EnviroStar, Inc. — Form 10-Q Summary
Period and context: The filing covers the unaudited quarter and nine months ended March 31, 2013, for EnviroStar, Inc., a seller of commercial and industrial laundry, dry-cleaning equipment and boilers, with license and franchise operations. The request metadata says “2012 Q3” and “EVI Industries”; those do not match the filing, which identifies EnviroStar and fiscal 2013 Q3.
Financial performance
| Metric | Nine months ended March 31, 2013 | Prior-year period | Three months ended March 31, 2013 | Prior-year quarter |
|---|---|---|---|---|
| Total revenue | $19.54 million | $16.41 million | $6.58 million | $5.12 million |
| Operating income | $840 thousand | $511 thousand | $400 thousand | $114 thousand |
| Net earnings | $527 thousand | $323 thousand | $250 thousand | $74 thousand |
| EPS, basic and diluted | $0.07 | $0.05 | $0.04 | $0.01 |
| Operating margin | 4.3% | 3.1% | 6.1% | 2.2% |
Nine-month revenue rose 19.1% and net earnings rose 63.3%; Q3 revenue increased 28.5% and net earnings increased 239.1%. Nine-month net sales were $19.38 million, while development, franchise, license, commission and other revenue was $162 thousand. Cost of sales was 77.5% of net sales for the nine months, versus 76.6% a year earlier; Q3 cost of sales was 76.3%, versus 76.6%. SG&A was 18.9% of total revenue for the nine months (21.3% prior year) and 18.4% for Q3 (22.3% prior year). Management attributed cost-of-sales changes to product mix and lower SG&A ratios to spreading expenses over higher revenue.
Cash, liquidity and capital
- Nine-month operating cash flow was $3.95 million, compared with $279 thousand in the prior-year period. The increase was substantially supported by $3.77 million of higher customer deposits and $2.01 million of deferred customer payments; a $2.55 million increase in other current assets, mostly vendor prepayments for specialized equipment, partly offset the cash inflows.
- Investing activities used $24 thousand, primarily capital expenditures. Financing activities used $4.22 million for a $0.60-per-share special dividend paid in December 2012. Cash declined by $296 thousand to $6.23 million.
- At March 31, 2013, current assets were $13.04 million and current liabilities were $8.74 million. The resulting current ratio was approximately 1.49, compared with approximately 4.10 at June 30, 2012. The increase in current liabilities largely reflected customer deposits ($4.83 million) and deferred income ($2.03 million).
- No borrowings were outstanding under the $2.25 million revolving credit facility, which was extended to November 1, 2013. The company reported compliance with its covenants. The facility is secured by substantially all company assets and includes restrictive covenants.
- Total assets were $13.35 million and shareholders’ equity was $4.60 million at March 31, 2013. The filing reports no off-balance-sheet financing arrangements.
Changes, outlook and risks
Equipment sales increased 25.3% for the nine-month period and 42.2% in Q3; spare-parts sales rose 0.6% and 6.2%, respectively. Foreign sales declined 9.5% for the nine months and 3.5% in Q3. Franchise, license, commission and other revenue declined, mainly because of lower distributor commissions and franchise royalties.
Large orders received in fiscal Q1 were delayed because the customer had not obtained government construction permits, not because of company delays. The permits were received in early April 2013; shipments had begun, and management expected them to be completed before fiscal year-end. Inventory was up $516 thousand (21.8%) from June 30, 2012 to support the backlog. Management expected existing cash, operating cash flow and available credit to fund operations and anticipated capital expenditures for at least the next 12 months and meet longer-term liquidity needs. This is management’s stated expectation, not a guarantee.
Principal disclosed risks include economic and industry conditions, competition and pricing pressure, inventory availability and cost, currency movements affecting foreign sales, environmental and other regulatory compliance, and access to capital. Export customers pay in U.S. dollars; the company had no foreign-exchange contracts outstanding. A related-party warehouse and office lease with a trust whose trustees include the company president runs through October 31, 2014; nine-month rent was approximately $92 thousand. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the delayed large-order backlog shipped as expected before fiscal year-end, and whether customer deposits and deferred payments were recognized appropriately as shipments occurred.
- Whether the vendor prepayments and elevated inventory converted into completed shipments and cash, and whether product mix continued to affect gross margins.
- The sustainability of operating cash flow, given its substantial dependence on customer deposits and deferred customer payments.
- The company’s liquidity and covenant position after the special dividend, including the facility’s November 2013 expiry and asset collateralization.
- Whether foreign-sales weakness, lower franchise-related revenue, or other disclosed market and regulatory risks materially affected subsequent results.