See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
May 31, 2018
Note 1. Organization and Basis of Presentation
EACO Corporation (“EACO”), incorporated in Florida
in September 1985, is a holding company primarily comprised of its wholly-owned subsidiary, Bisco Industries, Inc. (“Bisco”).
Bisco was incorporated in Illinois in 1974 and 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.
Note 2. Significant Accounting Policies and Significant
Recent Accounting Pronouncements
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting periods. These estimates
include allowance for doubtful accounts receivable, slow moving and obsolete inventory reserves, recoverability of the carrying
value and estimated useful lives of long-lived assets, workers’ compensation liability and the valuation allowance against
deferred tax assets. Actual results could differ from those estimates.
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements have been prepared by the Company in conformity with GAAP for interim financial information and the rules and regulations
of the U.S. Securities and Exchange Commission (“SEC”) for interim reporting. In the opinion of management, all adjustments
considered necessary in order to make the financial statements not misleading have been included.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations
for presentation of interim financial information. Therefore, the condensed consolidated interim financial statements should be
read in conjunction with the Company’s Annual Report on Form 10-K for the year ended August 31, 2017 (“fiscal
2017”). The condensed consolidated balance sheet as of August 31, 2017 and related disclosures were derived from the audited
consolidated financial statements as of August 31, 2017. Operating results for the three and nine months ended May 31, 2018
are not necessarily indicative of the results that may be expected for future quarterly periods or the entire fiscal year.
Principles of Consolidation
The consolidated financial statements for all periods presented
include the accounts of EACO, its wholly-owned subsidiary, Bisco, and Bisco’s wholly-owned Canadian subsidiary, Bisco Industries
Limited (all of which are collectively referred to herein as the “Company”, “we”, “us” and
“our”). All significant intercompany transactions and balances have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less when purchased to be cash equivalents.
Trade Accounts Receivable, Net
Trade accounts receivable are carried at original invoice amount,
less an estimate for an allowance for doubtful accounts. Management determines the allowance for doubtful accounts by identifying
probable credit losses in the Company’s accounts receivable and reviewing historical data to estimate the collectability
on items not yet specifically identified as problem accounts. Trade accounts receivable are written off when deemed uncollectible.
Recoveries of trade accounts receivable previously written off are recorded when received. A trade account receivable is considered
past due if any portion of the receivable balance is outstanding if past due more than 30 days. The Company does not charge interest
on past due balances. The allowance for doubtful accounts was $111,000 at May 31, 2018 and August 31, 2017.
Inventories, Net
Inventory consists primarily of electronic fasteners and components,
and is stated at the lower of cost or estimated net realizable value. Cost is determined using the average cost method. Inventories
are presented net of a reserve for slow moving or obsolete items of $1,377,000 and $1,220,000 at May 31, 2018 and August 31, 2017,
respectively. The reserve is based upon management’s review of inventories on-hand over their expected future utilization
and length of time held by the Company.
Securities Sold Short
Securities sold short represent transactions in which the Company
sells a security borrowed from the broker, which it is obligated to purchase and deliver back to the broker. The initial value
of the underlying security is recorded as a liability, and is adjusted to market value at each reporting period, with unrealized
appreciation or depreciation being recorded for the change in value of the open short position. The Company records a realized
gain or loss when the short position is closed. By entering into short sales, the Company bears the market risk of an unfavorable
increase in the price of the security sold short in excess of the proceeds received. The market value of open short positions is
separately presented as a liability in the consolidated balance sheets.
The Company is required to establish a margin account with the
lending broker equal to the market value of open short positions. As the use of such funds is restricted while the short sale is
outstanding, the balance of this account is classified as restricted cash, current in the consolidated balance sheets. The restricted
cash related to securities sold short was $823,000 and $707,000 at May 31, 2018 and August 31, 2017, respectively.
Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the
impairment review, assets are measured by comparing the carrying amount to future net cash flows. If assets are considered
to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds their
estimated fair values.
Income Taxes
Deferred taxes on income result from temporary differences between
the reporting of income for financial statement and tax reporting purposes. A valuation allowance related to a deferred tax asset
is recorded when it is more likely than not that some or all of the deferred tax asset will not be realized. In making such determination,
the Company considers all available positive and negative evidence, including, but not limited to, scheduled reversals of deferred
tax liabilities, projected future taxable income (if any), tax planning strategies and recent financial performance.
We provide tax contingencies, if any, for federal, state, local
and international exposures relating to audit results, tax planning initiatives and compliance responsibilities. The development
of these reserves requires judgments and estimates regarding tax issues, potential outcomes and timing. Actual results could
differ from those estimates.
Revenue Recognition
The Company generally recognizes revenue at the time of product
shipment, as the Company’s shipping terms are generally FOB shipping point. Revenue is considered to be realized or realizable
and earned when there is persuasive evidence of a sales arrangement in the form of an executed contract or purchase order, the
product has been shipped, the sales price is fixed or determinable, and collectability is reasonably assured.
Earnings Per Common Share
Basic earnings per common share for
the three and nine months ended May 31, 2018 and 2017 were computed based on the weighted average number of common shares outstanding
during each respective period. Diluted earnings per share for those periods have been computed based on the weighted average number
of common shares outstanding, giving effect to all potentially dilutive common shares that were outstanding during the respective
periods (See Note 4).
Foreign Currency Translation and Transactions
Assets and liabilities recorded in functional currencies other
than the U.S. dollar (Canadian dollars for Bisco’s Canadian subsidiary) are translated into U.S. dollars at the period-end
rate of exchange (monetary items) or translated at historical rates (nonmonetary items). Revenue and expenses are translated at
the weighted-average exchange rates for the periods ended May 31, 2018 and 2017. The resulting translation adjustments are charged
or credited directly to accumulated other comprehensive income (loss). The average exchange rates for the quarters ended May 31,
2018 and 2017 were $0.78 and $0.74, respectively. The average exchange rates of Canadian dollars to U.S. dollars for the nine months
ended May 31, 2018 and 2017 were $0.79 and $0.75, respectively.
Concentrations
Net sales to customers outside the United States were approximately
9% of revenues for each of the nine months ended May 31, 2018 and 2017, and related accounts receivable were approximately 11%
of total accounts receivable for each period at May 31, 2018 and 2017.
No single customer accounted for more than 10% of revenues for
the three and nine months ended May 31, 2018 or 2017.
Significant Recent Accounting Pronouncements
In August 2015, the Financial Accounting Standards Board (“FASB”)
deferred the effective date of Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers
(Topic 606)”, which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts
with customers and will supersede most current revenue recognition guidance. We will adopt this guidance during the first quarter
of the fiscal year ending August 31, 2019 (“fiscal 2019”). The new guidance is required to be applied retrospectively
to each prior reporting period presented or retrospectively with the cumulative effect of initially applying it recognized at
the date of initial application. We have established a cross-functional team to assess the potential impact of the new revenue
standard. The assessment process consists of reviewing its current accounting policies and practices to identify potential differences
that would result from applying the requirements of the new standard to our revenue contracts and identifying appropriate changes
to the business processes, systems and controls to support revenue recognition and disclosure requirements under the new standard.
We are currently evaluating the potential impact on our business processes, systems, controls and our consolidated financial statements
of the new revenue standard and do not anticipate significant changes to our statement of operations. Our assessment will be completed
during fiscal 2019 at which time the method of adoption will be selected.
In July 2015, the FASB issued ASU 2015-11 “Simplifying
the Measurement of Inventory.” This guidance is part of the “Simplification Initiative” to identify and re-evaluate
areas where the generally accepted accounting principles may be complex and cumbersome to apply. This guidance will require that
inventory be stated at the lower of cost or net realizable value as opposed to the lower of cost or market. Net realizable value
is the estimated selling price for the inventory less completion, disposal and transportation costs. This guidance became effective
for fiscal years beginning after December 15, 2016. The Company adopted this statement on September 1, 2017, and its impact on
the results of operations and financial position did not have a material impact on the Company’s results of operations or
financial position.
In November 2015, the FASB issued ASU 2015-17, “Balance
Sheet Classification of Deferred Taxes.” The guidance requires that all deferred tax assets and liabilities, along with any
related valuation allowance, be classified as non-current on the balance sheet. This guidance became effective for annual reporting
periods beginning after December 15, 2016 with early adoption permitted. The Company adopted this statement on September 1, 2017,
and is properly reported in the Company’s balance sheets.
In February 2016, the FASB issued ASU 2016-02, “Leases,”
which will require a lessee to recognize assets and liabilities with lease terms of more than 12 months. Both capital and operating
leases will need to be recognized on the balance sheet. This guidance is effective for annual reporting periods beginning after
December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. The Company is currently evaluating
this statement and its impact on the Company’s results of operations or financial position.
In June 2016, the FASB issued ASU 2016-13, “Financial
Instruments – Credit Losses,” which will require the measurement of all expected credit losses for financial assets
held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance
is effective for annual reporting periods beginning after December 15, 2019 and interim periods within fiscal years beginning after
December 15, 2020. The Company is currently evaluating this statement and its impact on the Company’s results of operations
or financial position.
In November 2016, the FASB issued ASU 2016-18, “Statement
of Cash Flows - Restricted Cash (a consensus of the FASB Emerging Issues Task Force).” This standard requires restricted
cash and cash equivalents to be included with cash and cash equivalents on the statement of cash flows under a retrospective transition
approach. The guidance will become effective for fiscal years beginning after December 15, 2017 and interim periods within those
fiscal years with early adoption permitted. The Company is adopting the guidance of this standard effective September 1, 2018 for
fiscal year ending August 31, 2019.
Note 3. Debt
The Company has a $10,000,000 line of credit agreement with
Community Bank, N.A. Borrowings under this agreement bear interest at the bank’s reference rate (4.75% at May 31, 2018 and
4.25% at August 31, 2017). Borrowings are secured by substantially all assets of the Company and its subsidiaries. The credit agreement,
expires in March 2019. The amounts outstanding under this line of credit as of May 31, 2018 and August 31, 2017 were $6,668,000
and $6,967,000, respectively. Availability under the line of credit was $3,332,000 and $3,033,000 at May 31, 2018 and August 31,
2017, respectively.
The line of credit agreement contains certain covenants, including
the maintenance of certain financial ratios. As of May 31, 2018 and August 31, 2017, the Company was in compliance with all such
financial covenants.
On May 15, 2017, the Company entered into a $5,400,000 loan
agreement with Community Bank, N.A. The proceeds of the loan were used to purchase the building that houses the Company’s
corporate headquarters and distribution center located in Anaheim, California (“Lakeview Property”). 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 that is 1.70% plus one year
LIBOR updated based on one year LIBOR, no more than once in any 12 month period. At May 31, 2018 and August 31, 2017, the one year
LIBOR was 1.79%. At May 31, 2018, the outstanding balance of this loan was $5,261,000.
The Company has also entered into a business loan agreement
(and related $100,000 promissory note) with Community Bank N.A in order to obtain a $100,000 letter of credit as security for the
Company’s worker’s compensation requirements.
Note 4. Earnings per Share
The following is a reconciliation of the numerators and denominators
of the basic and diluted computations for earnings per common share (in thousands, except per share data):
|
|
Three Months Ended
May 31,
|
|
|
Nine Months Ended
May 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,253
|
|
|
$
|
1,278
|
|
|
$
|
4,767
|
|
|
$
|
2,686
|
|
Less: accrued preferred stock dividends
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Net income available for common shareholders
|
|
$
|
2,234
|
|
|
$
|
1,259
|
|
|
$
|
4,710
|
|
|
$
|
2,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – basic and diluted
|
|
$
|
0.46
|
|
|
$
|
0.26
|
|
|
$
|
0.97
|
|
|
$
|
0.54
|
|
For the three and nine months ended May 31, 2018 and 2017, 40,000
potential common shares (issuable upon conversion of 36,000 shares of the Company’s Series A cumulative convertible preferred
stock) have been excluded from the computation of diluted earnings per share because their inclusion would be anti-dilutive since
the conversion price was greater than the average market price of the common stock.
Note 5. Related Party Transactions
The Company leases buildings under operating lease agreements
from a grantor trust (the “Trust”) that is beneficially owned by the Company’s majority shareholder, who is also
the Company’s Chairman and CEO. During the three months ended May 31, 2018 and 2017, the Company incurred approximately $68,000
and $120,000, respectively, of expense related to these leases.
On November 21, 2017, the Company entered into a Commercial
and Industrial Lease Agreement (the “Lease”) with the Trust, for the lease of a facility in Glendale Heights, Illinois.
The Company relocated its Chicago sales office and distribution center to this facility in December 2017. The Lease is a ten year
lease with an initial monthly rental rate of $22,600, which is subject to annual rent increases of approximately 2.5% as set forth
in the Lease.
Within the next two years, the Company plans to relocate its
corporate headquarters and Anaheim distribution center to an 80,000 square foot facility in Anaheim, California that is owned by
the Trust. The Company plans to enter into a new lease with the Trust in the near future concerning such facility.
Note 6. Income Taxes
The Company accounts for income taxes under the asset and liability
method, whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. Management evaluates the need to establish a valuation allowance for
deferred tax assets based upon the amount of existing temporary differences, the period in which they are expected to be recovered,
and expected levels of taxable income. A valuation allowance to reduce deferred tax assets is established when it is “more
likely than not” that some or all of the deferred tax assets will not be realized. Management has determined that other than
deferred tax assets associated with certain state net operating losses and capital losses, net deferred tax assets will more likely
than not be utilized. Therefore, a valuation allowance has been established against only those assets related to state net operating
losses and capital losses.
During the three and nine months ended May 31, 2018, the Company
recorded an income tax provision of $993,000 and $2,310,000, resulting in an effective tax rate of 30.6% and 32.6%, respectively.
For the three and nine months ended May 31, 2017, the Company recorded income tax provision of $848,000 and $1,709,000 , resulting
in an effective tax rate of 39.9% and 38.9%, respectively. The current period effective tax rate differs from the current statutory
rate of 21% primarily due to the three and nine months ended May 31, 2018 and 2017 extending into both calendar years 2017 and
2018, creating a blended tax rate. The difference in the effective tax rate is also attributed to the valuation allowance against
certain deferred tax assets, state income tax expenses and permanent book to tax differences.
Accounting for uncertainty in income taxes prescribes a recognition
threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected
to be taken in a tax return and provides guidance on de-recognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition. For the three and nine months ended May 31, 2018, the Company did not have a liability for
any unrecognized tax benefit. The Company has elected to classify interest and penalties as a component of its income tax provision.
For the three and nine months ended May 31, 2018, the Company did not have a liability for penalties or interest. The Company does
not expect any changes to its unrecognized tax benefit for the next twelve months that would materially impact its consolidated
financial statements.
On December 22, 2017, the Tax Cuts and Jobs Act (the “Act”)
was enacted. The Act reduces the US federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced
earnings. The SEC staff issued Staff Accounting Bulletin No. 118 (SAB 118"), which provides guidance on accounting for the
tax effects of the Act. SAB 118 provides a measurement period that should not extend beyond one year from the Act enactment date
for companies to complete the accounting under ASC 740. To the extent that a company's accounting for certain income tax effects
of the Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial
statements. We recorded the effects of the Act using our best estimates and the information available to us through the date the
financial statements were issued. However, our analysis is ongoing and as such, the income tax effects that we have recorded are
provisional.
At May 31, 2018, we have not completed our accounting for the
tax effects of enactment of the Act; however, in certain cases, as described below, we have made a reasonable estimate of the effects
on our existing deferred tax balances. We have not been able to make a reasonable estimate for the one-time transition tax. and
continue to account for those items based on our existing accounting under ASC 740, “Income Taxes”. For the items for
which we were able to determine a reasonable estimate, we recognized a provisional amount of $141,591, which is included as a component
of income tax expense from continuing operations.
Prior to the reporting period in which the Act was enacted,
the Company did not recognize a deferred tax liability related to unremitted foreign earnings because it overcame the presumption
of the repatriation of foreign earnings. Upon enactment, the Act imposes a tax on certain foreign earnings and profits at various
tax rates. Based on the Company’s facts and circumstances, it was not able to determine a reasonable estimate of the tax
liability for this item for the reporting period in which the Act was enacted by the time the financial statements for that reporting
period were issued; that is, the Company did not have the necessary information available, prepared, or analyzed to develop a reasonable
estimate of the tax liability for this item (or evaluate how the Act would impact the Company’s existing accounting position
to indefinitely reinvest unremitted foreign earnings). As a result, the Company did not include a provisional amount for this item
in its financial statements that were issued during the reporting period in which the Act was enacted, but would do so in its future
financial statements issued for subsequent reporting periods, beginning with the first reporting period falling within the measurement
period by which the necessary information became available, prepared, or analyzed in order to develop the reasonable estimate and
ending with the first reporting period within the measurement period in which the Company was able to obtain, prepare, and analyze
the necessary information to complete the accounting under ASC 740.
Note 7. Commitments and Contingencies
From time to time, we may be subject to
legal proceedings and claims which arise in the normal course of our business. Any such matters and disputes could be costly and
time consuming, subject us to damages or equitable remedies, and divert our management and key personnel from our business operations.
We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually
or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial position or cash
flows.
Note 8. Subsequent Events
Management has evaluated events subsequent to May 31, 2018 through
the date that these unaudited condensed consolidated financial statements are being filed with the SEC, for transactions and other
events which may require adjustment of and/or disclosure in such financial statements.