General
The following discussion should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto contained in Item 8 of this
Report. See also "Forward Looking Statements" preceding Part I, Item 1 of this
Report.
Overview
The Company, through its wholly-owned subsidiaries, is a value-added
distributor, and provides advisory and technical services. Through its vast
sales organization, the Company provides its customers with planning, designing,
and consulting services related to their commercial laundry operations. The
Company sells and/or leases its customers commercial laundry equipment,
specializing in washing, drying, finishing, material handling, water heating,
power generation, and water reuse applications. In support of the suite of
products it offers, the Company sells related parts and accessories.
Additionally, through the Company's robust network of commercial laundry
technicians, the Company provides its customers with installation, maintenance,
and repair services.
The Company's customers include government, institutional, industrial,
commercial and retail customers. Product purchases made by customers range from
parts and accessories, to single or multiple units of equipment, to large
complex systems. The Company also provides its customers with the services
described above.
Prior to the completion of the Company's first acquisition pursuant to its
"buy-and-build" growth strategy in October 2016, the Company's operations
related to the activities described above consisted solely of the business and
operations of Steiner-Atlantic Corp. ("Steiner-Atlantic"), a wholly-owned
subsidiary of the Company. Beginning in 2015, the Company implemented a
"buy-and-build" growth strategy which includes (i) the consideration and pursuit
of acquisitions and other strategic transactions which management believes may
complement the Company's existing business or otherwise offer growth
opportunities for, or benefit, the Company and (ii) the implementation of a
growth culture at acquired businesses based on the exchange of ideas and
business concepts among the management teams of the Company and the acquired
businesses as well as through certain additional initiatives, which may include
investments in new locations, additional product lines, expanded service
capabilities and advanced technologies. See "Buy-and-Build Growth Strategy"
below and in Part I, Item 1 of this Report for additional information regarding
the Company's "buy-and-build" growth strategy, including information regarding
acquisitions consummated by the Company since its implementation of the
"buy-and-build" growth strategy in 2015.
The Company reports its results of operations through a single reportable
segment.
Total revenues for the fiscal year ended June 30, 2020 ("fiscal 2020") increased
by 3% compared to the fiscal year ended June 30, 2019 ("fiscal 2019"). The
increase in revenues during fiscal 2020 are attributable to a combination of
increases in revenues at certain of the Company's legacy businesses and the
revenues generated by the businesses acquired by the Company during fiscal 2020,
including Professional Laundry Systems, LLC, which was acquired during August
2019, and Large Equipment, Inc. (d/b/a Laundry Systems of Tennessee) and TN
Ozone, Inc. (d/b/a Premier Laundry Solutions and Premier Equipment Rental)
(collectively "Laundry Systems of Tennessee"), which were acquired during
January 2020. The increase in revenues was also attributable to the revenues of
businesses acquired by the Company during fiscal 2019 whose results were
consolidated in the Company's financial statements for all of fiscal 2020 as
compared to just the period of fiscal 2019 from the respective closing date of
the acquisition through the end of fiscal 2019, including Scott Equipment, Inc.,
which was acquired in September 2018, and PAC Industries, Inc., which was
acquired in February 2019. These increases in revenues were largely offset by a
decline in revenues from certain legacy businesses related to the COVID-19
pandemic (as further described below).
Net income for fiscal 2020 decreased by 79% from fiscal 2019. The decrease in
net income is primarily attributable the decline in revenues from legacy
businesses resulting from the COVID-19
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pandemic and to an increase in operating expenses in connection with investments
in the Company's growth strategy, partially offset by an increase in the
Company's gross margins.
The Company's operating expenses consist primarily of (a) selling, general and
administrative expenses, primarily salaries, and commissions and marketing
expenses that are variable and correlate to changes in sales, (b) expenses
related to the operation of warehouse facilities, including a fleet of
installation and service vehicles, and facility rent, which are payable mostly
under non-cancelable operating leases, and (c) operating expenses at the parent
company, including compensation expenses, fees for professional services,
expenses associated with being a public company, including increased expenses
attributable to the Company's growth, and expenses in furtherance of the
Company's "buy-and-build" growth strategy.
Impact of COVID-19 on the Company's Business
The COVID-19 pandemic has been, and continues to be, an unprecedented disruption
in the economy and has negatively impacted, and may continue to negatively
impact, the Company's business and results. Specifically, beginning at the end
of the quarter ended March 31, 2020, the COVID-19 pandemic and accompanying
economic disruption have caused delays and declines in the placement of customer
orders, the completion of equipment and parts installations, and the fulfillment
of parts orders. Accordingly, the Company experienced declines in revenue for
the most recently completed third and fourth fiscal quarters compared to the
same periods of the prior fiscal year. This trend may continue in the near-term
and possibly longer, including, without limitation, if the pandemic increases in
size and scope, its duration is prolonged or among other matters related
thereto, governmental actions, including, without limitation, business
restrictions are imposed. In response to the economic and business disruption,
the Company has taken actions to reduce costs and spending across the
organization, including changes to inventory stock levels, renegotiating payment
terms with suppliers, and reducing hiring activities. The Company continues to
actively monitor the COVID-19 pandemic and may take further actions, including
those that may alter business operations, if required by federal, state or local
authorities or otherwise determined to be advisable by management.
The Company is focused on ensuring ample liquidity to meet its business needs.
To that end, during May 2020, the Company and certain of its subsidiaries
received loans (the "PPP Loans") under the Paycheck Protection Program (the
"PPP") established under the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act") in the aggregate principal amount of approximately $6.9
million. See "Liquidity and Capital Resources" below for additional information
regarding the Company's credit facility and the PPP Loans.
As of the date of this Annual Report on Form 10-K, significant uncertainty
exists concerning the magnitude of the impact and duration of the COVID-19
pandemic. Factors arising from the COVID-19 pandemic that have impacted, or may
negatively impact, the Company's business and results, including sales and gross
margin, in the future include, but are not limited to: limitations on the
ability of suppliers to manufacture, or the Company's ability to procure from
manufacturers, the products the Company sells, or to meet delivery requirements
and commitments; limitations on the ability of the Company's employees to
perform their work due to impacts caused by the pandemic or local, state, or
federal orders that restrict the Company's operations or the operations of its
customers, or require that the employees be quarantined; limitations on the
ability of carriers to deliver products to the Company's facilities and
customers; limitations on the ability or desire of the Company's customers to
conduct their business, purchase products and services and pay for purchases on
a timely basis or at all; and decreased demand for products and services.
The situation surrounding COVID-19 remains fluid. The Company is unable to
determine or predict the nature, duration, or scope of the overall impact that
the COVID-19 pandemic will have on the Company's business, results of
operations, liquidity, or financial condition, as such impact will depend on
future developments, including the severity and duration of the pandemic and
government and other actions taken in response thereto, all of which are highly
uncertain. Further, even after the COVID-19 pandemic subsides, the Company may
continue to experience adverse impacts to its business as a result of, among
other things, any economic impact that has occurred or may occur in the future
and changes in customer or supplier behavior.
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Buy-and Build Growth Strategy
Since the implementation of its "buy-and-build" growth strategy in 2015, the
Company has consummated 14 business acquisitions, including, without limitation,
the following:
•
On October 10, 2016, the Company purchased substantially all the assets of
Western State Design, LLC ("WSD"), a California-based distributor of commercial,
industrial, and vended laundry products and provider of installation and
maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry, for a purchase price consisting of $18.5
million in cash and 2,044,990 shares of the Company's common stock.
•
On October 31, 2017, the Company purchased substantially all of the assets of
Tri-State Technical Services, Inc. ("TRS"), a Georgia-based distributor of
commercial, industrial, and vended laundry products and provider of installation
and maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry. The consideration paid by the Company in
connection with the acquisition consisted of approximately $7.95 million in cash
and 338,115 shares of the Company's common stock.
•
On February 9, 2018, the Company purchased substantially all of the assets of
Zuf Acquisitions I LLC (d/b/a/ AAdvantage Laundry Systems) for approximately
$11.0 million and Sky-Rent LP for approximately $6.0 million. The acquired
businesses are based in Dallas and distribute commercial, industrial, and vended
laundry products and provide installation and maintenance services to the new
and replacement segments of the commercial, industrial and vended laundry
industry. The approximately $20.4 million of total consideration paid by the
Company consisted of approximately $8.1 million in cash and 348,360 shares of
the Company's common stock.
•
On September 12, 2018, the Company purchased substantially all of the assets of
Scott Equipment, Inc. ("SEI"), a Texas-based distributor of commercial,
industrial, and vended laundry products and provider of installation and
maintenance services to the new and replacement segments of the commercial,
industrial and vended laundry industry. The consideration paid by the Company in
connection with this acquisition (the "SEI Acquisition") consisted of
approximately $6.5 million in cash and 209,678 shares of the Company's common
stock.
•
On February 5, 2019, the Company acquired PAC Industries Inc. ("PAC"), a
Pennsylvania-based distributor of commercial, industrial, and vended laundry
products and provider of installation and maintenance services to the new and
replacement segments of the commercial, industrial and vended laundry industry,
pursuant to a merger whereby PAC merged with and into a newly-formed
wholly-owned subsidiary of the Company (the "PAC Acquisition"). The
consideration paid by the Company in connection with the PAC Acquisition
consisted of $6.4 million in cash and 179,847 shares of the Company's common
stock.
In addition to the SEI Acquisition and the PAC Acquisition, during fiscal 2019,
the Company completed the acquisition of four other companies: Industrial
Laundry Services, Inc. ("ILS") on September 4, 2018; Washington Automated, Inc.
("WAI") on November 6, 2018; Skyline Equipment, Inc. ("Skyline") on November 14,
2018; and Worldwide Laundry, Inc. ("WWL") on November 16, 2018, each of which is
a distributor of commercial, industrial, and vended laundry products and a
provider of installation and maintenance services to the new and replacement
segments of the commercial, industrial and vended laundry industry. The total
consideration for these four transactions consisted of $3.5 million in cash, net
of $738,000 of cash acquired, and 141,000 shares of the Company's common stock.
During fiscal 2020, the Company acquired four businesses: Professional Laundry
Systems, LLC ("PLS"), which was acquired on August 1, 2019; Large Equipment,
Inc. (d/b/a Laundry Systems of Tennessee) and TN Ozone, Inc. (d/b/a Premier
Laundry Solutions and Premier Equipment Rental) (collectively "LST"), which were
acquired on January 31, 2020; and Commercial Laundry Equipment Company, Inc.
("CLE"), which was acquired on February 28, 2020. The total consideration for
the acquisitions completed during fiscal 2020 consisted of $1.6 million in cash
(subject to certain working capital and other adjustments), net of $192,000 of
cash acquired, the assumption of $129,000 of long-term debt, and the issuance of
132,726 shares of the Company's common stock.
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See Note 3 to the Consolidated Financial Statements included in Item 8 of this
Report for additional information about the acquisitions completed during fiscal
2020 and fiscal 2019.
Each acquisition was effected by the Company through a separate wholly-owned
subsidiary formed by the Company for the purpose of effecting the transaction,
whether by an asset purchase or merger, and operating the acquired business
following the transaction. In connection with each transaction, the Company,
indirectly through its applicable wholly-owned subsidiary, also assumed certain
of the liabilities of the acquired business. The financial position, including
assets and liabilities, and results of operations of the acquired businesses
following the respective closing dates of the acquisitions are included in the
Company's consolidated financial statements.
Consolidated Financial Condition
The Company's total assets increased from $154.5 million at June 30, 2019 to
$160.7 million at June 30, 2020. The increase in total assets was primarily
attributable to the establishment of an operating lease asset in connection with
the adoption of Accounting Standards Codification ("ASC") 842, Leases (Topic
842) ("ASC 842"), effective July 1, 2019, as described in Note 2 to the
Consolidated Financial Statements included in Item 8 of this Report, an increase
in cash, and the assets of the businesses acquired by the Company during fiscal
2020 as described above, partially offset by decreases in working capital,
primarily accounts receivable and inventory. The decreases in accounts
receivable and inventory were primarily the result of strategic initiatives
undertaken in response to the COVID-19 pandemic, including, but not limited to,
tightening of extension of credit to customers, increased collection activities
and changes to inventory stock levels. The Company's total liabilities decreased
slightly from $73.0 million at June 30, 2019 to $72.9 million at June 30, 2020,
primarily due to a decrease in long-term debt, partially offset by increases in
accounts payable and accrued expenses, increases in customer deposits, and the
adoption of the aforementioned new lease accounting standard effective July 1,
2019, resulting in the establishment of an operating lease liability.
Liquidity and Capital Resources
The Company had cash of approximately $9.8 million at June 30, 2020 compared to
$5.0 million at June 30, 2019. The increase in cash was primarily due to
proceeds from changes in operating assets and liabilities, proceeds from the PPP
Loans received by the Company and certain of its subsidiaries during May 2020,
and earnings from operations, partially offset by cash used for optional debt
repayments under the Company's 2018 Credit Agreement (as defined below), capital
expenditures, and cash used to fund the cash consideration paid in connection
with the Company's business acquisitions during fiscal 2020.
The following table summarizes the Company's Consolidated Statements of Cash
Flows (in thousands):
Fiscal Years Ended June 30,
Net cash provided (used) by: 2020 2019
Operating activities $ 23,066 $ (8,725 )
Investing activities $ (4,754 ) $ (15,521 )
Financing activities $ (13,561 ) $ 27,954For fiscal 2020, operating activities provided cash of approximately $23.1
million compared to approximately $8.7 million of cash used by operating
activities in fiscal 2019. The $31.8 million increase in cash provided by
operating activities was primarily attributable to changes in accounts
receivable, inventory and customer deposits, as discussed above, partially
offset by a decrease in earnings from operations.
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Investing activities used cash of approximately $4.8 million during fiscal 2020
compared to approximately $15.5 million in fiscal 2019. The $10.8 million
decrease in cash used by investing activities is due primarily to a decrease in
cash consideration paid in connection with acquisitions, partially offset by
capital expenditures in furtherance of certain growth initiatives, including
capital expenditures in connection with growth initiatives related to the
equipment used in the laundry route and rental business in which certain of the
Company's subsidiaries are engaged.
Financing activities used cash of approximately $13.6 million in fiscal 2020
compared to approximately $28.0 million in cash provided by financing activities
in fiscal 2019. The cash used by financing activities during fiscal 2020 related
to total repayments of debt under the Company's 2018 Credit Agreement and
$573,000 in share repurchases to settle employee tax withholding obligations
upon the vesting of restricted shares or in connection with the grant of
unrestricted shares.
On November 2, 2018, the Company entered into a syndicated credit agreement (the
"2018 Credit Agreement") for a five-year revolving credit facility in the
maximum aggregate principal amount of up to $100 million, with an accordion
feature to increase the revolving credit facility by up to $40 million for a
total of $140 million. A portion of the revolving credit facility is available
for swingline loans of up to a sublimit of $5 million and for the issuance of
standby letters of credit of up to a sublimit of $10 million.
Borrowings (other than swingline loans) under the 2018 Credit Agreement bear
interest at a rate, at the Company's election at the time of borrowing, equal to
(a) LIBOR plus a margin that ranges from 1.25% to 1.75% depending on the
Company's consolidated leverage ratio, which is a ratio of consolidated funded
indebtedness to consolidated earnings before interest, taxes, depreciation and
amortization (EBITDA) (the "Consolidated Leverage Ratio") or (b) the highest of
(i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the one
month LIBOR rate plus 100 basis points (such highest rate, the "Base Rate"),
plus a margin that ranges from 0.25% to 0.75% depending on the Consolidated
Leverage Ratio. Swingline loans bear interest calculated at the Base Rate plus a
margin that ranges from 0.25% to 0.75% depending on the Consolidated Leverage
Ratio. The 2018 Credit Agreement has a term of five years and matures on
November 2, 2023.
The 2018 Credit Agreement contains certain covenants, including financial
covenants requiring the Company to comply with maximum leverage ratios and
minimum interest coverage ratios. The 2018 Credit Agreement also contains other
provisions which may restrict the Company's ability to, among other things,
dispose of or acquire assets or businesses, incur additional indebtedness, make
certain investments and capital expenditures, pay dividends, repurchase shares
and enter into transactions with affiliates. At June 30, 2020, the Company was
in compliance with its covenants under the 2018 Credit Agreement and $12.8
million was available to borrow under the revolving credit facility.
The obligations of the Company under the 2018 Credit Agreement are secured by
substantially all of the assets of the Company and certain of its subsidiaries,
and are guaranteed, jointly and severally, by certain of the Company's
subsidiaries.
On May 21, 2020, the Company and certain of its subsidiaries received PPP Loans
totaling approximately $6.9 million in principal amount from Fifth Third Bank,
N.A. (the "Lender") under the PPP established under the CARES Act. Each PPP Loan
is evidenced by a promissory note dated May 21, 2020 (each, a "Promissory Note")
issued by the applicable borrower to the Lender. The term of each PPP Loan is
two years. The interest rate on each PPP Loan is 1.00%, which is deferred for
the first six months of the term of the PPP Loan. The Promissory Note evidencing
each PPP Loan is in the Lender's standard form for loans made by it under the
PPP and contains customary events of default relating to, among other things,
payment defaults and breaches of representations and warranties or other
provisions of the Promissory Note. The occurrence of an event of default may
result in a claim for the immediate repayment of all amounts outstanding under
the applicable PPP Loan, collection of all other amounts owing from the
respective Borrower and filing suit and obtaining judgment against the
respective Borrower. Each PPP Loan may be prepaid in whole or in part at any
time without penalty.
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The proceeds of the PPP Loans have been and are expected to be used for payroll
costs but may also be used for other permitted purposes under the CARES Act,
including rent or utility costs. Under the terms of the CARES Act, each borrower
can apply for forgiveness for all or a portion of the PPP Loan and, as described
below, the Company has agreed to apply and for each of its subsidiaries that
received PPP Loans to apply for forgiveness. Such forgiveness will be
determined, subject to limitations, based on the use of loan proceeds in
accordance with the terms of the CARES Act, as described above, during the
24-week period after loan origination and the maintenance or achievement of
certain employee levels. While the Company believes that the proceeds of the PPP
Loans have been or will be used only for qualifying expenses in accordance with
the terms of the CARES Act, any forgiveness of a PPP Loan will be subject to
approval by the Lender and the U.S. Small Business Administration, which is
administering the PPP under the CARES Act, and there can be no assurance that
any or all of the PPP Loans will be forgiven in whole or in part.
The Company received the consent (the "Consent") of Bank of America, N.A., U.S.
Bank National Association, and Fifth Third Bank under the Company's 2018 Credit
Agreement in connection with its and its subsidiaries' receipt of the PPP Loans.
The Consent, among other things, contains certain representations, warranties
and agreements of the Company, including, without limitation, to use the
proceeds of the PPP Loan only for permitted expenses under the CARES Act, to
timely apply for forgiveness of the PPP Loans, and to maintain all records
required to be submitted in connection with the forgiveness of the PPP Loans.
The breach of any such representations, warranties or agreements will constitute
a default under the 2018 Credit Agreement, subject to any applicable cure
periods or provisions thereof.
The Company believes that its existing cash, anticipated cash from operations
and funds available under the Company's 2018 Credit Agreement will be sufficient
to fund its operations and anticipated capital expenditures for at least the
next twelve months. The Company may also seek to raise funds through the
issuance of equity and/or debt securities or the incurrence of additional
secured or unsecured indebtedness, including in connection with acquisitions or
other transactions consummated by the Company as part of its "buy-and-build"
growth strategy.
Off-Balance Sheet Financing
As of June 30, 2020, the Company had no off-balance sheet financing arrangements
within the meaning of Item 303(a)(4) of Regulation S-K.
Results of Operations
Revenues
Revenues for fiscal 2020 increased by approximately $7.5 million (3%) from
fiscal 2019. The increase in revenues was primarily due to a combination of
increases in revenues at certain of its legacy businesses and the revenues of
the businesses acquired by the Company during fiscal 2020 as described above. In
addition, the Company's revenues for fiscal 2020 include a full year of revenues
of Scott Equipment and PAC Industries, which were acquired on September 12, 2018
and February 5, 2019, respectively, as compared to approximately nine months and
four months of results of Scott Equipment and PAC Industries, respectively, for
fiscal 2019. These increases in revenues were largely offset by a decline in
revenues at certain of the Company's legacy businesses resulting from the
COVID-19 pandemic.
From time to time the Company enters into longer-term contracts to fulfill large
complex laundry projects for divisions of the federal government where the
nature of, and competition for, such contracts may result in a lower gross
margin as compared to other equipment sales. During fiscal 2020, the Company
entered into a number of such lower-margin equipment sales. The Company believes
that the increase in equipment sales provides a strong foundation for the
Company to further strengthen its customer relationships, including that they
may in the future result in higher gross margin opportunities from the sale of
parts, accessories, supplies, and technical services related to the equipment.
Despite the lower gross
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margin from such longer-term contracts, the Company believes that the long-term
benefit from the increase in its installed equipment base will outweigh the
possible short-term impact to gross margin.
Operating Expenses
Fiscal Year Ended
June 30,
2020 2019
As a percentage of revenues:
Cost of sales, net 76.6 % 76.9 %
As a percentage of revenues:
Selling, general and administrative expenses 22.2 % 20.0 %
Cost of sales, expressed as a percentage of revenues, decreased to 76.6% in
fiscal 2020 from 76.9% in fiscal 2019, representing gross margins of 23.4% in
fiscal 2020 and 23.1% in fiscal 2019. The increases were primarily attributable
to product and customer mix.
Further, as described above, from time to time the Company enters into
longer-term contracts, including to fulfill large complex laundry projects for
divisions of the federal government. These contracts generally have a lower
gross margin compared to other equipment sales and, as a result, adversely
impact the Company's gross margin for periods in which a significant number of
these contracts are entered into. However, the Company believes that these
contracts will result in higher margin opportunities over the long-term. During
fiscal 2020 and fiscal 2019, the Company entered into a number of longer-term
federal government contracts, which adversely impacted the Company's gross
margin for each such period. In the absence of such longer-term federal
government contracts, gross margins for fiscal 2020 as compared to fiscal 2019
decreased 1.0% to 24.2%.
Selling, general and administrative expenses increased by approximately $6.7
million (15%) in fiscal 2020 compared to fiscal 2019. As a percentage of
revenues, selling, general and administrative expenses increased to 22.2% in
fiscal 2020 from 20.0% in fiscal 2019. The increase in operating expenses is
primarily attributable to (a) operating expenses of acquired businesses, (b)
additional operating expenses at the acquired businesses in pursuit of future
growth and in support of the Company's growing operations, (c) increases in
operating expenses at the parent company level in connection with the Company's
growth, including greater accounting fees and expenses, legal fees, and
insurance costs, (d) the addition of sales, service, and operations support
professionals and related costs, as total personnel at June 30, 2020 increased
by 5% compared to total personnel at June 30, 2019, with most of such growth
attributable to sales and service related personnel, (e) increased investments
in sales, service, and operations related technologies in support of the
Company's "buy-and-build" growth strategy, and (f) an increase in non-cash
amortization expense related to the intangible assets acquired in connection
with acquisitions, an increase in depreciation expense and an increase in
non-cash share-based compensation.
Interest expense, net was approximately $1.4 million in fiscal 2020 and fiscal
2019, and represents interest on borrowings. Interest expense was flat as the
increase in average outstanding debt was offset by a decrease in interest rates
under the 2018 Credit Agreement.
The Company's effective income tax rate was 42.5% for fiscal 2020 compared to
33.4% in fiscal 2019. The increase in the effective income tax rate in fiscal
2020 reflects the net impact of permanent book-tax differences resulting
primarily from nondeductible compensation.
Inflation
Inflation did not have a significant effect on the Company's operations during
either of fiscal 2020 or 2019.
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Transactions with Related Parties
Certain of the Company's subsidiaries lease warehouse and office space from one
or more of the principals of the Company or its subsidiaries. These leases
include the following:
The Company's wholly-owned subsidiary, Steiner-Atlantic, leases 28,000 square
feet of warehouse and office space from an affiliate of Michael S. Steiner,
President of Steiner-Atlantic and a former director and officer of the Company,
pursuant to a lease agreement dated November 1, 2014, as amended. The lease term
was extended during January 2020 to run through October 31, 2020. Monthly base
rental payments under the lease are $12,000. In addition to base rent,
Steiner-Atlantic is responsible under the lease for costs related to real estate
taxes, utilities, maintenance, repairs and insurance. Payments under this lease
totaled approximately $148,000 and $146,000 during fiscal 2020 and 2019,
respectively.
On October 10, 2016, the Company's wholly-owned subsidiary, Western State
Design, entered into a lease agreement pursuant to which it leases 17,600 square
feet of warehouse and office space from an affiliate of Dennis Mack, a director
and Executive Vice President, Corporate Strategy of the Company, and Tom Marks,
Executive Vice President, Business Development of the Company. Monthly base
rental payments are $12,000 during the initial term of the lease. In addition to
base rent, Western State Design is responsible under the lease for costs related
to real estate taxes, utilities, maintenance, repairs and insurance. The lease
has an initial term of five years and provides for two successive three-year
renewal terms at the option of the Company. Payments under this lease totaled
approximately $144,000 during each of fiscal 2020 and 2019.
On October 31, 2017, the Company's wholly-owned subsidiary, Tri-State Technical
Services, entered into lease agreements pursuant to which it leases a total of
81,000 square feet of warehouse and office space from an affiliate of Matt
Stephenson, President of Tri-State. Monthly base rental payments total $21,000
during the initial terms of the leases. In addition to base rent, Tri-State is
responsible under the leases for costs related to real estate taxes, utilities,
maintenance, repairs and insurance. Each lease has an initial term of five years
and provides for two successive three-year renewal terms at the option of the
Company. Payments under these leases totaled approximately $252,000 during each
of fiscal 2020 and 2019.
On February 9, 2018, the Company's wholly-owned subsidiary, AAdvantage Laundry
Systems, entered into a lease agreement pursuant to which it leases a total of
5,000 square feet of warehouse and office space from an affiliate of Mike
Zuffinetti, former Chief Executive Officer of AAdvantage. Monthly base rental
payments are $3,950 during the initial term of the lease. In addition to base
rent, AAdvantage is responsible under the lease for costs related to real estate
taxes, utilities, maintenance, repairs and insurance. The lease has an initial
term of five years and provides for two successive three-year renewal terms at
the option of the Company. During February 2018, AAdvantage entered into a
month-to-month lease agreement with an affiliate of Mike Zuffinetti for a total
of 17,000 square feet of warehouse and office space. Monthly base rental
payments under this lease were $13,500. This month-to-month lease was terminated
on October 31, 2018. In addition, on November 1, 2018, AAdvantage entered into a
lease agreement pursuant to which it leases warehouse and office space from an
affiliate of Mike Zuffinetti. Monthly base rental payments were $26,000
initially. Pursuant to the lease agreement, on January 1, 2019, the lease
expanded to cover additional warehouse space and, in connection therewith,
monthly base rental payments increased to $36,000. In addition to base rent,
AAdvantage is responsible under the lease for costs related to real estate
taxes, utilities, maintenance, repairs and insurance. The lease has an initial
term of five years and provides for two successive three-year renewal terms at
the option of the Company. Payments under the leases described in this paragraph
totaled approximately $481,000 and $369,000 during fiscal 2020 and 2019,
respectively.
On September 12, 2018, the Company's wholly-owned subsidiary, Scott Equipment,
entered into lease agreements pursuant to which it leases a total of 18,000
square feet of warehouse and office space from an affiliate of Scott Martin,
President of Scott Equipment. Monthly base rental payments total $11,000 during
the initial terms of the leases. In addition to base rent, Scott Equipment is
responsible under the leases for costs related to real estate taxes, utilities,
maintenance, repairs and insurance. Each lease has an
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initial term of five years and provides for two successive three-year renewal
terms at the option of the Company. Payments under these leases totaled
approximately $137,000 and $114,000 during fiscal 2020 and 2019, respectively.
On February 5, 2019, the Company's wholly-owned subsidiary, PAC Industries,
entered into two lease agreements pursuant to which it leases a total of 29,500
square feet of warehouse and office space from an affiliate of Frank Costabile,
President of PAC Industries, and Rocco Costabile, Director of Finance of PAC
Industries. Monthly base rental payments total $14,600 during the initial terms
of the leases. In addition to base rent, PAC Industries is responsible under the
leases for costs related to real estate taxes, utilities, maintenance, repairs
and insurance. Each lease has an initial term of four years and provides for two
successive three-year renewal terms at the option of the Company. Payments under
these leases totaled approximately $176,000 and $73,000 during fiscal 2020 and
2019, respectively.
Critical Accounting Policies
Use of Estimates
In connection with the preparation of its financial statements in accordance
with generally accepted accounting principles in the United States ("GAAP"), the
Company makes estimates and assumptions, including those that affect the
reported amounts of assets and liabilities, contingent assets and liabilities,
and the reported amounts of revenues and expenses during the reported periods.
Estimates and assumptions made may not prove to be correct, and actual results
may differ from the estimates. The accounting policies that the Company has
identified as critical to its business operations and to an understanding of the
Company's financial statements are set forth below. The critical accounting
policies discussed below are not intended to be a comprehensive list of all of
the Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by GAAP, with no need for
management's judgment in their application. There are also areas in which
management's judgment in selecting any available alternative would not produce a
materially different result.
Revenue Recognition
Performance Obligations and Revenue Over Time
Revenue primarily consists of revenues from the sale or leasing of commercial
and industrial laundry and dry cleaning equipment and steam and hot water
boilers manufactured by others; the sale of related replacement parts and
accessories; and the provision of installation and maintenance services. The
Company generates revenue primarily from the sale of equipment and parts to
customers. Therefore, the majority of the Company's contracts are short-term in
nature and have a single performance obligation (to deliver products), and the
Company's performance obligation is satisfied when control of the product is
transferred to the customer. Other contracts contain a combination of equipment
sales and services expected to be performed in the near-term, which services are
distinct and accounted for as separate performance obligations. Significant
judgment may be required by management to identify the distinct performance
obligations within each contract. Revenue is recognized on these contracts when
control transfers to the Company's customers via shipment of products or
provision of services and the Company has the right to receive consideration for
these products and services. Additionally, from time to time, the Company enters
into longer-termed contracts which provide for the sale of the equipment by the
Company and the provision by the Company of related installation and
construction services. The installation on these types of contracts is usually
completed within six to twelve months. The Company recognizes a portion of its
revenue over time using the cost-to-cost measure of progress, which measures a
contract's progress toward completion based on the ratio of actual contract
costs incurred to date to the Company's estimated costs at completion.
Significant judgment may be required by management in the cost estimation
process for these contracts, which is based on the knowledge and experience of
the Company's project managers, subcontractors and financial professionals.
Changes in job performance and job conditions are factors that influence
estimates of the total contract transaction price, total costs to complete those
contracts and the
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Company's revenue recognition. The determination of the total estimated cost and
progress toward completion requires management to make significant estimates and
assumptions. Total estimated costs to complete projects include various costs
such as direct labor, material and subcontract costs. Changes in these estimates
can have a significant impact on the revenue recognized each period. From time
to time, the Company also enters into maintenance and service contracts. These
longer-term contracts, maintenance and service contracts have a single
performance obligation where revenue is recognized over time using the
cost-to-cost measure of progress, which best depicts the continuous transfer of
control of goods or services to the customer.
The Company measures revenue, including shipping and handling fees charged to
customers, as the amount of consideration it expects to be entitled to receive
in exchange for its goods or services, net of any taxes collected from customers
and subsequently remitted to governmental authorities. Costs associated with
shipping and handling activities performed after the customer obtains control
are accounted for as fulfillment costs.
Revenue from products transferred to customers at a point in time is recognized
when obligations under the terms of the contract with the Company's customer are
satisfied, which generally occurs with the transfer of control upon shipment.
Revenues that are recognized over time include (i) longer-termed contracts that
include equipment purchase with installation and construction services, (ii)
maintenance contracts, and (iii) service contracts.
Contract Assets and Liabilities
Contract assets and liabilities are presented in the Company's condensed
consolidated balance sheets. Contract assets consist of unbilled amounts
resulting from sales under longer-term contracts when the cost-to-cost method of
revenue recognition is utilized and revenue recognized exceeds the amount billed
to the customer. As noted above, the cost estimation process for these contracts
may require significant judgment by management. The Company typically receives
progress payments on sales under longer-term contracts as work progresses,
although for some contracts, the Company may be entitled to receive an advance
payment. Contract assets also include retainage. Retainage represents a portion
of the contract amount that has been billed, but for which the contract allows
the customer to retain a portion of the billed amount (generally, from 5% to 20%
of contract billings) until final contract settlement. Retainage amounts are
generally classified as current assets within the Company's consolidated balance
sheets. Retainage that has been billed, but is not due until completion of
performance and acceptance by customers, is generally expected to be collected
within one year. Contract liabilities consist of advanced payments, billings in
excess of costs incurred and deferred revenue.
Goodwill
The Company evaluates goodwill for impairment annually or more frequently when
an event occurs or circumstances change that indicate that the carrying value
may not be recoverable. Goodwill is tested for impairment at the reporting unit
level by first performing a qualitative assessment to determine whether it is
more likely than not that the fair value of the reporting unit is less than its
carrying value. If the reporting unit does not pass the qualitative assessment,
then the reporting unit's carrying value is compared to its fair value. If
the fair value is determined to be less than the carrying value, a second step
is performed to measure the amount of impairment loss. This step compares the
current implied goodwill in the reporting unit to its carrying amount. If the
carrying amount of the goodwill exceeds the implied goodwill, an impairment is
recorded for the excess. The identification and measurement of goodwill
impairment involves the estimation of the fair value of the reporting unit and
involves uncertainty because management must use judgment in determining
appropriate assumptions to be used in the measurement of fair value. The Company
performed its annual impairment test on April 1 and determined there was no
impairment.
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Customer Relationships, Tradenames and Other Intangible Assets
Customer relationships, tradenames, and other intangible assets are stated at
cost less accumulated amortization. These assets, except for tradenames, are
amortized on a straight-line basis over the estimated future periods to be
benefited (5-10 years). The estimates of fair value of the Company's
indefinite-lived intangibles and long-lived assets are based on information
available as of the date of the assessment and take into account management's
assumptions about expected future cash flows and other valuation techniques. The
Company reviews the recoverability of intangible assets that are amortized based
primarily upon an analysis of undiscounted cash flows from the intangible
assets. In the event the expected future net cash flows become less than the
carrying amount of the assets, an impairment loss would be recorded in the
period the determination is made based on the fair value of the related assets.
Income Taxes
The Company follows Financial Accounting Standards Board ("FASB") ASC Topic 740,
"Income Taxes" ("ASC 740"). Under the asset and liability method of ASC 740,
deferred tax assets and liabilities are recognized for the future tax
consequences attributed to differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under ASC 740, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date. If it is determined that
it is more likely than not that some portion of a deferred tax asset will not be
realized, a valuation allowance is recognized.
Significant judgment is required in developing the Company's provision for
income taxes, deferred tax assets and liabilities, and any valuation allowances
that might be required against the deferred tax assets. Management evaluates the
Company's ability to realize its deferred tax assets on a quarterly basis and
adjusts its valuation allowance when it believes that it is more likely than not
that the asset will not be realized.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation
commonly referred to as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The
Tax Act represents significant U.S. federal tax reform legislation that includes
a permanent reduction to the U.S. federal corporate income tax rate. Pursuant to
Staff Accounting Bulletin ("SAB") No. 118 ("SAB 118"), the Company's measurement
period for implementing the accounting changes required by the Tax Act closed on
December 22, 2018. The Company completed the accounting for the effects of the
Tax Act in the second quarter of fiscal 2019. See Note 12 to the Consolidated
Financial Statements included in Item 8 of this Report for additional
information regarding income taxes.
Recently Issued Accounting Guidance
See Note 2 to the Consolidated Financial Statements included in Item 8 of this
Report for a description of Recently Issued Accounting Guidance.
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