UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended |
|
| |
|
OR | |
|
| |
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to |
|
| |
|
Commission file number |
(Exact name of registrant as specified in its charter)
|
|
| |||
|
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |||
|
| ||||
|
| ||||
|
(Address of principal executive offices) | ||||
|
| ||||
|
( | ||||
|
(Registrant’s telephone number, including area code) | ||||
|
Securities registered pursuant to Section 12(b) of the Act: | ||
|
| ||
|
Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
|
|
|
|
|
| ||
|
Not Applicable | ||
|
(Former name, former address and former fiscal year, if changed since last report) | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: Common Stock, $.025 par value per share –
|
Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations |
18 |
|
Item 3.Quantitative and Qualitative Disclosures About Market Risk |
27 |
|
Item 4.Controls and Procedures |
27 |
|
PART II – OTHER INFORMATION | |
|
Item 1.Legal Proceedings |
28 |
|
Item 1A.Risk Factors |
28 |
|
Item 6.Exhibits |
29 |
|
Signatures |
30 |
PART I—FINANCIAL INFORMATION
Item 1.Financial Statements.
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data) (Unaudited)
|
For the three months ended September 30, | ||||||||
|
2022 |
2021 | |||||||
|
Revenues |
$ |
|
$ |
| ||||
|
Cost of sales |
|
| ||||||
|
Gross profit |
|
| ||||||
|
Selling, general and administrative expenses |
|
| ||||||
|
Operating income |
|
| ||||||
|
Interest expense, net |
|
| ||||||
|
Income before income taxes |
|
| ||||||
|
Provision for income taxes |
|
| ||||||
|
| ||||||||
|
Net income |
$ |
|
$ |
| ||||
|
| ||||||||
|
Net earnings per share – basic |
$ |
|
$ |
| ||||
|
| ||||||||
|
Net earnings per share – diluted |
$ |
|
$ |
| ||||
See Notes to Condensed Consolidated Financial Statements
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
|
ASSETS | ||||||||
|
September 30, 2022 (Unaudited) |
June 30, 2022 | |||||||
|
Current assets | ||||||||
|
Cash |
$ |
|
$ |
| ||||
|
Accounts receivable, net of allowance for doubtful accounts of $ |
|
| ||||||
|
Inventories, net |
|
| ||||||
|
Vendor deposits |
|
| ||||||
|
Contract assets |
|
| ||||||
|
Other current assets |
|
| ||||||
|
Total current assets |
|
| ||||||
|
|
| |||||||
|
Equipment and improvements, net |
|
| ||||||
|
Operating lease assets |
|
| ||||||
|
Intangible assets, net |
|
| ||||||
|
Goodwill |
|
| ||||||
|
Other assets |
|
| ||||||
|
|
| |||||||
|
Total assets |
$ |
|
$ |
| ||||
See Notes to Condensed Consolidated Financial Statements
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
|
September 30, 2022 (Unaudited) |
June 30, 2022 | |||||||
|
Current liabilities | ||||||||
|
Accounts payable and accrued expenses |
$ |
|
$ |
|
| |||
|
Accrued employee expenses |
|
|
|
| ||||
|
Customer deposits |
|
|
|
| ||||
|
Contract liabilities |
|
|
|
| ||||
|
Current portion of operating lease liabilities |
|
|
|
| ||||
|
Total current liabilities |
|
|
|
| ||||
|
|
|
| ||||||
|
Deferred tax liabilities, net |
|
|
|
| ||||
|
Long-term operating lease liabilities |
|
|
|
| ||||
|
Long-term debt, net |
|
|
|
| ||||
|
|
|
| ||||||
|
Total liabilities |
|
|
|
| ||||
|
|
|
| ||||||
|
Commitments and contingencies (Note 11) |
|
| ||||||
|
|
|
| ||||||
|
Shareholders’ equity |
|
| ||||||
|
Preferred stock, $ |
|
|
|
| ||||
|
Common stock, $. |
|
|
|
| ||||
|
Additional paid-in capital |
|
|
|
| ||||
|
Treasury stock, |
( |
) |
|
( |
) | |||
|
Retained earnings |
|
|
|
| ||||
|
Total shareholders’ equity |
|
|
|
| ||||
|
Total liabilities and shareholders’ equity |
$ |
|
$ |
|
| |||
See Notes to Condensed Consolidated Financial Statements
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
(In thousands, except share data) (Unaudited)
|
Three months ended September 30, 2022 | ||||||||||||||||||||||||||||
|
Common Stock |
Additional Paid-in |
Treasury Stock |
Retained | |||||||||||||||||||||||||
|
Shares |
Amount |
Capital |
Shares |
Cost |
Earnings |
Total | ||||||||||||||||||||||
|
Balance at June 30, 2022 |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
| |||
|
| ||||||||||||||||||||||||||||
|
Stock compensation |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net income |
- |
|
|
- |
|
|
| |||||||||||||||||||||
|
Balance at September 30, 2022 |
|
$ |
|
$ |
|
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||||||
|
Three months ended September 30, 2021 | ||||||||||||||||||||||||||||
|
Common Stock |
Additional Paid-in |
Treasury Stock |
Retained | |||||||||||||||||||||||||
|
Shares |
Amount |
Capital |
Shares |
Cost |
Earnings |
Total | ||||||||||||||||||||||
|
Balance at June 30, 2021 |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
|
$ |
|
| ||
|
| ||||||||||||||||||||||||||||
|
Stock compensation |
|
|
|
|
|
|
| |||||||||||||||||||||
|
| ||||||||||||||||||||||||||||
|
Net income |
- |
|
|
- |
|
|
| |||||||||||||||||||||
|
Balance at September 30, 2021 |
|
$ |
|
$ |
|
|
$ |
( |
) |
$ |
|
$ |
| |||||||||||||||
See Notes to Condensed Consolidated Financial Statements
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
|
For the three months ended | ||||||||
|
September 30, 2022 |
September 30, 2021 | |||||||
|
Operating activities: | ||||||||
|
Net income |
$ |
|
$ |
| ||||
|
Adjustments to reconcile net income to net cash used by operating activities: | ||||||||
|
Depreciation and amortization |
|
| ||||||
|
Amortization of debt discount |
|
| ||||||
|
Provision for bad debt expense |
|
| ||||||
|
Non-cash lease expense |
( |
) |
| |||||
|
Stock compensation |
|
| ||||||
|
Inventory reserve |
( |
) |
( |
) | ||||
|
(Benefit) provision for deferred income taxes |
|
( |
) | |||||
|
Other |
( |
) |
( |
) | ||||
|
(Increase) decrease in operating assets: | ||||||||
|
Accounts receivable |
( |
) |
( |
) | ||||
|
Inventories |
( |
) |
( |
) | ||||
|
Vendor deposits |
( |
) |
( |
) | ||||
|
Contract assets |
( |
) |
| |||||
|
Other assets |
( |
) |
( |
) | ||||
|
Increase (decrease) in operating liabilities: | ||||||||
|
Accounts payable and accrued expenses |
|
( |
) | |||||
|
Accrued employee expenses |
|
( |
) | |||||
|
Customer deposits |
( |
) |
| |||||
|
Contract liabilities |
( |
) |
( |
) | ||||
|
Net cash used by operating activities |
( |
) |
( |
) | ||||
|
Investing activities: | ||||||||
|
Capital expenditures |
( |
) |
( |
) | ||||
|
Cash paid for acquisitions, net of cash acquired |
( |
) |
| |||||
|
Net cash used by investing activities |
( |
) |
( |
) | ||||
|
Financing activities: | ||||||||
|
Proceeds from long-term debt |
|
| ||||||
|
Debt repayments |
( |
) |
( |
) | ||||
|
Net cash provided by financing activities |
|
| ||||||
|
Net decrease in cash |
( |
) |
( |
) | ||||
|
Cash at beginning of period |
|
| ||||||
|
Cash at end of period |
$ |
|
$ |
| ||||
See Notes to Condensed Consolidated Financial Statements
EVI Industries, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands) (Unaudited)
|
For the three months ended | ||||||||
|
September 30, 2022 |
September 30, 2021 | |||||||
|
Supplemental disclosures of cash flow information: | ||||||||
|
Cash paid during the period for interest |
$ |
|
$ |
| ||||
|
Cash paid during the period for income taxes |
$ |
|
$ |
| ||||
See Notes to Condensed Consolidated Financial Statements
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note (1) - General: The accompanying unaudited condensed consolidated financial statements include the accounts of EVI Industries, Inc. and its subsidiaries (the “Company”). All material intercompany balances and transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial statements and the instructions to Form 10-Q and Article 10 of Regulation S-X related to interim period financial statements. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include certain information and footnotes required by GAAP for complete financial statements. However, in management’s opinion, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring accruals and adjustments) which are necessary in order to state fairly the Company’s results of operations, financial position, shareholders’ equity and cash flows as of and for the periods presented. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year or any other future period. The unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes, including the Summary of Significant Accounting Policies, included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. The June 30, 2022 balance sheet information contained herein was derived from the Company’s audited consolidated financial statements as of that date included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The estimates and assumptions made may not prove to be correct, and actual results could differ from the estimates.
The Company, through its wholly-owned subsidiaries, is a value-added distributor, and provides advisory and technical services. Through its vast sales organization, the Company provides its customers with planning, designing, and consulting services related to their commercial laundry operations. The Company sells and/or leases its customers commercial laundry equipment, specializing in washing, drying, finishing, material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers, the Company sells related parts and accessories. Additionally, through the Company’s robust network of commercial laundry technicians, the Company provides its customers with installation, maintenance, and repair services.
The Company’s customers include government, institutional, industrial, commercial and retail customers. Product purchases made by customers range from parts and accessories, to single or multiple units of equipment, to large complex systems. The Company also provides its customers with the services described above.
The Company’s growth strategy includes organic growth initiatives and business acquisitions pursuant to the Company’s “buy-and-build” growth strategy, which was implemented in 2015.
The COVID-19 pandemic has negatively impacted, and may continue to negatively impact, the Company’s business and results. See “Management’s Discussion and Analysis of Financial Conditions and Results of Operations” included as Item 2 of this Quarterly Report on Form 10-Q for additional information regarding the impact of, and uncertainties surrounding, the COVID-19 pandemic.
Note (2) – Summary of Significant Accounting Policies: There have been no material changes to the Company’s significant accounting policies from those described in Note 2 to the Company’s audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Note (3) – Recently Issued Accounting Guidance: In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), which will change the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other specified instruments, entities will be required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard will also require enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The guidance must be applied
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
using a cumulative-effect transition method. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022, and for interim periods within those fiscal years (the fiscal year ending June 30, 2024 for the Company), with early adoption permitted. The Company is currently evaluating the impact that adopting this guidance may have on its consolidated financial statements.
Other than as described above, management does not believe that accounting standards and updates which have been issued but are not yet effective will have a material impact on the Company’s consolidated financial statements upon adoption.
Note (4) – Acquisitions:
On September 1, 2022, the Company completed the acquisitions of Aldrich Clean-Tech Equipment Corp. (“ACT”), a Massachusetts-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry, and K&B Laundry Service, LLC (“K&B”), a North Carolina-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry. The total consideration for these two acquisitions consisted of $
Note (5) - Earnings Per Share: The Company computes earnings per share using the two-class method. The two-class method of computing earnings per share is an earnings allocation formula that determines earnings per share for common stock and any participating securities according to dividends declared (whether paid or unpaid) and participation rights in undistributed earnings. Shares of the Company’s common stock subject to unvested restricted stock awards and restricted stock units are considered participating securities because they contain a non-forfeitable right to cash dividends (in the case of restricted stock awards) or dividend equivalents (in the case of restricted stock units) paid prior to vesting or forfeiture, if any, irrespective of whether the awards or units ultimately vest. Basic and diluted earnings per share for the three months ended September 30, 2022 and 2021 are computed as follows (in thousands, except per share data):
|
For the three months ended September 30, | |||||||
|
2022 (Unaudited) |
2021 (Unaudited) | ||||||
|
| |||||||
|
Net income |
$ |
|
$ |
| |||
|
Less: distributed and undistributed income allocated to unvested restricted common stock |
|
| |||||
|
Net income allocated to EVI Industries, Inc. shareholders |
$ |
|
$ |
| |||
|
Weighted average shares outstanding used in basic earnings per share |
|
| |||||
|
Dilutive common share equivalents |
|
| |||||
|
Weighted average shares outstanding used in diluted earnings per share |
|
| |||||
|
Basic earnings per share |
$ |
|
$ |
| |||
|
Diluted earnings per share |
$ |
|
$ |
| |||
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
At September 30, 2022 and 2021, other than
Note (6) - Debt: Long-term debt as of September 30, 2022 and June 30, 2022 are as follows (in thousands):
|
September 30, 2022 |
June 30, 2022 | |||||||
|
Revolving credit facility |
$ |
|
$ |
| ||||
|
Less: unamortized discount and deferred financing costs |
( |
) |
( |
) | ||||
|
Total long-term debt, net |
$ |
|
$ |
| ||||
On November 2, 2018, the Company entered into a syndicated credit agreement (the “Credit Agreement”) for a
Prior to the amendment described below, borrowings (other than swingline loans) under the Credit Agreement accrued interest at a rate, at the Company’s election at the time of borrowing, equal to (a)
On May 6, 2022, the Company entered into an amendment to the Credit Agreement. The amendment amended the Credit Agreement to, among other things, extend the maturity date from
The Credit Agreement contains certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage ratios. The Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase shares and enter into transactions with affiliates. At September 30, 2022, the Company was in compliance with its covenants under the Credit Agreement and $
The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed, jointly and severally, by certain of the Company’s subsidiaries.
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Note (7) - Leases:
Company as Lessee
As of September 30, 2022, the Company had
The following table provides details of the Company’s future minimum lease payments under operating lease liabilities recorded on the Company’s condensed consolidated balance sheet as of September 30, 2022. The table below does not include commitments that are contingent on events or other factors that are currently uncertain or unknown.
|
Fiscal years ending June 30, |
Total Operating Lease Obligations (in thousands) | |||
|
2023 (remainder of) |
$ |
|
| |
|
2024 |
|
| ||
|
2025 |
|
| ||
|
2026 |
|
| ||
|
2027 |
|
| ||
|
Thereafter |
|
| ||
|
Total minimum lease payments |
$ |
|
| |
|
Less: amounts representing interest |
|
| ||
|
Present value of minimum lease payments |
$ |
|
| |
|
Less: current portion |
|
| ||
|
Long-term portion |
$ |
|
| |
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
The table below presents additional information related to the Company’s operating leases (in thousands):
|
Three months ended September 30, | ||||||||
|
2022 |
2021 | |||||||
|
Operating lease cost |
| |||||||
|
Operating lease cost (1) |
$ |
|
|
$ |
|
| ||
|
Short-term lease cost (1) |
|
|
|
| ||||
|
Variable lease cost (1) |
|
|
|
| ||||
|
Total lease cost |
$ |
|
|
$ |
|
| ||
|
| ||
|
(1) |
|
|
The table below presents lease-related terms and discount rates as of September 30, 2022:
|
September 30, 2022 | ||
|
Weighted average remaining lease terms | ||
|
Operating leases |
| |
|
Weighted average discount rate | ||
|
Operating leases |
|
The table below presents supplemental cash flow information related to the Company’s long-term operating lease liabilities for the three months ended September 30, 2022 and 2021 (in thousands):
|
Three months ended September 30, | ||||||||
|
2022 |
2021 | |||||||
|
Cash paid for amounts included in the measurement of lease liabilities: |
$ |
|
|
$ |
|
| ||
|
Operating lease right-of-use assets obtained in exchange for operating lease liabilities: |
$ |
|
|
$ |
|
| ||
Company as Lessor
The Company derives a portion of its revenue from equipment leasing arrangements. Such arrangements provide for monthly payments covering the equipment provided, maintenance, and interest. These arrangements meet the criteria to be accounted for as sales type leases. Accordingly, revenue from the provision of the equipment is recognized upon delivery of the equipment and its acceptance by the customer. Upon the recognition of such revenue, an asset is established for the investment in sales type leases. Maintenance revenue and interest are recognized monthly over the lease term.
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
The future minimum lease payments receivable for sales type leases are as follows (in thousands):
|
Fiscal years ending June 30, |
Total Minimum Lease Payments Receivable |
Amortization of Unearned Income |
Net Investment in Sales Type Leases | |||||||||
|
2023 (remainder of) |
$ |
|
$ |
|
$ |
|
| |||||
|
2024 |
|
|
|
| ||||||||
|
2025 |
|
|
|
| ||||||||
|
2026 |
|
|
|
| ||||||||
|
2027 |
|
|
|
| ||||||||
|
Thereafter |
|
|
|
| ||||||||
|
$ |
|
| ||||||||||
|
* | ||||||||||||
The total net investments in sales type leases, including stated residual values, as of September 30, 2022 and June 30, 2022 was $
Note (8) - Income Taxes: Income taxes are recorded in the Company’s quarterly financial statements based on the Company’s estimated annual effective income tax rate, subject to adjustment for discrete events, should they occur.
As of September 30, 2022 and June 30, 2022, the Company had net deferred tax liabilities of approximately $
The Company follows ASC Topic 740-10-25, “Accounting for Uncertainty in Income Taxes” (“ASC 740”). ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. During the three months ended September 30, 2022 and 2021, the Company’s accounting for income taxes in accordance with this standard did not result in a material adjustment to the Company’s provision for income taxes.
As of September 30, 2022, the Company was subject to potential federal and state tax examinations for the tax years 2018 through 2021.
Note (9) – Equity Plans:
Equity Incentive Plan
In November 2015, the Company’s stockholders approved the Company’s 2015 Equity Incentive Plan (the “Plan”). During December 2020, the Company’s stockholders approved an amendment to the Plan to
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
increase the number of shares of the Company’s common stock authorized for issuance pursuant to awards granted under the Plan to
During the three months ended September 30, 2022, restricted stock awards of a total of
For the three months ended September 30, 2022, non-cash share-based compensation expense related to awards granted under the Plan totaled $
As of September 30, 2022, the Company had $
The following is a summary of non-vested restricted stock activity as of and for the three months ended September 30, 2022:
|
Restricted Stock Awards |
Restricted Stock Units | |||||||||||||||
|
Shares |
Weighted- Average Grant Date Fair Value |
Shares |
Weighted-Average Grant Date Fair Value | |||||||||||||
|
Non-vested awards or units outstanding at June 30, 2022 |
|
$ |
|
|
$ |
|
| |||||||||
|
Granted |
|
|
|
|
| |||||||||||
|
Vested |
|
|
|
|
| |||||||||||
|
Forfeited |
|
|
( |
) |
|
| ||||||||||
|
Non-vested awards or units outstanding at September 30, 2022 |
|
$ |
|
|
$ |
|
| |||||||||
Employee Stock Purchase Plan
During 2017, the Company’s stockholders approved the Company’s 2017 Employee Stock Purchase Plan, which, subject to the terms of the plan, allows eligible employees the opportunity to purchase shares of the Company’s common stock at a
Note (10) – Transactions with Related Parties: Certain of the Company’s subsidiaries lease warehouse and office space from one or more of the principals or former principals of those subsidiaries. These leases include the following:
During , the Company’s wholly-owned subsidiary, Western State Design, Inc. (“Western State Design”), entered into a lease agreement pursuant to which it leases
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
Strategy of the Company, and Tom Marks, Executive Vice President, Business Development and President of the West Region of the Company. The lease had an initial term of and provides for two successive three-year renewal terms at the option of the Company. Monthly base rental payments were $
During , the Company’s wholly-owned subsidiary, Tri-State Technical Services, LLC (“Tri-State”), entered into lease agreements pursuant to which it leases a total of
During , the Company’s wholly-owned subsidiary, AAdvantage Laundry Systems, LLC (“AAdvantage”), entered into a lease agreement pursuant to which it leases a total of
During , the Company’s wholly-owned subsidiary, Scott Equipment, LLC (“Scott Equipment”), entered into lease agreements pursuant to which it leases a total of
During , the Company’s wholly-owned subsidiary, PAC Industries, LLC (“PAC Industries”), entered into two lease agreements pursuant to which it leases a total of
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
During , the Company’s wholly-owned subsidiary, Yankee Equipment Systems, LLC (“Yankee Equipment Systems”), entered into a lease agreement pursuant to which it leases a total of
During , the Company’s wholly-owned subsidiary, Consolidated Laundry Equipment, LLC (“Consolidated Laundry Equipment”), entered into two lease agreements pursuant to which it leases a total of
Note (11) – Commitments and Contingencies: In the ordinary course of business, certain of the Company’s contracts require the Company to provide performance and payment bonds related to projects in process. These bonds are intended to provide a guarantee to the customer that the Company will perform under the terms of the contract and that the Company will pay subcontractors and vendors. If the Company fails to perform under the contract or pay subcontractors and vendors, the customer may demand that the surety make payments or provide services under the bond. The Company is required to reimburse the surety for expenses or outlays it incurs. At September 30, 2022 and June 30, 2022, no such performance or payment bonds were outstanding.
The Company may from time to time become subject to litigation and other legal proceedings. Litigation and other legal proceedings may require the Company to incur significant expenses, including those relating to legal and other professional fees, as well as damages or other payments. Litigation and other legal proceedings are inherently uncertain, and adverse outcomes in litigation or other legal proceedings could adversely affect the Company’s financial condition, cash flows, and operating results.
Note (12) – Goodwill: The changes in the carrying amount of goodwill are as follows (in thousands):
|
Balance at June 30, 2022 |
$ |
| ||
|
Goodwill from acquisitions (1) |
| |||
|
Working capital adjustments (2) |
| |||
|
Balance at September 30, 2022 |
$ |
|
|
(1) |
|
|
(2) |
|
Note (13) – Subsequent Events:
On November 1, 2022, the Company, indirectly through a wholly-owned subsidiary, acquired substantially all of the assets of Wholesale Commercial Equipment Company SE, LLC (“Wholesale Commercial Equipment”), an Alabama-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry. In connection with the transaction, the Company, indirectly through its wholly-owned subsidiary, also assumed certain of the liabilities of Wholesale Commercial Equipment. The consideration paid by the Company in connection with the transaction was not material to the Company on a consolidated basis. The financial condition and results of operations of Wholesale Commercial Equipment subsequent to the November 1, 2022 closing date of the transaction will be included in the Company’s consolidated financial statements commencing with the quarter ending December 31, 2022.
17
| Item 2. | Management’s Discussion and Analysis of Financial Conditions and Results of Operations. |
Forward Looking Statements
Certain statements in this Quarterly Report on Form 10-Q are “forward looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report on Form 10-Q, words such as “may,” “should,” “could,” “seek,” “believe,” “expect,” “anticipate,” “estimate,” “project,” “intend,” “strategy” and similar expressions are intended to identify forward looking statements. Forward looking statements may relate to, among other things, events, conditions and trends that may affect the future plans, operations, business, strategies, operating results, financial position and prospects of the Company. Forward looking statements are subject to a number of known and unknown risks and uncertainties that may cause actual results, trends, performance or achievements of the Company, or industry trends and results, to differ materially from the future results, trends, performance or achievements expressed or implied by such forward looking statements. These risks and uncertainties include, among others, those associated with: general economic and business conditions in the United States and other countries where the Company operates or where the Company’s customers and suppliers are located; industry conditions and trends; credit market volatility; risks related to supply chain delays and disruptions and the impact they may have on the Company’s business and results, including the Company’s ability to deliver products and services to its customers on a timely basis; risks relating to inflation, including the current inflationary trend, and the impact of inflation on the Company’s costs and its ability to increase the price of its products and services to offset such costs, and on the market for the Company’s products and services; risks related to labor shortages and increases in the costs of labor, and the impact thereof on the Company, including its ability to deliver or service products or otherwise meet customers’ expectations; risks relating to the COVID-19 pandemic and the impact thereof on the Company and its business, financial condition, liquidity and results and on the Company’s suppliers and customers, including risks related to potential audits of the loans received by the Company and certain of its subsidiaries under the Payroll Protection Program notwithstanding the previous forgiveness of the loans, and risks associated with vaccine mandates, including the potential loss of employees, fines for noncompliance and loss of, or future inability to secure, certain contracts, including with the federal government; risks associated with international relations and international hostilities, including actions of foreign governments and the impact thereof on economic conditions, including supply chain constraints and inflationary trends; the Company’s ability to implement its business and growth strategies and plans, including changes thereto; risks and uncertainties associated with the Company’s ”buy-and-build” growth strategy, including, without limitation, that the Company may not be successful in identifying or consummating acquisitions or other strategic transactions, integration risks, risks related to indebtedness incurred by the Company in connection with the financing of acquisitions, dilution experienced by the Company’s existing stockholders as a result of the issuance of shares of the Company’s common stock in connection with acquisitions, risks related to the business, operations and prospects of acquired businesses, risks that suppliers of the acquired business may not consent to the transaction or otherwise continue its relationship with the acquired business following the transaction and the impact that the loss of any such supplier may have on the results of the Company and the acquired business, risks that the Company’s goals or expectations with respect to acquisitions and other strategic transactions may not be met, and risks related to the accounting for acquisitions; risks relating to the impact of pricing concessions and other measures which the Company may take from time to time in connection with its expansion and pursuit of market share growth, including that they may not be successful and may adversely impact the Company’s gross margin and other financial results; technology changes; competition, including the Company’s ability to compete effectively and the impact that competition may have on the Company and its results, including the prices which the Company may charge for its products and services and on the Company’s profit margins, and competition for qualified employees; to the extent applicable, risks relating to the Company’s ability to enter into and compete effectively in new industries, as well as risks and trends related to those industries; risks relating to the Company’s relationships with its principal suppliers and customers, including the impact of the loss of any such relationship; risks that equipment sales may not result in the ancillary benefits anticipated, including that they may not lead to increases in customers (or a stronger relationship with customers) or higher gross margin sales of parts,
18
accessories, supplies, and technical services related to the equipment, and the risk that the benefit of lower gross margin equipment sales under longer-term contracts will not outweigh the possible short-term impact to gross margin; the risk that the Company’s service operations may not expand to the extent anticipated, or at all; risks related to the Company’s indebtedness; the availability, terms and deployment of debt and equity capital if needed for expansion or otherwise; changes in, or the failure to comply with, government regulation, including environmental regulations; litigation risks, including the costs of defending litigation and the impact of any adverse ruling; the availability and cost of inventory purchased by the Company; the relative value of the United States dollar to currencies in the countries in which the Company’s customers, suppliers and competitors are located; risks relating to the recognition of revenue, including the amount and timing thereof (including potential delays resulting from delays in installation or in receiving required supplies) and that orders in the Company’s backlog may not be fulfilled as or when expected; risks related to the adoption of new accounting standards and the impact it may have on the Company’s financial statements and results; risks that the Company’s decentralized operating model, and that product, end-user and geographic diversity, may not result in the benefits anticipated and may change over time; risks related to organic growth initiatives and market share and other growth strategies, including that they may not result in the benefits anticipated; risks that investments, initiatives and expenses, including, without limitation, investments in acquired businesses and modernization initiatives, expenses associated with the Company’s implementation of its enterprise resource planning system, and other investments, initiatives and expenses, may not result in the benefits anticipated; and other economic, competitive, governmental, technological and other risks and factors discussed in the Company’s filings with the SEC, including, without limitation, those described in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022. Many of these risks and factors are beyond the Company’s control. Further, past performance and perceived trends may not be indicative of future results. The Company cautions that the foregoing factors are not exclusive. The reader should not place undue reliance on any forward looking statement, which speaks only as of the date made. The Company does not undertake to, and specifically disclaims any obligation to, update or supplement any forward looking statement, whether as a result of changes in circumstances, new information, subsequent events or otherwise, except as may be required by law.
Company Overview
EVI Industries, Inc., through its wholly-owned subsidiaries (collectively “EVI” or the “Company”), is a value-added distributor, and provides advisory and technical services. Through its vast sales organization, the Company provides its customers with planning, designing, and consulting services related to their commercial laundry operations. The Company sells and/or leases its customers commercial laundry equipment, specializing in washing, drying, finishing, material handling, water heating, power generation, and water reuse applications. In support of the suite of products it offers, the Company sells related parts and accessories. Additionally, through the Company’s robust network of commercial laundry technicians, the Company provides its customers with installation, maintenance, and repair services.
The Company’s customers include government, institutional, industrial, commercial and retail customers. Product purchases made by customers range from parts and accessories, to single or multiple units of equipment, to large complex systems. The Company also provides its customers with the services described above.
The Company’s operating expenses consist primarily of (a) selling, general and administrative expenses, which are comprised primarily of salaries, and commissions and marketing expenses that are variable and correlate to changes in sales, (b) expenses related to the operation of warehouse facilities, including a fleet of installation and service vehicles, and facility rent, which are payable mostly under non-cancelable operating leases, and (c) operating expenses at the parent company, including compensation expenses, fees for professional services, other expenses associated with being a public company, and expenses in furtherance of the Company’s “buy-and-build” growth strategy.
19
Growth Strategy
During 2015, the Company implemented a “buy-and-build” growth strategy. The “buy” component of the strategy includes the consideration and pursuit of acquisitions and other strategic transactions which management believes would complement the Company’s existing business or otherwise offer growth opportunities for, or benefit, the Company. The Company generally seeks to structure acquisitions to include both cash and stock consideration. Acquisitions are effected through a wholly-owned subsidiary which acquires the business or assets of the acquired company, whether by an asset purchase or merger, and operates the acquired business following the transaction. In connection with each transaction, the Company, indirectly through its applicable wholly-owned subsidiary, also assumes certain of the liabilities of the acquired business. The financial position, including assets and liabilities, and results of operations of the acquired businesses following the respective closing dates of the acquisitions are included in the Company’s consolidated financial statements. As described in greater detail in Note 4 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, on September 1, 2022, the Company acquired Aldrich Clean-Tech Equipment Corp. (“ACT”), a Massachusetts-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry, and K&B Laundry Service, LLC (“K&B”), a North Carolina-based distributor of commercial, industrial, and vended laundry products and provider of installation and maintenance services to the new and replacement segments of the commercial, industrial and vended laundry industry. The financial condition and results of operations of ACT and K&B subsequent to the September 1, 2022 closing date of each acquisition are included in the Company’s consolidated financial statements for the quarter ending September 30, 2022. See also Note 13 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for information regarding the acquisition of Wholesale Commercial Equipment Company SE, LLC which was consummated on November 1, 2022.
The “build” component of the Company’s “buy-and-build” growth strategy involves implementing a growth culture at acquired businesses based on the exchange of ideas and business concepts among the management teams of the Company and the acquired businesses as well as through certain initiatives, which may include investments in additional sales and service personnel, new product lines, enhanced service operations and capabilities, new and improved facilities, and advanced technologies.
The Company pursues market share growth using a variety of strategies aimed at increasing the installed base of the wide range of commercial laundry equipment the Company represents. Certain market share growth tactics may, from time to time, result in lower gross margins. However, the Company believes that a greater installed base of equipment strengthens the Company’s existing customer relationships and may lead to increases in the total number of customers, consequently creating a larger and stronger customer base to which the Company may sell products and services. These may include certain higher margin products and services and any additional products and services which the Company may offer or sell from time to time as a result of any business acquisitions, the sale or lease of complementary products, and expansion of its service operations. From time to time, the Company also enters into longer-term contracts, including to fulfill large complex laundry projects for divisions of the federal government, where the nature of, and competition for, such contracts may result in a lower gross margin as compared to other equipment sales. Despite the potential for a lower gross margin from such longer-term contracts, the Company believes that the long-term benefit from the increase in its installed equipment will outweigh the possible short-term impact to gross margin.
Further, as a value-added distributor and a provider of technical services in the commercial laundry industry, the Company partners with its customers to plan, design, install, and maintain their commercial laundry operations. The nature of the Company’s business not only requires an experienced and well-trained sales organization to procure customer orders, but also requires proper, timely, and cost-effective installation ranging from single units of equipment to complex multimillion dollar laundry systems. Such
20
installations also require coordination and collaboration with the Company’s customers and any third parties they may retain. Consequently, the recognition of revenue and profit may from time to time be impacted by delays in construction and/or the preparation of customer facilities for the installation of purchased commercial laundry equipment and systems. This may result in decreased revenue and profit in a current period but a source of future revenue and profit through the ultimate fulfillment of the orders.
Impact of COVID-19 on the Company’s Business
The COVID-19 pandemic has negatively impacted, and may continue to negatively impact, the Company’s business and results. Specifically, beginning at the end of the quarter ended March 31, 2020, the COVID-19 pandemic and accompanying economic disruption caused delays and declines in the placement of customer orders, the completion of equipment and parts installations, and the fulfillment of parts orders. Factors arising from the COVID-19 pandemic that have impacted, or may in the future negatively impact, the Company’s business and results, including sales and gross margin, include, but are not limited to: supply chain disruptions, which resulted in, and may continue to result in, delays in delivering products or services to the Company’s customers as well as increases in product costs; labor shortages and increases in the costs of labor; limitations on the ability of the Company’s employees to perform their work due to sickness or other impacts caused by the pandemic or local, state, federal or foreign orders that may restrict the Company’s operations or the operations of its customers, or require that employees be quarantined; limitations on the ability of carriers to deliver products to the Company’s facilities and customers; risks associated with vaccine mandates, including the potential loss of employees, fines for noncompliance and loss of, or future inability to secure, certain contracts, including with the federal government; adverse impacts of the pandemic on certain industries and customers of the Company which operate in those industries, including the hospitality industry; and potential decreased demand for products and services, including potential limitations on the ability of, or adverse changes in the desire of, the Company’s customers to conduct their business, purchase products and services, and pay for purchases on a timely basis or at all. Further, the Company may continue to experience adverse impacts to its business as a result of, among other things, any adverse impact that has occurred or may occur in the future in the economy or markets generally, and changes in customer or supplier behavior.
Recent Accounting Pronouncements
Refer to Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a description of Recently Issued Accounting Guidance.
Results of Operations
Three-Month Period Ended September 30, 2022 Compared to the Three-Month Period Ended September 30, 2021
Revenues
Revenues for the three-month period ended September 30, 2022 increased $19.7 million, or 31%, compared to the same period of the prior fiscal year. The increase in revenue is primarily attributable to continued improved conditions in connection with the recovery from the COVID-19 pandemic during the period and the completion during the period of projects previously delayed by the pandemic. Additionally, the increase in revenues was partially attributable to price increases established throughout the Company’s product lines and service offerings aimed at maintaining or increasing margins to cover incremental product and operating costs, as well as the revenues generated by the businesses acquired by the Company during fiscal
21
2022 (primarily Consolidated Laundry Equipment, Inc. and Central Equipment Company, LLC, which was acquired during February 2022) and the three-month period ended September 30, 2022.
Gross Profit
Gross profit for the three-month period ended September 30, 2022 increased $6.9 million, or 39%, compared to the same period of the prior fiscal year. The increase was primarily the result of increased revenues and more favorable product and customer mix. The increase is also attributable to the Company’s efforts to drive higher margin sales opportunities from promoting solution selling as a value-added distributor. This resulted in an increase in gross margins from 27.7% for the three-month period ended September 30, 2021 to 29.4% for the three-month period ended September 30, 2022.
Selling, General and Administrative Expenses
Operating expenses increased by approximately $5.2 million, or 34%, for the three-month period ended September 30, 2022 compared to the same period of the prior fiscal year. The increase is primarily attributable to (a) operating expenses of acquired businesses, including additional operating expenses at the acquired businesses in pursuit of future growth and in connection with the Company’s optimization initiatives, (b) increases in selling costs, including commissions, from increases in revenues during the period, and (c) increases in depreciation and amortization and stock compensation.
Interest Expense, Net
Interest expense for the three month period ended September 30, 2022 was $377,000 compared to $115,000 for the same period of the prior fiscal year. The increase in interest expense was attributable primarily to the increase in the average effective interest rate incurred on outstanding borrowings.
Income Taxes
The Company’s effective tax rate was 28.9% for the three-month period ended September 30, 2022 compared to 20.9% for the same period of the prior fiscal year. The increase in the effective tax rate is attributable to an increase in the net impact of permanent book-tax differences resulting primarily from nondeductible compensation.
Net Income
Net income for the three months ended September 30, 2022 was $2.8 million compared to net income of $2.0 million for the same period of the prior fiscal year. The increase in net income was attributable primarily to the increase in revenue and the resulting gross profit, partially offset by an increase in selling, general and administrative expenses, all as described in further detail above.
Consolidated Financial Condition
The Company’s total assets increased from $230.8 million at June 30, 2022 to $241.0 million at September 30, 2022. The increase in total assets was primarily attributable to an increase in current assets, as described below under “Liquidity and Capital Resources - Working Capital.” The Company’s total liabilities increased from $113.1 million at June 30, 2022 to $119.8 million at September 30, 2022, which was primarily attributable to an increase in accounts payable and accrued expenses and long-term debt, partially offset by a decrease in customer deposits. The increase in long-term debt was attributable to borrowings under the Company’s credit facility in excess of optional repayments. The changes in current liabilities, including the increase in accounts payable and accrued expenses and the decrease in customer deposits, are described under “Liquidity and Capital Resources - Working Capital” below.
22
Liquidity and Capital Resources
For the three-month period ended September 30, 2022, cash decreased by approximately $200,000 compared to a decrease of approximately $3.3 million during the three-month period ended September 30, 2021. The Company’s primary sources of cash are sales and borrowings under its credit facility. The Company’s primary uses of cash are purchases of the products sold by the Company, employee related costs, and the cash consideration paid in connection with business acquisitions.
Working Capital
Working capital increased from $30.8 million at June 30, 2022 to $41.7 million at September 30, 2022, primarily reflecting increases in inventory, accounts receivable and contract assets, and decreases in customer deposits, partially offset by increases in accounts payable and accrued expenses. The increase in inventory was primarily due to warehousing of inventory staged for fulfillment of contractual orders where either the customer is not ready to receive delivery of the product or only partial orders have been received from manufacturers as a result of continued supply chain constraints as well as increases in product costs. The increase in accounts receivable is due to increased sales and the timing of collections. The increase in contract assets is due in large part to the progress of certain large complex laundry projects for divisions of the federal government. The decrease in customer deposits was due primarily to fulfillment of certain orders which had been previously delayed in light of extended inventory lead times and supply chain constraints, as well as other delays, including construction or other delays which inhibited a customer’s ability to receive products, as described above. The increase in accounts payable and accrued expenses is due in large part to timing of vendor and other payments.
Cash Flows
The following table summarizes the Company’s cash flow activity for the three months ended September 30, 2022 and 2021 (in thousands):
|
Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash provided (used) by: | ||||||||
| Operating activities | $ | (6,205 | ) | $ | (10,436 | ) | ||
| Investing activities | $ | (1,995 | ) | $ | (848 | ) | ||
| Financing activities | $ | 8,000 | $ | 8,000 | ||||
The individual items contributing to cash flow changes for the periods presented are detailed in the unaudited condensed consolidated statements of cash flows included in Item 1 of this Quarterly Report on Form 10-Q.
Operating Activities
For the three months ended September 30, 2022, operating activities used cash of $6.2 million compared to $10.4 million of cash used by operating activities during the three months ended September 30, 2021. This $4.2 million decrease in cash used by operating activities was primarily attributable to changes in working capital and an increase in net income. The changes in working capital include increases in cash used from operating activities from changes in operating assets such as accounts receivable and from changes in operating liabilities such as accounts payable and accrued expenses, contract liabilities and accrued employee expenses, partially offset by decreases to the cash used by operating activities from changes in operating assets such as contract assets and from changes in operating liabilities such as customer deposits.
23
Investing Activities
Net cash used in investing activities increased $1.1 million to $2.0 million during the three months ended September 30, 2022 compared to $848,000 during the three months ended September 30, 2021. This $1.1 million increase was attributable primarily to an increase in cash used in connection with acquisitions, partially offset by a decrease in capital expenditures.
Financing Activities
For both the three months ended September 30, 2022 and 2021, financing activities provided cash of $8.0 million. The $8.0 million in cash provided by financing activities was attributable to proceeds from borrowings during both the three months ended September 30, 2022 and 2021 in excess of optional debt payments to fund changes in working capital in each such period.
Revolving Credit Agreement
On November 2, 2018, the Company entered into a syndicated credit agreement (the “Credit Agreement”) for a five-year revolving credit facility in the maximum aggregate principal amount of up to $100 million, with an accordion feature to increase the revolving credit facility by up to $40 million for a total of $140 million. A portion of the revolving credit facility is available for swingline loans of up to a sublimit of $5 million and for the issuance of standby letters of credit of up to a sublimit of $10 million.
Prior to the amendment described below, borrowings (other than swingline loans) under the Credit Agreement accrued interest at a rate, at the Company’s election at the time of borrowing, equal to (a) LIBOR plus a margin that ranged from 1.25% to 1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the one month LIBOR rate plus 100 basis points, plus a margin that ranged from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. Swingline loans accrued interest calculated at the base rate determined in accordance with clause (b) of the preceding sentence plus a margin that ranged from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. The Credit Agreement had an initial term of five years with a scheduled maturity date of November 2, 2023.
On May 6, 2022, the Company entered into an amendment to the Credit Agreement. The amendment amended the Credit Agreement to, among other things, extend the maturity date from November 2, 2023 to May 6, 2027 and, in connection with the phasing out of LIBOR, replace LIBOR with the Bloomberg Short-Term Bank Yield Index rate (the “BSBY rate”). As a result, borrowings (other than swingline loans) under the Credit Agreement bear interest, at a rate, at the Company’s election at the time of borrowing, equal to (a) the BSBY rate plus a margin that ranges between 1.25% and 1.75% depending on the Company’s Consolidated Leverage Ratio or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the BSBY rate plus 100 basis points (such highest rate, the “Base Rate”), plus a margin that ranges between 0.25% and 0.75% depending on the Consolidated Leverage Ratio. Swingline loans generally bear interest at the Base Rate plus a margin that ranges between 0.25% and 0.75% depending on the Consolidated Leverage Ratio.
The Credit Agreement contains certain covenants, including financial covenants requiring the Company to comply with maximum leverage ratios and minimum interest coverage ratios. The Credit Agreement also contains other provisions which may restrict the Company’s ability to, among other things, dispose of or acquire assets or businesses, incur additional indebtedness, make certain investments and capital expenditures, pay dividends, repurchase shares and enter into transactions with affiliates. At September 30, 2022, the Company was in compliance with its covenants under the Credit Agreement and $32.1 million was available to borrow under the revolving credit facility.
24
The obligations of the Company under the Credit Agreement are secured by substantially all of the assets of the Company and certain of its subsidiaries, and are guaranteed, jointly and severally, by certain of the Company’s subsidiaries.
The Company believes that its existing cash, anticipated cash from operations and funds available under the Company’s Credit Agreement will be sufficient to fund its operations and anticipated capital expenditures for at least the next twelve months and thereafter. The Company may also seek to raise funds through the issuance of equity and/or debt securities or the incurrence of additional secured or unsecured indebtedness, including in connection with acquisitions or other transactions pursued by the Company as part of its “buy-and-build” growth strategy.
Off-Balance Sheet Financing
The Company had no off-balance sheet financing arrangements within the meaning of Item 303(a)(4) of Regulation S-K at September 30, 2022.
Inflation
Inflation did not have a significant effect on the Company’s results during any of the reported periods. However, the Company faces risks relating to inflation, including the current inflationary trend, which may have an adverse impact on the market for the Company’s products and services, including that there is no assurance that the Company will be able to effectively increase the price of its products and services to offset increased costs.
Transactions with Related Parties
Certain of the Company’s subsidiaries lease warehouse and office space from one or more of the principals or former principals of those subsidiaries. These leases include the following:
During October 2016, the Company’s wholly-owned subsidiary, Western State Design, Inc. (“Western State Design”), entered into a lease agreement pursuant to which it leases 17,600 square feet of warehouse and office space from an affiliate of Dennis Mack, a director and Executive Vice President, Corporate Strategy of the Company, and Tom Marks, Executive Vice President, Business Development and President of the West Region of the Company. The lease had an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Monthly base rental payments were $12,000 during the initial term of the lease. The Company exercised its option to renew the lease for the first three-year renewal term, which commenced in October 2021. Base rent for the first renewal term is $19,000 per month. In addition to base rent, Western State Design is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Payments under this lease totaled $57,000 and $36,000 during the three months ended September 30, 2022 and 2021, respectively.
During October 2017, the Company’s wholly-owned subsidiary, Tri-State Technical Services, LLC (“Tri-State”), entered into lease agreements pursuant to which it leases a total of 81,000 square feet of warehouse and office space from an affiliate of Matt Stephenson, President of Tri-State. Monthly base rental payments total $21,000 during the initial terms of the leases. In addition to base rent, Tri-State is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $63,000 during each of the three months ended September 30, 2022 and 2021.
During February 2018, the Company’s wholly-owned subsidiary, AAdvantage Laundry Systems, LLC (“AAdvantage”), entered into a lease agreement pursuant to which it leases a total of 5,000 square feet of
25
warehouse and office space from an affiliate of Mike Zuffinetti, former Chief Executive Officer of AAdvantage. Monthly base rental payments are $4,000 during the initial term of this lease. In addition, during November 2018, AAdvantage entered into an additional lease agreement pursuant to which it leases warehouse and office space from an affiliate of Mike Zuffinetti. Monthly base rental payments under this lease were $26,000 initially. Pursuant to the lease agreement, on January 1, 2019, the lease expanded to cover additional warehouse space and, in connection therewith, monthly base rental payments under this lease increased to $36,000. In addition to base rent, AAdvantage is responsible under each of these leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under the leases described in this paragraph totaled approximately $120,000 during each of the three months ended September 30, 2022 and 2021.
During September 2018, the Company’s wholly-owned subsidiary, Scott Equipment, LLC (“Scott Equipment”), entered into lease agreements pursuant to which it leases a total of 18,000 square feet of warehouse and office space from an affiliate of Scott Martin, former President of Scott Equipment. Monthly base rental payments total $11,000 during the initial terms of the leases. In addition to base rent, Scott Equipment is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of five years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $35,000 during each of the three months ended September 30, 2022 and 2021.
During February 2019, the Company’s wholly-owned subsidiary, PAC Industries, LLC (“PAC Industries”), entered into two lease agreements pursuant to which it leases a total of 29,500 square feet of warehouse and office space from an affiliate of Frank Costabile, former President of PAC Industries, and Rocco Costabile, former Director of Finance of PAC Industries. Monthly base rental payments total $15,000 during the initial terms of the leases. In addition to base rent, PAC Industries is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of four years and provides for two successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $46,000 during each of the three months ended September 30, 2022 and 2021.
During November 2020, the Company’s wholly-owned subsidiary, Yankee Equipment Systems, LLC (“Yankee Equipment Systems”), entered into a lease agreement pursuant to which it leases a total of 12,500 square feet of warehouse and office space from an affiliate of Peter Limoncelli, President of Yankee Equipment Systems. Monthly base rental payments are $11,000 during the initial term of the lease. In addition to base rent, Yankee Equipment Systems is responsible under the lease for costs related to real estate taxes, utilities, maintenance, repairs and insurance. The lease has an initial term of three years and provides for three successive three-year renewal terms at the option of the Company. Payments under this lease totaled approximately $36,000 and $35,000 during the three months ended September 30, 2022 and 2021, respectively.
During February 2022, the Company’s wholly-owned subsidiary, Consolidated Laundry Equipment, LLC (“Consolidated Laundry Equipment”), entered into two lease agreements pursuant to which it leases a total of 20,300 square feet of warehouse and office space from an affiliate of William Kincaid, President of Consolidated Laundry Equipment. Monthly base rental payments total $20,000 during the initial terms of the leases. In addition to base rent, Consolidated Laundry Equipment is responsible under the leases for costs related to real estate taxes, utilities, maintenance, repairs and insurance. Each lease has an initial term of three years and provides for three successive three-year renewal terms at the option of the Company. Payments under these leases totaled approximately $60,000 during the three months ended September 30, 2022.
26
Critical Accounting Policies
In connection with the preparation of its financial statements, the Company makes estimates and assumptions, including those that affect the reported amounts of assets and liabilities, contingent assets and liabilities, and revenues and expenses during the reported periods. Estimates and assumptions made may not prove to be correct, and actual results may differ from the estimates. The accounting policies that the Company has identified as critical to its business operations and to an understanding of the Company’s financial statements remain unchanged from those described in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
Recently Issued Accounting Guidance
See Note 3 to the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for a description of recently issued accounting guidance.
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk. |
The Company’s indebtedness subjects the Company to interest rate risk. Interest rates are subject to the influence of economic conditions generally, both domestic and foreign, and also to the monetary and fiscal policies of the United States and its agencies, particularly the Federal Reserve. The nature and timing of any changes in such policies or general economic conditions and the effect they may have on the Company are unpredictable. The Company’s indebtedness may also have other important impacts on the Company, including that the Company will be required to utilize cash flow to service the debt, indebtedness may make the Company more vulnerable to economic downturns, and the Company’s indebtedness subjects the Company to covenants and may place restrictions on its operations and activities, including its ability to pay dividends and take certain other actions. As of September 30, 2022, interest on borrowings under the Company’s Credit Agreement accrued at a rate, at the Company’s election at the time of borrowing, equal to (a) the BSBY rate plus a margin that ranged from 1.25% to 1.75% depending on the Company’s consolidated leverage ratio, which is a ratio of consolidated funded indebtedness to consolidated earnings before interest, taxes, depreciation and amortization (EBITDA) (the “Consolidated Leverage Ratio”) or (b) the highest of (i) prime, (ii) the federal funds rate plus 50 basis points, and (iii) the BSBY rate plus 100 basis points, plus a margin that ranged from 0.25% to 0.75% depending on the Consolidated Leverage Ratio. As of September 30, 2022, the Company had approximately $36.0 million of outstanding borrowings under the Credit Agreement with a weighted average interest rate of 3.95%. Based on the amounts outstanding at September 30, 2022, a hypothetical 1% increase in daily interest rates would increase the Company’s annual interest expense by approximately $360,000.
All of the Company’s export sales require the customer to make payment in United States dollars. Accordingly, foreign sales may be affected by the strength of the United States dollar relative to the currencies of the countries in which the Company’s customers are located, as well as the strength of the economies of the countries in which the Company’s customers are located. The Company has, at times in the past, paid certain suppliers in Euros. The Company had no foreign exchange contracts outstanding at September 30, 2022 or June 30, 2022.
The Company’s cash is maintained in bank accounts which bear interest at prevailing interest rates. At September 30, 2022, bank deposits exceeded Federal Deposit Insurance Corporation limits.
| Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, management of the Company, with the participation of the Company’s principal executive officer and principal financial officer, evaluated the effectiveness of the Company’s “disclosure controls and procedures” (as defined in Rule 13a-15(e) and
27
15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s principal executive officer and principal financial officer concluded that, as of September 30, 2022, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act (a) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (b) is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. It should be noted that a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the Company’s periodic reports.
Changes in Internal Control over Financial Reporting
During the quarter ended September 30, 2022, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II—OTHER INFORMATION
| Item 1. | Legal Proceedings |
From time to time, the Company is involved in, or subject to, legal and regulatory claims, proceedings, demands or actions arising in the ordinary course of business. There have been no material changes with respect to such matters from the disclosure included in the “Legal Proceedings” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
| Item 1A. | Risk Factors |
There have been no material changes in the risk factors that the Company faces from those disclosed in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022.
28
| Item 6. | Exhibits. |
| Exhibit | |
| Number | Description |
| *31.01 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| *31.02 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| +32.01 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| +32.02 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
| 101.INS | XBRL Instance Document |
| 101.SCH | XBRL Taxonomy Extension Schema Document |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* Filed with this Quarterly Report on Form 10-Q.
+ Furnished with this Quarterly Report on Form 10-Q.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: November 8, 2022 | EVI Industries, Inc. | |
| By: | /s/ Robert H. Lazar | |
| Robert H. Lazar | ||
| Chief Financial Officer |
30