EVI Industries, Inc. — Form 10-Q Summary
Reporting period: Three months ended September 30, 2019, the first quarter of EVI’s fiscal 2020 (not calendar 2019 Q1). Comparisons are with the three months ended September 30, 2018, unless otherwise noted. Financial amounts are in U.S. dollars.
Business context
EVI distributes commercial laundry equipment, parts and accessories, and provides related planning, installation, maintenance and repair services. Its growth strategy combines organic initiatives with acquisitions. On August 1, 2019, EVI acquired substantially all assets of Commercial Laundry Products, Inc., Professional Laundry Systems of PA, Inc. and Professional Laundry Systems West, Inc. (PLS), for $324,000 cash, net of cash acquired, and 37,050 shares. The purchase-price allocation was preliminary.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $55.681 million | $43.375 million |
| Gross profit / gross margin | $13.834 million / 24.8% | $9.722 million / 22.4% |
| Selling, general and administrative expenses | $12.553 million | $8.290 million |
| Operating income / operating margin | $1.281 million / 2.3% | $1.432 million / 3.3% |
| Net income | $580,000 | $796,000 |
| Diluted earnings per share | $0.04 | $0.06 |
| Cash from (used in) operating activities | $1.833 million | $(5.862) million |
| Capital expenditures | $1.286 million | $647,000 |
Revenue increased 28%, primarily because acquired businesses—including Scott Equipment, Washington Automated and PAC Industries—contributed results not included for all or part of the prior-year quarter. Gross profit rose 42%; management attributed the margin improvement partly to fewer lower-margin, longer-term federal government contracts than in the prior-year period. Excluding those contracts, management said gross margin increased 0.3 percentage points to 25.3%.
SG&A increased 51%, and rose to 22.5% of revenue from 19.1%. Management cited acquired-company costs, investment in personnel, systems and growth initiatives, and higher amortization and share-based compensation. As a result, operating income and net income declined despite higher revenue and gross profit. Net interest expense increased to $422,000 from $165,000, primarily due to higher average borrowings. The effective tax rate was 32.5%, versus 37.2%.
Financial position, liquidity and debt
- Cash was $5.261 million at September 30, 2019, compared with $5.038 million at June 30, 2019. Working capital decreased to $36.3 million from $37.2 million.
- Total assets were $158.9 million and total liabilities were $75.1 million. The balance sheet included $40.8 million of revolving-credit borrowings, net debt carrying value of $40.577 million, and operating lease liabilities totaling $5.921 million.
- The five-year revolving facility has a stated maximum of $100 million, with an accordion feature for up to $140 million. At quarter-end, EVI reported $4.0 million available to borrow and compliance with its financial covenants. The facility matures November 2, 2023 and is secured by substantially all company assets and guaranteed by certain subsidiaries.
- Operating cash flow was $1.833 million, compared with cash used of $5.862 million in the prior-year quarter. Management attributed the improvement primarily to working-capital movements. Investing activities used $1.610 million; financing activities had no net cash flow. Cash increased by $223,000 during the quarter.
- Management stated that cash, expected operating cash flow and available facility funds should cover operations and anticipated capital expenditures for at least the next 12 months.
Material changes, outlook and risks
- EVI adopted the new lease accounting standard on July 1, 2019, recognizing operating lease assets and liabilities; there was no opening retained-earnings adjustment and no material effect on operating results or cash flows.
- No specific revenue, earnings or margin guidance was provided. Management described continued investment in its acquisition-led growth strategy and expects the business to pursue acquisitions and other strategic opportunities.
- Interest-rate exposure is material: quarter-end borrowings had a weighted-average rate of 3.54%; a hypothetical 1 percentage-point increase in daily rates would raise annual interest expense by approximately $408,000.
- Outstanding performance and payment bonds totaled $8.0 million; the filing reported no estimated costs to complete the bonded projects. The company may face ordinary-course litigation, with no material changes reported from its prior annual filing.
- Risks highlighted include economic and industry conditions, competition and margin pressure, acquisition identification and integration, supplier and customer relationships, debt and covenant restrictions, interest rates, inventory availability, regulation, and litigation. Management reported no material changes to previously disclosed risk factors.
- Related-party facility leases are disclosed, including leases with affiliates of certain executives and directors. The filing also notes that bank deposits exceeded FDIC insurance limits.
Key facts investors should verify
- Whether acquired-business growth and PLS integration translate into sustainable organic growth and profitability.
- Whether SG&A growth moderates and operating margins recover as investments and acquisition-related costs develop.
- Available borrowing capacity, covenant headroom, debt costs and sensitivity to interest-rate changes.
- Cash conversion and working-capital trends, especially receivables, inventory and customer deposits.
- Final PLS purchase-price allocation, acquisition performance, and the terms and governance of related-party leases.