EnviroStar, Inc. — FY2017 Form 10-K
Period and issuer: The filing reports the fiscal year ended June 30, 2017, with FY2016 as the comparative period; it is not a report for 2016 Q4. The filing identifies the registrant as EnviroStar, Inc., which differs from the request metadata listing EVI Industries, Inc.
Business context
EnviroStar distributes commercial and industrial laundry and dry-cleaning equipment, boilers, parts, and related installation and maintenance services, primarily in the United States, Canada, the Caribbean, and Latin America. It operates as one reportable segment. FY2017 includes Western State Design from October 10, 2016, and Martin-Ray from June 19, 2017. Management describes its growth plan as a buy-and-build strategy.
Financial results and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $93.978 million | $36.016 million |
| Gross profit | $20.339 million | $8.212 million |
| Operating income | $5.350 million | $2.791 million |
| Net income | $3.167 million | $1.740 million |
| Diluted earnings per share | $0.31 | $0.25 |
| Cash from operating activities | $2.590 million | $1.441 million |
- Revenue rose 161% and net income rose 82%, primarily due to the Western State Design acquisition.
- Gross margin was approximately 21.6%, down from 22.8%; operating margin was approximately 5.7%, down from 7.7%; net margin was approximately 3.4%, down from 4.8%. Cost of sales as a share of revenue increased with product mix, while SG&A rose to 15.9% of revenue from 15.1%. FY2017 SG&A included $559,000 of acquisition-related transaction costs.
- Operating cash flow improved, while investing activities used $14.945 million, mainly for acquisitions. Financing activities provided $9.140 million.
- Cash was $727,000 at June 30, 2017, versus $3.942 million a year earlier. Current assets were $23.800 million and current liabilities $21.180 million, implying working capital of $2.620 million and a current ratio of about 1.12.
- Debt was $4.523 million gross ($4.445 million net of unamortized costs); no revolving borrowings were outstanding. The company reported $11.5 million available under its revolving line, subject to an asset-based borrowing formula, and compliance with loan covenants.
- Total assets increased to $57.135 million from $10.161 million; total liabilities rose to $24.911 million from $5.072 million. Goodwill was $24.753 million and net intangible assets were $7.160 million at year-end.
Material changes, outlook, and risks
- Western State Design was acquired for $18.5 million cash and 2,044,990 shares; Martin-Ray was acquired for $2.0 million cash and 98,668 shares. Both purchase price allocations were preliminary. Western State Design generated $22.139 million of recorded goodwill.
- After year-end, the company signed an agreement to acquire Tri-State Technical Services for $8.25 million cash, subject to adjustments, and 338,115 shares. Closing remained subject to conditions; completion was not assured.
- Management said existing cash, operating cash flow, and available credit were expected to fund operations and anticipated capital expenditures for at least the next 12 months. No quantified revenue or earnings guidance was provided.
- Key disclosed risks include acquisition integration and growth-management challenges, customer and supplier concentration, collections, competition, debt and covenant restrictions, and foreign-exchange and economic exposure. A federal government agency represented about 22% of FY2017 revenue and 28.8% of year-end receivables. Four manufacturers accounted for about 59% of purchases.
- Henry M. Nahmad may control about 67.6% of voting power. The Western State Design acquisition and private placement, including a $6.0 million share sale to an entity managed by Mr. Nahmad, increased share count and present related-party considerations.
- The company paid a $0.10-per-share dividend in FY2017, down from $0.20 in FY2016. Goodwill impairment testing reported no impairment. The independent auditor gave an unqualified opinion on the financial statements; auditor attestation of internal controls was not provided, and management reported controls effective.
- The filing’s MD&A cash-flow discussion gives slightly different figures from the audited cash-flow statement; the audited statement reports operating cash flow of $2.590 million, investing cash outflow of $14.945 million, and financing inflow of $9.140 million.
Investor verification priorities
- Confirm the intended issuer and reporting period, given the metadata’s EVI Industries/2016 Q4 labels versus the filing’s EnviroStar/FY2017 disclosures.
- Assess the acquired businesses’ full-year contribution, integration progress, preliminary purchase accounting, and expected amortization and goodwill risks.
- Review receivables quality, especially government-agency exposure, contract billings and collections, and adequacy of the doubtful-account allowance.
- Check revolving-credit availability, covenant headroom, debt service, and funding and closing status of the Tri-State transaction.
- Evaluate dilution, related-party transactions, voting control, and the remaining share-based compensation expense.