Business context and reporting period
EnviroStar, Inc. (the registrant named in the filing) reported its unaudited first quarter of fiscal 2018, the three months ended September 30, 2017, compared with the same quarter of 2016. It distributes commercial and industrial laundry and dry-cleaning equipment, boilers, parts, and related installation and maintenance services. The filing’s reporting period is September 30, 2017, notwithstanding the request metadata’s “2017 Q1” label.
Financial performance
Amounts below are in millions of dollars except per-share data. The quarter’s results include Western State Design, acquired in October 2016, and Martin-Ray, acquired in June 2017; the prior-year comparison does not include those businesses.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $26.273 | $9.472 |
| Gross profit | $6.149 | $2.020 |
| Gross margin | 23.4% | 21.3% |
| Operating income | $0.983 | $0.566 |
| Operating margin | 3.7% | 6.0% |
| Net income | $0.563 | $0.352 |
| Basic and diluted EPS | $0.05 | $0.05 |
| Cash used by operating activities | $0.735 | $2.485 |
Revenue increased 177% and net income rose 60%, primarily due to the acquired businesses. Gross margin improved mainly from product mix, but SG&A increased to $5.166 million from $1.454 million, including acquisition-related costs and $357,000 of share-based compensation. SG&A was 20% of revenue versus 15%; operating margin declined despite higher operating income. Weighted-average basic shares rose to 10.468 million from 7.034 million, helping explain why EPS remained unchanged.
Financial position, liquidity and debt
At September 30, 2017, cash was $0.414 million, total current assets $22.400 million, current liabilities $18.290 million, total assets $55.595 million, and total liabilities $22.451 million. Total debt, net of discount and financing costs, was $4.875 million, including $0.714 million current; $4.345 million was outstanding under the term loan and $0.603 million under the revolver. The company reported $10.8 million available on the revolving line and compliance with its covenants at quarter-end.
Operating cash outflow improved from $2.485 million to $0.735 million, with collections of receivables contributing to the change; investing outflow was $0.003 million, and financing provided $0.425 million. Cash fell $0.313 million during the quarter. Management said existing cash, operating cash flow, and credit-facility availability should fund operations and anticipated capital expenditures for at least 12 months.
Material developments, outlook and risks
- Hurricane Irma delayed orders, deliveries, shipments, and installation work in Florida and the Caribbean, offsetting some revenue growth.
- On October 31, 2017, after quarter-end, the company acquired Tri-State for $8.25 million in cash, subject to adjustments, plus 338,115 shares; $2.1 million of the cash consideration was placed in escrow. The cash consideration was funded with credit-facility borrowings.
- The credit facility was amended in October 2017: its maximum increased from $20.0 million to approximately $22.2 million, an additional approximately $2.8 million was borrowed under the term loan, and minimum monthly principal payments increased from $60,000 to $100,000. The filing says approximately $8.0 million of facility borrowings funded Tri-State’s cash consideration.
- Borrowings bear interest at one-month LIBOR plus a spread, exposing the company to rate changes. A hypothetical 1% LIBOR increase was estimated to raise annual interest expense by approximately $50,000 based on term-loan borrowings at quarter-end. Debt is secured by substantially all company and subsidiary assets and is subject to financial and other covenants.
- Management identifies acquisition integration, financing and dilution, competition and margins, inventory availability and cost, customer and supplier relationships, shipment and installation timing, and economic and regulatory conditions as risks. The filing provides no specific earnings or revenue guidance.
- The company recorded $357,000 of share-based compensation in the quarter and disclosed $14.3 million of unrecognized compensation expense related to restricted-stock awards. The board also approved a new non-employee director compensation program in November 2017 that includes annual restricted-stock awards and cash fees.
Most important facts for investors to verify
- How much of reported growth and future results reflects acquired businesses, and whether integration and operating performance meet expectations.
- Post-Tri-State debt, borrowing availability, covenant headroom, cash needs, and the impact of higher required principal payments and variable interest rates.
- Whether hurricane-related delays affected subsequent orders, revenue recognition, or installation schedules.
- The timing and income-statement impact of the $14.3 million in unrecognized share-based compensation, and potential dilution from acquisition and compensation-related share issuance.
- Whether management’s 12-month liquidity assessment remains supportable as acquisition-related obligations and working-capital needs evolve.