See accompanying notes to unaudited condensed
consolidated financial statements.
See accompanying notes to unaudited condensed
consolidated financial statements.
* Derived from the Company’s audited financial statements
included in its Form 10-K for the year ended August 31, 2015 filed with the U.S. Securities and Exchange Commission on November
25, 2015.
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, 2016
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, 2015 (“fiscal
2015”). The condensed consolidated balance sheet as of August 31, 2015 and related disclosures were derived from the audited
consolidated financial statements as of August 31, 2015. Operating results for the three and nine month periods ended May
31, 2016 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 Industries, Inc., and Bisco’s wholly-owned Canadian subsidiary,
Bisco Industries Limited (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 for 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, 2016 and August 31, 2015.
Inventories, Net
Inventory consists primarily of electronic fasteners and components,
and is stated at the lower of cost or estimated market value. Cost is determined using the average cost method. Inventories are
presented net of a reserve for slow moving or obsolete items of $1,283,000 and $1,105,000 at May 31, 2016 and August 31, 2015,
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 $1,502,000 and $1,781,000 for May 31, 2016 and August 31, 2015 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 of such assets to their [projected] 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 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, 2016 and 2015 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. Revenue and expenses are translated at the weighted-average exchange rates in effect during the reporting period.
The resulting translation adjustments are charged or credited directly to accumulated other comprehensive income or loss. The average
exchange rates of Canadian dollars to U.S. dollars for the three months ended May 31, 2016 and 2015 were $0.77 and $0.81, respectively.
The average exchange rates of Canadian dollars to U.S. dollars for the nine months ended May 31, 2016 and 2015 were $0.75 and
$0.85, respectively.
Concentrations
Net sales to customers outside the United States were approximately
9% and 7% of total net sales for the nine months ended May 31, 2016 and 2015, respectively, and accounts receivable related to
international sales were approximately 12% and 7 % of total accounts receivable at May 31, 2016 and August 31, 2015, respectively.
No single customer accounted for more than 10% of revenues for
the three and nine months ended May 31, 2016 or 2015.
Significant Recent Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09 “Revenue from
Contracts with Customers” to supersede previous revenue recognition guidance under current GAAP. The guidance presents steps
for comprehensive revenue recognition that requires an entity to 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 guidance becomes effective for annual reporting periods beginning after December 15, 2017, including interim
periods within that reporting period. The Company is currently evaluating this statement and its impact on its results of operations
or financial position.
In July 2015, the FASB issued ASU 2015-11 “Simplifying
the Measurement of Inventory”. The 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. The guidance will require that
inventory be stated at the lower of cost and 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. The guidance becomes effective
for fiscal years beginning after December 15, 2016. The Company is currently evaluating this statement and its impact on its 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 noncurrent on the balance sheet. The guidance becomes effective for annual reporting
periods beginning after December 6, 2016 with early adoption permitted. The Company is currently evaluating this statement and
its impact on its results of operations or financial position.
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. The 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 its 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. The guidance
is effective for annual reporting periods beginning after December 15, 2019 and interim periods within those fiscal years. The
Company is currently evaluating this statement and its impact on its results of operations or financial position.
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 either the 30, 60, or 90 day London Inter-Bank Offered Rate
(“LIBOR”) (0.65 % and 0.31% for the 90 day LIBOR at May 31, 2016 and August 31, 2015, respectively) plus 1.75%
and/or the bank’s reference rate (3.5% and 3.25% at May 31, 2016 and August 31, 2015, respectively). Borrowings are secured
by substantially all assets of Bisco and are guaranteed by the Company’s Chief Executive Officer, Chairman of the Board and
majority shareholder, Glen F. Ceiley. The agreement expires on March 1, 2017.
The amounts outstanding under this line of credit as of May
31, 2016 and August 31, 2015 were $1,385,000 and zero, respectively. Availability under the line of credit was $8,615,000 at May
31, 2016.
The line of credit agreement contains nonfinancial and financial
covenants, including the maintenance of certain financial ratios. As of May 31, 2016 and August 31, 2015, the Company was in compliance
with all financial covenants.
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:
|
|
Three Months Ended
May 31,
|
|
|
Nine Months Ended
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,619
|
|
|
$
|
1,174
|
|
|
$
|
2,850
|
|
|
$
|
2,688
|
|
Less: accrued preferred stock dividends
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
(57
|
)
|
|
|
(57
|
)
|
Net income available for common shareholders
|
|
$
|
1,600
|
|
|
$
|
1,155
|
|
|
$
|
2,793
|
|
|
$
|
2,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share – basic and diluted
|
|
$
|
0.33
|
|
|
$
|
0.24
|
|
|
$
|
0.59
|
|
|
$
|
0.55
|
|
For the three and nine months
ended May 31, 2016 and 2015, 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 three buildings under operating lease agreements
from its majority shareholder, who is also the Company’s Chairman and CEO. During the three months ended May 31, 2016 and
2015, the Company incurred approximately $173,000 and $165,000, respectively, of expense related to these leases. During the nine
months ended May 31, 2016 and 2015, the Company incurred approximately $519,000 and $495,000, respectively, of expense related
to these leases.
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, 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, 2016, the Company
recorded an income tax provision of $836,000 and $1,640,000, respectively, resulting in an effective tax rate of 34.1% and 36.5%,
respectively. For the three and nine months ended May 31, 2015, the Company recorded an income tax provision of $918,000 and $1,899,000,
respectively, resulting in an effective tax rate of 43.9% and 41.4%, respectively. The effective tax rate differs from the statutory
rate of 34% primarily due to the existence of a 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, 2016, the Company did not have a liability for
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, 2016, 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.