EnviroStar, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended December 31, 2015 (the second quarter of fiscal 2016); six-month results cover the period from July 1 through December 31, 2015. EnviroStar sells commercial and industrial laundry and dry-cleaning equipment and boilers, and operates a smaller license and franchise business.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Year-over-year change | Six months ended Dec. 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $8.63 million | +24.6% | $14.86 million | -7.2% |
| Operating income | $608,000 | -21.7% | $860,000 | -43.4% |
| Net earnings | $379,000 | -21.7% | $536,000 | -43.5% |
| Basic and diluted EPS | $0.05 | Compared with $0.07 | $0.08 | Compared with $0.13 |
Gross margin, based on cost of sales as a percentage of net sales, was 21.7% for the quarter and 21.9% for the six-month period, versus 28.4% and 25.1%, respectively, a year earlier. SG&A was $1.28 million for the quarter and $2.47 million for the six months. The effective tax rate was 37.7%.
Six-month operating cash flow was $2.10 million, compared with cash used of $2.38 million in the prior-year period. Cash and cash equivalents increased to $4.60 million from $3.91 million at June 30, 2015. Investing activities used $1,563; financing activities used $1.41 million, reflecting dividends paid. At December 31, current assets were $9.45 million and current liabilities were $5.76 million. No borrowings were outstanding under the $2.25 million revolving credit facility; it was extended to November 1, 2016.
Material changes and management commentary
- Quarterly net sales increased 27.3%, principally due to the timing of equipment orders being put into service. Six-month net sales declined 6.5%.
- Lower margins reflected product mix and the prior-year quarter’s relatively high-margin installations. The prior-year quarter also benefited from significant restocking-charge income; cancellation and restocking fees were lower in fiscal 2016.
- License and franchise revenue fell 87.3% in the quarter and 56.2% for the six months. Management attributed the decline primarily to lower cancellation and restocking fees. The segment recorded a six-month operating loss of $12,202.
- Operating cash flow benefited from a $1.70 million increase in customer deposits, collections of prior-period receivables, and lower inventory. These sources were partly offset by $877,000 of increased prepaid and other assets, principally vendor deposits for specialized equipment.
- The company paid a special cash dividend of $0.20 per share, approximately $1.41 million, in December 2015. Management said cash, operating cash flow, and available credit should fund operations and anticipated capital expenditures for at least the next 12 months.
Outlook, risks, and other notable items
The filing provides no specific revenue or earnings guidance. Management notes that interim results may not indicate full-year results and identifies risks including economic and industry conditions, competition and margins, inventory availability and cost, currency movements, regulation, shipment timing and revenue recognition, backlog, access to capital, and the execution of acquisitions or other strategic opportunities.
The credit facility is subject to financial and other restrictive covenants; the company reported compliance at December 31, 2015. Federal and state tax examinations may cover tax years 2012–2015. A warehouse and office lease with an affiliate of the COO is a related-party arrangement; payments were approximately $66,600 for the six months. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the quarterly sales rebound and equipment-order timing persist, and how the order backlog converts to shipments and revenue.
- Whether gross margins recover from the year-over-year decline and how much prior-period results depended on high-margin installations and restocking fees.
- The sustainability and composition of operating cash flow, particularly the contribution of customer deposits and the use of vendor deposits.
- Cash needs, dividend policy, and continued access to the revolving facility, including covenant compliance and its November 2016 maturity.
- Potential effects of tax examinations, related-party lease terms, and adoption of pending accounting standards.