EnviroStar, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2018 (fiscal first quarter). The filing describes a distributor and service provider for commercial, industrial and vended laundry and dry-cleaning equipment, boilers, parts, installation and maintenance. Results include acquired businesses only from their acquisition dates.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $43.375 million | $26.273 million |
| Gross profit / margin | $9.722 million / 22.4% | $6.149 million / 23.4% |
| Operating income / margin | $1.432 million / 3.3% | $0.983 million / 3.7% |
| Net income | $0.796 million | $0.563 million |
| Diluted EPS | $0.06 | $0.05 |
| Net cash used by operating activities | $5.862 million | $0.735 million |
| Net cash used by investing activities | $4.941 million | $0.003 million |
| Net cash provided by financing activities | $11.350 million | $0.425 million |
At September 30, 2018, cash was $1.877 million, current assets were $51.029 million and current liabilities were $31.732 million. Total assets were $121.100 million and total liabilities were $52.477 million. Debt was $21.367 million, comprising $15.346 million drawn on the revolver and a $6.076 million term loan; $4.7 million remained available under the then-current revolver. The company reported compliance with its credit-facility covenants.
Changes and drivers
- Revenue rose 65% and net income rose 41% year over year, primarily reflecting acquisitions, including Tri-State, AAdvantage and Scott Equipment. ILS and Scott Equipment were acquired during the quarter.
- Gross margin declined about 1 percentage point, which management attributed primarily to product mix. SG&A increased 60% to $8.290 million, but fell as a share of revenue to 19% from 20%. Higher costs included acquired-company expenses, intangible amortization, share-based compensation, and increased parent-company accounting, insurance and personnel costs.
- Interest expense increased to $0.165 million from $0.066 million, reflecting higher borrowings. The effective tax rate was 37.2%, versus 38.6%, with the decrease attributed to the Tax Act, partly offset by nondeductible compensation.
- Operating cash use increased mainly because of working-capital movements, including higher receivables from payment timing and higher inventory associated with equipment orders. Acquisition cash payments and capital expenditures drove investing cash use; acquisition funding drove increased borrowings.
Acquisitions, liquidity and outlook
ILS was acquired September 4 for $0.671 million cash, net of cash acquired, plus 20,699 shares. Scott Equipment was acquired September 12; its preliminary purchase-price allocation recorded $6.135 million of goodwill and $3.1 million of intangible assets. Allocations remain subject to adjustment. Unaudited pro forma results, assuming both acquisitions occurred July 1, 2017, were revenue of $48.557 million and net income of $0.963 million for the quarter; these figures are informational and not necessarily indicative of actual or future results.
On November 2, 2018, the company replaced its prior facility with a five-year revolving credit agreement of up to $100 million, with an accordion feature for up to an additional $40 million. Approximately $20.8 million was borrowed to repay the previous facility. The new agreement includes leverage and interest-coverage covenants and restrictions on certain activities. On November 6, the company acquired Washington Automated; consideration was described as immaterial on a consolidated basis.
Management stated that cash, anticipated operating cash flows and availability under the new facility should fund operations and anticipated capital expenditures for at least 12 months. No specific earnings or revenue guidance was provided. Management cited its buy-and-build strategy as a source of growth and associated costs. It cautioned that acquisition integration, financing and dilution, customer and supplier relationships, competition, economic conditions, shipment timing and revenue recognition, and interest-rate changes could affect results. A hypothetical 1% increase in one-month LIBOR would have increased annual interest expense by approximately $214,000 based on September 30 borrowings.
Other notable items
- The company adopted the new revenue standard on July 1, 2018; it reported no impact on the amount or timing of revenue recognition.
- Unrecognized share-based compensation expense was $15.1 million. Related-party property leases with company executives, directors or affiliates were disclosed.
- Performance and payment bonds outstanding totaled $8.3 million; estimated costs to complete the bonded projects were $2.7 million at quarter-end.
- The filing reported no material change in previously disclosed risk factors or legal proceedings. Disclosure controls were assessed as effective; the SEI acquisition was the noted quarter change to internal control over financial reporting.
Key facts for investors to verify
- How much of reported growth and profitability is organic versus attributable to acquisitions, and how the acquired businesses are performing after integration.
- Whether working-capital investment, especially receivables and inventory, converts to cash and whether operating cash flow improves.
- Debt levels, borrowing availability, interest costs and compliance with the new facility’s financial covenants.
- Final acquisition purchase-price allocations, goodwill and intangible valuations, and the impact of the November 2018 Washington Automated acquisition.
- Margin trends, ongoing acquisition-related and parent-company costs, related-party lease terms, and any final changes to Tax Act estimates.