EVI Industries, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2019. Although the request metadata says “2018 Q4,” this filing reports FY2019, with FY2018 comparatives; it is not a quarterly filing. EVI is a commercial and industrial laundry equipment distributor and service provider, pursuing a buy-and-build acquisition strategy. Results are reported in one segment.
Key financial results
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $228.3 million | $150.0 million |
| Gross profit / margin | $52.7 million / 23.1% | $36.5 million / 24.3% |
| Operating income / margin | $7.0 million / 3.1% | $6.9 million / 4.6% |
| Net income / diluted EPS | $3.7 million / $0.29 | $4.0 million / $0.33 |
| Operating cash flow | $(8.7) million | $11.3 million |
| Investing cash flow | $(15.5) million | $(14.2) million |
| Cash at year-end | $5.0 million | $1.3 million |
| Debt at year-end | $40.8 million gross | $10.1 million gross |
Revenue increased 52%, primarily from acquisitions. Net income declined 6% as higher operating and interest expenses offset revenue growth; the effective tax rate fell to 33.4% from 37.9%. Selling, general and administrative expenses rose 55% to $45.7 million and increased to 20.0% of revenue from 19.7%. The gross margin decline reflected more lower-margin federal government project sales and product mix.
Cash generation weakened materially: operating activities used $8.7 million, with working capital changes—including receivables, inventory and lower customer deposits—among the principal factors. Accounts receivable rose to $30.6 million from $16.0 million, and inventory to $26.4 million from $15.4 million. Current assets of $67.9 million exceeded current liabilities of $30.7 million. Cash less gross debt was approximately negative $35.8 million.
Material changes and financing
- FY2019 acquisitions included Scott Equipment, PAC Industries, Industrial Laundry Services, Washington Automated, Skyline Equipment and Worldwide Laundry. Acquisition-related goodwill increased to $54.5 million from $37.1 million; total assets increased to $154.5 million from $95.5 million.
- The company entered a five-year revolving credit agreement in November 2018, with a $100 million commitment and an accordion feature up to $140 million. It matures November 2, 2023, is secured by substantially all company assets and has variable-rate borrowing terms.
- At June 30, 2019, $40.8 million was outstanding and $6.9 million was available to borrow. EVI reported compliance with financial covenants. Management said existing cash, expected operating cash and facility availability should fund operations and anticipated capital expenditures for at least 12 months.
- EVI paid a $0.13-per-share dividend in January 2019, totaling approximately $1.6 million. Future dividends are discretionary and subject to debt restrictions.
- After year-end, on August 1, 2019, EVI acquired three related laundry businesses in a transaction described as immaterial on a consolidated basis.
Outlook, risks and unusual items
- No numerical revenue, earnings or margin guidance is provided. Management expects lower-margin large government contracts to support customer relationships and create potential future parts, supplies and service opportunities; it believes long-term benefits may outweigh near-term margin pressure.
- Acquisition execution and integration are central risks, including management capacity, acquired-business controls, employee and customer retention, debt financing, dilution, and potential goodwill or intangible-asset impairment.
- Supplier concentration is significant: three manufacturers represented approximately 62% of product purchases in FY2019. Loss of a key supplier or customer could adversely affect results.
- Debt is floating-rate and subject to leverage and interest-coverage covenants. A hypothetical 1 percentage-point rate increase would add approximately $408,000 to annual interest expense based on year-end borrowings. The filing also identifies LIBOR transition risk.
- Three manufacturers’ equipment sales, a federal agency, accounted for approximately 9% of FY2019 revenue; no individual customer exceeded 10%. The largest single-project receivable was $4.0 million.
- Outstanding performance and payment bonds were $8.0 million; the company reported no estimated costs to complete projects secured by those bonds at year-end. EVI reported no pending legal proceeding expected to be material, while noting litigation outcomes are uncertain.
- CEO and controlling stockholder Henry Nahmad had voting power over approximately 59.4% of shares, presenting control, governance and trading-liquidity considerations. Related-party warehouse leases are disclosed, including leases with affiliates of executives and subsidiary principals.
- Management and the auditor reported effective internal controls and the auditor issued unqualified opinions. However, controls at the six businesses acquired in FY2019 were excluded from the assessment; those businesses represented 29% of year-end assets and 17% of FY2019 revenue.
- The company adopted the new revenue standard in FY2019 without an impact on revenue amount or timing at adoption. It expected the new lease standard, effective July 1, 2019, to add right-of-use assets and lease liabilities, with no significant effect expected on operations or cash flows.
Investor verification priorities
- Assess whether acquisition-driven revenue growth translates into organic growth, stronger operating margins and sustainable earnings.
- Track operating cash flow, receivables collection, inventory levels and customer deposits against sales growth.
- Review leverage, actual covenant headroom, borrowing availability, variable-rate exposure and refinancing or acquisition-funding needs.
- Verify integration progress and internal-control remediation for the acquired businesses, as well as final purchase-price allocations and goodwill assumptions.
- Evaluate exposure to concentrated suppliers, large government projects, the $4.0 million project receivable and performance-bond obligations.
- Review related-party lease terms, controlling-stockholder influence, and the sustainability and debt-covenant limits of dividends.