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 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 48
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
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 accounting principles generally accepted
in the United States of America. 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.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers,
issued as a new Topic, ASC Topic 606 ("ASU 2014-09"). This new revenue
recognition standard provides a 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
adopted the guidance beginning in fiscal 2019 using the modified retrospective
approach. The adoption of this guidance did not have a significant impact on our
consolidated financial statements.
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In February 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)," which
requires lessees to recognize almost all leases on their balance sheet as a
right-of-use asset and a lease liability. For income statement purposes, the
FASB retained a dual model, requiring leases to be classified as either
operating or finance. Classification is based on criteria that are largely
similar to those applied in current lease accounting, but without explicit
bright lines. Lessor accounting is similar to the current model, but updated to
align with certain changes to the lessee model and the new revenue recognition
standard. This ASU is effective for fiscal years beginning after December 15,
2019, including interim periods within those fiscal years. The Company adopted
ASU 2016-02 on September 1, 2019 and applied the package of practical expedients
included therein, as well as utilized the transition method included in ASU
2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the
beginning of the earliest period presented, the presentation of financial
information for periods prior to September 1, 2019 remains unchanged and in
accordance with Leases (Topic 840). As of November 30, 2019, the Company has
right of use assets of approximately $13.5 million (net of the reversal of the
current deferred rent liability) and lease liabilities of approximately $11.2
million recorded in the consolidated balance sheet.
There have been no changes to the Company's critical accounting policies for the
three months ended November 30, 2019, except for the adoption of ASU 2016-02
referenced above. For additional information regarding our critical accounting
policies, please see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Annual Report on Form 10-K
for the year ended August 31, 2019 as filed with the SEC on November 27, 2019.
Results of Operations
Comparison of the Three Months Ended November 30, 2019 and 2018
Net Sales and Gross Profit ($ in thousands)
Three Months Ended
November 30, $ %
2019 2018 Change Change
Net sales $ 56,040 $ 50,786 $ 5,254 10.3 %
Cost of sales 40,144 36,677 3,467 9.5 %
Gross profit $ 15,896 $ 14,109 $ 1,787 12.7 %
Gross profit as a percent of revenues 28.4 % 27.8 % 0.6 %
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
November 30, 2019 ("Q1 2020") as compared to the three months ended November 30,
2018 ("Q1 2019") was largely due to a higher volume of product sales, increased
sales department headcount over prior year quarter, increased sales related to
new inventory items, and increased productivity from the Company's employees.
Revenues have also increased due to the Company continuing to focus on
relationship building programs with current and potential customers and vendors,
which resulted in additional new authorized distributorships in the current
fiscal year.
The gross margins in Q1 2020 increased by 0.6% as a percentage of revenues when
compared to Q1 2019. This increase was primarily due to mix of products sold and
larger discounts on purchased inventory for large dollar volume orders in Q1
2020 compared to Q1 2019.
Selling, General and Administrative Expenses ($ in thousands)
Three Months Ended
November 30, $ %
2019 2018 Change Change
Selling, general and
administrative expenses $ 12,602 $ 11,490 $ 1,112 9.7 %
Percent of net sales 22.5 % 22.6 % (0.1 )%
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 Q1 2020 increased from Q1 2019 largely
due to an increase in employee headcount, annual raises, and higher sales
bonuses related to higher sales. The increase is also due to additional rental
expense due to rent paid for the Hunter Lease while it is being constructed and
rent paid for our current headquarters at the Lakeview Property. SG&A as a
percent of revenue in Q1 2020 decreased slightly from Q1 2019 primarily due to
the Company being able to increase sales with current and new customers without
having to incur additional significant SG&A expenses.
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Other (Expense) Income, Net ($ in thousands)
Three Months Ended
November 30, $ %
2019 2018 Change Change
Other income:
Net (loss) gain on trading securities $ (80 ) $ 228 $ (308 ) (135.1 )%
Loss on sale of real property
(102 ) - (102 ) (100.0 )%
Interest and other (expense), net (119 ) (77 ) (42 ) (54.5 )%
Other (expense) income, net $ (301 ) $ 151 $ (452 ) (299.3 )%
Percent of net sales (0.5 )% 0.3 % (0.8 )%
Other (expense) income, 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 Q1 2020, the Company recognized a net loss
on trading securities of $80,000 as compared to a net gain of $228,000 in Q1
2019 in net realized and unrealized gains. The decrease in trading securities in
Q1 2020 was primarily due to timing of sales and purchases and general market
climate of short and long positions during the period.
During Q1 2020, the Company sold the Lakeview Property for a cash purchase price
of $7,075,000 in November 2019, realizing a total loss of $102,000 from the sale
in the current quarter.
Interest and other (expense), net, increased in Q1 2020 compared to Q1 2019 due
to the interest expense on the Construction Loan for the Hunter Property and
also due to a higher balance held on the revolving line of credit during the
current period. The Company repaid the Lakeview Loan in full in November 2019 in
connection with the sale of the Lakeview Property.
Income Tax Provision ($ in thousands)
Three Months Ended
November 30, $ %
2019 2018 Change Change
Income tax provision $ 1,076 $ 845 $ 231 27.3 %
Percent of pre-tax income 36.0 % 30.5 %
5.5 %
The provision for income taxes increased by $231,000 in Q1 2020 over the prior
year period. This increase was primarily due to a discrete tax item due to
certain deferred tax assets and permanent book tax differences related to prior
periods that was reconciled and recorded in the current quarter for
approximately $277,000. The increase in taxes was also due to higher taxable
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 30.5% at Q1 2019 to
36% at Q1 2020 primarily due to permanent books to tax adjustments.
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Liquidity and Capital Resources
As of November 30, 2019 and 2018, the Company held approximately $6,056,000 and
$3,328,000 of unrestricted cash and cash equivalents, respectively. The Company
also held $405,000 and $1,873,000 of marketable securities at November 30, 2019
and August 31, 2019, respectively, which could be liquidated, if necessary.
The Company currently has a $15,000,000 line of credit agreement with the Bank.
On December 4, 2019, the Company entered into the Amendment, which modified the
Company's line of credit between the Company and the Bank to increase the
maximum amount that may be borrowed there under from $10.0 million to $15.0
million. In addition, the interest rate provisions under the line of credit were
modified so that in no event would such interest rate be less than 3.5% per
annum or the maximum interest rate permitted under law. The expiration date of
the line of credit under the agreement is July 5, 2021 and has a variable
interest rate option that the Company may select (subject to the requirements in
the Amendment and provided that the Company is not in default under the line of
credit agreement): to (A) The default variable interest index rate, which is
Citizens Business Bank Prime Rate of Interest, which is the prime rate (4.75% at
November 30, 2019 and August 31, 2019) less 0.500%; or (B) One Hundred Eighty
(180) day Libor Rate plus a margin of 1.550%; and (v) replace the preferred rate
of interest with a discounted rate. The amounts outstanding under this line of
credit as of November 30, 2019 and August 31, 2019 is currently all under the
default variable interest index rate of 4.25% and 4.75%, respectively.
Borrowings are secured by substantially all of the assets of the Company and its
subsidiary. The amounts outstanding under this line of credit as of November 30,
2019 and August 31, 2019 were $6,534,000 and $6,114,000, respectively. The line
of credit agreement contains certain nonfinancial and financial covenants,
including the maintenance of certain financial ratios. As of November 30, 2019
and August 31, 2019, the Company was in compliance with all such covenants.
On July 12, 2019, the Company also entered into the Construction Loan for the
primary purpose of financing tenant improvements at the Hunter Property. The
Construction Loan is 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 Note provide that the Company may only request
advances through July 15, 2020, and thereafter, the Construction Loan will
convert to a term loan. Interest on the Construction Loan is payable monthly,
subject to variable interest rate based on the Bank's internal prime rate (4.75%
and 5.25% at November 30, 2019 and August 31, 2019, respectively). The balance
of the Construction Loan at November 30, 2019 was $2,152,000 and $342,000
respectively.
The Company plans to move its corporate headquarters during March 2020 to the
Hunter Property, which is significantly larger than our current headquarters.
The Company expects to incur higher capital expenditures during the first and
second quarter of fiscal year 2020 to fund tenant improvements to modify this
facility to meet the Company's requirements.
On May 15, 2017, the Company entered into the Lakeview Loan, the proceeds of
which were used to purchase the Lakeview Property located in Anaheim,
California. This loan is payable in 35 regular monthly payments of $27,142 and
one last payment of $5,001,607 due on the maturity date of the loan on May 16,
2020. The loan is secured by a deed of trust to the Lakeview Property and bears
a variable interest rate, which is 1.70% plus one year LIBOR (2.0% at November
30, 2019 and August 31, 2019). This rate can be periodically reset based on the
one year LIBOR rate no more than once in any 12 month period at the election of
the Bank. At August 31, 2019 and August 31, 2018, the one year LIBOR was 2.0%
and 2.8%, respectively. At August 31, 2019, the outstanding balance of this loan
was approximately $5,141,000. November 19, 2019, Bisco sold the Lakeview
Property for a cash purchase price of $7,075,000 and used the proceeds from the
sale to repay all of the outstanding principal and accrued interest on the
Lakeview Loan.
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 worker's compensation requirements.
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Cash Flows from Operating Activities
Cash used in operating activities was $1,668,000 for the three months ended
November 30, 2019 as compared with cash used in operations of $556,000 for the
three months ended November 30, 2018. The increase in current period cash used
by operating activities was primarily due to the increase in inventory to stock
new and selling lines and a decrease in trade accounts payable due to timing of
payments to vendors in the current period. This was also adversely impacted to
some extent by a decrease in trade accounts receivables in the current period
due to higher revenues in the previous quarter ended August 31, 2019. The prior
period cash used in operating activities was primarily due to an increase in
inventory and accrued expense.
Cash Flows from Investing Activities
Cash provided by investing activities was $8,237,000 for the three months ended
November 30, 2019 as compared with cash used in investing activities of $409,000
for the three months ended November 30, 2018. The increase in cash flow from
investing activities in the current year period compared to the prior year
period was primarily due to the Company's proceeds from the sale of the Lakeview
Property in November 2019 for $7,075,000 and a net increase in securities sold
short in the three months ending November 30, 2019. This was partially offset by
purchase of construction of leasehold improvements in the quarter for $1,810,000
for the new corporate headquarters. The prior year cash used in investing
activities was primarily due to the Company's a net increase in securities sold
short in the three months ending November 30, 2018.
Cash Flows from Financing Activities
Cash provided by financing activities for the three months ended November 30,
2019 was $2,919,000 as compared with cash used in financing activities of
$659,000 for the three months ended November 30, 2018. The cash increased used
in financing activities comparing the current period to the prior year period is
primarily due to the repayment of the entire Lakeview Property mortgage loan in
November 2019, when the property was sold, partially offset by new borrowings on
construction loan of $1,810,000 related to the leasehold improvements of the new
corporate headquarters. Cash provided by financing activities in the prior year
period is primarily due to borrowings of $1,099,000 on the Company's revolving
line of credit.
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, 2019 as filed
with the SEC on November 27, 2019.
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