EVI Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2020, the first quarter of fiscal 2021 (unaudited). Unless otherwise noted, amounts are in millions of dollars. EVI distributes, leases and services commercial laundry equipment and pursues growth through acquisitions.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Revenue | $57.878 | $55.681 | +4% |
| Gross profit / margin | $13.333 / 23.0% | $13.834 / 24.8% | Gross profit −4%; margin −1.8 percentage points |
| SG&A | $12.437 | $12.553 | −1% |
| Operating income | $0.896 | $1.281 | −30% |
| Net interest expense | $0.169 | $0.422 | −60% |
| Net income | $0.518 | $0.580 | −11% |
| Diluted EPS | $0.04 | $0.04 | Unchanged as reported |
| Operating cash flow | $4.319 | $1.833 | +$2.486 |
| Capital expenditures | $0.997 | $1.286 | −$0.289 |
Financial position and liquidity
- At September 30, 2020, cash was $5.111, total assets $164.037, total liabilities $75.115 and shareholders’ equity $88.922. Working capital was $16.4, down from $22.2 at June 30, 2020.
- Total debt, net, was $19.724, comprising $13.0 of revolving credit borrowings and $6.892 of PPP loans; the filing reports $19.341 as long-term debt, net. Revolver borrowings were down from $21.0 at June 30. The company reported $19.5 of remaining availability under its credit facility and compliance with its covenants.
- Cash declined $4.678 during the quarter. Operating activities provided $4.319; investing activities used $0.997; financing activities used $8.000, largely reflecting optional debt repayments. Operating cash flow benefited from increases in accounts payable, customer deposits and contract liabilities, while contract assets increased and used cash.
- Management stated that cash, anticipated operating cash flows and available credit were expected to fund operations and anticipated capital expenditures for at least the next 12 months.
Material changes and management commentary
- Revenue rose on higher federal-government laundry project activity, contributions from acquired businesses and market-share initiatives. These gains were partly offset by pandemic-related declines at certain subsidiaries.
- Gross margin fell primarily because federal-government projects represented a larger share of sales and generally carry lower margins. Excluding those projects, management said gross margin increased 1.4 percentage points year over year, to 26.7%.
- Lower commissions and other cost-saving measures helped reduce SG&A. Reduced average borrowings and interest rates lowered net interest expense. The effective tax rate fell to 28.7% from 32.5%.
- Contract assets rose to $8.654 from $3.443 million, largely related to large federal-government projects. Customer deposits increased to $11.358 from $8.511 million, partly reflecting stricter credit-extension standards during the pandemic.
- On November 3, 2020, after quarter-end, EVI acquired Yankee Equipment Systems for approximately $13.5 million: $6.5 million cash and 278,385 EVI shares. It also assumed the acquired company’s approximately $0.915 million PPP loan. Results of the acquired business are to be included from the quarter ending December 31, 2020.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said the pandemic’s severity, duration and effects remain highly uncertain and may continue to affect demand, installations, supply, sales, margins, liquidity and results.
- The company responded with cost and spending reductions, inventory adjustments, supplier payment-term renegotiations and reduced hiring. Management may take further actions as conditions require.
- EVI received approximately $6.9 million in PPP loans in May 2020. Forgiveness is subject to lender and SBA approval; the filing gives no assurance that all or any portion will be forgiven. The company also disclosed risks relating to loan certifications and compliance with program requirements.
- The revolving facility is secured by substantially all company assets and contains financial and other covenants. A hypothetical 1% increase in daily interest rates would increase annual interest expense by approximately $0.130 million, based on September 30 borrowings.
- The filing reports no material changes to previously disclosed risk factors and no outstanding performance or payment bonds at September 30, 2020. Ordinary-course legal matters may nonetheless entail costs or adverse outcomes.
Key facts for investors to verify
- Whether federal-government project mix and related lower gross margins persist, and whether anticipated higher-margin follow-on sales materialize.
- Whether pandemic-related customer delays, demand weakness and operational or supply-chain constraints affect subsequent-period results and cash generation.
- The status and amount of forgiveness, if any, for the company’s and acquired Yankee Equipment Systems’ PPP loans.
- Post-acquisition funding, integration and dilution effects from the Yankee transaction, and the acquired business’s contribution to results.
- Whether liquidity, credit-facility availability and covenant compliance remain adequate as working capital and project-related contract balances change.