EnviroStar, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2011. The filing identifies the registrant as EnviroStar, Inc. and its subsidiaries.
Business context and financial performance
The company sells commercial and industrial laundry and dry-cleaning equipment, parts and boilers, and operates license and franchise businesses.
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Total revenue | $4.98 million, down 5.4% | $11.29 million, up 11.6% |
| Operating income | $23,871 | $396,276 |
| Net earnings | $15,396, down 81.3% | $248,894, up 16.3% |
| Basic and diluted earnings per share | $0.01 | $0.04 |
| Operating margin | Approximately 0.5% | Approximately 3.5% |
Six-month net sales rose 12.7% to $11.15 million; other revenue was $142,801, down 36.9%, largely because a significant commission received in the prior-year first quarter did not recur. For the quarter, net sales fell 5.8%, while other revenue increased 43.0%. Equipment sales declined 8.5% in the quarter, partly offset by 8.7% growth in spare-parts sales. Foreign sales increased 30.4% for the six months and 116.9% for the quarter.
For the six months, cost of sales was 76.6% of net sales versus 77.1% a year earlier; SG&A was 20.9% of revenue versus 21.3%. Quarterly SG&A rose 11.8%, mainly due to higher payroll and sales commissions associated with added staff and expanded activity in Mexico. The quarterly effective tax rate was 43.6%, compared with 38.4% a year earlier; the six-month rates were 38.3% and 38.2%, respectively.
Cash, liquidity and debt
- Cash and cash equivalents were $6.67 million at December 31, 2011, down $241,229 from June 30, 2011. Current assets were $10.35 million and current liabilities were $2.61 million.
- Six-month operating cash flow was $115,507, compared with $939,336 in the prior-year period. Investing activities used $5,050; financing activities used $351,686 for a $0.05-per-share dividend.
- The company reported no borrowings under its revolving credit facility. A replacement facility entered into in November provides up to $2.25 million, including a $1.0 million letter-of-credit subfacility and a $250,000 foreign-exchange subfacility. It is secured by substantially all company and subsidiary assets and includes financial and other covenants; the company reported compliance at December 31.
- Management said existing cash and expected operating cash flow would be sufficient for operations and anticipated capital spending for at least the next 12 months. No off-balance-sheet financing arrangements were reported.
Changes, outlook and risks
- Management reported that incoming orders and backlog were trending higher, with some shipments scheduled for the second half of the fiscal year. It expected inventories to increase over the remainder of the year to support orders, while cautioning that quarterly results are not indicative of full-year results.
- Management described the cash position as strong despite the dividend. The filing provides no numerical earnings or revenue guidance.
- Risks identified include economic and industry conditions, competition and pricing pressure, inventory availability and cost, foreign-currency movements, environmental and other regulatory compliance, execution of business plans, and access to capital. Export customers pay in U.S. dollars; no foreign-exchange contracts were outstanding at period-end.
- The company leases warehouse and office space from a trust connected to principal shareholders and directors. It reported rental expense of approximately $59,500 for the six months and stated that lease terms are comparable to market terms.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether higher orders and backlog convert into shipments and revenue in the second half, and how the expected inventory build affects working capital and cash flow.
- Whether quarterly profitability recovers after the sharp year-over-year decline in net earnings and operating income.
- The terms and ongoing covenant compliance of the secured $2.25 million credit facility, despite no current borrowings.
- The sustainability of cash generation following the dividend and the effect of customer deposits, receivables, and inventory movements.
- Related-party lease terms and the company’s exposure to foreign-market demand, currency changes, and the other disclosed business risks.