EnviroStar, Inc. — FY2014 Form 10-K
Period and business: The filing is for the fiscal year ended June 30, 2014, with FY2013 as the comparable period. Although the request metadata identifies EVI Industries and “2013 Q4,” the filing itself names EnviroStar, Inc. and reports FY2014 annual results. Its principal business distributes commercial and industrial laundry, drycleaning and boiler equipment, parts, and maintenance services in the United States, Caribbean and Latin America; it also licenses and franchises DRYCLEAN USA stores.
Financial performance and condition
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Total revenue | $33.83 million | $36.23 million | Down 6.6% |
| Net sales | $33.11 million | $35.98 million | Down 8.0% |
| Operating income | $2.60 million | $2.57 million | Up 1.1% |
| Net earnings | $1.62 million | $1.61 million | Up 0.8% |
| Basic and diluted EPS | $0.23 | $0.23 | Unchanged |
| Operating cash flow | $6.16 million | $3.66 million | Up $2.50 million |
| Cash and cash equivalents at year-end | $9.22 million | $5.94 million | Up $3.28 million |
- Margins: Cost of sales rose to 78.6% of net sales from 77.8%, reducing gross margin to 21.4% from 22.2%; management attributed the change mainly to product mix. SG&A was 15.4% of revenue versus 15.6%. Effective tax rate was 37.8% versus 37.9%.
- Liquidity and working capital: Current assets were $13.57 million and current liabilities $9.33 million at June 30, 2014 (current ratio approximately 1.46). Inventory increased 42.0% to $2.84 million, which management attributed mainly to shipping delays; it expected inventory to decline in FY2015 as shipments were completed.
- Debt and financing: No borrowings were outstanding under the $2.25 million revolving credit facility at year-end or during FY2014. The facility was secured by substantially all company and subsidiary assets, subject to covenants, and was scheduled to mature November 1, 2014. The company reported covenant compliance.
- Cash flow and distributions: Operating cash flow benefited materially from a $3.50 million increase in accounts payable and accrued expenses and a $1.20 million increase in customer deposits. Capital expenditures were $65,110. Financing cash outflow was $2.81 million, principally a special dividend of $0.40 per share.
Material changes and notable items
- Equipment sales decreased 9.9%, attributed to fewer large negotiated orders; spare-parts sales increased 5.2%.
- Development, franchise and license fees, commissions and other revenue rose to $722,665 from $246,911, mainly due to the sale of the DRYCLEAN USA master franchise for Mexico and supplier commissions on a direct customer sale. The company intended to close its small Mexico office following the franchise sale.
- Export revenue increased to approximately $9.41 million from $4.38 million, principally in the Caribbean and Latin America. Most export sales were denominated in U.S. dollars.
- Commercial and industrial equipment and boiler segment revenue was $33.23 million, versus $36.03 million; license and franchise segment revenue was $598,777, versus $193,363. Segment operating income was $2.61 million and $329,069, respectively, in FY2014.
- Shareholders’ equity declined to $4.49 million from $5.68 million, largely reflecting the dividend payout. Total liabilities rose to $9.33 million from $5.37 million, including higher accounts payable and customer deposits.
Outlook, risks and contingencies
- Management said it expected FY2015 to be “another good year,” citing a solid increase in backlog at the start of the year; the filing provides no quantified revenue or earnings guidance.
- Key exposures include variable demand for large equipment orders, intense competition, supplier dependence, product pricing and margins, customer and supplier economic conditions, and regulatory changes. Three manufacturers represented approximately 60% of FY2014 purchases; two customers each generated more than 10% of revenue.
- Cash held at banks exceeded FDIC insurance limits by approximately $8.7 million at June 30, 2014. The filing also identifies customer receivables and foreign-market conditions as risks; no foreign-exchange contracts were outstanding at year-end.
- The company reported no material pending legal proceedings, no material subsequent events, and no material effect from environmental-law compliance anticipated. Certain U.S. federal and state tax years 2010–2013 remained subject to examination.
- Related-party matters include warehouse and office leases from a trust associated with Chairman and CEO Michael S. Steiner, and approximately $60,000 per year paid to a law firm where a director is Senior Counsel. The principal related-party lease was due to expire October 31, 2014.
- The financial statements received an unqualified independent audit opinion. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor was not engaged to audit internal control.
Important facts for investors to verify
- Confirm the correct issuer and reporting period: the supplied metadata says EVI Industries and 2013 Q4, while this document is EnviroStar’s FY2014 Form 10-K.
- Check subsequent filings for renewal or replacement of the revolving credit facility, which was scheduled to mature November 1, 2014.
- Track whether the reported backlog converted into FY2015 shipments and whether inventory normalized after the cited shipping delays.
- Assess the sustainability of earnings and operating cash flow, given lower revenue and the significant contribution from increased payables and customer deposits.
- Monitor customer and supplier concentration, uninsured bank balances, and the status of the related-party property lease.
- Verify the dividend record date: the filing lists November 27, 2012 for the dividend declared November 8, 2013, an apparent date inconsistency.