EnviroStar, Inc. — Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended June 30, 2018, compared with fiscal 2017. Although the request metadata refers to “2017 Q4,” the filing is an annual report for fiscal 2018, not a quarterly report. EnviroStar distributes commercial and industrial laundry and dry-cleaning equipment, boilers, parts, and related installation and maintenance services. It reports one operating segment.
Growth strategy is acquisition-led. Fiscal 2018 results included a full year of Western State Design and post-closing results from Martin-Ray, Tri-State and AAdvantage. Industrial Laundry Services and Scott Equipment were acquired after year-end.
Financial highlights
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $150.0 million | $94.0 million |
| Gross profit / margin | $36.5 million / 24.3% | $20.3 million / 21.6% |
| Operating income / margin | $6.9 million / 4.6% | $5.4 million / 5.7% |
| Net income | $4.0 million | $3.2 million |
| Diluted earnings per share | $0.33 | $0.31 |
| Cash from operating activities | $11.3 million | $2.6 million |
| Cash and cash equivalents at year-end | $1.3 million | $0.7 million |
| Total assets / total liabilities | $95.5 million / $38.4 million | $57.1 million / $24.9 million |
Revenue rose approximately 60% and net income 25%, primarily reflecting acquisitions and the additional months of Western State Design results. Gross margin improved, mainly due to product mix; SG&A rose 97% to $29.6 million and increased from 15.9% to 19.7% of revenue, reflecting acquired operations, amortization, share-based compensation and higher parent-company costs. Net interest expense increased to $552,000 from $160,000. The effective tax rate was 37.9%, versus 38.9%; the Tax Cuts and Jobs Act impact was provisional.
Working-capital liquidity included $36.4 million of current assets and $29.1 million of current liabilities at year-end. The company reported $10.0 million of debt outstanding: $6.4 million term loan and $3.7 million revolving borrowings. The credit facility had $12.2 million available to borrow, and the company reported compliance with its covenants. Management said available cash, operating cash flow and expected borrowing availability should fund operations and anticipated capital expenditures for at least 12 months.
Material changes, outlook and risks
- Operating cash flow increased substantially, but investing used $14.2 million, largely for acquisitions; financing provided $3.4 million. Acquisition-related stock issuance and borrowings were significant components of the growth strategy.
- The company paid a $0.12-per-share dividend in January 2018, totaling approximately $1.4 million. Future dividends are discretionary and may be restricted by debt terms.
- No quantified earnings or revenue guidance is provided. Management describes continued acquisition-led growth and reports a commitment letter for a larger replacement credit facility, subject to conditions; it expected to repay the existing facility if the new financing closed.
- Key risks include acquisition integration and execution, increased leverage and interest-rate exposure, supplier concentration (four manufacturers represented 76% of purchases versus 59% in fiscal 2017), competition, and dependence on key personnel. A 1% increase in one-month LIBOR was estimated to add about $101,000 to annual interest expense.
- Outstanding performance and payment bonds were $8.3 million, with estimated project completion costs of $4.4 million. Management did not expect pending legal matters to have a material effect, but notes litigation outcomes are uncertain.
- Related-party leases and the controlling shareholder warrant attention. CEO Henry M. Nahmad may vote approximately 62.5% of outstanding shares. Acquired Tri-State and AAdvantage were excluded from management’s internal-control assessment; the auditor’s unqualified control opinion likewise excluded those businesses. The auditor gave unqualified opinions on the financial statements and assessed controls as effective for the scope audited.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus acquisition-driven, and how acquired businesses perform after integration.
- Final purchase-price allocations and working-capital adjustments for Tri-State and AAdvantage, plus the financial and financing effects of the subsequent acquisitions.
- Terms, closing status and covenant implications of the proposed replacement credit facility; availability under the existing asset-based revolver.
- Whether the higher SG&A burden, share-based compensation and acquisition-related amortization affect future margins and per-share results.
- Supplier concentration, customer collections and exposure under performance bonds; the filing reports $16.0 million in net receivables and a $233,000 doubtful-account allowance.
- Final tax effects of the Tax Act, and the timing and impact of bringing acquired businesses within internal-control assessments.