EVI Industries, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2019. The filing covers fiscal 2019, notwithstanding the request metadata’s “2018 Q3” label. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions.
Business context and results
EVI distributes commercial and industrial laundry, dry-cleaning, boiler, and water-treatment equipment and related parts, and provides installation and maintenance services. Its growth strategy centers on acquisitions. Six businesses were acquired during the nine months, with results included from their respective closing dates.
| Metric | Three months ended Mar. 31, 2019 | Three months ended Mar. 31, 2018 | Nine months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2018 |
|---|---|---|---|---|
| Revenue | $59.3 million | $43.7 million | $163.4 million | $106.0 million |
| Gross profit | $13.4 million | $11.2 million | $36.8 million | $25.4 million |
| Operating income | $1.1 million | $1.9 million | $4.6 million | $5.1 million |
| Net income | $0.5 million | $1.1 million | $2.5 million | $3.2 million |
| Diluted earnings per share | $0.04 | $0.09 | $0.20 | $0.27 |
Financial position and cash flow
- Margins: Gross margin was 22.6% for the quarter and 22.5% year to date, versus 25.6% and 24.0%, respectively, a year earlier. Management attributed most of the decline to a larger contribution from lower-margin federal government projects; product mix also reduced margins.
- Cash flow: Operating activities used $9.6 million in the nine months, compared with $1.5 million used in the prior-year period, primarily reflecting working-capital increases. Investing activities used $14.3 million, including $12.5 million net cash paid for acquisitions and $1.7 million in capital expenditures. Financing activities provided $29.3 million. Cash increased $5.4 million to $6.7 million.
- Liquidity: Current assets were $68.9 million and current liabilities were $32.4 million at March 31, 2019; reported working capital was $36.5 million, up from $7.3 million at June 30, 2018. Receivables, inventory, and contract assets increased, partly reflecting growth, order timing, and longer-term contract billing and collections.
- Debt: Long-term debt, net, was $41.6 million, versus $8.8 million at June 30, 2018. The company had $41.8 million outstanding under its revolving facility and reported $7.2 million available to borrow. It was in compliance with facility covenants at quarter-end. The filing reports a 3.73% weighted-average borrowing rate; a hypothetical 1% rate increase would add approximately $418,000 to annual interest expense.
Changes and management commentary
- Revenue increased 54% year to date and 36% in the quarter, primarily due to acquired businesses. Gross profit rose, but operating income and net income declined as higher SG&A, interest expense, and noncash amortization and share-based compensation more than offset revenue growth.
- SG&A increased 58.4% year to date and 32.6% in the quarter. Management cited acquired-company costs, investment in personnel and operating capabilities, acquisition-related expenses, and higher amortization and share compensation.
- Six acquisitions were completed during the period. Purchase price allocations for the acquisitions remained preliminary; goodwill increased to $54.6 million from $37.1 million at June 30, 2018. Acquisitions were funded with cash, credit-facility borrowings, and common-stock issuance.
- Management stated that cash, anticipated operating cash flow, and available credit were expected to be sufficient for operations and anticipated capital expenditures for at least the next 12 months. No specific earnings or revenue guidance was provided.
Risks, contingencies, and other notable items
- The $100 million revolving facility, with a potential $40 million accordion, matures November 2, 2023 and is secured by substantially all company assets. Its covenants and other provisions may restrict additional borrowing, acquisitions, dividends, and other actions.
- Outstanding performance and payment bonds totaled $9.2 million; estimated costs to complete the related projects were $494,000. The company must reimburse sureties for payments or services required if it does not meet its obligations.
- Management highlighted acquisition integration and financing risks, dilution, supplier and customer relationships, competition, economic conditions, inventory availability, and the lower margins and timing of longer-term contracts. Federal and state tax examinations may cover 2015–2018.
- The filing describes leases with affiliates of certain executives and directors, including leases entered into by acquired businesses. It also reports that bank deposits exceeded FDIC insurance limits at March 31, 2019.
- The company adopted the new revenue standard on July 1, 2018, with no impact on revenue amount or timing through adoption. It expected to adopt the new lease standard on July 1, 2019 and was still assessing the impact.
Important facts for investors to verify
- Whether working-capital investment and contract-asset growth convert to operating cash flow and collections.
- Whether acquired businesses deliver expected growth and margins, and whether preliminary purchase accounting or integration results change.
- Debt levels, borrowing availability, interest-rate exposure, and continued compliance with credit covenants.
- The margin and cash-flow effects of federal government contracts and changes in product mix.
- Acquisition-related dilution, related-party leases, and any developments in bonded projects or tax examinations.