EVI Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2019. Unaudited results are compared with the periods ended December 31, 2018. EVI distributes, leases, installs, and services commercial laundry equipment and pursues a buy-and-build acquisition strategy. Dollar figures below are in millions unless noted.
Financial results
| Metric | Three months ended Dec. 31, 2019 | Prior year | Six months ended Dec. 31, 2019 | Prior year |
|---|---|---|---|---|
| Revenue | $66.7 | $60.8 | $122.3 | $104.2 |
| Gross profit | $14.1 | $13.7 | $27.9 | $23.4 |
| Gross margin | 21.1% | 22.5% | 22.8% | 22.5% |
| SG&A | $13.3 | $11.6 | $25.8 | $19.9 |
| Operating income | $0.8 | $2.1 | $2.1 | $3.5 |
| Net income | $0.3 | $1.3 | $0.8 | $2.1 |
| Diluted EPS | $0.02 | $0.10 | $0.06 | $0.16 |
- Revenue rose 10% for the quarter and 17% for the six-month period. Management attributed growth to acquired businesses—including Scott Equipment, Washington Automated, and PAC Industries—and market-share initiatives.
- Gross profit increased, but quarterly gross margin fell 1.4 percentage points. Management cited market-share tactics and lower-margin, longer-term federal government contracts. Excluding those contracts, management said margins also declined year over year.
- SG&A increased 15% for the quarter and 30% for the six months, reflecting acquired operations, growth-related staffing and technology investments, and higher amortization, depreciation, and share-based compensation. Personnel were up 29% year over year, with 74% of that increase in sales and service roles.
- Net income declined despite higher revenue and gross profit, as margin pressure, higher operating costs, and increased interest expense offset growth. Net interest expense was $0.4 million for the quarter and $0.9 million for the six months.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $9.6 million, versus cash used of $9.9 million a year earlier. The improvement primarily reflected working-capital changes, including lower receivables and higher customer deposits, partly offset by lower accounts payable and accrued expenses.
- Investing activities used $2.6 million, including $2.2 million of capital expenditures and $0.5 million net cash paid for acquisitions. Financing activities used $6.1 million, primarily reflecting $9.8 million of debt repayments against $4.0 million of borrowings. Cash increased $0.9 million to $5.9 million.
- At December 31, 2019, long-term debt was $34.8 million net of financing costs ($35.0 million principal), down from $40.6 million at June 30, 2019. The revolving facility has a $100 million commitment, with an accordion feature to $140 million; reported borrowing availability was $4.4 million. EVI was in compliance with its financial covenants.
- Working capital was $31.1 million, down from $37.2 million at June 30, 2019. Management attributed the decrease principally to adoption of the lease standard, debt repayment using cash, and lower receivables, partly offset by increased inventory.
- Operating lease assets and liabilities were recognized under the new lease standard adopted July 1, 2019. At December 31, lease liabilities totaled $5.8 million; adoption had no material effect on operating results or cash flows.
- Management stated existing cash, anticipated operating cash flow, and available credit should fund operations and anticipated capital expenditures for at least the next 12 months.
Material developments, outlook, and risks
- EVI acquired PLS on August 1, 2019; its preliminary allocation included $0.9 million of goodwill and $0.3 million of identified intangibles. On January 31, 2020, EVI acquired Laundry Systems of Tennessee. On February 7, 2020, it signed a definitive agreement to acquire substantially all assets and certain liabilities of Commercial Laundry Equipment Company. These subsequent transactions were not included in December-quarter results.
- No quantitative financial guidance was provided. Management described growth initiatives and its expectation that a larger installed equipment base may create future parts, accessory, and service opportunities; it cautioned that market-share strategies and large contracts can pressure near-term margins and project timing can delay revenue and profit recognition.
- Key stated risks include acquisition identification, financing and integration; leverage, interest rates and credit covenants; competition and pricing pressure; supplier and customer relationships; inventory availability; installation delays; and general economic conditions. Outstanding performance and payment bonds were $8.0 million, with no estimated costs to complete the related projects. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
- The credit facility is secured by substantially all company assets and includes restrictions on, among other things, acquisitions, additional debt, dividends, and share repurchases. A 1% increase in interest rates would raise annual interest expense by approximately $0.35 million based on period-end borrowings.
- Related-party warehouse and office leases were disclosed. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth from acquisitions and market-share tactics can translate into sustained operating income and improved margins.
- Integration, financing, dilution, and performance implications of the PLS and subsequent acquisitions, including the signed Commercial Laundry Equipment transaction.
- Actual borrowing availability and covenant headroom: the filing reports only $4.4 million available under the revolving facility despite its stated commitment.
- Working-capital trends, including inventory levels, customer deposits, receivable collections, and cash conversion.
- Exposure to lower-margin federal contracts, installation delays, interest-rate changes, and disclosed related-party leases.