict in the Middle East has contributed to volatility in crude oil and natural gas markets, resulting in higher material and transportation costs. Because many plastic resins are petroleum- and natural gas-based, disruptions in these markets may reduce supply availability and increase material costs. Energy price volatility has also contributed to higher transportation and logistics costs. These events are expected to impact material costs during the fiscal year ending January 31, 2027. Although the Company increased product prices slightly in fiscal 2027 to offset higher costs, it may not be able to fully pass through increases in raw materials, transportation, and energy, including steel and plastics.

Beginning in 2025, the United States implemented and proposed significant changes to trade policies, including broad-based tariffs on imports from certain countries and product categories under the International Emergency Economic Powers Act (“IEEPA”). These actions included tariffs on imports from Canada, Mexico, and China, as well as higher tariffs on steel, aluminum, and certain manufactured goods, including furniture. As a result, U.S. tariff rates increased to their highest levels in decades. Tariffs have also been used as a policy tool in trade negotiations and in connection with broader geopolitical objectives. These tariffs increased the cost of imported components and materials during the fiscal year ended January 31, 2026.

In February 2026, the U.S. Supreme Court ruled that tariffs imposed under IEEPA were unconstitutional. Subsequently, in March 2026, the U.S. Court of International Trade ("CIT") issued orders directing U.S. Customers and Border Protection ("CBP") to process related refunds. In response to these rulings, CBP launched a refund claims process for qualifying importers. Since the IEEPA tariffs were first imposed in February 2025, the Company has paid approximately $1.0 million in related tariffs and has now begun the process of requesting refunds of eligible amounts paid. As of April 30, 2026, the Company has not recognized any tariff refunds in its unaudited condensed consolidated financial statements because the Company was unable to assert that the realization of such recovery is probable as of such date, due to uncertainties surrounding the refund process and collectability of claims. Should the circumstances surrounding the refund process become more certain and the likelihood of collection become probable, we may recognize a receivable for the amount of the IEEPA tariffs paid. We may also be entitled to interest on the amounts recovered. As of the date of this Quarterly Report on Form 10-Q, the Company has not received any portion of the requested refunds.

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The short- and mid-term impacts of trade uncertainties could adversely affect the Company’s operating results and financial condition in future periods. 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, 2026.

Three Months Ended April 30, 2026

For the three months ended April 30, 2026, the Company incurred a net loss of $2.8 million on sales of $30.7 million, compared to net income of $0.7 million on sales of $33.8 million in the same period of the prior year. Sales for the three months ended April 30, 2026 decreased by approximately $3.1 million or 9.1%, compared to the prior year. First quarter sales in the prior year were boosted by the previously noted disaster recovery orders, which contributed approximately $2.7 million in additional shipments compared to approximately $190,000 during the first fiscal quarter this year. Excluding these shipments, net sales for the current period decreased by 1.7%, driven by the current dynamic macroeconomic environment and uncertainty surrounding state and local governments' budget and spending levels, which adversely affected the demand for the Company's products.

Cost of goods sold was 58.6% of net sales for the quarter ended April 30, 2026, compared to 52.5% for the same quarter last year. Gross margin for the first quarter was 41.4% compared to 47.5% in the prior year. Gross margin declined in the current period primarily due to lower sales volume, partially offset by a slight reduction in manufacturing spending. The Company reduced production levels in order to maintain control over inventory levels. Lower production levels resulted in a slightly unfavorable overhead variance. The material portion of our costs as a percentage of sales was 31.9% for the quarter ended April 30, 2026 and 29.8% for the same quarter last year, reflecting effects of the ongoing conflict in the Middle East.

Selling, general and administrative ("SG&A") expenses for the three months ended April 30, 2026 increased by $0.2 million. SG&A expenses as a percentage of sales for the three months ended April 30, 2026 were 53.3% compared to 47.7% in the same period last year. This increase was the result of changes to product mix, as business shifted to a higher percentage of full service deliveries. Full service delivery orders are more service oriented and as such the associated expenses are recorded in SG&A instead of cost of sales. Additionally, a certain portion of SG&A is fixed in nature and as such does not fluctuate with sales volume.

The Company holds equity securities in a rabbi trust to fund benefits under its Virco Important Performers Retirement Plan ("VIP Plan"). The Company recorded approximately $0.1 million of unrealized loss and $1.2 million of unrealized gain during the three months ended April 30, 2026 and 2025, respectively.

During the quarter ended April 30, 2026, the Company recorded approximately $189,000 in net pension benefit, compared to $27,000 in pension expense in the same period last year. As a result of the expected settlement of the VIP Plan during the fourth quarter of the fiscal year ending January 31, 2027, the Company recognized increased amortization of actuarial gains previously recorded in accumulated other comprehensive (loss) income.

For the three months ended April 30, 2026 and 2025, the effective income tax rates were 25.0% and 26.4%, 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.

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 increased by $2.7 million at April 30, 2026 compared to last year. The increase is primarily due to a the timing of customer payments and collections around the fiscal quarter end, offset by lower sales in the current year.

Inventory decreased by $5.7 million at April 30, 2026 compared to last year. The decrease is primarily driven by lower production levels, offset slightly by higher material costs. Management moderated production levels in order to maintain control over inventory levels.

Accrual basis capital expenditures for the three months ended April 30, 2026 were $0.6 million compared to $1.6 million for the same period last year. Capital expenditures are being financed through the Company's operating cash flow and are restricted to $8.0 million per year by covenant.

Despite recording a net loss for the three months ended April 30, 2026, the Company improved net cash used in operating activities by $9.7 million compared to the same period last year. Moderation of production and inventory levels led to favorable

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cash flow activity for inventories and accounts payable compared to last year. For the three months ended April 30, 2026, the Company spent $0.7 million for capital expenditures, issued $0.4 million of cash dividends and spent $0.2 million to repurchase 31,598 shares of its common stock. As of April 30, 2026, $7.0 million was authorized by the Board and available for repurchase of shares by the Company, subject to the restrictions on share 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 distri

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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Overview of Operating Results

Virco Mfg. Corporation is the nation’s largest domestic manufacturer and distributor of Furniture, Fixtures, and Equipment ("FF&E") for the education (K-12) market. The Company’s operating model and unique market differs in several ways from the traditional furniture industry model. The furniture industry is traditionally structured around furniture manufacturers that sell to end customers through dealership networks. These dealership networks can be aligned with one manufacturer or open to

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multiple manufacturers. Virco is one of the few domestic manufacturers of school furniture that call on and sell direct to school customers, with approximately 75% to 85% of sales being direct to customers.

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; government facilities at the federal, state, county and municipal levels; and places of worship. In addition, the Company sells to wholesalers, distributors, retailers, catalog retailers, and internet retailers that serve these same markets. These institutions are frequently characterized by extreme seasonality and/or a bid-based purchasing function. The Company's business model, which is designed to support this strategy, is highly integrated. The Company markets and sells direct to the schools and provides project management and logistics. Approximately 80% of sales are delivered FOB 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. Virco's sales force is supported by a project management team which includes field-based project specialists, in-house interior designers, project management specialists, purchasing specialists, and field service supervisors. The project management team and the sales force utilize the Company's proprietary PlanSCAPE® software in conjunction with Building Information Modeling when preparing complete package solutions for the FF&E segment of bond-funded public school construction projects. The PlanSCAPE® software supports classroom by classroom product selection, product specification, pricing, and furniture delivery including delivery to and turnkey classroom setup. PlanSCAPE® software also enables the entire Virco sales force to prepare quotations for less complicated projects. An important element of Virco's business model is the Company's emphasis on developing and maintaining key manufacturing, warehousing, distribution, delivery, project management and service capabilities. The Company has developed a comprehensive product offering for the FF&E needs of the K-12 education market, enabling a school to procure all of its FF&E requirements from one source.

China’s entry into the World Trade Organization in 2001 had a severe impact on the industry, with most furniture manufacturers closing their domestic fabrication facilities and importing components or finished goods from China. This also enabled dealers and resellers to bypass domestic sources and purchase direct from China for domestic distribution. During this time Virco retained its domestic fabrication facilities. Today these facilities are substantially depreciated on our books but extremely well maintained, automated where cost effective, and fully operational. Recent economic events, in some cases accelerated by COVID, tariffs, volatility in both cost and availability of ocean freight, and other extended supply chain challenges have made our domestic manufacturing footprint a significant competitive advantage compared to companies which import finished products.

Furniture sold into the educational market is characteristically heavy, bulky, and logistically challenging compared to other markets significantly impacted by imports.

The market for school furniture is traditionally seasonal, with approximately 50% of annual sales occurring in the months of June, July, and August. The Company has traditionally met the seasonal needs with significant overtime and by hiring seasonal temporary labor. During fiscal 2021, the demand for school furniture declined primarily due to the COVID-19 pandemic disruption, order rates declined by 20%, and the Company reduced production levels. Because of the traditional dependence on temporary seasonal labor, the Company was able to reduce seasonal hiring to match production to demand. The Company did not sever any of its full-time employees during the pandemic.

In the prior fiscal year, the Company benefited from a large series of disaster recovery orders that were received at the end of fiscal 2024 and the first quarter of fiscal 2025. During fiscal 2025, the Company shipped and recognized revenue related to these orders of approximately $23.0 million. These shipments positively affected the Company’s traditional seasonal cycle, with positive impacts on production, overhead absorption, accounts receivable, collections, as well as lower borrowings to support that inventory. This project was substantially completed at the end of fiscal year 2025. The Company believes that the timing and related positive impacts of this project were non-recurring and that more typical seasonal and financial patterns are likely to return moving forward.

Following a downturn during the COVID pandemic, order rates recovered during fiscal 2022, 2023, and 2024. Initially, the Company had 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 - 2026 our ability to support the seasonal business model returned to pre-COVID capabilities, with the Company delivering 47% - 49% of annual revenue during June, July, and August.

Virco's product offering consists primarily of items manufactured by Virco, complemented with products sourced from other furniture manufacturers to fill any gaps in product manufactured by the Company. The Company has served the education industry for over 76 years and over this time developed products to address a variety of classroom management trends, from collaborative learning to individual and combination desks facilitating distancing and classroom control. The pandemic caused a noticeable change in the types of products requested by educators. In fiscal 2021, we experienced an increase in the demand for individual desks. In fiscal 2022, demand began to return to products supporting collaborative learning. This trend continued

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through fiscal 2023, 2024, 2025 and 2026. 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. Finally, management continues to hone Virco's ability to forecast, finance, manufacture, warehouse, deliver and install furniture within the relatively narrow delivery window associated with the highly seasonal demand for education sales. The educational sales market is extremely seasonal. In fiscal 2025 and 2026, approximately 50% 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. Virco's substantial warehouse space allows the Company to build and ship adequate inventories to service this narrow delivery window for the education market.

The budgetary pressures directly impact the demand for the Company's products, as the demand for educational furniture largely depends upon: (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 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. In response to these budgetary pressures, schools typically elect to retain teachers and spend less on repairs, maintenance, and replacement furniture, which in turn reduces the demand for, and sales of, the Company's products.

The significant budgetary challenges faced by the education industry have had an impact on the Company’s business model over this time frame and have created opportunities as well. In response to their budgetary challenges, many school districts closed warehouses and reduced janitorial and support staff in order to retain accredited teachers. Selling efforts must now reach school principals and administrative staff in addition to the district business offices. Sales priced under national contracts or buying groups are displacing competitive bids administered by professional purchasing departments. Distribution and service has become a more meaningful component of our business as most deliveries are to school sites, and over 50% include delivery into the classroom. This evolution adds to the seasonal challenges of our business, but also creates opportunities to suppliers that can execute during the short summer delivery window.

The Company’s operating results can be impacted significantly by cost and volatility of commodities, especially steel, plastic, wood, and energy. The majority of the Company's sales are generated under annual contracts in which the Company can raise the price of its products once every six months and only on future orders. 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 not as severe as experienced in 2022. Increased selling prices covered increases in commodity prices during fiscal 2023. In 2025 and 2026, the Company increased selling prices in anticipation of additional cost increases. The cost of materials in 2025 and 2026 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. The Company typically benefits from any decreases in raw material or distribution costs under the contracts described above.

Beginning in 2025, the United States implemented and proposed significant changes to trade policies, including broad-based tariffs on imports from certain countries and product categories under the International Emergency Economic Powers Act (“IEEPA”). These actions included tariffs on imports from Canada, Mexico, and China, as well as higher tariffs on steel, aluminum, and certain manufactured goods, including furniture. As a result, U.S. tariff rates increased to their highe

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