EVI Industries, Inc. — Form 10-Q Summary
Business context and reporting period. The filing covers the quarter and six months ended December 31, 2018, EVI’s fiscal second quarter. EVI distributes and services commercial and industrial laundry, dry-cleaning, boiler, water-filtration, and related equipment. Its growth strategy relies on acquisitions. Unless stated otherwise, figures below are in millions of dollars.
Financial performance
| Metric | Three months ended Dec. 31, 2018 | Three months ended Dec. 31, 2017 | Six months ended Dec. 31, 2018 | Six months ended Dec. 31, 2017 |
|---|---|---|---|---|
| Revenue | $60.841 | $36.135 | $104.216 | $62.408 |
| Gross profit | $13.677 | $8.231 | $23.399 | $14.218 |
| Operating income | $2.102 | $2.208 | $3.534 | $3.191 |
| Net income | $1.265 | $1.510 | $2.061 | $2.073 |
| Diluted EPS | $0.10 | $0.13 | $0.16 | $0.18 |
- Revenue rose 68% in the quarter and 67% for the six-month period, primarily from acquired businesses.
- Gross margin was 22.5% for both 2018 periods, down from 22.8% in the comparable 2017 periods; management attributed the decline mainly to product and customer mix.
- SG&A rose 92% in the quarter and 80% for six months. SG&A was 19.0% and 19.1% of revenue, respectively, versus 16.7% and 17.7% a year earlier. Drivers included acquired operations, added personnel, public-company-related costs, amortization, and share-based compensation.
- Quarterly operating income and net income declined despite higher sales. Six-month operating income increased, while net income was approximately flat. Higher average borrowings contributed to six-month net interest expense of $0.539, versus $0.183 a year earlier.
Cash flow, balance sheet, and debt
- For the six months, operating activities used $9.855, compared with $0.408 provided in the prior-year period. Working-capital movements included a $10.985 increase in accounts receivable and a $3.347 increase in inventory. EVI said it collected about $5.8 of receivables from significant late-period contract billings after quarter-end.
- Investing activities used $8.431, including $7.231 for acquisitions, net of cash acquired, and $1.200 of capital expenditures. Financing activities provided $27.129, largely reflecting borrowings and repayments associated with acquisitions and operations. Cash ended the period at $10.173, up from $1.330 at June 30, 2018.
- At December 31, total assets were $144.540 and total liabilities were $71.927. Current assets of $68.093 exceeded current liabilities of $33.449, yielding working capital of about $34.6.
- Debt, net of financing costs, was $37.545, compared with $10.012 at June 30. The November 2018 five-year revolving facility provides up to $100, with a $40 accordion feature. EVI reported $12.8 available to borrow and compliance with its covenants at quarter-end. The facility is secured by substantially all company assets and includes leverage and interest-coverage requirements and other restrictions.
- Interest-rate sensitivity: EVI reported a 3.66% weighted-average borrowing rate at December 31 and estimated that a 1 percentage-point increase in rates would add approximately $0.378 to annual interest expense, based on period-end borrowings.
Material changes, outlook, and risks
- EVI completed five acquisitions during the six months ended December 31, 2018. Purchase-price allocations were preliminary. On February 5, 2019, after quarter-end, it acquired PAC Industries for cash and stock totaling $13.1.
- Unaudited supplemental pro forma results, as if the five 2018 acquisitions had occurred on July 1, 2017, showed six-month revenue of $115.599 and net income of $2.532 in 2018, versus $83.744 and $2.937 in 2017. The company cautioned that these figures are informational and not indicative of actual or future results.
- The board declared a $0.13-per-share cash dividend in December 2018, paid January 8, 2019. Future dividends are subject to board approval and debt restrictions.
- Management said existing cash, expected operating cash flow, and facility availability should fund operations and anticipated capital expenditures for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- Key stated risks include acquisition execution and integration, acquisition-related debt and share dilution, supplier and customer relationships, competition and margins, working-capital and inventory needs, and variable interest rates. Outstanding performance and payment bonds were $9.4, with estimated costs to complete the related projects of $1.6.
- The filing reports no material changes in legal proceedings or risk factors from the prior Form 10-K. It also discloses leases with affiliates of certain executives and directors. Management concluded disclosure controls were effective; the filing notes no material internal-control changes other than the WAI acquisition.
Important facts for investors to verify
- Whether acquired businesses sustain growth and contribute profitably after integration, given that reported revenue growth was acquisition-led while quarterly earnings declined.
- Whether receivables collected after quarter-end and inventory levels translate into improved operating cash flow.
- Debt availability, interest costs, and ongoing compliance with credit-facility covenants as acquisition spending continues.
- Final acquisition purchase-price allocations, including goodwill and intangible-asset assumptions, and the performance of the subsequent PAC acquisition.
- The filing’s working-capital comparison: MD&A states $34.6 at December 31, 2018 versus $7.3 at December 31, 2017; the balance sheet also shows approximately $7.3 at June 30, 2018.