EnviroStar(EVI) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed consolidated financial statements, including operations, balance sheets, equity, and cash flows, with detailed notes Condensed Consolidated Statements of Operations Details revenues, costs, and net income for periods ended December 31, 2019 and 2018 | Metric (in thousands) | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | | :-------------------- | :---------------------------- | :---------------------------- | :------------------------------ | :------------------------------ | | Revenues | $122,338 | $104,216 | $66,657 | $60,841 | | Cost of sales | $94,429 | $80,817 | $52,582 | $47,164 | | Gross profit | $27,909 | $23,399 | $14,075 | $13,677 | | Operating income | $2,086 | $3,534 | $805 | $2,102 | | Net income | $843 | $2,061 | $263 | $1,265 | | Net earnings per share – basic | $0.07 | $0.17 | $0.02 | $0.10 | | Net earnings per share - diluted | $0.06 | $0.16 | $0.02 | $0.10 | - Revenues increased by 17% for the six months ended December 31, 2019, and by 10% for the three months ended December 31, 2019, compared to the prior year periods[7] - Net income decreased significantly for both the six-month period (from $2.061 million to $0.843 million) and the three-month period (from $1.265 million to $0.263 million) ended December 31, 2019, compared to the prior year[7] Condensed Consolidated Balance Sheets Presents financial position, including assets, liabilities, and equity as of December 31, 2019, and June 30, 2019 | Metric (in thousands) | December 31, 2019 (Unaudited) | June 30, 2019 | | :-------------------- | :---------------------------- | :------------ | | Total current assets | $64,294 | $67,868 | | Total assets | $158,401 | $154,485 | | Total current liabilities | $33,159 | $30,712 | | Total liabilities | $74,130 | $72,983 | | Total shareholders' equity | $84,271 | $77,262 | - Total assets increased by $3.9 million from June 30, 2019, to December 31, 2019, primarily due to the adoption of the new lease standard and the PLS Acquisition[8][10][114] - Total liabilities increased by $1.1 million, mainly due to the new lease standard and increased customer deposits, partially offset by decreased long-term debt and accounts payable[10][114] - Shareholders' equity increased by $7.0 million, from $77.262 million to $84.271 million[10] Condensed Consolidated Statements of Shareholders' Equity Details changes in shareholders' equity, including common stock, additional paid-in capital, and retained earnings | Metric (in thousands, except shares) | Balance at June 30, 2019 | Six Months Ended Dec 31, 2019 Changes | Balance at Dec 31, 2019 | | :----------------------------------- | :----------------------- | :------------------------------------ | :---------------------- | | Common Shares | 11,825,615 | 67,952 | 11,893,567 | | Common Stock Amount | $296 | $1 | $297 | | Additional Paid-in Capital | $73,010 | $2,234 | $75,244 | | Treasury Stock Cost | $(1,439) | $(309) | $(1,748) | | Retained Earnings | $9,635 | $843 | $10,478 | | Common Stock Related to Acquiree's ESOP | $(4,240) | $4,240 | $0 | | Total Shareholders' Equity | $77,262 | $7,009 | $84,271 | - Total shareholders' equity increased by $7.0 million during the six months ended December 31, 2019, driven by net income and share issuances related to acquisitions and employee stock plans, partially offset by share repurchases[12] - Issuance of shares in connection with acquisitions contributed $5.5 million to total equity during the six months ended December 31, 2019[12] Condensed Consolidated Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the six-month periods | Cash Flow Activity (in thousands) | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | | :-------------------------------- | :---------------------------- | :---------------------------- | | Net cash provided (used) by operating activities | $9,608 | $(9,855) | | Net cash used by investing activities | $(2,639) | $(8,431) | | Net cash (used) provided by financing activities | $(6,083) | $27,129 | | Net increase in cash and cash equivalents | $886 | $8,843 | | Cash and cash equivalents at end of period | $5,924 | $10,173 | - Operating activities generated $9.6 million in cash for the six months ended December 31, 2019, a significant improvement from $9.9 million cash used in the prior year, primarily due to changes in working capital[16][119] - Net cash used in investing activities decreased by $5.8 million, mainly due to lower cash paid for acquisitions, partially offset by increased capital expenditures[16][120] - Financing activities used $6.1 million in cash, a substantial shift from $27.1 million provided in the prior year, reflecting debt repayments exceeding new borrowings[16][121] Notes to Condensed Consolidated Financial Statements Explains significant accounting policies, acquisitions, debt, leases, and other material financial statement items - The Company adopted ASU No. 2016-02, Leases (Topic 842), on July 1, 2019, recognizing ROU assets and lease liabilities for operating leases on the balance sheet, with no material impact on operations or cash flows[25][26][28] - The PLS Acquisition on August 1, 2019, involved purchasing assets and assuming liabilities of Commercial Laundry Products, Inc., Professional Laundry Systems of PA, Inc., and Professional Laundry Systems West, Inc., allocating $0.945 million to goodwill[30] - Long-term debt decreased from $40.563 million to $34.791 million at December 31, 2019, under a $100 million revolving credit facility (2018 Credit Agreement) with $4.4 million available to borrow[39][41] - Unrecognized compensation expense for restricted stock awards and units totaled $13.5 million and $1.2 million, respectively, as of December 31, 2019, to be recognized over weighted-average periods of 17.3 and 14.8 years[65] - Goodwill increased from $54.501 million to $55.529 million at December 31, 2019, primarily due to $0.945 million from the PLS Acquisition[81] - Subsequent events include the acquisition of Laundry Systems of Tennessee on January 31, 2020, and a definitive agreement to acquire Commercial Laundry Equipment Company, Inc. on February 7, 2020[82][83] Item 2. Management's Discussion and Analysis of Financial Conditions and Results of Operations Management discusses financial performance, condition, and results, covering revenues, expenses, liquidity, and capital Company Overview Describes EVI Industries' business as a value-added distributor of commercial laundry equipment and services - EVI Industries, Inc. is a value-added distributor providing advisory and technical services for commercial laundry operations, including selling/leasing equipment, parts, accessories, and offering installation, maintenance, and repair services[88] - The company serves retail, commercial, industrial, institutional, and government customers, with product purchases ranging from parts to complex systems[89] - Equipment sales are seen as a foundation to strengthen customer relationships and lead to higher gross margin opportunities from related parts, accessories, supplies, and technical services[90] Acquisition History Outlines the company's "buy-and-build" growth strategy and lists significant acquisitions made over time - The company implemented a 'buy-and-build' growth strategy in 2015, acquiring multiple businesses since then[92] - During the six months ended December 31, 2019, the company acquired PLS (Commercial Laundry Products, Inc., Professional Laundry Systems of PA, Inc., and Professional Laundry Systems West, Inc.)[94] - Subsequent to the reporting period, on January 31, 2020, the company acquired Laundry Systems of Tennessee (LSOT)[95] - Acquisitions prior to the current fiscal year include Western State Design, Martin-Ray Laundry Systems, Tri-State Technical Services, AAdvantage Laundry Systems, Industrial Laundry Services, Scott Equipment, Washington Automated, Skyline Equipment, Worldwide Laundry, and PAC Industries[96] Results of Operations Analyzes revenues, gross profit, operating expenses, and net income for the current and prior year periods | Metric | Six Months Ended Dec 31, 2019 | Six Months Ended Dec 31, 2018 | Change (YoY) | Three Months Ended Dec 31, 2019 | Three Months Ended Dec 31, 2018 | Change (YoY) | | :----------------------------------- | :---------------------------- | :---------------------------- | :----------- | :------------------------------ | :------------------------------ | :----------- | | Revenues | $122.3 million | $104.2 million | +17% | $66.7 million | $60.8 million | +10% | | Gross Profit | $27.9 million | $23.4 million | +19% | $14.1 million | $13.7 million | +3% | | Gross Margin | 22.8% | 22.5% | +0.3 pp | 21.1% | 22.5% | -1.4 pp | | Selling, General & Administrative Expenses | $25.8 million | $19.9 million | +30% | $13.3 million | $11.6 million | +15% | | Net Interest Expense | $0.855 million | $0.539 million | +59% | $0.433 million | $0.374 million | +16% | | Effective Tax Rate | 31.5% | 31.2% | +0.3 pp | 29.3% | 26.8% | +2.5 pp | | Net Income | $0.843 million | $2.1 million | -59% | $0.263 million | $1.3 million | -79% | - Revenue increases were primarily driven by acquired businesses and successful market share growth tactics[103] - Gross margins were adversely impacted by market share growth strategies and longer-term federal government contracts, which generally have lower margins[105][106] - Operating expenses increased significantly due to post-acquisition expenses, growth initiatives, increased personnel (up 29% YoY), investments in technology, and higher non-cash amortization, depreciation, and share-based compensation[107][108] - Net income decreased substantially due to lower gross margins and increased operating expenses, despite revenue growth[113] Consolidated Financial Condition Reviews changes in total assets and liabilities, highlighting key drivers of these movements - Total assets increased from $154.5 million to $158.4 million, mainly due to the adoption of the new lease standard and the PLS Acquisition, partially offset by decreases in accounts receivable and contract assets[114] - Total liabilities increased from $73.0 million to $74.1 million, primarily due to the new lease standard and increased customer deposits, offset by decreased long-term debt and accounts payable[114] Liquidity and Capital Resources Assesses cash position, working capital, and available credit facilities to meet financial obligations - Cash and cash equivalents increased by $0.886 million for the six months ended December 31, 2019, compared to an $8.8 million increase in the prior year[115] - Working capital decreased from $37.2 million to $31.1 million, primarily due to the new lease standard, lower accounts receivable, and debt repayments, partially offset by higher inventory[116] - The 2018 Credit Agreement provides a $100 million revolving credit facility (with a $40 million accordion feature) maturing November 2, 2023, used for working capital, acquisitions, and general corporate purposes[122] - As of December 31, 2019, the company was in compliance with debt covenants and had $4.4 million available under the revolving credit facility[126] - The company believes existing cash, anticipated cash from operations, and available credit will be sufficient for operations and capital expenditures for at least the next twelve months[127] Transactions with Related Parties Details lease agreements and other financial transactions between the company and its related parties - Several subsidiaries lease warehouse and office space from affiliates of their principals or company directors/executives[132][133][134][135][137][138] | Subsidiary | Related Party | Lease Payments (6 months ended Dec 31, 2019) | | :--------- | :------------ | :------------------------------------------- | | Steiner-Atlantic Corp. | Affiliate of Michael S. Steiner | $74,000 | | Western State Design, Inc. | Affiliates of Dennis Mack & Tom Marks | $72,000 | | Tri-State Technical Services, Inc. | Affiliate of Matt Stephenson | $126,000 | | AAdvantage Laundry Systems, Inc. | Affiliate of Mike Zuffinetti | $240,000 | | Scott Equipment, Inc. | Affiliate of Scott Martin | $69,000 | | PAC Industries Inc. | Affiliates of Frank & Rocco Costabile | $88,000 | Item 3. Quantitative and Qualitative Disclosures about Market Risk Discusses market risks, primarily interest rate risk from variable-rate debt and foreign currency risk from export sales - The company is exposed to interest rate risk due to its variable-rate debt under the 2018 Credit Agreement, which accrues interest at LIBOR or Base Rate plus a margin[141] - As of December 31, 2019, with $35.0 million outstanding debt at a weighted average interest rate of 3.49%, a hypothetical 1% increase in daily interest rates would increase annual interest expense by approximately $350,000[143] - Foreign sales are affected by the strength of the United States dollar, as all export sales require payment in USD. The company had no foreign exchange contracts outstanding[144] Item 4. Controls and Procedures Confirms effectiveness of disclosure controls and procedures, noting no material changes in internal control - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[146] - No material changes in internal control over financial reporting occurred during the quarter ended December 31, 2019[147] PART II – OTHER INFORMATION Item 1. Legal Proceedings States no material changes in legal proceedings have occurred since the prior Annual Report on Form 10-K - No material changes in legal and regulatory claims or proceedings have occurred since the last Annual Report on Form 10-K[150] Item 1A. Risk Factors Indicates no material changes in risk factors since disclosure in its prior Annual Report on Form 10-K - No material changes in risk factors have occurred since the last Annual Report on Form 10-K[151] Item 6. Exhibits Lists exhibits filed with the Quarterly Report on Form 10-Q, including officer certifications and XBRL documents - Exhibits include certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 from the Principal Executive Officer and Principal Financial Officer[153] - XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, and Presentation Linkbase Documents are also filed[153]