Earl Scheib Announces Operating Results for the Third Quarter of Fiscal Year 2008
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SHERMAN OAKS, Calif.--Earl Scheib, Inc. (PINK SHEETS:ESHB) reported its results for the third quarter and nine months ended January 31, 2008 of the fiscal year ending April 30, 2008.
Net sales for the third quarter of fiscal 2008 were $8,242,000, a decrease of 12.5% from the third quarter of fiscal 2007 net sales of $9,417,000. The Company had the same number of sales days in the third quarter of fiscal 2008 and 2007, and operated a weighted-average three fewer retail paint shops in the 2008 quarter compared to 2007. On a same-day basis, same-shop (shops open one year or more) sales decreased by 11.7%; while combined sales in the fleet and truck center and commercial coatings operations remained flat in the third quarter of fiscal 2008 compared to the third quarter of fiscal 2007. The decrease in same-shop, same-day sales was primarily due to a reduction in car volume.
Net sales for the nine months ended January 31, 2008 were $32,182,000, as compared to $34,110,000 for the nine months ended January 31, 2007, a decrease of 5.7%. The Company had the same number of sales days in the nine months ended January 31, 2008 and 2007, and operated a weighted average of one less retail paint shop during the nine months ended January 31, 2008 compared to 2007. On a same-day basis, same-shop sales decreased by 4.8%; while combined sales in the fleet and truck center and commercial coatings operations decreased by $46,000 in the first nine months of fiscal 2008 compared to fiscal 2007. The decrease in same-shop, same-day sales was primarily due to a reduction in car volume.
The operating loss for the third quarter of fiscal 2008 was $1,892,000 compared to an operating loss of $1,433,000 in the third quarter of fiscal 2007. Gross margins decreased in absolute dollars and decreased by 7.2% of sales in the third quarter of fiscal 2008 compared to fiscal 2007 due primarily to the decrease in sales which was proportionally greater than the decrease in the components of cost of sales. Selling, general and administrative expenses decreased by $269,000 but increased by 0.6% of sales in the third quarter of fiscal 2008, compared to 2007, due primarily to the decrease in sales which was proportionally greater than the reduction in selling, general and administrative expenses.
The operating loss for the nine months ended January 31, 2008 was $3,176,000 compared to an operating loss of $1,099,000 in the nine months ended January 31, 2007. Gross margins decreased in absolute dollars and decreased by 4.1% of sales in the nine months ended January 31, 2008 compared to 2007 due primarily to the decrease in sales which was proportionally greater than the decrease in the components of cost of sales. Selling, general and administrative expenses increased by $356,000 or 2.6% of sales due primarily to increased advertising, payrolls and legal/professional services.
During the second quarter of fiscal 2008, a former retired executive of the Company, on whose life the Company held a life insurance policy, passed away. As a result, the Company received life insurance proceeds of $415,000 after deduction of an outstanding policy loan of $228,000. Estimates of the cash surrender value of the policy were previously recognized in “Other assets” on the financial statements. The excess of the proceeds over the previously recorded cash surrender value, amounting to $275,000, is included in the financial results for the nine months ended January 31, 2008.
Net interest expense decreased by $102,000 in the nine month period of fiscal 2008 from fiscal 2007 due primarily to elimination of the Company’s prior credit facility financing costs.
Overall, the net loss for the third quarter of fiscal 2008 was $1,939,000, or $0.48 per diluted share, compared to a net loss of $1,423,000, or $0.32 per diluted share, for the third quarter of fiscal 2007. For the nine months ended January 31, 2008, the net loss was $2,969,000, or $0.74 per diluted share, compared to a net loss of $1,266,000, or $0.29 per diluted share, for the nine months ended January 31, 2007.
In the third quarter of fiscal 2008, the Company borrowed $983,000 against the cash value of life insurance policies owned by the Company. These policies were purchased years ago in conjunction with the Company’s non-qualified supplemental compensation plan (the “Plan”). The policy loans bear interest at variable rates of 4.50% to 5.79%, with interest payable annually in April or May. The principal is not payable until such time as the policies may be surrendered by the Company, generally upon the death of an insured Plan participant. At January 31, 2008, the policy cash values approximated $2,682,000, while the policy loans amounted to $2,438,000.
The Company has a $4,000,000 credit facility with one if its banks, which provides $3,000,000 for issuance of stand-by letters of credit ($2,655,000 in letters of credit were outstanding, as of January 31, 2008, in favor of the Company’s workers compensation insurance carrier to secure the estimated unfunded portion of the Company’s workers compensation insurance liabilities), and a $1,000,000 revolving credit line. The credit facility is secured by the Company’s assets, namely liens on certain California owned real estate. The credit facility contains a net worth covenant. As a result of the Company’s losses, the Company is in default of this covenant. The bank is continuing the credit facility, with the exception that the Company cannot access the $1,000,000 revolving credit line while in default of the covenant. The Company had not previously borrowed on this revolving credit line.
Christian Bement, Chief Executive Officer and President, stated that, “Our results in the third quarter and nine month periods of fiscal 2008 decreased primarily as a result of the loss of car volume, which started to decline in March 2006. We are still struggling with the economic weights around the necks of our consumers. Reversing the decrease in car volume is our number one priority. We recently made significant cost reductions in the face of declining volume. We have seen positive results from these cost reductions in February and we are finally cautiously optimistic that our fourth quarter 2008 financial results will be an improvement over the 2007 quarter, primarily as a result of the cost cutting measures the Company has taken. We closed the two Florida paint shops during January 2008. With the deteriorating economy, these shops were not able to attain profitable operations and we felt that an exit from these markets to eliminate any future losses was prudent.
“On March 17, 2008, we announced that the Board of Directors retained the investment banking firm of Wedbush Morgan Securities Inc. to begin a process to explore strategic alternatives to enhance stockholder value and to act as our exclusive financial advisor to assist management and the Board of Directors in this process. We continue to be very focused on our mission to serve the best interests of our stockholders. By hiring Wedbush Morgan Securities and its experienced bankers who specialize in middle market companies, we express our belief that the Company’s current market capitalization does not reflect the true value of our strong position and opportunities in the aftermarket automotive paint and collision repair industry nor the value of the Company’s assets. However, there can be no assurance that the exploration of strategic alternatives will result in a transaction.”
Earl Scheib, Inc., founded in 1937, is a nationwide operator of 98 auto paint and collision repair shops located in approximately 90 cities throughout the United States. In addition, through a wholly-owned subsidiary, Earl Scheib, Inc. manufactures paint coating systems that are used not only by its paint and collision repair shops, but are also sold to original equipment manufacturers and used by architectural construction firms. For more information, visit Earl Scheib on the web at www.earlscheib.com.
"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995
Written and oral statements made by the Company that are not historic in nature are "forward looking statements" as defined under the Private Securities Litigation Reform Act of 1995, including statements made in this document and in filings with the Securities and Exchange Commission. Generally, the words "believe," "expect," "hope," "intend," "estimate," "anticipate," "plan," "will," "project," and similar expressions identify forward-looking statements. All statements which address operating performance, events, developments or strategies that the Company expects or anticipates in the future are forward-looking statements.
Forward-looking statements involve risks and uncertainties that could cause actual results or events to differ materially from the Company's past experience or current expectations. The following are some of the risks and uncertainties that may impact the forward-looking statements: the impact of the Company’s cost cutting measures, the success of the Company’s exploration of strategic alternatives, the impact of the point-of-sale computer system, the effect of weather, the effect of economic conditions, the impact of competitive products, services, pricing, capacity and supply constraints or difficulties, changes in laws and regulations applicable to the Company, the impact of advertising and promotional activities, the impact of new shops, new business initiatives or growth opportunities, new product rollout, Quality Fleet & Truck Centers and commercial coatings business, the potential adverse effects of certain litigation, financing, insurance or lending constraints, and the impact of various tax positions taken by the Company. The Company undertakes no obligation to correct or update any forward-looking statements whether as a result of new information, future events or otherwise.
| Earl Scheib, Inc. | |||||||||||||||||||
| Consolidated Statements of Operations | |||||||||||||||||||
| (thousand of dollars, except per share data) | |||||||||||||||||||
| Unaudited | |||||||||||||||||||
| Three Months ended | Nine Months ended | ||||||||||||||||||
| January 31, | January 31, | ||||||||||||||||||
| 2008 | 2007 | 2008 | 2007 | ||||||||||||||||
| Net Sales | $ | 8,242 | $ | 9,417 | $ | 32,182 | $ | 34,110 | |||||||||||
| Cost of Sales | 7,854 | 8,301 | 26,609 | 26,816 | |||||||||||||||
| Gross Margin | 388 | 1,116 | 5,573 | 7,294 | |||||||||||||||
| Selling, General & Administrative Expense | 2,280 | 2,549 | 8,749 | 8,393 | |||||||||||||||
| Operating Loss | (1,892 | ) | (1,433 | ) | (3,176 | ) | (1,099 | ) | |||||||||||
| Gain (Loss) on Sales of Real Property | (6 | ) | 15 | (8 | ) | 15 | |||||||||||||
| Proceeds From Life Insurance | 0 | 0 | 275 | 0 | |||||||||||||||
| Interest Income (Expense), net | (31 | ) | 15 | (30 | ) | (132 | ) | ||||||||||||
| Loss Before Income Tax | (1,929 | ) | (1,403 | ) | (2,939 | ) | (1,216 | ) | |||||||||||
| Provision For Income Tax | 10 | 20 | 30 | 50 | |||||||||||||||
| Net Loss | $ | (1,939 | ) | $ | (1,423 | ) | $ | (2,969 | ) | $ | (1,266 | ) | |||||||
| Loss Per Share: | |||||||||||||||||||
| Basic | $ | (0.48 | ) | $ | (0.32 | ) | $ | (0.74 | ) | $ | (0.29 | ) | |||||||
| Diluted | (0.48 | ) | (0.32 | ) | (0.74 | ) | (0.29 | ) | |||||||||||
| Weighted Average Shares Outstanding: | |||||||||||||||||||
| Basic | 4,009 | 4,399 | 4,004 | 4,397 | |||||||||||||||
| Diluted | 4,009 | 4,399 | 4,004 | 4,397 | |||||||||||||||
| Earl Scheib, Inc. | |||||||||||||
| Consolidated Balance Sheets | |||||||||||||
| (thousands of dollars, except share data) | |||||||||||||
| Unaudited | |||||||||||||
| January 31, | April 30, | ||||||||||||
| Assets | 2008 | 2007 | |||||||||||
| Current assets: | |||||||||||||
| Cash and cash equivalents | $ | 2,020 | $ | 3,000 | |||||||||
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Accounts receivable, less allowances of $37 at January 31, 2008 and $45 at April 30, 2007 |
687 | 590 | |||||||||||
| Inventories | 1,946 | 1,698 | |||||||||||
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Prepaid expenses, including advertising costs of $9 at January 31, 2008 and $158 at April 30, 2007 |
1,485 | 1,589 | |||||||||||
| Deferred income taxes | 1,428 | 1,428 | |||||||||||
| Other current assets | 63 | 197 | |||||||||||
| Total current assets | 7,629 | 8,502 | |||||||||||
| Property, plant and equipment | 7,551 | 7,893 | |||||||||||
| Deferred income taxes | 241 | 241 | |||||||||||
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Other, including cash surrender value of life insurance of $2,682 at January 31, 2008 and $3,027 at April 30, 2007 |
2,920 | 3,232 | |||||||||||
| $ | 18,341 | $ | 19,868 | ||||||||||
| Liabilities | |||||||||||||
| Current liabilities: | |||||||||||||
| Accounts payable | $ | 1,457 | $ | 953 | |||||||||
| Accrued expenses: | |||||||||||||
| Payroll and related taxes | 1,531 | 1,345 | |||||||||||
| Insurance | 3,103 | 2,760 | |||||||||||
| Interest | 73 | 94 | |||||||||||
| Advertising | 19 | 315 | |||||||||||
| Legal and professional | 0 | 86 | |||||||||||
| Other | 1,080 | 1,082 | |||||||||||
| Income taxes payable | 14 | 0 | |||||||||||
| Total current liabilities | 7,277 | 6,635 | |||||||||||
| Deferred management compensation | 2,396 | 2,435 | |||||||||||
| Long-term debt and obligations | 2,438 | 1,683 | |||||||||||
| Shareholders' Equity | |||||||||||||
|
Capital stock $1 par - 12,000,000 shares authorized; 4,808,000 issued; 4,009,000 and 4,001,000 shares outstanding at January 31, 2008 and April 30, 2007, respectively |
4,808 | 4,808 | |||||||||||
| Additional paid-in capital | 6,902 | 6,844 | |||||||||||
| Retained earnings (accumulated deficit) | (1,921 | ) | 1,056 | ||||||||||
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Treasury stock, at cost (799,000 and 807,000 shares at January 31, 2008 and April 30, 2007, respectively) |
(3,559 | ) | (3,593 | ) | |||||||||
| Total shareholders' equity | 6,230 | 9,115 | |||||||||||
| $ | 18,341 | $ | 19,868 | ||||||||||
| Earl Scheib, Inc. | |||||||||||||
| Condensed Consolidated Statements of Cash Flows | |||||||||||||
| (thousands of dollars) | |||||||||||||
| Unaudited | |||||||||||||
| Nine Months ended | |||||||||||||
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January 31, |
|||||||||||||
| 2008 | 2007 | ||||||||||||
| Net Cash Used in Operating Activities | $ | (1,708 | ) | $ | (1,310 | ) | |||||||
| Cash Flows From Investing Activities: | |||||||||||||
| Capital expenditures | (404 | ) | (709 | ) | |||||||||
| Reduction in cash surrender value of life insurance | 368 | 0 | |||||||||||
| Proceeds from sale of property and equipment | 9 | 15 | |||||||||||
|
Net cash used in investing activities |
(27 |
) |
(694 | ) | |||||||||
|
Cash Flows From Financing Activities |
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|
Proceeds from life insurance loans |
983 |
0 |
|||||||||||
| Debt reduction from life insurance proceeds | (228 | ) | 0 | ||||||||||
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Net cash provided by financing activities |
755 |
0 |
|||||||||||
| Net decrease in cash and cash equivalents | (980 | ) | (2,004 | ) | |||||||||
| Cash and cash equivalents, at beginning of the period | 3,000 | 5,603 | |||||||||||
| Cash and cash equivalents, at end of the period | $ | 2,020 | $ | 3,599 | |||||||||
