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
the SEC 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
and its wholly-owned subsidiary, Bisco, and Bisco's wholly-owned Canadian
subsidiary, Bisco Industries Limited.
EACO is a holding company primarily comprised of its wholly-owned subsidiary,
Bisco. Bisco is a distributor of electronic components and fasteners with 50
sales offices and seven distribution centers located throughout the United
States and Canada. 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 and Estimates
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.
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.
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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.
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
six months ended February 28, 2022.
Results of Operations
Comparison of the Three Months Ended February 28, 2022 and 2021
Net Sales and Gross Profit ($ in thousands)
Three Months Ended
February 28, $ %
2022 2021 Change Change
Net sales $ 66,587 $ 55,751 $ 10,836 19.4 %
Cost of sales 48,462 40,727 7,735 19.0 %
Gross profit $ 18,125 $ 15,024 $ 3,101 20.6 %
Gross profit as a percent of net sales 27.2 % 26.9 % 0.3 %
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 increase in revenues in the three months ended February 28, 2022 ("Q2 2022")
as compared to the three months ended February 28, 2021 ("Q2 2021") was largely
due to higher demand for products and favorable economic conditions in the
current period. Further, the prior year period had decreased sales and gross
margins, resulting from the global industry-wide slowdown due to the impact from
the COVID-19 pandemic.
Selling, General and Administrative Expenses ($ in thousands)
Three Months Ended
February 28, $ %
2022 2021 Change Change
Selling, general and
administrative expenses $ 13,439 $ 12,540 $ 899 7.2 %
Percent of net sales 20.2 % 22.5 % (2.3) %
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 Q2 2022 increased from Q2 2021 largely
due to increased travel expenses related to sales meetings and events and higher
professional fees. The increase was partially offset by decreases in employee
headcount when comparing Q2 2022 to Q2 2021. SG&A as a percent of revenue in Q2
2022 decreased from Q2 2021 by 2.3%, primarily due to decreases in the employee
headcount and an increase in Q2 2022 sales due to the rebounding economy.
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Other (Expense), Net ($ in thousands)
Three Months Ended
February 28, $ %
2022 2021 Change Change
Other income (expense):
Net (loss) gain on trading securities $ (22) $ (506) $ 484 95.7 %
Interest and other (expense), net
(53) (60) 7 11.7 %
Other income (expense), net $ (75) $ (566) $ 491 86.7 %
Percent of net sales (0.1) % (1.0) % 0.9 %
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 Q2 2022, the Company recognized a net loss
on trading securities of $22,000 as compared to a net loss of $506,000 in Q2
2021. The net trading securities losses in Q2 2022 and Q2 2021 was primarily due
to timing of sales and purchases and general market climate for short and long
positions during the period.
Interest and other (expense), net, decreased in Q2 2022 compared to Q2 2021,
which was primarily due to lower variable rates on our loans and carrying a
lower balance on our line of credit during Q2 2022 compared to Q2 2021.
Income Tax Provision ($ in thousands)
Three Months Ended
February 28, $ %
2022 2021 Change Change
Income tax provision $ 1,204 $ 524 $ 680 129.8 %
Percent of pre-tax income 26.1 % 27.3 % (1.2) %
The provision for income taxes increased by $680,000 in Q2 2022 over the prior
year period. This increase was primarily due to higher income in the current
quarter as compared to the prior year period. The income tax provision as a
percent of pre-tax income decreased from 27.3% at Q2 2021 to 26.1% at Q2 2022,
which was primarily due to the state tax rate mix and permanent book tax
differences.
Comparison of the Six Months Ended February 28, 2022 and 2021
Net Sales and Gross Profit ($ in thousands)
Six Months Ended
February 28, $ %
2022 2021 Change Change
Net Sales $ 130,409 $ 109,154 $ 21,255 19.5 %
Cost of sales 94,106 79,678 14,428 18.1 %
Gross profit $ 36,303 $ 29,476 $ 6,827 23.2 %
Percent of net sales 27.8 % 27.0 % 0.8 %
The increase in revenues and gross margins as a percent of revenues in the six
months ended February 28, 2022 as compared to the six months ended February 28,
2021 was largely due to higher demand for products and favorable economic
conditions in the current period. Further, the prior year period had decreased
sales and gross margins resulting from the global industry-wide slowdown.
Selling, General and Administrative Expenses ($ in thousands)
Six Months Ended
February 28, $ %
2022 2021 Change Change
Selling, general and administrative expenses $ 22,334 $ 25,221 $ (2,887) (11.4) %
Percent of net sales 17.1 % 23.1 % 6.0 %
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SG&A in the six months ended February 28, 2022 decreased from the same period in
the prior year primarilydue to a decrease in payroll taxes as a result of
federal tax credits related to the Employee Retention Credit (ERC) of $5.4
million recorded in the first quarter of fiscal year 2022. Q2 2021 also had
non-recurring expense incurred related to the relocation of the Company's
corporate headquarters to the Hunter Property. The decrease in SG&A was
partially offset due to annual raises and higher depreciation expense. SG&A as a
percent of revenue in Q2 2022 decreased from Q2 2021 primarily due to the ERC
and higher sales growth due to the rebounding economy in the current period.
Other (Expense), Net ($ in thousands)
Six Months Ended
February 28, $ %
2022 2021 Change Change
Other income (expense):
Net (loss) gain on trading securities $ (78) $ (1,059) $ 981 92.6 %
Interest and other (expense), net
(105) (129) 24 18.6 %
Other income (expense), net $ (183) $ (1,188) $ 1,005 84.6 %
Percent of net sales (0.1) % (1.1) % (1.0) %
During the six months ended February 28, 2022, the Company recognized a net loss
on trading securities of $78,000 as compared to a net loss of $1,059,000 in the
same period in the prior year. The net trading securities losses in Q2 2022 and
2021 was primarily due to timing of sales and purchases and general market
climate for short positions during the period.
Interest and other (expense), net, decreased during the six months ended
February 28, 2022 compared to the same period in the prior year, which was
primarily due to carrying a lower balance on our line of credit during the
current period.
Income Tax Provision ($ in thousands)
Six Months Ended
February 28, $ %
2022 2021 Change Change
Income tax provision $ 3,593 $ 822 $ 2,771 337.1 %
Percent of pre-tax income 26.1 % 26.8 % (0.7) %
The provision for income taxes increased by $2,771,000 for the six months ended
February 28, 2022 when compared to the prior year period. This increase was
primarily due to higher 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 26.8% for
the six months ended February 28, 2021 to 26.1% in the current year period,
which was primarily due to the state tax rate mix and permanent book tax
differences.
Liquidity and Capital Resources
As of February 28, 2022 and August 31, 2021, the Company held approximately
$5,622,000 and $4,455,000 of unrestricted cash and cash equivalents,
respectively. The Company also held $4,598,000 and $3,741,000 of marketable
securities at February 28, 2022 and August 31, 2021, respectively, which could
be liquidated, if necessary.
As of February 28, 2022, the Company held a $15,000,000 Line of credit with the
Bank. Borrowings are secured by substantially all of the assets of the Company
and its subsidiaries. The amounts outstanding under this line of credit as of
February 28, 2022 and August 31, 2021 were zero. The line of credit agreement
contains certain nonfinancial and financial covenants, including the maintenance
of certain financial ratios. As of February 28, 2022 and August 31, 2021, the
Company was in compliance with all such covenants. The expiration date of the
line of credit under the line of credit agreement was July 5, 2022. The Company
is currently in process of negotiating a new line of credit agreement with the
Bank expect to have it in place before the fiscal year end. The Company believes
it has adequate cash available for its business operations while it negotiates
its new line of credit agreement with the Bank.
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.
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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
February 28, 2022 and August 31, 2021). 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 February 28, 2022 and August 31, 2021 was $4,643,000 and
$4,698,000, respectively.
EACO has also entered into a business loan agreement (and related $100,000
promissory note) with the Bank in order to obtain a $100,000 letter of credit as
security for the Company's workers' compensation requirements.
Cash Flows from Operating Activities
Cash provided by operating activities was $4,355,000 for the six months ended
February 28, 2022 as compared with cash provided by operations of $3,540,000 for
the six months ended February 28, 2021. Cash provided by operating activities in
the current period was primarily due to net income earned in the period and an
increase in trade accounts payable. Increases to net income was primarily due to
increases in revenues and ERC of $5.4M credited to payroll taxes. This was
adversely impacted to some extent by an increase in inventory and trade accounts
receivable related to the Company's increased sales volume for the six months
ended February 28, 2022 when compared to the prior year period. The prior period
cash provided by operating activities was primarily due to the net income in
that period and a decrease in prepaid expenses and other assets and a decrease
in trade accounts receivables.
Cash Flows from Investing Activities
Cash used in investing activities was $1,579,000 for the six months ended
February 28, 2022 as compared with cash used in investing activities of
$5,758,000 for the six months ended February 28, 2021. Cash used in investing
activities in the period was primarily due to purchase of marketable securities
and equipment in the period. Cash used in investing activities in the prior year
period was primarily due to the purchase of marketable securities and the
decrease of liabilities for short sales of trading securities. The increase in
cash flow from investing activities in the current period compared to the prior
year period was primarily due to less purchases of securities in the current
period.
Cash Flows from Financing Activities
Cash used in financing activities for the six months ended February 28, 2022 was
$1,154,000 as compared with cash used in financing activities of $2,665,000 for
the six months ended February 28, 2021. The cash used in financing activities
for the current period is primarily due to an increase in bank overdraft in the
period, which represents outstanding checks in excess of cash due to the nightly
sweep feature of the cash account to the line of credit with the Bank. Cash used
in financing activities in the prior year period is primarily due to payments to
pay down our revolving line credit facility in the prior year period, but
partially offset by an increase in the bank overdraft liability in that period.
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 ended August 31, 2021 as filed
with the SEC on July 6, 2022.
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