EnviroStar, Inc. (now EVI Industries, Inc.) — Form 10-Q summary
Reporting period: Quarter and six months ended December 31, 2016 (the second quarter of fiscal 2017). The filing is under the name EnviroStar, Inc. Amounts below are in millions except per-share data and percentages. Results include Western State Design only from its October 10, 2016 acquisition date, so year-over-year comparisons are not on a like-for-like basis.
Financial performance
| Metric | Three months ended Dec. 31, 2016 | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2016 | Six months ended Dec. 31, 2015 |
|---|---|---|---|---|
| Revenue | $33.398 | $8.626 | $42.870 | $14.863 |
| Gross profit | $7.068 | $1.891 | $9.088 | $3.326 |
| Gross margin | 21.2% | 21.9% | 21.2% | 22.4% |
| Operating income | $2.276 | $0.607 | $2.841 | $0.860 |
| Net income | $1.329 | $0.379 | $1.680 | $0.536 |
| Reported diluted EPS | $0.13 | $0.05 | $0.19 | $0.08 |
- Revenue rose 287% for the quarter and 188% for the six-month period; net income rose 251% and 213%, respectively. Management attributed the increases primarily to the acquired WSD business.
- Cost of sales was 78.8% of revenue in both 2016 periods, versus 78.1% for the prior-year quarter and 77.6% for the prior-year six months. Management cited product mix.
- SG&A was $4.792 million for the quarter and $6.247 million for six months. As a percentage of revenue, it was 14.3% and 14.6%, respectively, down from 14.9% and 16.6% in the comparable periods. The filing attributes the percentage decrease mainly to the larger revenue base; expenses include $478,000 of acquisition-related costs.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $1.486 million, compared with $2.095 million a year earlier. The filing cites working-capital needs, including a $6.2 million increase in receivables from December shipments not yet due, partly offset by a $4.4 million increase in accounts payable and accrued expenses.
- Investing cash outflow was $13.401 million, primarily for the acquisition. Financing provided $10.815 million, including borrowings and private-placement proceeds, offset by debt repayments. Cash declined $1.100 million to $2.842 million.
- At December 31, 2016, current assets were $28.213 million and current liabilities $25.869 million (current ratio approximately 1.09). Total assets were $57.942 million; total liabilities were $30.113 million.
- Debt was $4.881 million gross under the term loan ($4.818 million net of discount and financing costs), including $714,000 current maturities. No revolver borrowings were outstanding; $10.8 million was available under the asset-based borrowing formula. The $20 million facility comprises a $15 million revolver and $5 million term loan, matures October 2021, and is secured by substantially all company and subsidiary assets. Rates float at one-month LIBOR plus 2.25% on revolver borrowings and 2.85% on the term loan.
- The company reported compliance with all credit covenants at period-end. Management believed cash, operating cash flow and available facility funds would cover operations and anticipated capital expenditures for at least the next 12 months.
Material changes, outlook and risks
- WSD acquisition: Closed October 10, 2016 for approximately $18.5 million cash and 2,044,990 shares. The preliminary purchase-price allocation recorded $22.069 million goodwill and $6.464 million intangible assets and remains subject to adjustment during the measurement period. The remaining 388,504 acquisition shares were issued in the following quarter.
- The acquisition was financed in part with $12.5 million of credit-facility borrowings and a $6 million private placement of 1,290,323 shares to Symmetric Capital II LLC, managed by the company’s CEO and chairman. The related-party transaction and resulting dilution are important to assess. A $1.039 million dividend declared in November was payable at quarter-end and paid January 6, 2017.
- No specific revenue or earnings guidance was provided. Management described a buy-and-build growth strategy and cautioned that acquisition benefits may not be realized as expected. Risks include integration and acquisition execution, debt service and covenants, floating interest rates, working-capital demands, product mix, shipment timing, competition, and economic and currency conditions. A 1% LIBOR increase was estimated to add about $49,000 in annual interest expense based on term-loan borrowings at period-end.
- The filing reported no material changes in legal proceedings or risk factors from the prior annual report. Disclosure controls were considered effective; acquisition completion was the noted change relevant to internal control reporting.
Important facts for investors to verify
- WSD’s post-acquisition contribution and pro forma comparability: the filing’s unaudited pro forma six-month results show revenue of $59.507 million and net income of $2.557 million for 2016, versus $49.182 million and $1.689 million for 2015; these are informational estimates, not reported results.
- Final purchase-price allocation, goodwill and intangible-asset valuation, and whether acquisition synergies and integration benefits materialize.
- Receivable collections, contract billings and working-capital conversion, given the quarter-end receivable increase and acquisition-related balance-sheet expansion.
- Debt amortization, floating-rate exposure, covenant headroom and actual revolver availability under the borrowing-base formula.
- Related-party financing, leases and the $520,000 receivable from an entity controlled by two company executives; $450,000 was repaid in January 2017.