Business context and reporting period
EnviroStar, Inc. (now identified in the filing as EnviroStar, Inc.; the request metadata says EVI Industries, Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2017, the third quarter of its fiscal 2017, and the nine months then ended. Amounts below are in millions of dollars unless stated otherwise. The company distributes commercial and industrial laundry, dry-cleaning and boiler equipment, parts and services. Results include Western State Design (WSD) from its October 10, 2016 acquisition.
Financial performance and position
| Metric | Three months ended March 31, 2017 | Three months ended March 31, 2016 | Nine months ended March 31, 2017 | Nine months ended March 31, 2016 |
|---|---|---|---|---|
| Revenue | $24.653 | $12.760 | $67.523 | $27.623 |
| Gross profit / gross margin | $5.580 / 22.6% | $2.841 / 22.3% | $14.668 / 21.7% | $6.166 / 22.3% |
| Operating income / margin | $1.499 / 6.1% | $1.241 / 9.7% | $4.340 / 6.4% | $2.100 / 7.6% |
| Net income | $0.890 | $0.774 | $2.570 | $1.310 |
| Basic and diluted EPS | $0.08 | $0.11 | $0.27 | $0.19 |
For the nine months, operating cash flow was $3.613 versus $0.455 in the prior-year period; investing cash flow was $(13.517), primarily reflecting the acquisition; and financing cash flow was $9.574. Cash declined $0.330 to $3.612. At March 31, 2017, current assets were $22.575 and current liabilities $19.181 (working capital of $3.394; current ratio approximately 1.18). Total assets were $52.263 and total liabilities $23.385.
Debt was $4.702 gross, including $0.714 current maturities, and $4.620 net of unamortized discount and financing costs. The company had no revolver borrowings and reported $8.3 million available under its asset-based revolving line. The credit facility is secured by substantially all company and subsidiary assets, bears interest at one-month LIBOR plus 2.25% on revolver borrowings and 2.85% on the term loan, and matures October 10, 2021. The company reported covenant compliance. A hypothetical 1% LIBOR increase would add approximately $47,000 to annual interest expense at the reported term-loan balance.
Material changes versus the prior comparable period
- Revenue rose 93% in the quarter and 144% for the nine months; net income rose 15% and 96%, respectively. Management attributed the increases primarily to WSD, whose results were consolidated only after the acquisition.
- Gross margin was slightly higher in the quarter but lower for the nine-month period; management cited product mix. SG&A as a percentage of revenue increased to 16.6% from 12.5% for the quarter and to 15.3% from 14.7% for the nine months. Acquisition integration and approximately $478,000 of transaction costs contributed to expenses.
- The WSD acquisition had accounting purchase consideration of $34.6 million including cash acquired, comprising $18.5 million cash consideration and 2,044,990 company shares. The preliminary allocation included $22.139 million goodwill and $6.464 million intangible assets. Purchase-price allocations remained subject to adjustment during the measurement period.
- Acquisition financing included a $6.0 million related-party private placement and credit-facility borrowing. The company paid a $1.0 million dividend during the nine months, versus $1.4 million in the comparable prior-year period.
Outlook, risks and other notable items
Management stated that cash, operating cash flow and available credit were expected to fund operations and anticipated capital expenditures for at least the next 12 months. The filing provides no numerical earnings or revenue guidance. Management cautioned that acquisition benefits may not be realized as expected and identified risks including integration, debt and covenant limits, competition and margins, inventory availability and cost, shipment timing and revenue recognition, foreign exchange and economic conditions. The filing reported no material change in previously disclosed risk factors or legal proceedings and no off-balance-sheet financing arrangements.
Acquisition-related and governance items warrant attention: $2.8 million of the cash consideration was placed in escrow for at least 18 months; 449,974 restricted shares were granted during the nine months with a stated grant-date fair value of $6.4 million; and the company disclosed leases with affiliates of executives/directors, as well as the private placement to an entity managed by the CEO. Management reported effective disclosure controls and no material change in internal control over financial reporting. After quarter-end, on May 12, 2017, the CFO retired and Rob Lazar was appointed CFO.
Important facts for investors to verify
- How much of reported growth and future performance is attributable to WSD, and whether integration and acquisition synergies meet management expectations.
- Final acquisition accounting, including the substantial goodwill balance and any subsequent measurement-period adjustments or impairment indicators.
- Cash conversion and working-capital trends, including receivables, customer deposits, contract billings and vendor deposits.
- Debt-service capacity, LIBOR sensitivity, covenant headroom and the actual availability of asset-based revolver capacity.
- Effects of share issuance and restricted-stock awards on ownership dilution and per-share results, alongside the disclosed related-party financing and leases.