Filing summary
Period and identity: This is EnviroStar, Inc.’s unaudited Form 10-Q for the quarter ended March 31, 2014, covering fiscal 2014 Q3 and the first nine months of fiscal 2014. The supplied metadata identifies EVI Industries, Inc. and 2013 Q3, which does not match the filing. EnviroStar sells commercial and industrial laundry and dry-cleaning equipment and boilers, and operates license and franchise businesses.
Financial performance
| Metric | Nine months ended March 31, 2014 | Prior-year period | Quarter ended March 31, 2014 | Prior-year quarter |
|---|---|---|---|---|
| Total revenue | $24.88 million | $19.54 million | $6.55 million | $6.58 million |
| Operating income | $1.95 million | $0.84 million | $0.50 million | $0.40 million |
| Net earnings | $1.22 million | $0.53 million | $0.31 million | $0.25 million |
| Diluted EPS | $0.17 | $0.07 | $0.04 | $0.04 |
| Operating cash flow | $1.82 million | $3.95 million | Not provided separately | Not provided separately |
- Nine-month revenue rose 27.3%, while quarterly revenue fell 0.5%. Nine-month net sales increased 26.7%, reflecting equipment sales growth of 40.4%, spare-parts growth of 9.4%, and foreign-sales growth of 31.1%.
- Operating margin increased to about 7.9% for the nine months from 4.3%; quarterly operating margin was about 7.7% versus 6.1%. Management attributed the quarterly earnings improvement despite slightly lower sales to higher margins, including a more favorable product mix.
- Cost of sales was 77.6% of net sales for the nine months, compared with 77.5% a year earlier; for the quarter it improved to 75.7% from 76.3%. SG&A was $3.86 million for the nine months, up 4.7%, and $1.13 million for the quarter, down 6.5%.
Liquidity, cash flow and debt
- Cash was $4.93 million at March 31, 2014, down $1.01 million from June 30, 2013. Current assets were $8.97 million and current liabilities $5.11 million; the current ratio was approximately 1.75.
- Operating activities generated $1.82 million, compared with $3.95 million in the prior-year period. Cash generation included $0.94 million from lower receivables and $0.55 million from higher customer deposits; cash uses included a $0.67 million reduction in accrued employee expenses and a $0.23 million inventory increase.
- Investing activities used $18,000, primarily for capital expenditures. Financing activities used $2.81 million for a $0.40-per-share dividend paid in December 2013. Cash declined after the dividend and inventory investment.
- No borrowings were outstanding under the $2.25 million revolving credit facility, extended through November 1, 2014. The facility is secured by substantially all company assets and includes financial and other covenants; the company reported compliance. Management said cash, operating cash flow and available credit should be sufficient for operations and anticipated capital expenditures for at least 12 months.
Changes, outlook and risks
- The increase in nine-month earnings and revenue contrasts with nearly flat third-quarter revenue. Nine-month operating cash flow was lower year over year, in part because the prior period included unusually large customer deposits and deferred income tied to large orders and delayed shipments.
- Customer deposits increased $0.55 million during the current nine-month period. Management said new orders offset reductions as orders shipped; inventory was increased to support the order backlog.
- No specific revenue or earnings forecast was provided. Management reported no significant inflation impact and expected newly issued accounting guidance to have no material effect.
- Risks identified include economic and industry conditions, competition and pricing pressure, technology changes, inventory availability and cost, foreign-currency movements, regulation, execution of business plans, and access to capital. Export customers pay in U.S. dollars; the company reported no foreign-exchange contracts outstanding.
- The company leases warehouse and office space from a trust connected to its president and principal shareholder. The lease was extended through October 31, 2014; nine-month rent expense was approximately $94,800. Management considers the terms comparable to market terms.
Important facts to verify
- Confirm that EnviroStar’s March 31, 2014 filing—not the EVI Industries, Inc. / 2013 Q3 metadata—is the intended filing.
- Assess whether the order backlog and customer deposits convert to shipments and cash as expected, and whether inventory levels remain appropriate.
- Review the sustainability of improved margins and earnings given flat third-quarter revenue and product-mix sensitivity.
- Check liquidity and covenant compliance after the special dividend, including the revolving facility’s November 1, 2014 expiration and secured collateral terms.
- Consider the related-party lease terms and the company’s exposure to currency, supplier, regulatory and competitive risks.