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.
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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 InMay 2014 , theFinancial 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 (effectiveSeptember 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.
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There have been no changes to the Company's critical accounting policies for the
six months ended
Results of Operations
Comparison of the Three Months Ended
Three Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Net sales $ 55,751 $ 56,828 $ (1,077 ) (1.9 )%
Cost of sales 40,727 41,029 (302 ) (0.7 )%
Gross profit $ 15,024 $ 15,799 $ (775 ) (4.9 )%
Gross profit as a percent of revenues 26.9 % 27.8% (0.9 )%
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 decrease in revenues in the three months ended February 28, 2021 ("Q2 2021")
as compared to the three months ended February 29, 2020 ("Q2 2020") was largely
due to lower demand for aerospace product resulting from the global
industry-wide slowdown due to the impact from the COVID-19 pandemic. While our
sales continue to remain strong, we cannot predict how long the pandemic will
last or the impact of such pandemic on our financial condition and resultsof operations.
The gross margins in Q2 2021 decreased by 0.9% as a percentage of revenues when compared to Q2 2020. This decrease was primarily due to a combination of product and customer mix, and overall declines in gross profit margin due to the global industry-wide slowdown and the impacts from the COVID-19 outbreak. The PPE products distributed by the Company typically carry lower margins, which also contributed to the decline in gross margins in the current periods.
Selling, General and Administrative Expenses ($ in thousands)
Three Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Selling, general and administrative
expenses $ 12,540 $ 12,673 $ (133 ) (1.0 )%
Percent of net sales 22.5 % 22.3 % 0.2 %
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 2021 decreased from Q2 2020 largely
due to larger rent expense in Q2 2020 related to paying rent for 2 corporate
headquarters. In Q2 2020, the Company occupied the previous headquarters during
the construction of the current headquarters and paid rent for both locations
during this period. The decrease was partially offset by increases in employee
headcount and annual raises in Q2 2021. SG&A as a percent of revenue in Q2 2021
increased slightly from Q2 2020 by 0.2%, primarily due to increases in the
employee headcount and a decrease in Q2 2021 sales due to the COVID-19 pandemic.
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Other (Expense), Net ($ in thousands)
Three Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Other income (expense):
Net (loss) gain on trading securities $ (506 ) $ 471 $ (977 ) (207.4 )%
Interest and other (expense), net (60 ) (65 ) 5 7.7 %
Other income (expense), net $ (566 ) $ 406 $ (972 ) (239.4 )%
Percent of net sales (1.0 )% 0.7 % (1.7 )%
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 2021, the Company recognized a net loss
on trading securities of $506,000 as compared to a net gain of $471,000 in Q2
2020. The net trading securities losses in Q2 2021 was primarily due to timing
of sales and purchases and general market climate for short and long positions
during the period.
Interest and other (expense), net, decreased in Q2 2021 compared to Q2 2020, which was primarily due to lower variable rates on our loans and carrying a lower balance on our line of credit during Q2 2021 compared to Q2 2020.
Income Tax Provision ($ in thousands)
Three Months Ended
February 29, February 28, $ %
2021 2020 Change Change
Income tax provision $ 524 $ 934 $ (410 ) (43.9 )%Percent of pre-tax income 27.3 % 26.4 %
0.9 %
The provision for income taxes decreased by $410,000 in Q2 2021 over the prior
year period. This decrease was primarily due to lower income in the current
quarter as compared to the prior year period. The income tax provision as a
percent of pre-tax income increased from 26.4% at Q2 2020 to 27.3% at Q2 2021,
which was primarily due to the state tax rate mix and permanent book tax
differences.
Comparison of the Six Months Ended February 28, 2021 and February 29, 2020
Six Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Revenues $ 109,154 $ 112,868 $ (3,714 ) (3.3 )%
Cost of revenues 79,678 81,173 (1,495 ) (1.8 )%
Gross margin $ 29,476 $ 31,695 $ (2,219 ) (7.0 )%
Percent of revenues 27.0 % 28.1 % (1.1 )%
The decrease in revenues in the six months ended February 28, 2021 as compared
to the six months ended February 29, 2020 was largely due to lower demand for
aerospace product resulting from the global industry-wide slowdown due to the
impact from the COVID-19 pandemic. While our sales continue to remain strong, we
cannot predict how long the pandemic will last or the impact of such pandemic on
our financial condition and results of operations.
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The gross margins during the six months ended February 28, 2021 decreased by
1.1% 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 the global industry-wide slowdown
and the impacts from the COVID-19 outbreak. The PPE products distributed by the
Company typically carry lower margins, which also contributed to the decline in
gross margins in the current periods.
Selling, General and Administrative Expenses ($ in thousands)
Six Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Selling, general and administrative
expenses $ 25,221 $ 25,275 $ (54 ) (0.2 )%
Percent of net sales 23.1 % 22.4 %
0.7 %
SG&A in the six months ended February 28, 2021 decreased from the same period in
the prior year primarily due to larger rent expense in the prior year period
related to paying rent for 2 corporate headquarters. In the prior year period,
the Company occupied the previous headquarters during the construction of the
current headquarters and paid rent for both locations during this period. The
decrease in SG&A expense was partially offset by increases in employee headcount
and annual raises in Q2 2021. SG&A as a percent of revenue in the six months
ended February 28, 2021 increased from prior year period by 0.7%, primarily due
to increases in the employee headcount and a decrease in sales in the current
period due to the COVID-19 pandemic.
Other (Expense), Net ($ in thousands)
Six Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Other income (expense):Net (loss) gain on trading securities$ (1,059 ) $ 391$ (1,450 ) (370.8 )% Loss on sale of property - (102 ) 102 100.0 % Interest and other (expense), net (129 ) (184 ) 55 29.9 % Other income (expense), net$ (1,188 ) $ 105$ (1,293 ) (1,231.4 )% Percent of net sales (1.1 )% 0.1 % (1.0 )%
During the six months endedFebruary 28, 2021 , the Company recognized a net loss on trading securities of$1,059,000 as compared to a net gain of$391,000 in the same period in the prior year. The net trading securities losses in Q2 2021 was primarily due to timing of sales and purchases and general market climate for short positions during the period. DuringNovember 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$102,000 from the sale in the six months endingFebruary 29, 2020 .
Interest and other (expense), net, decreased during the six months ended
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Income Tax Provision ($ in thousands)
Six Months Ended
February 28, February 29, $ %
2021 2020 Change Change
Income tax provision $ 822
26.8 % 30.8 % (4.0 )%
The provision for income taxes decreased by$1,188,000 at six months endedFebruary 28, 2021 when compared to the prior year period. This decrease was primarily due to lower income in the current quarter as compared to the prior year period. The decrease in the income tax provision is also due to 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 Q1 2020 for approximately$277,000 . The income tax provision as a percent of pre-tax income decreased from 30.8% at six months endedFebruary 29, 2020 to 26.8% 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 and recorded in Q1 2020 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 ofFebruary 28, 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 ofFebruary 28, 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 ofFebruary 28, 2021 andAugust 31, 2020 , the Company was in compliance with all such covenants. InSeptember 2019 , Bisco entered into the Hunter Lease with the Trust, which is the grantor trust ofGlen 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 at5065 East Hunter Avenue ,Anaheim, California , which serves as the Company's new corporate headquarters. The Hunter Lease has a term that expires onAugust 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 ofMay 15, 2027 . The terms of the Construction Loan provide that the Company may only request advances throughJuly 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. OnJuly 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% atFebruary 28, 2021 andAugust 31, 2020 ). Concurrent with the execution of this Construction Loan, Bisco entered into a commercial security agreement, datedJuly 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 atFebruary 28, 2021 andAugust 31, 2020 was$4,754,000 and$4,807,000 , respectively. 18
OnMay 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. InSeptember 2019 , Bisco entered into a Purchase Agreement to sell the Lakeview Property for a cash sale price of$7,075,000 , which closed escrow onNovember 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 atFebruary 28, 2021 .
Cash Flows from Operating Activities
Cash provided by operating activities was$3,540,000 for the six months endedFebruary 28, 2021 as compared with cash used in operations of$3,621,000 for the six months endedFebruary 29, 2020 . The increase in current period cash provided by operating activities was primarily due to a net loss in trading securities of$1,059,000 during the period, since it is an investing activity, and also due to a decrease in accounts receivable and prepaid asset balances related to the Company's lower sales volume for the six months endedFebruary 28, 2021 when compared to the prior year period. Cash flows from operating activities were also adversely impacted to some extent by a decrease in accrued expenses in the current period due to timing of payments and expenses. 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$5,758,000 for the six months endedFebruary 28, 2021 as compared with cash provided by investing activities of$5,585,000 for the six months endedFebruary 29, 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 and an increase in liabilities of short sales of trading securities in the six months endingFebruary 29, 2020 .
Cash Flows from Financing Activities
Cash used in financing activities for the six months endedFebruary 28, 2021 was$2,665,000 as compared with cash provided by financing activities of$1,224,000 for the six months endedFebruary 29, 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, but partially offset by an increase in the bank overdraft liability, 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 borrowings on the Company's line of credit and construction loan. This was partially offset by the repayment of the entire Lakeview Property mortgage loan inNovember 2019 , when the property was sold.
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.
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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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