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
the
Overview
The condensed consolidated financial statements comprise the accounts of
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
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. There have been no
changes to the Company's critical accounting policies for the three months ended
Revenue Recognition
In
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
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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.
Results of Operations
Comparison of the Three Months Ended
Three Months Ended
November 30, $ %
2022 2021 Change Change
Net sales $ 76,319 $ 63,822 $ 12,497 19.6 %
Cost of sales 54,656 45,644 9,012 19.7 %
Gross margin $ 21,663 $ 18,178 $ 3,485 19.2 %
Gross margin as a percent of revenues 28.3 % 28.5 % (0.2) %
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 net sales and gross margins in the three months ended
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Selling, General and Administrative Expenses ($ in thousands)
Three Months Ended
November 30, $ %
2022 2021 Change Change
Selling, general and
administrative expenses $ 15,685 $ 8,895 $ 6,790 76.3 %
Percent of net sales 20.6 % 13.9 % 6.7 %
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 2023 increased from Q1 2022 largely
due to a decrease in payroll taxes in Q1 2022 as a result of federal tax credits
related to the Employee Retention Credit (ERC) of
Other (Expense), Net ($ in thousands)
Three Months Ended
November 30, $ %
2022 2021 Change Change
Other income (expense):
Net gain (loss) on trading securities
(48) (52) 4 7.7 %
Other Income (expense), net $ 394 $ (108) $ 502 464.8 %
Percent of net sales 0.5 % (0.2) % 0.7 %
Other income (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 Q1 2023, the Company recognized a net gain
on trading securities of
Interest and other (expense), net, decreased in Q1 2023 compared to Q1 2022, which was primarily due to a lower interest expense related to the Construction Loan.
Income Tax Provision ($ in thousands)
Three Months Ended
November 30, $ %
2022 2021 Change Change
Income tax provision $ 1,661 $ 2,389 $ (728) 30.5 %
Percent of pre-tax income 26.1 % 26.0 % 0.1 %
The provision for income taxes decreased by
Liquidity and Capital Resources
As of
As of
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including the maintenance of certain financial ratios. As of
The Company entered into a Construction Loan with the Bank to borrow up to
Cash Flows from Operating Activities
Cash provided by operating activities was
Cash Flows from Investing Activities
Cash used in investing activities was
Cash Flows from Financing Activities
Cash used in financing activities for the three months ended
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
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