UNITED STATESSECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended December 31, 2012
OR
For the transition period from to
EnviroStar, Inc.
(Exact name of Registrant as Specified in Its charter)
290 N.E. 68 Street, Miami, Florida 33138
(Address of Principal Executive Offices)
(305) 754-4551
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ýNo o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ýNo o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer oNon-accelerated filer o Smaller reporting companyý
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.025 par value per share – 7,033,732 shares outstanding as of February 8, 2013.
PART 1. FINANCIAL INFORMATION
EnviroStar, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
See Notes to Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets
Condensed Consolidated Statements of Cash Flows
EnviroStar, Inc. and SubsidiariesNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2012(Unaudited)
Note (1) - General: The accompanying unaudited condensed consolidated financial statements include the accounts of EnviroStar, Inc. and its subsidiaries (the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X related interim period financial statements. Accordingly, these condensed consolidated financial statements do not include certain information and footnotes required by GAAP for complete financial statements. However, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals) which, in the opinion of management, are necessary in order to make the financial statements not misleading. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The condensed consolidated financial statements should be read in conjunction with the Summary of Significant Accounting Policies and other footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2012. The June 30, 2012 balance sheet information contained herein was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K as of that date.
The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Note (2) - Earnings Per Share: Basic earnings per share for the six and three months ended December 31, 2012 and 2011 are computed as follows:
At December 31, 2012, the Company had no outstanding options to purchase shares of the Company’s common stock or other dilutive securities.
Note (3) - Lease and Mortgage Receivables:Lease and mortgage receivables result from customer leases of equipment under arrangements which qualify as sales type leases. At December 31, 2012, future lease payments, net of deferred interest ($16,484 at December 31, 2012), due under these leases was $71,685. At June 30, 2012, future lease payments, net of deferred interest ($18,694 at June 30, 2012), due under these leases was $71,396.
Note (4) - Revolving Credit Line:Effective November 1, 2012, the Company’s existing $2,250,000 revolving line of credit facility was extended to November 1, 2013. The Company’s obligations under the credit facility are guaranteed by the Company’s subsidiaries and collateralized by substantially all of the Company’s assets. No amounts were outstanding under this facility at December 31, 2012 or June 30, 2012, nor were there any amounts outstanding at any time during fiscal 2012 or the first six months of fiscal 2013. The loan agreement requires maintenance of certain debt service coverage and leverage ratios and contained other restrictive covenants, including limitations on the extent to which the Company and its subsidiaries could incur additional indebtedness, pay dividends, guarantee indebtedness of others, grant liens, sell assets and make investments. The Company was in compliance with these covenants at December 31, 2012 and June 30, 2012.
Note (5) - Income Taxes: Income tax expense varies from the federal corporate income tax rate of 34%, primarily due to state income taxes, net of federal income tax effect, and permanent differences.
As of December 31, 2012 and June 30, 2012, the Company had deferred tax assets of $143,215 and $146,526, respectively. Consistent with the guidance of the Financial Accounting Standards Board (the “FASB”) regarding accounting for income taxes, the Company regularly estimates its ability to recover deferred tax assets and establishes a valuation allowance against deferred tax assets to reduce the balance to amounts expected to be recoverable. This evaluation considers several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income and available tax planning strategies. As of December 31, 2012, and June 30, 2012 management believes that it is more-likely-than not that the results of future operations will generate sufficient taxable income to realize the net amount of the Company’s deferred tax assets over the periods during which temporary differences reverse.
The Company follows Accounting Standards Codification (“ASC”) Topic 740-10-25, “Accounting for Uncertainty in Income Taxes” (“ASC 740”). ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. During the six and three months ended December 31, 2012, this standard did not result in any adjustment to the Company’s provision for income taxes.
As of December 31, 2012, the Company was subject to potential Federal and State tax examinations for the tax years 2009 through 2012.
Note (6) – Cash Dividends: On November 9, 2012, the Company’s Board of Directors declared a $.60 per share cash dividend (an aggregate of $4,220,239), which was paid on December 12, 2012 to shareholders of record at the close of business on November 28, 2012.
Note (7) - Segment Information: The Company’s reportable segments are strategic businesses that offer different products and services. They are managed separately because each business requires different marketing strategies. The Company primarily evaluates the operating performance of its segments based on the categories noted in the table below. The Company has no sales between segments. Financial information for the Company’s business segments is as follows:
Note (8) - Recently Adopted Accounting Guidance:
In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Loss” (“ASU 2010-20”). ASU 2010-20 amends ASC Topic 310, “Receivables” to enhance disclosures about the credit quality of financing receivables and the allowance for credit losses by requiring an entity to provide a greater level of disaggregated information and to disclose credit quality indicators, past due information, and modifications of its financing receivables. ASU 2010-20 is effective for interim or annual fiscal years for the Company beginning January 1, 2011. The Company’s adoption of ASU 2010-20 did not have a material impact on its consolidated financial statements
In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310): A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring” (“ASU 2011-02”). ASU 2011-02 provides additional guidance clarifying when the restructuring of a receivable should be considered a troubled debt restructuring. The additional guidance provided by ASU 2011-02 is for determining whether a creditor has granted a concession and whether the debtor is experiencing financial difficulty. ASU 2011-02 also ends the deferral of activity-based disclosures related to troubled debt restructurings. The Company adopted ASU 2011-02 in the third quarter of 2011. The adoption of ASU 2011-02 did not impact the Company’s consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends ASC 820, providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material effect on the Company’s consolidated financial statements.
Overview
Total revenues for both the first six month period and the second quarter of fiscal 2013 increased by 14.8% and 29.4%, respectively, when compared to the same periods of fiscal 2012. Net earnings followed the same pattern, increasing by 11.3% and 712.9% for the six and three month periods of fiscal 2013, respectively, when compared to the same periods of fiscal 2012. For the six month period ended December 31, 2012, equipment sales increased by 18.1% offsetting a 2.4% decrease in spare parts sales, compared with the same period of fiscal 2012.
The decrease in the Company’s cash position during the first six months of fiscal 2013 was the result of the payment in December 2012 of a special cash dividend of $.60 per share, aggregating $4,220,239. This decrease was partially offset by an increase of $3,278,225 in customer deposits.
During the first quarter of fiscal 2013, the Company received a number of large orders for shipment during fiscal 2013. A small percentage of these orders have been shipped during the second quarter, but the larger percentage of these orders is scheduled for shipment during the second half of fiscal 2013.
Liquidity and Capital Resources
For the six month period ended December 31, 2012, cash decreased by $752,411 compared to a decrease of $241,229 during the same period of fiscal 2012. The following summarizes the Company’s Condensed Consolidated Statements of Cash Flows:
For the six month period ended December 31, 2012, operating activities provided cash of $3,491,338 compared to $115,507 of cash provided during the same period of fiscal 2012. The increase in cash provided by operating activities during the first six months of fiscal 2012 was primarily due to an increase of $3,278,225 in customer deposits connected with a number of large orders received by the Company during the first quarter of fiscal 2013. In addition cash was provided by the Company’s net earnings of $276,994 and non-cash expenses for depreciation and amortization of $29,489. Accounts and trade notes receivable also provided cash of $710,575 as payments were received associated with heavy shipments in prior months. An increase in accounts payable and accrued expenses provided cash of 184,186 representing equipment purchased but not yet paid for. These increases in cash were offset by cash used to increase other current assets by $546,517, mostly for pre-payments to vendors for specialized equipment on order. The Company also increased inventories by $306,859 to support a larger backlog of orders to be shipped next quarter. Accrued employee expenses used cash of $126,854, mostly due to fiscal 2012 year end bonuses and sales commissions which were paid during the first quarter of fiscal 2013. All other changes in cash were of a minor nature due to ordinary fluctuations in business activities.
For the six month period ended December 31, 2011, operating activities provided cash of $115,507 compared to $939,326 of cash provided during the same period of fiscal 2011. Cash provided by operating activities during the first six months of fiscal 2012 was primarily due to a decrease of $471,729 in inventories and a $336,226 increase in customer deposits. Inventories are expected to rise during the balance of the fiscal year to support increased orders. Cash was also provided by the Company’s net earnings of $248,894 and non-cash expenses for depreciation and amortization of $24,876. Additional cash was provided by a $40,185 decrease in lease and mortgage receivables. These increases in cash were partially offset by increases of $124,705 in accounts and trade notes receivables, $143,509 in refundable income taxes and $162,951 in other assets. Cash was also used to reduce accounts payable and accrued expenses by $271,524, accrued employee expenses by $261,329 and in income taxes payable by $47,547. The decrease in accrued employee expenses was mostly due to fiscal 2011 year end bonuses and sales commissions accrued at June 30, 2011 which were paid during the first quarter of fiscal 2012. All other changes were due to the ordinary fluctuations in business activities.
Investing activities used cash of $23,540 and $5,050 during the six month periods ended December 31, 2012 and 2011, respectively, for capital expenditures.
Financing activities used cash of $4,220,239 and $351,686 during the six month periods ended December 31, 2012 and 2011 to pay cash dividends to shareholders.
Effective November 1, 2012, the Company’s existing $2,250,000 revolving line of credit facility was extended to November 1, 2013. The Company’s obligations under the credit facility are guaranteed by the Company’s subsidiaries and collateralized by substantially all of the Company’s and its subsidiaries’ assets. No amounts were outstanding under this facility at December 31, 2012 or June 30, 2012, nor were there any amounts outstanding at any time during fiscal 2012 or the first six months of fiscal 2013.
The Company believes that its existing cash, cash equivalents and net cash from operations will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months and to meet its long-term liquidity needs.
Off-Balance Sheet Financing
The Company has no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K.
Results of Operations
Revenues.
The following table sets forth certain information with respect to changes in the Company’s revenues for the periods presented:
Net sales for the six month period ended December 31, 2012 increased by $1,713,965 (15.4%) from the same period of fiscal 2012. The increase is mostly attributable to an 18.1% increase in equipment sales, which offset a 2.4% decrease in spare parts sales and a 11.4% decrease in foreign sales. For the second quarter of fiscal 2013, sales increased by $1,489,814 (30.3%) when compared to the second quarter of fiscal 2012. Equipment sales increased by 37.9%, which offset a decrease of 1.6% in spare parts sales when comparing the three month periods of fiscal 2013 and fiscal 2012. The improvement in overall sales during the second quarter of fiscal 2013 was attributable to a small percentage of shipments from our historically high backlog, the balance of which is scheduled to be shipped during the second half of fiscal 2013.
Revenues for development fees, franchise and license fees, commissions and other income, decreased by $45,263 (31.7%) and $26,355 (38.0%) for the six and three month periods, respectively, of fiscal 2013 when compared to the same periods of fiscal 2012. The reduction for both periods can be mostly attributable to a reduction in commission income paid to the Company by other distributors and a reduction in royalty fees paid by franchisees.
Operating Expenses.
Costs of sales, expressed as a percentage of sales, increased to 78.1% and 77.0% in the first six and three month periods of fiscal 2013, respectively, from 76.6% and 76.3% for the six and three month periods ended December 31, 2011. The increases were mostly due to shipments of large orders which normally carry lower margins and a reduction in spare parts sales which generally carry a higher margin.
Selling, general and administrative expenses increased by $117,588 (5.0%) and $109.808 (9.1%) for the six and three month periods of fiscal 2013, respectively, from the same periods in fiscal 2012. The increase for both periods was mainly due to higher payroll expenses associated with sales commissions. The improvements, shown as a percentage of revenues, were due to the absorption of selling, general and administrative expenses over higher revenues.
Interest income increased by $2,367 (32.5%) and $1,644 (48.3%) for the six and three month periods of fiscal 2013, respectively, from the same periods of fiscal 2012, due to higher outstanding cash balances.
The Company’s effective tax rate remained flat at 38.3% for the first six months of fiscal 2013 and 2012, however, the effective tax rate decreased to 38.0% from 43.6% during the three month period ended December 31, 2012 when compared to the same period of fiscal 2012. The variation reflects changes in permanent and temporary adjustments to taxable income.
Inflation
Inflation has not had a significant effect on the Company’s operations during any of the reported periods.
Transactions with Related Parties
The Company leases warehouse and office space under an operating lease from the Sheila Steiner Revocable Trust. The trustees of this trust are Sheila Steiner, and her son, Michael S. Steiner. Michael S. Steiner is the President and a director of the Company. Michael Steiner, individually, is also a principal shareholder of the Company.
The lease was for an original three year term which commenced on November 1, 2005, with two three-year renewal options in favor of the Company. The Company has exercised the second renewal option, extending the lease until October 31, 2014. The lease provides for annual rent increases commencing November 1, 2006 of 3% over the rent in the prior year. The Company bears the cost of real estate taxes, utilities, maintenance, non-structural repairs and insurance. The Company believes that the terms of the lease are comparable to terms that would be obtained from an unaffiliated third party for similar property in a similar locale. Rental expense under this lease was approximately $61,000 and $59,500 in the first six months of fiscal 2013 and 2012, respectively.
Critical Accounting Policies
The accounting policies that the Company has identified as critical to its business operations and to an understanding of the Company’s results of operations remain unchanged from those described in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012. The Company makes estimates and assumptions that affect the reported amount of assets and liabilities, contingent assets and liabilities, and the reported amounts of revenues and expenses during the reported period. Therefore, there can be no assurance that the actual results will not differ from those estimates.
Recently Adopted Accounting Guidance
In May 2011, the FASB issued ASU 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” (“ASU 2011-04”). ASU 2011-04 amends ASC 820, providing a consistent definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The Company’s adoption of ASU 2011-04 is not expected to have a material effect on the Company’s consolidated financial statements.
Forward Looking Statements
Certain statements in this Report are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Report, words such as “may,” “should,” “seek,” “believe,” “expect,” anticipate,” “estimate,” “project,” “intend,” “strategy” and similar expressions are intended to identify forward looking statements regarding events, conditions and financial trends that may affect the Company’s future plans, operations, business strategies, operating results and financial position. Forward-looking statements are subject to a number of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company, or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, among others: general economic and business conditions in the United States and other countries in which the Company’s customers and suppliers are located; industry conditions and trends; technology changes; competition and other factors which may affect prices which the Company may charge for its products and its profit margins; the availability and cost of the inventory purchased by the Company; the relative value of the United States dollar to currencies in the countries in which the Company’s customers, suppliers and competitors are located; changes in, or the failure to comply with, government regulation, principally environmental regulations; the Company’s ability to implement changes in its business strategies and development plans; and the availability, terms and deployment of debt and equity capital if needed for expansion. These and certain other factors are discussed in this Report and from time to time in other Company reports filed with the Securities and Exchange Commission. The Company does not assume an obligation to update the factors discussed in this Report or such other reports.
All of the Company’s export sales require the customer to make payment in United States dollars. Accordingly, foreign sales may be affected by the strength of the United States dollar relative to the currencies of the countries in which their customers and competitors are located, as well as the strength of the economies of the countries in which the Company’s customers are located. The Company has, at times in the past, paid certain suppliers in Euros. The Company’s bank revolving credit facility contains a $250,000 foreign exchange subfacility for this purpose. The Company had no foreign exchange contracts outstanding at December 31, 2012 or June 30, 2012.
The Company’s cash and cash equivalents are maintained in interest-bearing bank accounts, including a money market account, each of which bear interest at prevailing interest rates.
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, management of the Company, with the participation of the Company’s principal executive officer and the Company’s principal financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures.” As defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), “disclosure controls and procedures” means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Based on that evaluation, the Company’s principal executive officer and principal officer concluded that, as of the date of their evaluation, the Company’s disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the Company’s periodic filings under the Exchange Act is accumulated and communicated to the Company’s management, including those officers, to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Changes in Internal Controls
During the period covered by this Report, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Exhibit Index
XBRL (Extensible Business Reporting Language) information is furnished and not filed herewith, is not a part of a registration statement or Prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.