EnviroStar, Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016, the first quarter of fiscal 2017. The request metadata says “2016 Q1,” but the filing identifies this as fiscal 2017 Q1. The registrant is named EnviroStar, Inc. in the filing.
Financial performance
| Metric | Three months ended Sep. 30, 2016 | Prior-year period |
|---|---|---|
| Revenue | $9.472 million | $6.237 million |
| Operating income | $565,559 | $251,794 |
| Net earnings | $351,944 | $157,032 |
| Basic and diluted EPS | $0.05 | $0.02 |
| Operating cash flow | $(2.485) million | $4.397 million |
- Revenue increased 51.9%; net sales rose 53.3% to $9.454 million, while license fees, commissions and other income fell 74.2% to $17,800.
- Net earnings increased 124.1%. Cost of sales was 78.8% of net sales versus 77.9%, reflecting product mix; gross margin on net sales therefore declined to approximately 21.2% from 22.1%.
- SG&A increased 23.0% to $1.455 million, but fell to 15.4% of revenue from 19.0%, as higher sales absorbed costs. The increase reflected sales commissions and non-recurring WSD acquisition expenses.
- Cash and cash equivalents were $1.456 million at September 30, down from $3.942 million at June 30. Current assets were $9.580 million and current liabilities $4.304 million; working capital was approximately $5.276 million.
- Operating cash use was mainly driven by a $3.231 million increase in receivables, payments of accrued commissions and bonuses, and lower payables. Management attributed the receivables increase to September shipments whose payments were not yet due. No investing or financing cash flows were reported for the quarter.
- The company had no borrowings under its $2.25 million 2011 credit facility at September 30. There was no funded debt reported on the September 30 balance sheet.
Material changes and subsequent events
- On October 10, 2016, the company completed its acquisition of substantially all assets of Western State Design, LLC (WSD), a California commercial and industrial laundry-equipment distributor. Stated consideration was $28 million, subject to adjustments: approximately $18.5 million cash and shares. Of the cash, $2.8 million was placed in escrow for at least 18 months.
- The company issued 1,656,486 shares at closing; a further 388,504 shares are subject to stockholder approval and are not to be issued before January 1, 2017. The filing gives inconsistent total share consideration in its MD&A and note: 2,044,490 versus 2,044,990 shares.
- On October 7, the company entered a five-year, $20 million credit facility: a $15 million revolver and a $5 million term loan, replacing the prior facility. It borrowed approximately $12.5 million to help fund the acquisition and about $66,000 for facility costs. Rates are one-month LIBOR plus 2.25% on revolver borrowings and 2.85% on term borrowings. The facility is secured by substantially all company and subsidiary assets and includes financial and other restrictive covenants.
- The remaining acquisition cash funding included $6 million from an October 10 private placement of 1,290,323 shares to Symmetric Capital II LLC, managed by the company’s chairman, CEO and president. The acquisition and financing therefore involved both debt and substantial equity issuance.
- Following the acquisition, a subsidiary entered a five-year lease, with renewal options, for a facility affiliated with WSD’s former owners, who became company executive vice presidents. The filing also reports a pre-existing related-party lease and approximately $34,000 of quarterly payments under it.
- On November 11, independent directors approved cash bonuses of $400,000 for the chairman/CEO/president and $250,000 for the COO, and annual base salaries of $550,000 and $300,000, respectively, effective October 10.
Outlook, risks and other disclosures
- Management said existing cash, operating cash flow and funds available under the new facility should be sufficient for operations and anticipated capital expenditures for at least 12 months. It may seek additional debt or equity financing, including for acquisitions.
- Management linked quarterly sales growth to large orders and end-of-quarter shipments, while the prior-year quarter was affected by shipment delays and backlog. Interim results may not indicate full-year results.
- Key disclosed risks include acquisition integration and realization of expected benefits, increased indebtedness and covenant restrictions, dilution, shipment timing and revenue recognition, competition and margins, inventory availability and cost, economic conditions, foreign exchange exposure, and regulation. Export customers pay in U.S. dollars; no foreign-exchange contracts were outstanding.
- The company reported compliance with its old facility covenants at September 30, effective disclosure controls, and no material change in internal control over financial reporting. It reported no material change in legal proceedings or risk factors from its fiscal 2016 Form 10-K. Bank deposits exceeded FDIC insurance limits.
Important facts for investors to verify
- Confirm the actual share consideration for WSD: the filing’s note and MD&A report different totals.
- Review the acquisition accounting, purchase-price adjustments, acquired assets and liabilities, and subsequent contribution from WSD; the filing does not provide completed purchase-price allocation or post-acquisition results.
- Assess post-acquisition debt, interest expense, liquidity, and compliance headroom under the new facility’s financial covenants.
- Monitor receivables collection and operating cash conversion after the large September shipments.
- Review related-party financing, leases, executive compensation, and the dilution from the acquisition shares and private placement.