EVI Industries, Inc.
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.
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).
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 – 12,546,890 shares outstanding as of November 2, 2022.
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 |
|
$ |
83,428 |
|
|
$ |
63,741 |
|
Cost of sales |
|
|
58,923 |
|
|
|
46,102 |
|
Gross profit |
|
|
24,505 |
|
|
|
17,639 |
|
Selling, general and administrative expenses |
|
|
20,122 |
|
|
|
14,970 |
|
Operating income |
|
|
4,383 |
|
|
|
2,669 |
|
Interest expense, net |
|
|
377 |
|
|
|
115 |
|
Income before income taxes |
|
|
4,006 |
|
|
|
2,554 |
|
Provision for income taxes |
|
|
1,159 |
|
|
|
535 |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,847 |
|
|
$ |
2,019 |
|
|
|
|
|
|
|
|
|
|
Net earnings per share – basic |
|
$ |
0.20 |
|
|
$ |
0.15 |
|
|
|
|
|
|
|
|
|
|
Net earnings per share – diluted |
|
$ |
0.20 |
|
|
$ |
0.15 |
|
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 |
|
$ |
3,774 |
|
|
$ |
3,974 |
|
Accounts receivable, net of allowance for doubtful accounts of $1.7 million and $1.6 million, respectively |
|
|
44,320 |
|
|
|
43,014 |
|
Inventories, net |
|
|
54,244 |
|
|
|
49,359 |
|
Vendor deposits |
|
|
1,829 |
|
|
|
1,728 |
|
Contract assets |
|
|
5,368 |
|
|
|
1,519 |
|
Other current assets |
|
|
5,943 |
|
|
|
6,018 |
|
Total current assets |
|
|
115,478 |
|
|
|
105,612 |
|
|
|
|
|
|
|
|
|
|
Equipment and improvements, net |
|
|
12,941 |
|
|
|
13,033 |
|
Operating lease assets |
|
|
7,151 |
|
|
|
7,480 |
|
Intangible assets, net |
|
|
25,708 |
|
|
|
26,234 |
|
Goodwill |
|
|
71,714 |
|
|
|
71,039 |
|
Other assets |
|
|
8,054 |
|
|
|
7,370 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
241,046 |
|
|
$ |
230,768 |
|
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 |
|
$ |
42,213 |
|
|
$ |
42,026 |
|
Accrued employee expenses |
|
|
9,379 |
|
|
|
8,508 |
|
Customer deposits |
|
|
19,696 |
|
|
|
21,288 |
|
Contract liabilities |
|
|
- |
|
|
|
507 |
|
Current portion of operating lease liabilities |
|
|
2,471 |
|
|
|
2,518 |
|
Total current liabilities |
|
|
73,759 |
|
|
|
74,847 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities, net |
|
|
4,798 |
|
|
|
4,666 |
|
Long-term operating lease liabilities |
|
|
5,440 |
|
|
|
5,736 |
|
Long-term debt, net |
|
|
35,843 |
|
|
|
27,840 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
119,840 |
|
|
|
113,089 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ equity |
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value; authorized shares – 200,000; none issued and outstanding |
|
|
- |
|
|
|
- |
|
Common stock, $.025 par value; authorized shares - 20,000,000; 12,650,126 shares issued at September 30, 2022 and June 30, 2022, including shares held in treasury |
|
|
316 |
|
|
|
316 |
|
Additional paid-in capital |
|
|
98,224 |
|
|
|
97,544 |
|
Treasury stock, 127,801 shares at September 30, 2022 and June 30, 2022, at cost |
|
|
(3,070 |
) |
|
|
(3,070 |
) |
Retained earnings |
|
|
25,736 |
|
|
|
22,889 |
|
Total shareholders’ equity |
|
|
121,206 |
|
|
|
117,679 |
|
Total liabilities and shareholders’ equity |
|
$ |
241,046 |
|
|
$ |
230,768 |
|
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 |
|
|
12,650,126 |
|
|
$ |
316 |
|
|
$ |
97,544 |
|
|
|
127,801 |
|
|
$ |
(3,070 |
) |
|
$ |
22,889 |
|
|
$ |
117,679 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
- |
|
|
|
- |
|
|
|
680 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,847 |
|
|
|
2,847 |
|
Balance at September 30, 2022 |
|
|
12,650,126 |
|
|
$ |
316 |
|
|
$ |
98,224 |
|
|
|
127,801 |
|
|
$ |
(3,070 |
) |
|
$ |
25,736 |
|
|
$ |
121,206 |
|
|
|
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 |
|
|
12,399,137 |
|
|
$ |
310 |
|
|
$ |
90,501 |
|
|
|
120,706 |
|
|
$ |
(2,865 |
) |
|
$ |
18,794 |
|
|
$ |
106,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation |
|
|
- |
|
|
|
- |
|
|
|
479 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
2,019 |
|
|
|
2,019 |
|
Balance at September 30, 2021 |
|
|
12,399,137 |
|
|
$ |
310 |
|
|
$ |
90,980 |
|
|
|
120,706 |
|
|
$ |
(2,865 |
) |
|
$ |
20,813 |
|
|
$ |
109,238 |
|
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 |
|
$ |
2,847 |
|
|
$ |
2,019 |
|
Adjustments to reconcile net income to net cash used by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
1,446 |
|
|
|
1,236 |
|
Amortization of debt discount |
|
|
3 |
|
|
|
13 |
|
Provision for bad debt expense |
|
|
103 |
|
|
|
108 |
|
Non-cash lease expense |
|
|
(14 |
) |
|
|
100 |
|
Stock compensation |
|
|
680 |
|
|
|
479 |
|
Inventory reserve |
|
|
(136 |
) |
|
|
(31 |
) |
(Benefit) provision for deferred income taxes |
|
|
132 |
|
|
|
(162 |
) |
Other |
|
|
(36 |
) |
|
|
(14 |
) |
(Increase) decrease in operating assets: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(1,239 |
) |
|
|
(4,889 |
) |
Inventories |
|
|
(4,162 |
) |
|
|
(3,895 |
) |
Vendor deposits |
|
|
(101 |
) |
|
|
(43 |
) |
Contract assets |
|
|
(3,849 |
) |
|
|
222 |
|
Other assets |
|
|
(609 |
) |
|
|
(759 |
) |
Increase (decrease) in operating liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses |
|
|
113 |
|
|
|
(2,453 |
) |
Accrued employee expenses |
|
|
776 |
|
|
|
(318 |
) |
Customer deposits |
|
|
(1,652 |
) |
|
|
983 |
|
Contract liabilities |
|
|
(507 |
) |
|
|
(3,032 |
) |
Net cash used by operating activities |
|
|
(6,205 |
) |
|
|
(10,436 |
) |
Investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(771 |
) |
|
|
(848 |
) |
Cash paid for acquisitions, net of cash acquired |
|
|
(1,224 |
) |
|
|
- |
|
Net cash used by investing activities |
|
|
(1,995 |
) |
|
|
(848 |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
15,000 |
|
|
|
15,000 |
|
Debt repayments |
|
|
(7,000 |
) |
|
|
(7,000 |
) |
Net cash provided by financing activities |
|
|
8,000 |
|
|
|
8,000 |
|
Net decrease in cash |
|
|
(200 |
) |
|
|
(3,284 |
) |
Cash at beginning of period |
|
|
3,974 |
|
|
|
6,057 |
|
Cash at end of period |
|
$ |
3,774 |
|
|
$ |
2,773 |
|
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 |
|
$ |
371 |
|
|
$ |
98 |
|
Cash paid during the period for income taxes |
|
$ |
794 |
|
|
$ |
18 |
|
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 $1.2 million in cash, net of cash acquired, which the Company funded through borrowings under its credit facility. Fees and expenses related to these acquisitions, consisting primarily of legal and other professional fees, totaled approximately $102,000 and are classified as selling, general and administrative expenses in the Company’s consolidated statement of operations for the quarter ended September 30, 2022. Each acquisition was treated for accounting purposes as a purchase of the acquired business using the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations, pursuant to which the consideration paid by the Company was allocated to the acquired assets and assumed liabilities, in each case, based on their respective fair values as of the closing date, with the excess of the consideration transferred over the fair value of the net assets acquired being allocated to intangible assets and goodwill. The Company allocated a total of $639,000 to goodwill, which is expected to be amortized and deductible for tax purposes over 15 years. Goodwill is attributable primarily to the assembled workforces, as well as the expected benefits from the increased scale of the Company as a result of these acquisitions.
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 |
|
$ |
2,847 |
|
|
$ |
2,019 |
Less: distributed and undistributed income allocated to unvested restricted common stock |
|
|
351 |
|
|
|
176 |
Net income allocated to EVI Industries, Inc. shareholders |
|
$ |
2,496 |
|
|
$ |
1,843 |
Weighted average shares outstanding used in basic earnings per share |
|
|
12,522 |
|
|
|
12,278 |
Dilutive common share equivalents |
|
|
4 |
|
|
|
381 |
Weighted average shares outstanding used in diluted earnings per share |
|
|
12,526 |
|
|
|
12,659 |
Basic earnings per share |
|
$ |
0.20 |
|
|
$ |
0.15 |
Diluted earnings per share |
|
$ |
0.20 |
|
|
$ |
0.15 |
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
At September 30, 2022 and 2021, other than 1,758,733 shares and 1,175,163 shares, respectively, of common stock subject to unvested restricted stock awards or restricted stock units, there were no potentially dilutive securities outstanding.
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 |
|
$ |
36,000 |
|
|
$ |
28,000 |
|
Less: unamortized discount and deferred financing costs |
|
|
(157 |
) |
|
|
(160 |
) |
Total long-term debt, net |
|
$ |
35,843 |
|
|
$ |
27,840 |
|
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.
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 35 facilities, consisting of warehouse facilities and administrative offices, financed under operating leases with lease term expirations between 2022 and 2030. Rent expense consists of monthly rental payments under the terms of the Company’s lease agreements recognized on a straight-line basis.
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) |
|
$ |
2,088 |
|
2024 |
|
|
1,982 |
|
2025 |
|
|
1,408 |
|
2026 |
|
|
972 |
|
2027 |
|
|
798 |
|
Thereafter |
|
|
1,288 |
|
Total minimum lease payments |
|
$ |
8,536 |
|
Less: amounts representing interest |
|
|
625 |
|
Present value of minimum lease payments |
|
$ |
7,911 |
|
Less: current portion |
|
|
2,471 |
|
Long-term portion |
|
$ |
5,440 |
|
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) |
|
$ |
773 |
|
|
$ |
621 |
|
Short-term lease cost (1) |
|
|
- |
|
|
|
- |
|
Variable lease cost (1) |
|
|
18 |
|
|
|
35 |
|
Total lease cost |
|
$ |
791 |
|
|
$ |
656 |
|
|
|
|
(1) |
|
Expenses are classified within selling, general and administrative expenses in the Company’s condensed consolidated statements of operations. |
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 |
|
4.7 years |
Weighted average discount rate |
|
|
Operating leases |
|
3.3% |
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: |
|
$ |
773 |
|
|
$ |
621 |
|
Operating lease right-of-use assets obtained in exchange for operating lease liabilities: |
|
$ |
300 |
|
|
$ |
610 |
|
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) |
|
$ |
3,010 |
|
|
$ |
1,814 |
|
|
$ |
1,196 |
|
2024 |
|
|
3,131 |
|
|
|
1,891 |
|
|
|
1,240 |
|
2025 |
|
|
2,312 |
|
|
|
1,340 |
|
|
|
972 |
|
2026 |
|
|
1,660 |
|
|
|
840 |
|
|
|
820 |
|
2027 |
|
|
870 |
|
|
|
449 |
|
|
|
421 |
|
Thereafter |
|
|
679 |
|
|
|
264 |
|
|
|
415 |
|
|
|
|
|
|
|
|
|
|
|
$ |
5,064* |
|
* Excludes residual values of $2.7 million. |
The total net investments in sales type leases, including stated residual values, as of September 30, 2022 and June 30, 2022 was $7.8 million and $7.7 million, respectively. The current portion of $1.6 million and $2.0 million is included in other current assets in the consolidated balance sheets as of September 30, 2022 and June 30, 2022, respectively, and the long term portion of $6.2 million and $5.7 million is included in other assets in the consolidated balance sheets as of September 30, 2022 and June 30, 2022, respectively.
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 $4.8 million and $4.7 million, respectively. Consistent with the guidance of the FASB regarding accounting for income taxes, the Company regularly estimates its ability to recover deferred tax assets and establishes a valuation allowance against deferred tax assets to reduce the balance to amounts expected to be recoverable. This evaluation includes the consideration of several factors, including an estimate of the likelihood of generating sufficient taxable income in future periods over which temporary differences reverse, the expected reversal of deferred tax liabilities, past and projected taxable income, and available tax planning strategies. As of September 30, 2022, management believed that it was more-likely-than-not that the results of future operations will generate sufficient taxable income to realize the net amount of the Company’s deferred tax assets over the periods during which temporary differences reverse.
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 3,000,000 shares. The fair value of awards granted under the Plan is expensed on a straight-line basis over the vesting period of the awards. Share-based compensation expense is included in selling, general and administrative expenses in the Company’s condensed consolidated statements of operations.
During the three months ended September 30, 2022, restricted stock awards of a total of 222,672 shares and 93,789 restricted stock units were granted under the Plan. During the three months ended September 30, 2021, 10,303 restricted stock units were granted under the Plan. No restricted stock awards were granted under the Plan during the three months ended September 30, 2021. There were no restricted stock awards forfeited during either the three months ended September 30, 2022 or 2021. There were 376 and 8,327 restricted stock units forfeited during the three months ended September 30, 2022 and 2021, respectively.
For the three months ended September 30, 2022, non-cash share-based compensation expense related to awards granted under the Plan totaled $680,000. For the three months ended September 30, 2021, non-cash share-based compensation expense related to awards granted under the Plan totaled $479,000.
As of September 30, 2022, the Company had $21.4 million and $10.7 million of total unrecognized compensation expense related to restricted stock awards and restricted stock units, respectively, granted under the Plan, which is expected to be recognized over the weighted-average period of 15.4 years and 10.7 years, respectively.
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 |
|
|
1,026,183 |
|
|
$ |
21.65 |
|
|
|
416,465 |
|
|
$ |
26.75 |
|
Granted |
|
|
222,672 |
|
|
|
16.30 |
|
|
|
93,789 |
|
|
|
14.73 |
|
Vested |
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited |
|
|
- |
|
|
|
- |
|
|
|
(376 |
) |
|
|
10.63 |
|
Non-vested awards or units outstanding at September 30, 2022 |
|
|
1,248,855 |
|
|
$ |
20.69 |
|
|
|
509,878 |
|
|
$ |
24.55 |
|
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 5% discount. The Company’s employee stock purchase plan provides for six-month offering periods ending on December 31 and June 30 of each year. No shares were issued under the Company’s employee stock purchase plan during the three months ended September 30, 2022 or 2021.
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 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
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 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 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.
EVI Industries, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2022
(Unaudited)
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.
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 |
|
$ |
71,039 |
|
Goodwill from acquisitions (1) |
|
|
639 |
|
Working capital adjustments (2) |
|
|
36 |
|
Balance at September 30, 2022 |
|
$ |
71,714 |
|
|
|
(1) |
Relates to the two acquisitions consummated during September 2022, as described in Note 4, “Acquisitions.” |
(2) |
Represents working capital adjustments related to business acquisitions consummated by the Company during the fiscal year ended June 30, 2022. |
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.
|
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,
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.
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
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
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.
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.
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.
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
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.
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.