EVI

Business Context and Reporting Period

Company: DRYCLEAN USA, Inc. (EVI INDUSTRIES, INC.)
Filing Type: Form 10-K (Annual Report)
Period Ended: June 30, 2009
Business Overview: The Company is a supplier of commercial and industrial laundry and dry cleaning equipment, steam boilers, and related parts. It operates primarily through its subsidiary Steiner-Atlantic Corp., distributing proprietary lines (Aero-Tech, Multi-Jet, Green-Jet) and third-party equipment in the U.S., Caribbean, and Latin America. It also operates a franchise and licensing segment (DRYCLEAN USA) and a development subsidiary for turn-key dry cleaning establishments.

Key Financial Metrics

Margins: Cost of sales was 78.1% of net sales in 2009 (up from 77.2% in 2008). Selling, general, and administrative (SG&A) expenses were 19.6% of revenues in 2009 (down from 21.5% in 2008). The effective income tax rate was 38.2% in 2009 compared to 37.0% in 2008.

Debt and Liquidity: The Company maintains a $2,250,000 revolving credit facility with no outstanding borrowings as of June 30, 2009. The facility matures on October 30, 2009. The Company holds significant cash reserves, increasing by approximately $1.57 million during the fiscal year.

Material Changes Versus Prior Period

• Revenue Growth: Total revenues increased by 2.0% to a record high, driven by a 2.6% increase in the commercial laundry and dry cleaning segment. Foreign export revenues grew by 18.7% to approximately $5.16 million.
• Profit Decline: Despite revenue growth, net earnings decreased by 12.5%. This was primarily due to a $88,739 reduction in interest income caused by lower prevailing interest rates, despite higher cash balances.
• Segment Performance:
  • Commercial Laundry/Dry Cleaning: Sales of commercial laundry equipment increased by 28.0%, offset by significant declines in dry cleaning equipment sales (-61.9%) and boiler sales (-51.3%).
  • Franchise/License: Revenues decreased by 43.1% due to the recessionary economy impacting royalties and new franchise sales.
  • Brokerage: The Biz Brokers International subsidiary was discontinued in the third quarter of 2009 due to the slowing economy.
• Balance Sheet: Accounts receivable decreased by $1.65 million and inventories decreased by $812,000, reflecting the liquidation of high backlog levels from the prior year. This contributed significantly to the strong cash flow from operations.

Guidance, Outlook, and Risks

Outlook: Management expects Fiscal 2010 to be challenging due to the ongoing credit crisis. While the backlog sustained sales in 2009, it is now at a lower-than-normal level as new orders have trended lower than shipments. Management anticipates economic improvement in 2010 releasing pent-up demand. A new boiler product line has been added to enhance sales.

Risks and Contingencies:

• Economic Conditions: The credit crisis and general economic slowdown pose risks to customer financing and demand.
• Supplier Concentration: Two suppliers accounted for approximately 30% of purchases each in 2009. Proprietary products rely on exclusive manufacturing relationships in the U.S. and Italy.
• Interest Rate Risk: Lower interest rates significantly reduced interest income, a material component of earnings.
• Foreign Exchange: While export sales are in U.S. dollars, the strength of the dollar relative to other currencies affects competitiveness. The Company has a $250,000 foreign exchange subfacility but held no open contracts at year-end.
• Related Party Transactions: The Company leases 27,000 sq. ft. of its primary facility from Sheila Steiner, a principal shareholder and trustee.

Investor Verification Checklist

• Cash Flow Sustainability: Verify if the strong operating cash flow in 2009 was a one-time benefit from reducing receivables and inventory levels established in 2008, or indicative of ongoing operational efficiency.
• Backlog Trends: Confirm the current status of the order backlog, as management noted it is "lower than normal" and new orders are trending lower than shipments.
• Interest Income Sensitivity: Assess the impact of continued low interest rates on future net earnings, given the significant drop in interest income in 2009.
• Product Mix Shift: Evaluate the long-term impact of the shift from high-margin dry cleaning equipment to lower-margin laundry equipment on future gross margins.
• Credit Facility Renewal: Monitor the renewal of the $2.25 million revolving credit facility maturing in October 2009.