EACO CORPORATION Cautionary Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements can be identified by the use of terminology such as "anticipate," "believe," "could," "estimate," "expect," "forecast," "intend," "may," "plan," "possible," "project," "should," "will" and similar words or expressions. These forward-looking statements include, but are not limited to, statements regarding our anticipated revenue, expenses, profits and capital needs. These statements are based on our current expectations, estimates, projections, and the impact of certain accounting pronouncements, and are subject to a number of risks and uncertainties that could cause our actual results to differ materially from those projected or estimated, including, but not limited to the impact of Covid-19, adverse economic conditions, competitive pressures, unexpected costs and losses from operations or investments, increases in costs and overhead, our ability to maintain an effective system of internal controls over financial reporting, potential losses from trading in securities, our ability to retain key personnel and good relationships with suppliers, the willingness of lenders to extend financing commitments and the availability of capital resources, and the other risks set forth in "Risk Factors" in Part II, Item 1A of this report or identified from time to time in our other filings with theSEC and in public announcements. You should not place undue reliance on these forward-looking statements that speak only as of the date hereof. Except as required by law, we undertake no obligation to revise or update publicly any forward-looking statement for any reason, including to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The inclusion of forward looking statements in this Quarterly Report should not be regarded as a representation by management or any other person that the objectives or plans of the Company
will be achieved. Overview
The condensed consolidated financial statements comprise the accounts of
EACO is a holding company primarily comprised of its wholly-owned subsidiary, Bisco. Bisco is a distributor of electronic components and fasteners with 49 sales offices and seven distribution centers located throughoutthe United States andCanada . Bisco supplies parts used in the manufacture of products in a broad range of industries, including the aerospace, circuit board, communication, computer, fabrication, instrumentation, industrial equipment
and marine industries.
Revenues derived from Bisco and its subsidiary represent 100% of our total revenues and are expected to continue to represent all of the Company's total revenues for the foreseeable future.
Critical Accounting Policies The Company's discussion and analysis of its financial condition and results of operations are based upon its condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.
Within the context of these critical accounting policies, the Company is not currently aware of any reasonably likely events or circumstances that would result in materially different amounts being reported.
13
Revenue Recognition
In May 2014 , the Financial Accounting Standards Board ("the FASB") issued
Accounting Standards Updated ("ASU") 2014-09, Revenue from Contracts with
Customers, issued as a new Topic, ASC Topic 606 ("ASU 2014-09"). The new revenue
recognition standard provides a five-step analysis of transactions to determine
when and how revenue is recognized. The premise of the standard is that a
Company should recognize revenue to depict the transfer of promised goods or
services to customers in an amount that reflects the consideration to which the
entity expects to be entitled in exchange for those goods or services. The
Company has adopted ASU 2014-09 beginning in fiscal 2019 (effective September 1,
2018 ) using the modified retrospective approach. The impact of adopting the
standard on our consolidated financial statements and related disclosures was
not material.
We derive our revenue primarily from product sales. We determine revenue
recognition through the following steps: (1) identification of the contract with
a customer; (2) identification of the performance obligations in the contract;
(3) determination of the transaction price; (4) allocation of the transaction
price to the performance obligations in the contract; and (5) recognition of
revenue when, or as, we satisfy a performance obligation.
The Company's performance obligations consist solely of product shipped to
customers. Revenue from product sales is recognized upon transfer of control of
promised products to customers in an amount that reflects the consideration we
expect to receive in exchange for these products. Revenue is recognized net of
returns and any taxes collected from customers. We offer industry standard
contractual terms in our purchase orders.
Impairment of Long Lived Assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For the purpose of the impairment review, assets are tested on an individual basis. The recoverability of the assets is measured by a comparison of the carrying value of each asset to the future net undiscounted cash flows expected to be generated by such assets. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying value of the assets exceeds their estimated fair value. Deferred Tax Assets A valuation allowance is provided for deferred tax assets if it is more likely than not that these items will either expire before the Company is able to realize their benefit, or when future deductibility is uncertain. The Company records net deferred tax assets to the extent management believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance. Inventory The Company's inventory provisions are based upon management's review of inventories on-hand over their expected future utilization and length of time held by the Company. The Company's methodology for estimating these adjustments to the cost basis is evaluated for factors that could require changes to the cost basis including significant changes in product demand, market conditions, condition of the inventory or net realizable value. If business or economic conditions change, the Company's estimates and assumptions may be adjusted
as deemed appropriate.
There have been no changes to the Company's critical accounting policies for the
nine months ended
14
Results of Operations
Comparison of the Three Months Ended
Three Months Ended
May 31, $ %
2021 2020 Change Change
Net sales $ 62,676 $ 54,923 $ 7,753 14.1 %
Cost of sales 45,826 40,069 5,757 14.4 %
Gross margin $ 16,850 $ 14,854 $ 1,996 13.4 %Gross margin as a percent of revenues 26.9 % 27.0 %
(0.1 )%
Net sales consist primarily of sales of component parts and fasteners, but also
include, to a lesser extent, kitting charges and special order fees, as well as
freight charged to customers. The Company expanded its product offering during
the prior fiscal year to include personal protection equipment ("PPE")
including, among other things, masks, shields and sanitizing stations.
The increase in revenues in the three months ended May 31, 2021 ("Q3 2021") as
compared to the three months ended May 31, 2020 ("Q3 2020") was largely due to
higher demand for products resulting from businesses being allowed to resume
operations and production due to the availability of Covid-19 Vaccines and
relaxed pandemic regulations.
The gross margins in Q3 2021 remained consistent with the prior year period,
decreasing slightly by 0.1% as a percentage of revenues. This decrease was
primarily due to a combination of product and customer mix, and overall declines
in gross profit margin due to higher transport & material costs due to the
industry-wide impacts from the COVID-19 pandemic.
Selling, General and Administrative Expenses ($ in thousands)
Three Months Ended
May 31, $ %
2021 2020 Change Change
Selling, general and administrative
expenses $ 12,800 $ 12,732 $ 68 0.5 %
Percent of net sales 20.4 % 23.2 % (2.8 %)
Selling, general and administrative expense ("SG&A") consists primarily of
payroll and related expenses for the Company's sales and administrative staff,
professional fees including accounting, legal and technology costs and expenses,
and sales and marketing costs. SG&A in Q3 2021 increased slightly from Q3 2020
due to rent escalations and annual raises in the current period. Increases in
SG&A were slightly offset by reduced travel by the Company's salesforce. SG&A as
a percent of revenue in Q3 2021 decreased from Q3 2020 by 2.8%, primarily due to
sharp increases in net sales during the quarter without having to increase SG&A
expenses. SG&A expenses remained low due to restricted travel during the
pandemic and other cost cutting measures.
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Other (Expense), Net ($ in thousands)
Three Months Ended
May 31, $ %
2021 2020 Change Change
Other income (expense):Net gain on trading securities$ 196 $ 384 $ (188 ) (49.0 )% Loss on sale of property - (28 ) 28 100 % Interest and other expense, net (45 ) (40 ) (5 )
(12.5 )% Other income, net$ 151 $ 316 $ (165 ) (52.2 )% Percent of net sales 0.2 % 0.6 % (0.4 )% Other (expense), net, primarily consists of income or loss on trading in short-term marketable equity securities of publicly-held corporations and interest related to the Company's debt obligations. The Company's investment strategy consists of both long and short positions, as well as utilizing options designed to improve returns. During Q3 2021, the Company recognized a net gain on trading securities of$196,000 as compared to a net gain of$384,000 in Q3 2020. The net trading securities gain in Q3 2021 was primarily due to timing of sales and purchases and general market climate for short and long positions during the period. Interest and other (expense), net, increased slightly in Q3 2021 compared to Q3 2020, which was due to interest expense on the Construction Loan for the Hunter Property being capitalized in Q3 2020 as part of the leasehold improvements during the period it is under construction, compared to an expense in the current period due to completion of construction. This was partially offset in the current period due to no interest on the revolving line of credit.
Income Tax Provision ($ in thousands)
Three Months Ended
May 31, $ %
2021 2020 Change Change
Income tax provision
(1.3 )% The provision for income taxes increased by$438,000 in Q3 2021 over the prior year period. This increase was primarily due to higher net sales that created larger income in the current quarter as compared to the prior year period. The income tax provision as a percent of pre-tax income decreased from 28.0% at Q3 2020 to 26.7% at Q3 2021, which was primarily due to the state tax rate mix and permanent book tax differences. 16
Comparison of the Nine Months Ended
Nine Months Ended
May 31,
2021 2020 $ Change % Change
Revenues $ 171,830 $ 167,791 $ 4,039 2.4 %Cost of revenues 125,504 121,242 4,262 3.5 % Gross margin$ 46,326 $ 46,549 $ (223 ) (0.5 )% Gross margin as a percent of revenues 27.0 % 27.7 %
(0.7 )%
The increase in revenues in the nine months endedMay 31, 2021 as compared to the nine months endedMay 31, 2020 was largely due to higher demand for products in Q3 2021, resulting from businesses resuming operations and production due to the availability of Covid-19 Vaccines and relaxed pandemic regulations. The gross margins during the nine months endedMay 31, 2021 decreased by 0.7% as a percentage of revenues when compared to the prior year period. This decrease was primarily due to a combination of product and customer mix, and overall declines in gross profit margin due to higher transport & material costs due to the industry-wide impacts from the COVID-19 pandemic.
Selling, General and Administrative Expenses ($ in thousands)
Nine Months Ended
May 31,
2021 2020 $ Change % Change
Selling, general and administrative
expenses $ 38,021 $ 38,007 $ 14 0 %
Percent of net sales 22.1 % 22.7 % (0.6 )%
SG&A in the nine months endedMay 31, 2021 increased slightly from the same period in the prior year primarily due to rent escalations and annual raises in the current period. Increases in SG&A were partially offset by reduced travel by the Company's salesforce. SG&A as a percent of revenue in the nine months endedMay 31, 2021 decreased from prior year period by 0.6%, primarily due to sharp increases in net sales during the quarter without having to increase SG&A expenses. SG&A expenses remained low due to restricted travel during the pandemic and other cost cutting measures.
Other (Expense), Net ($ in thousands)
Nine Months Ended
May 31,
2021 2020 $ Change % Change
Other income (expense):
Net (loss) gain on trading securities $ (863 ) $ 775 $ (1,638 ) (211.4 )%
Loss on sale of real property - (130 ) 130 100.0 %
Interest and other expense, net (174 ) (224 ) 50 22.3 %
Other (expense) income, net $ (1,037 ) $ 421 $ (1,458 ) (346.3 )%
Percent of net sales (0.6 )% 0.3 % (0.9 )%
17
During the nine months ended May 31, 2021 , the Company recognized a net loss on
trading securities of $863,000 as compared to a net gain of $775,000 in the same
period in the prior year. The net trading securities losses in Q3 2021 was
primarily due to timing of sales and purchases and general market climate for
short positions during the period.
During November 2019 , the Company sold the previous corporate headquarters (the
"Lakeview Property") for a cash purchase price of $7,075,000 , realizing a total
loss of $102,000 from the sale in the nine months ending May 31, 2020 .
Interest and other (expense), net, decreased during the nine months ended
May 31, 2021 compared to the same period in the prior year, which was primarily
due to lower variable rates on our loans and carrying a lower balance on our
line of credit during the current period.
Income Tax Provision ($ in thousands)
Nine Months Ended
May 31, 2020 $ %
2021 2020 Change Change
Income tax provision
(3.3 )%
The provision for income taxes decreased by $750,000 at nine months ended
May 31, 2021 when compared to the prior year period. This decrease was primarily
due to lower income in the current period as compared to the prior year period.
The decrease in the income tax provision is also due to a discrete tax item due
to certain deferred tax assets and permanent books to tax differences related to
prior periods that was reconciled and recorded in during the nine months ended
May 31, 2020 for approximately $277,000 .
The income tax provision as a percent of pre-tax income decreased from 30.0% at
nine months ended May 31, 2020 to 26.7% in the current year period, which was
primarily due to a discrete tax item resulting from certain deferred tax assets
and permanent book to tax differences, which was reconciled in the prior year
period for approximately $277,000 .
Liquidity and Capital Resources
As of
The Company currently has a$15,000,000 line of credit agreement with the Bank. OnDecember 4, 2019 , the Company entered into a Change in Terms Agreement datedNovember 27, 2019 with the Bank (the "Amendment"), which modified the Company's$10,000,000 line of credit between the Company and the Bank to increase the maximum amount that may be borrowed thereunder from$10.0 million to$15.0 million . In addition, the Amendment removed the Company's interest rate options but provided that in no event would such interest rate be less than 3.5% per annum. The expiration date of the line of credit under the line of credit agreement isJuly 5, 2021 . The Company intends to renew the line of credit beyond its maturity date. The amounts outstanding under this line of credit as ofMay 31, 2021 andAugust 31, 2020 are currently all under the variable interest index rate of 3.5%. Borrowings are secured by substantially all of the assets of the Company and its subsidiaries. The amounts outstanding under this line of credit as ofMay 31, 2021 andAugust 31, 2020 were zero and$5,100,000 , respectively. The line of credit agreement contains certain nonfinancial and financial covenants, including the maintenance of certain financial ratios. As ofMay 31, 2021 andAugust 31, 2020 , the Company was in compliance with all
such
covenants.
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In September 2019 , Bisco entered into the Hunter Lease with the Trust, which is
the grantor trust of Glen Ceiley , our Chief Executive Officer, Chairman of the
Board and the Company's majority shareholder. Under the Hunter Lease, Bisco
leased from the Trust the Hunter Property, which consists of approximately
80,000 square feet of office and warehouse space located at 5065 East Hunter
Avenue , Anaheim, California , which serves as the Company's new corporate
headquarters. The Hunter Lease has a term that expires on August 31, 2029 .
The Company entered into a new Construction Loan with the Bank to borrow up to
$5,000,000 for the primary purpose of financing tenant improvements at the
Hunter Property. The Construction Loan was a line of credit evidenced by a
Promissory Note in the principal amount of up to $5,000,000 with a maturity date
of May 15, 2027 . The terms of the Construction Loan provide that the Company may
only request advances through July 15, 2020 , and thereafter, the Construction
Loan would convert to a term loan with a fixed rate of 4.6% and entitled to a
.25% rate discount if a demand deposit account is held with the Bank. On
July 15, 2020 , the amount drawn on the Construction Loan and converted to a term
loan was $4,807,000 . Interest on the Construction Loan is payable monthly (4.35%
at May 31, 2021 and August 31, 2020 ). Concurrent with the execution of this
Construction Loan, Bisco entered into a commercial security agreement, dated
July 12, 2019 , with the Bank, pursuant to which Bisco granted the Bank a
security interest in substantially all of Bisco's personal property to secure
Bisco's obligations under the Construction Loan. The outstanding balance of the
Construction Loan at May 31, 2021 and August 31, 2020 was $4,725,000 and
$4,807,000 , respectively.
On May 15, 2017 , the Company entered into a $5,400,000 loan agreement with the
Bank (the "Lakeview Loan"). The proceeds of the loan were used to purchase the
Lakeview Property. In September 2019 , Bisco entered into a Purchase Agreement to
sell the Lakeview Property for a cash sale price of $7,075,000 , which closed
escrow on November 19, 2019 . Upon the closing of escrow, Bisco used the proceeds
from the sale to repay all of the outstanding principal and accrued interest on
the Lakeview Loan. No amounts were outstanding on the Lakeview Loan at May31, 2021.
Cash Flows from Operating Activities
Cash provided by operating activities was$6,404,000 for the nine months endedMay 31, 2021 as compared with cash used in operations of$954,000 for the nine months endedMay 31, 2020 . The increase in current period cash provided by operating activities was primarily due to a decrease in balances to Prepaid expenses and Operating lease right-of-use assets and a net loss in trading securities of$863,000 during the period. The prepaid expense and operating lease right-of-use decreased due to amortization of the prepaid services through the period and timing of prepaid inventory. The prior period cash used in operating activities was primarily due to a decrease in the trade accounts payable and accrued expense balances and an increase in inventory.
Cash Flows from Investing Activities
Cash used in investing activities was$8,092,000 for the nine months endedMay 31, 2021 as compared with cash provided by investing activities of$3,105,000 for the nine months endedMay 31, 2020 . Cash used in investing activities in the period was primarily due to the purchase of marketable securities and the decrease of liabilities for short sales of trading securities. The decrease in cash flow from investing activities in the current period compared to the prior year period was primarily due to the Company's proceeds from the sale of the Lakeview Property received last fiscal year inNovember 2019 for$7,075,000 and a net decrease in sales of marketable securities in the nine months endedMay 31, 2020 .
Cash Flows from Financing Activities
Cash used in financing activities for the nine months endedMay 31, 2021 was$5,095,000 as compared with cash used in financing activities of$28,000 for the nine months endedMay 31, 2020 . The cash used in financing activities for the current period is primarily due to payments in the current period to pay down our revolving line credit facility to zero. Cash used in financing activities in the prior year period is primarily due to the repayment of the entireLakeview Property mortgage loan inNovember 2019 , when the property was sold, this was partially offset by borrowings on the Company's line of credit and construction loan. 19
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to have a material current or future effect on the Company's financial position, revenues, results of operations, liquidity or capital expenditures.
Contractual Financial Obligations
In addition to using cash flow generated from operations, the Company finances its operations through borrowings under its line of credit. These financial obligations are recorded in accordance with accounting rules applicable to the underlying transactions, with the result being that amounts owed under debt agreements and capital leases are recorded as liabilities on the consolidated balance sheets while lease obligations recorded as operating leases are disclosed in the notes to the consolidated financial statements and management's discussion and analysis of financial condition and results of operations in the Company's Annual Report on Form 10-K for the year endedAugust 31, 2020 as filed with theSEC onNovember 30, 2020 .
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