EnviroStar, Inc. (EVI Industries) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2017. The filing identifies the registrant as EnviroStar, Inc. Financial amounts below are in millions unless otherwise noted.
Financial performance
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Six months ended Dec. 31, 2017 | Six months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $36.135 | $33.398 | $62.408 | $42.870 |
| Gross profit | $8.231 | $7.068 | $14.218 | $9.088 |
| Operating income | $2.208 | $2.276 | $3.191 | $2.841 |
| Net income | $1.510 | $1.329 | $2.073 | $1.680 |
| Diluted EPS | $0.13 | $0.13 | $0.18 | $0.19 |
| Gross margin | 22.8% | 21.2% | 22.8% | 21.2% |
Second-quarter revenue rose 8%, while six-month revenue increased 46%. Net income increased 14% for the quarter and 23% for the six months. Growth primarily reflected the addition of Western State Design, Martin-Ray and, from October 31, 2017, Tri-State. Acquisitions also make period-to-period comparisons less representative of organic growth. The company reported six-month pro forma revenue of $71.583 million and net income of $2.636 million assuming Tri-State had been acquired July 1, 2016; these unaudited figures are not necessarily indicative of actual or future results.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $0.408 million, down from $1.486 million. Management attributed the decline mainly to a $2.2 million increase in costs exceeding billings on unfinished contracts and a $4.1 million decrease in accounts payable and accrued expenses.
- Investing cash outflow was $6.293 million, including $6.177 million paid for the Tri-State acquisition, net of cash acquired. Financing provided $6.343 million. Cash increased by $0.458 million to $1.185 million.
- At December 31, 2017, total assets were $77.945 million and total liabilities were $35.554 million. Current assets were $33.070 million versus current liabilities of $25.649 million.
- Total debt, net, was $11.1 million: $7.0 million under the term loan and $4.2 million under the revolving line. Debt was $4.445 million at June 30, 2017. The credit facility matures October 2021, bears interest at one-month LIBOR plus 2.25% on revolver borrowings and 2.85% on term-loan borrowings, and is secured by substantially all company and subsidiary assets.
- The company reported compliance with all credit covenants and $10.4 million available under the revolving line at December 31. Management believed cash, operating cash flow and available credit would fund operations and anticipated capital expenditures for at least twelve months.
Material changes, outlook and risks
- Gross margin improved to 22.8% from 21.2% in both the quarter and six-month comparison, which management attributed to product mix. SG&A rose to 17% of quarterly revenue and 18% of six-month revenue, from 15% in both prior-year periods, reflecting acquired operations, share-based compensation and intangible-asset amortization. Operating income declined 3% for the quarter despite revenue growth.
- The effective tax rate declined to 28% for the quarter and 31% for the six months, compared with 40% in both prior-year periods. Management attributed the reduction partly to the Tax Cuts and Jobs Act; related tax impacts were provisional and could change.
- After quarter-end, the company completed the AAdvantage acquisition on February 9, 2018, for $8.5 million cash, subject to adjustments, and 348,360 shares, plus assumed liabilities. The cash was funded with credit-facility borrowings. A February 8 amendment added approximately $5.0 million in revolver borrowings and increased the revolver limit to approximately $20 million.
- The company declared a $0.12-per-share dividend in December 2017, paid January 9, 2018. Its credit covenants may restrict dividends, acquisitions, capital expenditures and share repurchases. A hypothetical 1% increase in LIBOR would increase annual interest expense by approximately $112,000, based on December 31 borrowings.
- Management gave no specific financial guidance. Risks discussed include economic and industry conditions, competition and margin pressure, inventory availability and cost, customer or supplier concentration, order and installation timing, acquisition integration and financing, dilution, interest rates, foreign currency and uncertainty in the Tax Act estimates. The company noted that installation scheduling can affect revenue timing.
- Related-party leases with affiliates of directors and executives include the Steiner-Atlantic, Western State Design, Martin-Ray and Tri-State facilities. Management reported effective disclosure controls; no material change in internal control was reported other than the Tri-State acquisition. No material changes in legal proceedings or risk factors were reported.
Important facts for investors to verify
- How much revenue and profit growth came from acquired businesses versus organic performance, and how acquisition integration is progressing.
- Whether operating cash flow improves as contract costs, customer deposits and accounts payable fluctuate, and whether acquired working capital converts to cash.
- Debt, revolver availability, covenant headroom and interest expense after the AAdvantage acquisition and related credit-facility amendment.
- Final purchase accounting and tax effects, including the provisional Tax Act estimates and Tri-State valuation and working-capital adjustments.
- Future margins, share-based compensation expense, acquisition-related dilution, and the sustainability of dividends under credit restrictions.