EnviroStar, Inc. — Form 10-Q Summary
Reporting period: The filing covers the quarter and nine months ended March 31, 2018 (EnviroStar’s fiscal third quarter). This differs from the “2017 Q3” period in the request metadata. Financial amounts below are in millions of dollars unless otherwise noted.
Business context and results
EnviroStar distributes commercial, industrial and vended laundry and dry-cleaning equipment, parts and accessories, and provides installation, maintenance and system-design services. It operates in the United States, Canada, the Caribbean and Latin America. Results include the acquired businesses from their respective acquisition dates; management attributed most of the year-over-year growth to acquisitions.
| Metric | Nine months ended Mar. 31, 2018 | Prior year | Three months ended Mar. 31, 2018 | Prior year |
|---|---|---|---|---|
| Revenue | $106.0 | $67.5 | $43.7 | $24.7 |
| Gross profit | $25.4 | $14.7 | $11.2 | $5.6 |
| Operating income | $5.1 | $4.3 | $1.9 | $1.5 |
| Net income | $3.2 | $2.6 | $1.1 | $0.9 |
| Diluted EPS | $0.27 | $0.27 | $0.09 | $0.08 |
Financial position and cash flow
- Revenue increased 57% for the nine-month period and 77% for the quarter; net income rose 25% and 28%, respectively. The filing attributes growth primarily to Western State Design, Martin-Ray, Tri-State and AAdvantage.
- Cost of sales was 76% of revenue for the nine months, versus 78% a year earlier, and 74% for the quarter, versus 77%. Management attributed the improvement mainly to product mix. SG&A rose to 19% of revenue for the nine months from 15%, and to 21% for the quarter from 17%, reflecting acquired operations, amortization, share-based compensation and higher corporate costs.
- Effective tax rates fell to 31.8% for the nine months and 32.9% for the quarter, from 39.2% and 38.1%, respectively; management cited the Tax Cuts and Jobs Act. The tax impact remained provisional.
- Operating activities used $1.5 million of cash, compared with $3.6 million provided in the prior-year period. Investing activities used $13.7 million, including $13.4 million for acquisitions; financing activities provided $16.0 million. Cash increased by $0.8 million to $1.5 million.
- At March 31, 2018, total assets were $102.6 million and total liabilities were $46.3 million. Current assets were $43.1 million against current liabilities of $25.0 million.
- Total debt, net, was $22.2 million, up from $4.4 million at June 30, 2017; $15.6 million was drawn on the revolving line and $6.7 million on the term loan. The company reported $4.4 million available under the revolver and compliance with its covenants. The facility is secured by substantially all company and subsidiary assets, matures October 10, 2021, and carries floating rates based on one-month LIBOR. A hypothetical 1% LIBOR increase would raise annual interest expense by about $222,000.
Material changes, outlook and risks
- Tri-State was acquired in October 2017 and AAdvantage in February 2018. The AAdvantage transaction included approximately $8.1 million cash consideration and 348,360 shares; its purchase-price allocation, like Tri-State’s, was preliminary. Acquisition financing and stock issuance increased debt and diluted shareholders.
- Unaudited pro forma results assuming Tri-State and AAdvantage had been acquired at the start of the prior fiscal year showed nine-month revenue of $132.6 million versus $108.9 million, but net income of $5.0 million versus $5.7 million. These figures are not necessarily indicative of actual or future results.
- Management said existing cash, expected operating cash flow and available credit should fund operations and anticipated capital expenditures for at least 12 months. It gave no specific earnings or revenue guidance and may seek additional debt or equity funding for growth and acquisitions.
- Cash conversion weakened amid increased costs in excess of billings on uncompleted contracts and payment timing; customer deposits partially offset these uses. Installation-schedule delays can affect revenue timing.
- Risks include acquisition integration and execution, working-capital demands, floating-rate debt, covenant restrictions, competition and supplier/customer relationships. Performance and payment bonds totaled $9.7 million, with estimated costs to complete the related projects of $5.6 million.
- The company disclosed leases with affiliates of directors and executives, including leases associated with acquired subsidiaries. It also noted the Tax Act’s final accounting impact could differ from current estimates. Management reported effective disclosure controls; legal proceedings and risk factors had no material changes from the prior annual report.
Important facts for investors to verify
- Whether acquired businesses deliver expected results and can be integrated without further margin or cash-flow pressure.
- Final acquisition valuations, working-capital adjustments, goodwill and intangible-asset amortization, and the dilution from acquisition-related share issuances.
- Cash conversion, contract billing balances, revolver availability under the asset-based borrowing limit, and compliance with debt covenants.
- The final tax effects of the Tax Act and the terms, approval and ongoing costs of related-party leases.