You should read the following discussion of our financial condition and results
of operations in conjunction with our consolidated financial statements and the
related notes included in Part II, Item 8, "Financial Statements and
Supplementary Data" of this Annual Report on Form 10-K. In addition to our
historical consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause or contribute to these
differences include those discussed below and elsewhere in this Annual Report on
Form 10-K, particularly in Part I, Item 1A, "Risk Factors."
Overview
EACO is a holding company primarily comprised of its wholly-owned subsidiary,
Bisco, and includes Bisco's wholly-owned Canadian subsidiary, Bisco Industries
Limited. Bisco is a distributor of electronic components and fasteners with 49
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.
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Impact of COVID-19 on our Business
With respect to the ongoing and evolving coronavirus (COVID-19) outbreak, which
was designated as a pandemic by the World Health Organization on March 11, 2020,
the outbreak has caused substantial disruption in international and U.S.
economies and markets. The outbreak has had, and may continue to have, an
adverse impact on the Company, as well as the industries that the Company
serves, such as the aerospace, electronic parts, and industrial equipment
industries. The Company has had to temporarily close its 49 sales offices to the
public, and has experienced temporary closures of certain offices from time to
time to keep our employees safe. We had also temporarily shifted more than half
of our sales force to remote operations and have implemented changes our
warehouse and distribution operations to protect our employees. As a result,
this had a negative effect on our employee productivity due to remote work and
prevented sales employees from visiting customer office locations, which is a
main component to obtaining new and continued business for our sales team. The
Company also incurred additional expenses related daily office sanitization and
personal protective equipment ("PPE") it provided for its employees, which
include masks, sanitizer, and protective cubical walls. Expenses also related to
obtained software and hardware for remote work were also incurred. If
repercussions of the outbreak are prolonged, it could have a significant adverse
impact to the underlying industries of some of the Company's customers. To date,
the Company has has incurred disruptions to its business activities and supply
chain. Management cannot, at this point, estimate ultimate losses related to the
COVID-19 outbreak, if any, and accordingly no adjustments were reflected in the
accompanying financial statements related to this matter.
Critical Accounting Policies and Estimates
Revenue Recognition
In May 2014, the Financial Accounting Standards Board ("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 obligation consist solely of product shipped to
customers. Revenue from product sales is recognized upon transfer of control of
promised products upon shipment to customers at a point in time 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.
Inventory
The Company's inventory provisions for obsolescence reserve 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 this reserve 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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Results of Operations
Comparison of the Fiscal Years Ended August 31, 2021 and 2020
Revenues and Gross Margin (dollars in thousands)
Fiscal Years Ended August 31, $ %
2021 2020 Change Change
Revenues $ 237,962 $ 225,245 $ 12,717 5.6 %
Cost of revenues 177,177 163,868 13,309 8.1 %
Gross margin $ 60,785 61,377 $ (592) (1.0) %
Percent of revenues 25.5 % 27.2 %
Revenues consist primarily of sales of component parts and fasteners, and also
include, to a lesser extent, kitting charges and special order fees, as well as
freight charged to customers. The increase in revenues in fiscal 2021 compared
to fiscal 2020 was largely due to a higher volume of product sales, as well as
increased productivity from the Company's employees due to better training and
management. Revenues have also increased due in part to an increased focus to
sell to international customers. Sales to international customers has increased
1% as a percentage of revenues.
The gross margins in fiscal 2021 decreased by 1.0%, as a percentage of revenues,
when compared to fiscal 2020. This decrease is primarily due to higher material
expense and increased expenses related to warehouse and supply chain that are
allocated to the cost of revenues. This decrease was also due in part to the
overall declines in gross profit margin due to the global industry-wide
shortages and the impacts from the COVID-19 pandemic.
Selling, General and Administrative Expense (dollars in thousands)
Fiscal Years Ended
August 31, $ %
2021 2020 Change Change
Selling, general and administrative expenses $ 48,072 $ 50,936 $ (2,864) (5.6) %
Percent of revenues
20.2 % 22.6 % (2.3) %
Selling, general and administrative expense ("SG&A") consists primarily of
payroll and related expenses for the sales and administrative staff,
professional fees (including accounting, legal and technology costs and
expenses), and advertising costs. SG&A in fiscal 2021 decreased from fiscal 2020
largely due to a decrease in payroll taxes as a result of federal tax credits
related to the Employee Retention Credit (ERC) of $5.4 million. Further, the
decrease is also due to a decrease in the number of sales and administrative
employees, from 525 employees in fiscal 2020 to 484 employees in fiscal 2021.
Fiscal 2020 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 fiscal 2021 decreased from fiscal 2020 primarily
due to decreased employee headcount and higher sales growth due to the
rebounding economy.
Other Income (Expense), Net (dollars in thousands)
Fiscal Years Ended
August 31, $ %
Other income (expense): 2021 2020 Change Change
Realized gain on sales of marketable trading
securities $ (890) $ 620 $ (1,510) (243.5) %
Unrealized gain (loss) on marketable trading
securities 83 292 (209) (71.6) %
Loss on Sale of Property (130) 130 100 %
Interest and other (expense) (226) (256) 30 13.3 %
Other income (expense), net $ (1,033) $ 526 $ (1,559) (296.4) %
Other income (expense), net as a percent of
revenues (0.2) % 0.2 %
Other income (expense) includes income or losses on investments in marketable
equity securities of other publicly-held domestic corporations, interest income
(expense), and other nonoperating activities. The Company's investment strategy
consists of both long and short positions. The Company experienced net realized
and unrealized losses from trading securities of approximately $807,000
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during fiscal 2021 compared to $912,000 net realized and unrealized gains during
fiscal 2020. The trading securities losses in fiscal 2021 was primarily due to
timing of sale of investments and general market climate of investment positions
at year end.
During fiscal 2020, the Company sold the Lakeview Property for a cash purchase
price of $7,075,000 in November 2019, realizing a total loss of $130,000 from
the sale.
Interest and other expense decreased by $30,000, which was primarily due to
reduced interest expense on a lower average balance held on our line of credit
during fiscal 2021 compared to fiscal 2020.
Income Tax Provision (dollars in thousands)
Fiscal Years Ended
August 31, $ %
2021 2020 Change Change
Provision for income taxes $ 3,293 $ 3,174 $ 119 3.7 %
Percent of pre-tax income 28.2 % 28.9 % (0.7) %
The provision for income taxes increased by $119,000 in fiscal 2021 compared to
fiscal 2020, which was primarily a result of higher tax income in fiscal 2021 as
compared to fiscal 2020. The income tax provision as a percent of pre-tax income
decreased by 0.7% in fiscal 2021 compared to fiscal 2020, which was primarily
due to a discrete tax item recorded in the first quarter of fiscal 2020
resulting from certain deferred tax assets and permanent book to tax
differences, related to prior periods for approximately $277,000.
Liquidity and Capital Resources
As of August 31, 2021 and 2020, the Company held approximately $4,455,000 and
$6,079,000 of unrestricted cash and cash equivalents, respectively. The Company
also held $3,741,000 and $1,368,000 of marketable securities at August 31, 2021
and August 31, 2020, respectively, which could be liquidated, if necessary.
The Company currently has a $15,000,000 line of credit agreement with Citizens
Business Bank ("the Bank"). On December 4, 2019, the Company entered into a
Change in Terms Agreement dated November 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 3.0% per annum. The expiration date of the line
of credit under the line of credit agreement is July 5, 2022. The Company
intends to renew the line of credit beyond maturity. The amounts outstanding
under this line of credit as of August 31, 2021 and August 31, 2020 are
currently all under the default variable interest index rate of 3.0% and 3.5%,
respectively. 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 August 31, 2021 and August 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
of August 31, 2021 and August 31, 2020, the Company was in compliance with all
such covenants.
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
August 31, 2021 and 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
August 31, 2021 and August 31, 2020 was $4,698,000 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 August
31, 2021.
EACO has also entered into a business loan agreement (and related $100,000
promissory note) with the Bank that is renewed annually in order to obtain a
$100,000 letter of credit as security for the Company's workers' compensation
requirements.
Cash Flows from Operating Activities
During fiscal 2021, the Company provided $8,817,000 in net cash from its
operating activities. The current period cash provided by operating activities
was primarily due to net income of $8,387,000 and an increase in accrued
expenses. This was partially offset by increases in trade accounts receivable
and prepaid expenses. Increases in accrued expenses is primarily due to
increases in accrued bonuses due to higher sales, margin borrowings of $848,000
on the brokerage account, and $520,000 of stale checks older than 3 years
reclassed to accrued liability.
During fiscal 2020, the Company provided $2,783,000 in net cash from its
operating activities. The current period cash provided by operating activities
was primarily due to net income of $7,793,000, a decrease in trade accounts
receivables, a reduction in purchased inventory due to lower sales at year end,
and greater depreciation in the current period. This was partially offset by
decreases in trade accounts payable and accrued expenses due to less inventory
purchases and increased gains on trading securities not attributable to
operations.
Cash Flows from Investing Activities
Cash used in investing activities was $7,042,000 for fiscal 2021. This was
primarily due to the purchase of marketable securities and a decrease in
liability of short sales, which is due to timing of investing activities.
Cash provided by investing activities was $4,048,000 for fiscal 2020. This was
primarily due to proceeds of $7,075,000 from the sale of the Lakeview Property,
sale of marketable securities, and increases in liability of short sales. Cash
provided by investing activities was partially offset by fixed asset additions
of $6,705,000 from tenant improvements and furniture and fixtures for the new
corporate headquarters at the Hunter Property.
Cash Flows from Financing Activities
Cash used in financing activities for fiscal 2021 was $6,308,000, which was
primarily due net payments of $5,100,000 in fiscal 2021 to pay down the line of
credit with the Bank to a zero balance.
Cash used in financing activities for fiscal 2020 was $3,095,000, which was
primarily due to payments of $5,125,000 for the repayment of the Lakeview
Property mortgage and net payments of $1,014,000 in fiscal 2020 to repay a
portion of the line of credit with the Bank.
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Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements that are reasonably likely to
have a current or future effect on the consolidated 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 from banks. These financial obligations are
recorded in accordance with accounting rules applicable to the underlying
transactions, with the result that debt agreements are recorded as liabilities
in the accompanying consolidated balance sheets while obligations under
operating leases are disclosed in the notes to the accompanying consolidated
financial statements.
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