EnviroStar, Inc. — FY2013 Form 10-K
Period clarification: The filing covers the fiscal year ended June 30, 2013, with FY2012 as the comparative period; it is not a quarterly report for 2012 Q4. EnviroStar distributes commercial and industrial laundry and dry-cleaning equipment, boilers, parts and services, and operates a small franchise and licensing business. Equipment, parts and services accounted for approximately 99% of revenue.
Financial performance
| Metric | FY2013 | FY2012 |
|---|---|---|
| Total revenue | $36.23 million | $22.46 million |
| Operating income | $2.57 million | $0.81 million |
| Net earnings | $1.61 million | $0.51 million |
| Diluted earnings per share | $0.23 | $0.07 |
| Net cash from operations | $3.66 million | $0.04 million |
| Cash and cash equivalents at year-end | $5.94 million | $6.53 million |
- Revenue rose 61.3%; net sales increased 63.0%, including equipment sales growth of 90.1% and parts sales growth of 5.4%. Large orders drove growth; foreign sales declined 10.9%.
- Gross margin on net sales was approximately 22.2%, down from 23.3%, reflecting larger, lower-margin contracts. Operating margin improved to approximately 7.1% from 3.6%; net margin was approximately 4.4% versus 2.3%.
- SG&A increased 19.9% to $5.66 million, primarily on higher payroll and sales commissions, but declined as a share of revenue. The effective tax rate was 37.9%, compared with 38.2%.
- Operating cash flow improvement included $1.40 million of additional customer deposits and $0.90 million of accrued employee expenses, as well as earnings. Receivables increased $0.86 million on late-year shipments. Cash declined 8.9% after the dividend.
- Current assets were $10.79 million and current liabilities $5.37 million (current ratio approximately 2.0, versus 4.1 in FY2012). The increase in current liabilities included customer deposits of $2.47 million and accrued employee expenses of $1.46 million.
- No borrowings were outstanding under the $2.25 million revolving credit facility at year-end or during either reported year. The facility was secured by substantially all company assets, subject to financial and other covenants, and scheduled to mature November 1, 2013. The filing says the company was covenant-compliant and expected available liquidity to meet needs for at least 12 months.
Changes, outlook and risks
- The company paid a $0.60-per-share special dividend totaling $4.22 million in December 2012, versus $0.05 per share ($0.35 million) in FY2012. This exceeded FY2013 net earnings and reduced cash and retained earnings.
- Management described FY2013 as a banner year that might not be repeated, while expecting a strong FY2014 based on backlog and an improving economy. Several large orders received in July and August 2013 increased backlog and were scheduled for FY2014 shipment; no quantified earnings or revenue guidance was provided.
- Inventory fell 15.8% during FY2013 after strong fourth-quarter shipments; management expected it to rise in the first quarter of FY2014 to support backlog.
- Customer concentration increased: two customers each represented more than 10% of FY2013 revenue; none exceeded 10% in FY2012. Two suppliers accounted for approximately 45% and 19% of purchases in FY2013, up from 35% and 24% in FY2012.
- Other exposures include competition and pricing/margin pressure, economic weakness in export markets, supplier relationship dependence, and environmental and franchise regulation. The company reported no material pending litigation and no material impact from environmental compliance. Approximately $5.3 million of bank deposits exceeded FDIC insurance limits.
- Related-party matters include warehouse and office leases from a trust whose trustees include the CEO and a principal shareholder (FY2013 rent approximately $123,200), and approximately $60,000 paid to a law firm where a director is senior counsel.
- Independent auditors gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not required to attest to internal-control effectiveness.
Investor verification priorities
- Confirm the post-year-end revolving credit renewal or replacement, its terms, and the company’s capacity under its covenants.
- Assess whether the FY2014 backlog converted to shipments and collections, and whether the unusually high FY2013 growth and margins proved sustainable.
- Evaluate the quality and sustainability of operating cash flow, particularly the reliance on customer deposits and accrued commissions, alongside receivables collection.
- Verify customer and supplier concentration, contract margins, and the impact of lower export sales and potential supplier disruption.
- Review the special dividend’s effect on liquidity, the uninsured bank balance exposure, and ongoing related-party lease and legal-service arrangements.