The Company entered into secured financing agreements that require providing a security interest in specified equipment. As of June 30,December 31, 2020 and September 30, 2019,2020, the gross and net amounts of those assets are as follows:
9.10. Goodwill
Changes in the carrying amount of goodwill are as follows:
|
| | | | | | | | | | | |
| Integrated Solutions and Services | | Applied Product Technologies | | Total |
Balance at September 30, 2019 | $ | 222,013 |
| | $ | 170,877 |
| | $ | 392,890 |
|
Business combinations and divestitures | 1,798 |
| | (405 | ) | | 1,393 |
|
Measurement period adjustment | — |
| | 298 |
| | 298 |
|
Foreign currency translation | (1,142 | ) | | (12 | ) | | (1,154 | ) |
Balance at June 30, 2020 | $ | 222,669 |
| | $ | 170,758 |
| | $ | 393,427 |
|
| | | | | | | | | | | | | | | | | |
| Integrated Solutions and Services | | Applied Product Technologies | | Total |
Balance at September 30, 2020 | $ | 224,381 | | | $ | 172,824 | | | $ | 397,205 | |
Business combinations | 6,088 | | | 0 | | | 6,088 | |
Measurement period adjustment | 72 | | | 0 | | | 72 | |
Foreign currency translation | 1,990 | | | 3,238 | | | 5,228 | |
Balance at December 31, 2020 | $ | 232,531 | | | $ | 176,062 | | | $ | 408,593 | |
As of June 30,December 31, 2020 and September 30, 2019, $152,0242020, $159,240 and $151,880,$153,004, respectively, of goodwill was deductible for tax purposes.
10.11. Debt
Long‑term debt consists of the following:
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
First Lien Term Loan, due December 20, 2024 | $ | 816,907 | | | $ | 819,276 | |
Revolving Credit Facility | — | | | 0 | |
Equipment Financing, due February 28, 2021 to July 5, 2029, interest rates ranging from 3.25% to 8.07% (1) | 70,085 | | | 63,918 | |
Notes Payable, due July 31, 2023 | 560 | | | 611 | |
Mortgage (2) | 0 | | | 1,665 | |
Total debt | 887,552 | | | 885,470 | |
Less unamortized deferred financing fees | (8,911) | | | (9,436) | |
Total net debt | 878,641 | | | 876,034 | |
Less current portion | (18,426) | | | (14,339) | |
Total long‑term debt | $ | 860,215 | | | $ | 861,695 | |
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
First Lien Term Loan, due December 20, 2024 | $ | 821,646 |
| | $ | 928,753 |
|
Revolving Credit Facility | — |
| | — |
|
Equipment Financing, due June 30, 2024 to July 5, 2029, interest rates ranging from 3.84% to 8.07% | 56,003 |
| | 45,960 |
|
Notes Payable, due July 31, 2023 | 661 |
| | 807 |
|
Mortgage, due June 30, 2028 | 1,617 |
| | 1,635 |
|
Total debt | 879,927 |
| | 977,155 |
|
Less unamortized discount and lender fees | (9,957 | ) | | (12,138 | ) |
Total net debt | 869,970 |
| | 965,017 |
|
Less current portion | (14,611 | ) | | (13,418 | ) |
Total long‑term debt | $ | 855,359 |
| | $ | 951,599 |
|
(1)On December 30, 2020, the Company completed $3,905 of equipment financings due December 30, 2027 at a fixed interest rate of 3.73%. On December 31, 2020, the Company completed $3,899 of equipment financings due February 28, 2021 at a fixed interest rate of 3.25%.
(2)During the three months ended December 31, 2020, the Company paid off the outstanding balance of the mortgage due June 30, 2028.
Term Facilities and Revolving Credit Facility
On January 15, 2014, EWT Holdings III Corp. (“EWT III”), an indirect wholly-owned subsidiary of the Company, entered into a First Lien Credit Agreement (as modified, amended or supplemented from time to time, the “Credit Agreement”) and a Second Lien Credit Agreement (the “Credit Agreements” or, after the prepayment and termination of the Second Lien Credit Agreement, the “First Lien Credit Agreement” or “Credit Agreement”) among EWT III, EWT Holdings II Corp., the lenders party thereto and Credit Suisse AG as administrative agent and collateral agent.
In January 2020, The term loans outstanding under the Second Lien Credit Agreement were prepaid on October 28, 2016. The Credit Agreement also makes available to the Company utilized $100,000a revolving credit facility (the “Revolver”) of the proceeds from the saleup to $125,000, with a letter of the Memcor product linecredit sublimit of up to repay a portion of the Company’s First Lien Term Loans. As a result of the prepayment, the Company wrote off $1,795 of deferred financing fees during the three months ended March 31, 2020. On February 18, 2020, EWT III entered into Amendment No. 7 (the “Amendment”), among EWT III, as the borrower, EWT Holdings II Corp., as parent guarantor, the subsidiary guarantors party thereto, the financial institutions party thereto, and Credit Suisse AG, as administrative agent and collateral agent, relating to the Credit Agreement. As a result of the Amendment, the Company incurred $760 of fees which were recorded as deferred financing fees on the Consolidated Balance Sheets. Prior to the Amendment, First Lien Term Loans in an aggregate principal amount of approximately $826,000 (the “Existing Term Loans”) were$45,000. The term loans outstanding under the Credit Agreement. Pursuant toAgreement (the “First Lien Term Loan”) mature on December 20, 2024, and the Amendment, the Existing Term Loans were refinanced with the proceeds of the refinancing term loans. Additionally, the Amendment amended the Credit Agreement to, among other things:
| |
(i) | reduce the interest rate spread applicable to term loans based on LIBOR from (A) 2.75% to 2.50% per annum during any period during which EWT III maintains a public corporate family rating better than or equal to B1 from Moody’s and B+ from S&P, in each case with a stable outlook (a “Ratings Condition Period”), and (B) 3.00% to 2.75% per annum for any period other than a Ratings Condition Period; |
| |
(ii) | reduce the interest rate spread applicable to term loans based on the Base Rate from (A) 1.75% to 1.50% per annum during any Ratings Condition Period and (B) 2.00% to 1.75% per annum during any period other than a Ratings Condition Period; |
| |
(iii) | remove the 1.00% floor for term loans based on LIBOR and the 2.00% floor for term loans based on the Base Rate; |
| |
(iv) | schedule existing indebtedness and investments, allowing EWT III and its subsidiaries to incur incremental indebtedness and make incremental investments under the applicable baskets; |
| |
(v) | increase the generally permitted investments basket; and |
| |
(vi) | extend the 1.00% prepayment premium for refinancing in connection with certain repricing transactions through August 18, 2020. |
Revolver matures on December 20, 2022.
The Company makes quarterly principal payments of $2,369. At June 30,December 31, 2020, the interest rate on borrowings was 3.45%2.65%, comprised of 0.70%0.15% LIBOR plus the 2.75%2.50% spread.
Total deferredDeferred financing fees related to the First Lien Term Loan were $9,957 and $12,138, net of amortization, as of June 30, 2020 and September 30, 2019, respectively. These fees were included as a contra liability to debt on the Consolidated Balance Sheets.Sheets as follows:
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Current portion of deferred financing fees (1) | $ | (2,130) | | | $ | (2,112) | |
Long-term portion of deferred financing fees (2) | (6,781) | | | (7,324) | |
Total deferred financing fees | $ | (8,911) | | | $ | (9,436) | |
(1)Included in Current portion of debt, net of deferred financing fees on the Consolidated Balance Sheets.
(2)Included in Long-term debt, net of deferred financing fees on the Consolidated Balance Sheets.
Amortization of deferred financing fees included in interest expense were $526 and $515 for the three months ended December 31, 2020 and 2019, respectively.
The following summarizes the Company’s outstanding borrowings under the Revolver and outstanding letters of credit as of June 30,December 31, 2020 and September 30, 2019,2020, respectively.
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Borrowing availability under the Revolver | $ | 125,000 |
| | $ | 125,000 |
|
Outstanding borrowings under the Revolver | — |
| | — |
|
Outstanding letters of credit under the Revolver | 11,872 |
| | 12,956 |
|
Unused amounts under the Revolver | $ | 113,128 |
| | $ | 112,044 |
|
| | | |
Additional letters of credit under a separate arrangement | $ | 51 |
| | $ | 204 |
|
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Borrowing availability under the Revolver | $ | 125,000 | | | $ | 125,000 | |
Outstanding borrowings under the Revolver | 0 | | | 0 | |
Outstanding letters of credit under the Revolver | 11,824 | | | 12,963 | |
Unused amounts under the Revolver | $ | 113,176 | | | $ | 112,037 | |
| | | |
Additional letters of credit under a separate arrangement | $ | 33 | | | $ | 52 | |
The First Lien Credit Agreement contains limitations on incremental borrowings, is subject to leverage ratios and allows for optional prepayments. Under certain circumstances, the Company may be required to remit excess cash flows as defined based upon exceeding certain leverage ratios. The Company did not exceed such ratios during the ninethree months ended June 30,December 31, 2020, does not anticipate exceeding such ratios during the year ending September 30, 2020,2021, and therefore does not anticipate any additional repayments during the year ending September 30, 2020.2021.
Repayment Schedule
Aggregate maturities of all long‑term debt, including current portion of long‑term debt and excluding finance lease obligations as of June 30,December 31, 2020, are presented below:
|
| | | |
Fiscal Year | |
Remainder of 2020 | $ | 3,638 |
|
2021 | 14,661 |
|
2022 | 14,915 |
|
2023 | 15,125 |
|
2024 | 15,051 |
|
Thereafter | 816,537 |
|
Total | $ | 879,927 |
|
| | | | | |
Fiscal Year | |
Remainder of 2021 | $ | 16,440 | |
2022 | 17,002 | |
2023 | 17,295 | |
2024 | 797,133 | |
2025 | 7,754 | |
Thereafter | 31,928 | |
Total | $ | 887,552 | |
11.12. Derivative Financial Instruments
Interest Rate Risk Management
The Company is subject to market risk exposure arising from changes in interest rates on the senior secured credit facilities, which bear interest at rates that are indexed against LIBOR. The Company’s objectives in using interest
rate derivatives are to add stability to interest expense and to mitigate its exposure to rising interest rates. To accomplish these objectives, on May 22, 2020, the Company entered into an interest rate swap during the third quarter of fiscal 2020 to mitigate risks associated with variable rate debt. The interest rate swap isbecame effective on June 30, 2020, has a term of five years to hedge the variability of interest payments on the first $500,000 of the Company’s senior secured debt and provides for a fixedfixes the LIBOR rate on this portion of 0.5455%the senior secured debt at 0.55%. The interest rate swap has been designated as a cash flow hedge and unrealized gains or losses, net of income tax, are recorded as a component of AOCIAccumulated Other Comprehensive Income (“AOCI”) on the Consolidated Balance Sheets. As interest payments are made, the realized gain or loss on the payments areis recorded in Interest expense on the Unaudited Consolidated Statements of Operations.
In addition, in the third quarter of fiscal 2020, the Company terminated the interest rate cap it had entered effective November 28, 2018. The LIBOR interest rate cap covered a notional amount of $600,000 of the Company’s senior secured debt, was effective for a period of three years and had a strike rate of 3.5%. The premium paid for the interest rate cap was $2,235 and was being amortized to interest expense over its term of three years. As a result of the termination, this derivative was de-designated from hedge accounting and the Company wrote off the remaining unamortized premium of $1,118 to interest expense. No additional fees were incurred. At September 30, 2019, the unamortized premium was $1,614, of which $869 was included in Other non‑current assets and the remaining $745 was included in Prepaid and other current assets. The Company recorded $124 and $187 of premium amortization to interest expense during the three months ended June 30, 2020 and 2019, respectively, and $496 and $435 of premium amortization to interest expense during the nine months ended June 30, 2020 and 2019, respectively.
Foreign Currency Risk Management
The Company’s functional currency is the U.S. dollar. By operating internationally, the Company is subject to foreign currency risk from transactions denominated in currencies other than the U.S. dollar (“foreign currencies”). To mitigate cross-currency transaction risk, the Company analyzes significant exposures where it has receipts or payments in a currency other than the functional currency of its operations, and from time to time may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. The Company is also subject to currency translation risk associated with converting the foreign operations’ financial statements into U.S. dollars. The Company uses foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges. As of June 30,December 31, 2020,, the notional amount of the forward contracts held to sell foreign currencies was $17,866.$4,268.
Credit Risk Management
The counterparties to the Company’s derivative contracts are highly-rated financial institutions. The Company regularly reviews the creditworthiness of its financial counterparties and fully expects the counterparties to perform under their respective agreements. The Company is not subject to any obligations to post collateral under derivative instrument contracts. The Company records all derivative instruments on a gross basis in the Consolidated Balance Sheets. Accordingly, there are no offsetting amounts that net assets against liabilities.
Derivatives Designated as Cash Flow Hedges
The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, “Derivatives“Derivatives and Hedging” (Topic No. 815). As required by Topic No. 815, the Company records all derivatives on the balance sheet at fair value and adjusts to market on a quarterly basis. The Company’s interest rate capswap is valued based on readily-observable market inputs, such as quotations on interest rates and LIBOR yield curves at the reporting date. The Company’s foreign currency forward contracts are valued based on quoted forward foreign exchange prices and spot rates at the reporting date. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in AOCI until the hedged item affects earnings. The Company does not use derivative financial instruments for trading or speculative purposes.
The following represents the fair value recorded for derivatives designated as cash flow hedges for the periods presented:
| | | | | | | | | | | | | | | | | |
| | | Asset Derivatives |
| Balance Sheet Location | | December 31, 2020 | | September 30, 2020 |
| | | | | |
| | | | | |
Foreign currency forward contracts | Prepaid and other current assets | | 173 | | | 133 | |
|
| | | | | | | | | |
| | | Asset Derivatives |
| Balance Sheet Location | | June 30, 2020 | | September 30, 2019 |
Interest rate cap | Prepaid and other current assets | | $ | — |
| | $ | 19 |
|
Foreign currency forward contracts | Prepaid and other current assets | | 278 |
| | 269 |
|
|
| | | | | | | | | |
| | | Liability Derivative |
| Balance Sheet Location | | June 30, 2020 | | September 30, 2019 |
Interest rate swap | Accrued expenses and other current liabilities | | $ | 3,258 |
| | $ | — |
|
Foreign currency forward contracts | Accrued expenses and other current liabilities | | 411 |
| | 154 |
|
| | | | | | | | | | | | | | | | | |
| | | Liability Derivative |
| Balance Sheet Location | | December 31, 2020 | | September 30, 2020 |
Interest rate swap | Accrued expenses and other current liabilities | | $ | 3,703 | | | $ | 4,669 | |
Foreign currency forward contracts | Accrued expenses and other current liabilities | | 52 | | | 47 | |
The following represents the amount of gain (loss) gain recognized in AOCI (net of tax) during the periods presented:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Interest rate swap | $ | (3,258 | ) | | $ | — |
| | $ | (3,258 | ) | | $ | — |
|
Interest rate cap | (20 | ) | | (78 | ) | | (19 | ) | | 56 |
|
Foreign currency forward contracts | 10 |
| | (173 | ) | | (150 | ) | | (487 | ) |
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
Interest rate swap | | | | | $ | 457 | | | $ | 0 | |
Interest rate cap | | | | | 0 | | | (14) | |
Foreign currency forward contracts | | | | | 3 | | | 19 | |
The following represents the amount of (loss) gain on foreign currency forward contracts reclassified from AOCI into earnings during the periods presented:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
Location of (Loss) Gain | | 2020 | | 2019 | | 2020 | | 2019 |
Cost of product sales and services | | $ | (2 | ) | | $ | (4 | ) | | $ | (8 | ) | | $ | (130 | ) |
General and administrative expense | | 48 |
| | — |
| | 78 |
| | 1 |
|
Selling and marketing expense | | — |
| | — |
| | 28 |
| | — |
|
Research and development expense | | — |
| | (86 | ) | | — |
| | (87 | ) |
| | $ | 46 |
| | $ | (90 | ) | | $ | 98 |
| | $ | (216 | ) |
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended December 31, |
Location of (Loss) Gain | | | | | | 2020 | | 2019 |
| | | | | | | | |
General and administrative expense | | | | | | $ | (32) | | | $ | 54 | |
| | | | | | | | |
| | | | | | | | |
Interest expense | | | | | | (510) | | | 0 | |
| | | | | | $ | (542) | | | $ | 54 | |
Based on the fair value amounts of the Company’s cash flow hedges at June 30,December 31, 2020,, the Company expects that approximately $187$124 of pre-tax net lossesgains will be reclassified from AOCI into earnings during the next twelve months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle.
Derivatives Not Designated as Cash Flow Hedges
The following represents the fair value recorded for derivatives not designated as cash flow hedges for the periods presented:
| | | | | | | | | | | | | | | | | |
| | | Asset Derivatives |
| Balance Sheet Location | | December 31, 2020 | | September 30, 2020 |
Foreign currency forward contracts | Prepaid and other current assets | | $ | 0 | | | $ | 7 | |
| | | | | |
| | | Liability Derivatives |
| Balance Sheet Location | | December 31, 2020 | | September 30, 2020 |
Foreign currency forward contracts | Accrued expenses and other current liabilities | | $ | 1 | | | $ | 0 | |
|
| | | | | | | | | |
| | | Asset Derivatives |
| Balance Sheet Location | | June 30, 2020 | | September 30, 2019 |
Foreign currency forward contracts | Prepaid and other current assets | | $ | 27 |
| | $ | 9 |
|
12.13. Product Warranties
The Company accrues warranty obligations associated with certain products as revenue is recognized. Provisions for the warranty obligations are based upon historical experience of costs incurred for such obligations, adjusted for site‑specific risk factors, and, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience.
A reconciliation of the activity related to the accrued warranty, including both the current and long‑term portions, is as follows:
|
| | | | | | | | | | | | | | | |
| Current Product Warranties | | Non-Current Product Warranties |
| Nine Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Balance at beginning of the period | $ | 4,922 |
| | $ | 8,907 |
| | $ | 2,332 |
| | $ | 3,360 |
|
Warranty provision for sales | 2,496 |
| | 4,134 |
| | 481 |
| | 1,148 |
|
Settlement of warranty claims | (3,243 | ) | | (4,896 | ) | | (1,298 | ) | | (509 | ) |
Amounts related to sale of the Memcor product line | 795 |
| | — |
| | 136 |
| | — |
|
Foreign currency translation and other | 276 |
| | 119 |
| | (51 | ) | | (258 | ) |
Balance at end of the period | $ | 5,246 |
| | $ | 8,264 |
| | $ | 1,600 |
| | $ | 3,741 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Current Product Warranties | | Non-Current Product Warranties |
| Three Months Ended December 31, | | Three Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 |
Balance at beginning of the period | $ | 6,115 | | | $ | 4,922 | | | $ | 1,724 | | | $ | 2,332 | |
| | | | | | | |
Warranty provision for sales | 371 | | | 1,251 | | | 252 | | | 44 | |
Settlement of warranty claims | (978) | | | (1,989) | | | (374) | | | (1,076) | |
Amounts related to sale of the Memcor product line | 0 | | | 795 | | | 0 | | | 135 | |
Foreign currency translation and other | 69 | | | 152 | | | 44 | | | 36 | |
Balance at end of the period | $ | 5,577 | | | $ | 5,131 | | | $ | 1,646 | | | $ | 1,471 | |
13.14. Restructuring and Related Charges
To better align its resources with its growth strategies and reduce theits cost structure, the Company commits to various restructuring plans as necessary.
On October 30, 2018, The Company has undertaken various restructuring initiatives, including undertaking activities to reduce the Company announced a transitioncost structure and rationalize location footprint following the sale of the Memcor product line, transitioning from a 3-segment structure to a 2-segment operating model designed to better serve the needs of customers worldwide. This new structure was effective October 1, 2018worldwide, and combinedvarious initiatives within the Municipal services business with the former Industrial segment into a new segment, Integrated Solutions and Services a group entirely focused on engaging directly with end users. The former Products segment to drive efficiency and Municipal products businesses have been combined into a new segment, Applied Product Technologies, which is focused on developing product platforms to be sold primarily through third-party channels. effectiveness in certain divisions.
The Company currently expects to incur upapproximately $3,000 to $1,500$5,000 of expense duringcosts through the final phase of this transition.
Beginning in the second quarterremainder of fiscal 2020, the Company undertook activities2021 related to reduce the cost structure and rationalize location footprintrestructuring charges following the sale of the Memcor product line. The Company currently expects to incur approximately $3,000 to $5,000$1,000 of additionalcash costs related to these initiatives through the remainder of fiscal 2020 and is2021 as a result of its transition to a two-segment operating model related to other non-employee related business optimizations. The Company currently evaluating additional actions that could extendexpects to incur approximately $1,300 to $1,700 of costs through the remainder of fiscal 2021 related to the following fiscal year.restructuring within certain divisions of the Integrated Solutions and Services segment.
The table below sets forth the amounts accrued for the restructuring components and related activity:
|
| | | | | | | |
| Nine Months Ended June 30, |
| 2020 | | 2019 |
Balance at beginning of the period | $ | 655 |
| | $ | 710 |
|
Restructuring charges following the sale of the Memcor product line | 4,758 |
| | — |
|
Restructuring charges related to two-segment realignment | 1,866 |
| | 9,274 |
|
Restructuring charges related to other initiatives | 1,141 |
| | 2,086 |
|
Write off charge and other non‑cash activity | (62 | ) | | (520) |
|
Cash payments | (7,314) |
| | (9,830) |
|
Other adjustments | — |
| | (76) |
|
Balance at end of the period | $ | 1,044 |
| | $ | 1,644 |
|
| | | | | | | | | | | |
| Three Months Ended December 31, |
| 2020 | | 2019 |
Balance at beginning of the period | $ | 970 | | | $ | 655 | |
Restructuring charges following the sale of the Memcor product line | 908 | | 0 | |
Restructuring charges related to two-segment realignment | 238 | | 675 | |
Restructuring charges related to other initiatives | 29 | | 245 |
Release of prior reserves | (9) | | | (53) |
Write off charges | (121) | | | 0 | |
Cash payments | (986) | | | (1,156) |
Other adjustments | 92 | | | (1) |
Balance at end of the period | $ | 1,121 | | | $ | 365 | |
The balances for accrued restructuring liabilities at June 30,December 31, 2020 and September 30, 2019,2020, are recorded in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Restructuring charges primarily represent severance charges and other employee costs, fixed asset write-offs and certain non-cash charges and consulting fees.relocation expenses. The Company expects to pay the remaining amounts accrued as of June 30,December 31, 2020 during the remainder of fiscal 2020.2021.
The table below sets forth the location of amounts recorded above on the Unaudited Consolidated Statements of Operations:
|
| | | | | | | |
| Nine Months Ended June 30, |
| 2020 | | 2019 |
Cost of product sales and services | $ | 5,198 |
| | $ | 4,912 |
|
General and administrative expense | 2,310 |
| | 4,929 |
|
Sales and marketing expense | 173 |
| | 891 |
|
Research and development expense | 22 |
| | 108 |
|
| $ | 7,703 |
| | $ | 10,840 |
|
| | | | | | | | | | | |
| Three Months Ended December 31, |
| 2020 | | 2019 |
Cost of product sales and services | $ | 826 | | | $ | 384 | |
General and administrative expense | 138 | | | 480 | |
Sales and marketing expense | 218 | | | 3 | |
Research and development expense | (16) | | | 0 | |
| | | |
| $ | 1,166 | | | $ | 867 | |
The Company continues to evaluate restructuring activities that may result in additional charges in the future.
14.15. Employee Benefit Plans
The Company maintains multiple employee benefit plans.
Certain of the Company’s employees in the UK were participants in a Siemens defined benefit plan established for employees of a UK-based operation acquired by Siemens in 2004. The plan was frozen with respect to future service credits for active employees, however the benefit formula recognized future compensation increases. The Company agreed to establish a replacement defined benefit plan, with the assets of the Siemens scheme transferring to the new scheme on April 1, 2015.
The Company’s employees in Germany also participate in a defined benefit plan. Assets equaling the plan’s accumulated benefit obligation were transferred to a German defined benefit plan sponsored by the Company upon the acquisition of EWT from Siemens. The German entity also sponsors a defined benefit plan for a small group of employees located in France.
The components of net periodic benefit cost for the plans were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Service cost | $ | 259 |
| | $ | 214 |
| | $ | 779 |
| | $ | 648 |
|
Interest cost | 67 |
| | 118 |
| | 203 |
| | 357 |
|
Expected return on plan assets | (30 | ) | | (30 | ) | | (89 | ) | | (90 | ) |
Amortization of actuarial losses | 235 |
| | 95 |
| | 706 |
| | 288 |
|
Pension expense for defined benefit plans | $ | 531 |
| | $ | 397 |
| | $ | 1,599 |
| | $ | 1,203 |
|
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
Service cost | | | | | $ | 284 | | | $ | 261 | |
Interest cost | | | | | 79 | | | 68 | |
Expected return on plan assets | | | | | (87) | | | (30) | |
Amortization of actuarial losses | | | | | 264 | | | 236 | |
Pension expense for defined benefit plans | | | | | $ | 540 | | | $ | 535 | |
The components of pension expense, other than the service cost component which is included in General and administrative expense, are included in the line item Other operating expense in the Unaudited Consolidated Statements of Operations.
15.16. Income Taxes
The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent projected annual effective tax rate (“PAETR”), adjusted for the tax effect of discrete items. Management estimates the PAETR each quarter based on the forecasted annual pretax income or (loss). The Company is required to reduce deferred tax assets by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the benefit of the deferred tax assets will not be realized in future periods. The Company also records the income tax impact of certain discrete, unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
When a company maintains a valuation allowance in a particular jurisdiction, no net deferred income tax expense or (benefit) will typically be provided. Jurisdictions with projected income that maintain a valuation allowance typically will form part of the PAETR calculation discussed above. However, jurisdictions with a projected loss for the year that maintain a valuation allowance are excluded from the PAETR calculation. Instead, the income tax for these jurisdictions is computed separately.
The actual year-to-date income tax expense (benefit) is the product of the most current PAETR and the actual year-to-date pretax income (loss) adjusted for any discrete tax items. The income tax expense (benefit) for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense (benefit) and the year-to-date calculation for the prior quarter. Items unrelated to current period ordinary income or (loss) are recognized entirely in the period identified as a discrete item of tax. Discrete items generally relate to changes in tax laws, adjustments to prior period’s actual liability determined upon filing tax returns, and adjustments to previously recorded reserves for uncertain tax positions, initially recording or fully reversing valuation allowances. The inclusion of discrete items in a particular quarter can cause the actual effective rate for that quarter to vary significantly from the PAETR.
Therefore, the actual effective income tax rate for a particular quarter can vary significantly based upon the jurisdictional mix and timing of actual earnings compared to projected annual earnings, permanent items, earnings for those jurisdictions that maintain a valuation allowance, tax associated with jurisdictions excluded from the PAETR calculation and discrete items.
Annual Effective Tax Rate
The PAETR, which excludes the impact of discrete items, was 3.9%13.8% and 38.9%4.9% as of the ninethree months ended June 30,December 31, 2020 and 2019, respectively. For the ninethree months ended June 30,December 31, 2020, the PAETR of 3.9%13.8% was lower than the U.S federal statutory rate of 21.0% primarily due to the gain on the saleimpact of the Memcor product line, themaintaining a U.S. valuation allowance provided on U.S. deferred tax assets as well asand is higher than the prior year’s rate which included the impact of the sale of the Memcor product line, and the impact on deferred tax liabilities related to indefinite lived intangibles, a portion of which werewas reversed in relation to the sale of the Memcor product line.
The Company continues to maintain a full valuation on U.S. federal and state net deferred tax assets (excluding the tax effects of deferred tax liabilities associated with indefinite lived intangibles) for the year ending September 30, 20202021 as a result of pretax losses incurred since the Company’s inception in early 2014. The Company reported positive pre-tax earnings for the first time in 2017 and is projecting positive pre-tax earnings in 2020,2021, however, the Company generated pre-tax losses in all other years and was in a three-year cumulative loss position at September 30, 2019. The Company believes it is prudent to retain a valuation allowance until a more consistent pattern of earnings is established and net operating loss carryforwards begin to be utilized.
PriorCurrent and CurrentPrior Period Tax Expense
For the three months ended June 30,December 31, 2020, the Company recognized income tax expense of $740$1,084 on pretax income of $22,581.$7,561. The rate of 3.3%14.3% differed from the U.S. statutory rate of 21%21.0% principally due to the favorable impact to the PAETR of the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of themaintaining a U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion ofagainst U.S. deferred tax liabilities related to indefinite lived intangibles.assets.
For the three months ended June 30,December 31, 2019, the Company recognized income tax expense of $7,959 on a pretax income of $12,249. The rate of 65% differed from the U.S. statutory rate of 21% principally due to lower forecasted earnings in the U.S. due to restructuring initiatives for which no tax benefit will be realized, the impact of deferred tax liabilities related to indefinite lived intangibles as well as discrete items during the period related to the adjustment process for the difference between actual tax results per tax returns filed versus those expected from the prior year tax provision.
For the nine months ended June 30, 2020, the Company recognized income tax expense of $3,336$2,603 on pretax income of $86,593.$56,109. The rate of 3.9%4.6% differed from the statutory rate of 21%21.0% principally due to the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of the U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles.
For the nine months ended June 30, 2019, the Company recognized an income tax benefit of $1,134 on a pretax loss of $11,559. The rate of 9.8% differed from the statutory rate of 21% principally due to the benefit on an overall year-to-date loss offset by higher forecasted earnings in certain non-U.S. jurisdictions that have a higher statutory tax rate than the U.S. as well as the impact of deferred tax liabilities related to indefinite lived intangibles.
At June 30,December 31, 2020 and 2019, the Company had gross unrecognized tax benefits of $1,313.$1,322 and $1,289, respectively.
On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “CARES Act”) was passed in response to the COVID-19 pandemic. Provisions of the CARES Act adjust elements of the Tax Cuts and Jobs Act (“TCJA”), including net operating loss (“NOL”) modifications, a relaxation of the limitation on interest deductions, and modification of the credits for prior year minimum tax liability.
The CARES Act accelerates the ability of companies to recover the alternative minimum tax (“AMT”) credits by permitting immediate refund claims.
The TCJA subjected net operating losses arising in tax years beginning after December 31, 2017 to a taxable income limitation and eliminated the ability to carry these net operating losses back to a prior tax year. The CARES Act modified these rules and provides that NOLs arising in a tax year beginning after December 31, 2017 and ending before January 1, 2021 can be carried back five years. Additionally, the taxable income limitation is temporarily suspended for tax years beginning before January 1, 2021.
The TCJA limited the business interest expense deduction to 30% of adjusted taxable income (“ATI”) starting with the 2018 tax years. The CARES Act modified the TCJA limitations for business interest expense for 2019 and 2020 by increasing the limitation to 50% of ATI. Further, for the tax year 2020, the Company may use either the 2019 or 2020 ATI for purposes of determining deductible business interest expense.
The CARES Act did not have an impact on the Company’s Unaudited Consolidated Financial Statements.
16.17. Share-Based Compensation
The Company designs equity compensation plans to attract and retain employees while also aligning
employees’ interests with the interests of the Company’s shareholders. In addition, members of the Company’s Board of Directors (the “Board”) participate in equity compensation plans in connection with their service on the Company’s Board.
The Company established the Evoqua Water Technologies Corp. Stock Option Plan (the “Stock Option Plan”) shortly after the acquisition date of January 16, 2014. The plan allows certain management employees and the Board to purchase shares in Evoqua Water Technologies Corp.the Company. Under the Stock Option Plan, the number of shares available for award was 11,083. As of June 30,December 31, 2020, there were approximately 1,7042,149 shares available for future grants, however, the Company does not currently intend to make additional grants under the Stock Option Plan.
In connection with the IPO, the Board adopted, and the Company’s shareholders approved, the Evoqua Water Technologies Corp. 2017 Equity Incentive Plan (or the(the “Equity Incentive Plan”), under which equity awards may be granted in the form of options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalent rights, share awards and performance-based awards (including performance share units and performance-based restricted stock). Upon adoption of the Equity Incentive Plan, 5,100 shares of common stock of the Company were reserved for issuance thereunder. On February 18, 2020, the Company’s shareholders approved the amendment and restatement of the Equity Incentive Plan in order to increase the number of shares of common stock reserved for issuance thereunder by 5,000 shares and incorporate other changes. As of June 30,December 31, 2020, there were approximately 5,9635,916 shares available for grants under the Equity Incentive Plan.
In addition to the establishment of the Equity Incentive Plan, in connection with the IPO, the Company entered into restricted stock unit (“RSU”) agreements with each of the executive officers and certain other key members of management. Pursuant to the RSU agreements, 1,197 stock-settled RSUs were granted, the aggregate value of which equals $25,000. The RSUs vested and settled in full upon the second anniversary of the IPO on November 2, 2019, resulting in the issuance of 1,1591,158 shares, 419 of which were deposited into treasury in satisfaction of withholding tax obligations resulting from the vesting of the RSUs.
Option awards are granted at various times during the year, vest ratably at 25% per year, and are exercisable at the time of vesting. The options granted have a ten-year contractual term of ten years.term.
A summary of the stock option activity as of June 30,December 31, 2020 is presented below:
|
| | | | | | | | | | | | |
(In thousands, except per share amounts) | Options | | Weighted Average Exercise Price/Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
Outstanding at September 30, 2019 | 8,619 |
| | $ | 8.15 |
| | 6.3 years | | $ | 80,826 |
|
Granted | 800 |
| | 23.52 |
| | | |
|
|
Exercised | (1,711 | ) | | 5.61 |
| | | |
|
|
Cancelled | (5 | ) | | 20.50 |
| | | | |
Forfeited | (106 | ) | | 15.05 |
| | | |
|
|
Outstanding at June 30, 2020 | 7,597 |
| | $ | 10.24 |
| | 6.2 years | | $ | 69,871 |
|
Options exercisable at June 30, 2020 | 5,294 |
| | $ | 6.92 |
| | 5.1 years | | $ | 63,047 |
|
Options vested and expected to vest at June 30, 2020 | 7,521 |
| | $ | 10.13 |
| | 6.2 years | | $ | 69,763 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands, except per share amounts) | Options | | Weighted Average Exercise Price/Share | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Outstanding at September 30, 2020 | 7,430 | | | $ | 10.30 | | | 5.9 years | | $ | 83,152 | |
Granted | 1 | | | 23.18 | | | | | |
Exercised | (1,112) | | | 5.75 | | | | | |
| | | | | | | |
Forfeited | (4) | | | 19.00 | | | | | |
| | | | | | | |
Outstanding at December 31, 2020 | 6,315 | | | $ | 11.09 | | | 5.9 years | | $ | 100,326 | |
Options exercisable at December 31, 2020 | 4,177 | | | $ | 7.28 | | | 4.8 years | | $ | 82,285 | |
Options vested and expected to vest at December 31, 2020 | 6,301 | | | $ | 11.07 | | | 5.9 years | | $ | 100,226 | |
The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the ninethree months ended June 30,December 31, 2020 was $26,051.$19,362.
A summary of the status of the Company's non-vested stock options as of and for the ninethree months ended June 30,December 31, 2020 is presented below.
|
| | | | | | |
(In thousands, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value/Share |
Nonvested at beginning of period | 2,379 |
| | $ | 4.96 |
|
Granted | 800 |
| | 6.06 |
|
Vested | (770 | ) | | 4.77 |
|
Forfeited | (106 | ) | | 4.97 |
|
Nonvested at end of period | 2,303 |
| | $ | 5.40 |
|
| | | | | | | | | | | |
(In thousands, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value/Share |
Nonvested at beginning of period | 2,166 | | | $ | 5.56 | |
Granted | 1 | | | 8.12 | |
Vested | (25) | | | 2.27 | |
Forfeited | (4) | | | 6.47 | |
Nonvested at end of period | 2,138 | | | $ | 5.60 | |
The total fair value of options vested during the ninethree months ended June 30,December 31, 2020, was $3,673.$57.
Restricted Stock Units
The following is a summary of the RSU activity for the ninethree months ended June 30,December 31, 2020.
|
| | | | | | |
(In thousands, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value/Share |
Outstanding at September 30, 2019 | 2,002 |
| | $ | 17.45 |
|
Granted | 386 |
| | 23.10 |
|
Vested | (1,554 | ) | | 18.80 |
|
Forfeited | (51 | ) | | 14.09 |
|
Outstanding at June 30, 2020 | 783 |
| | $ | 17.77 |
|
Vested and expected to vest at June 30, 2020 | 749 |
| | $ | 17.64 |
|
| | | | | | | | | | | |
(In thousands, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value/Share |
Outstanding at September 30, 2020 | 750 | | | $ | 17.86 | |
Granted | 114 | | | 24.51 | |
Vested | (1) | | | 24.25 | |
Forfeited | (2) | | | 16.31 | |
| | | |
Cancelled | (7) | | | 21.22 | |
Outstanding at December 31, 2020 | 854 | | | $ | 18.71 | |
Vested and expected to vest at December 31, 2020 | 836 | | | $ | 18.63 | |
Expense Measurement and Recognition
The Company recognizes share-based compensation for all currently outstanding awards and, in future periods, will recognize compensation costs for the unvested portion of awards based on grant date fair values. Total share-based compensation expense was $2,542$3,076 and $4,985$3,691 during the three months ended June 30,December 31, 2020 and 2019, respectively, of which $2,520$3,019 and $4,978 was non-cash, respectively. Total share-based compensation expense was $8,559 and $14,308 during the nine months ended June 30, 2020 and 2019, respectively, of which $8,504 and $14,248$3,680 was non-cash, respectively. The unrecognized compensation expense related to stock options and restricted stock unitsRSUs was $10,140$7,653 and $11,972,$11,736, respectively at June 30,December 31, 2020, and is expected to be recognized over a weighted average period of 2.32.1 years and 2.92.2 years, respectively. The Company received $17,949$14,263 from the exercise of stock options during the ninethree months ended June 30,December 31, 2020. The remaining stock options exercised during the nine months ended June 30, 2020 were effected via a cashless net exercise.
Employee Stock Purchase Plan
Effective October 1, 2018, the Company implemented an employee stock purchase plan (“ESPP”(the “ESPP”) which allows employees to purchase shares of the Company’s stock at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last business day of a six-month purchase period within the offering period. These purchases are offered twice throughout each fiscal year, and wereare paid by employees through payroll deductions over the respective six month purchase period, at the end of which point the stock will beis transferred to the employees. On December 21, 2018, the Company registered 11,297 shares of common stock, par value $0.01 per share, of which 5,000 are available for future issuance under the ESPP. During the ninethree months ended June 30,December 31, 2020 and 2019, the Company incurred compensation expense of $227$216 and $293,$39, respectively in salaries and wages in respect of the ESPP, representing the fair value of the discounted price of the shares. These amounts are included in the total share-based compensation expense above. On October 1, 2019 and April 1,2, 2020, 56 and 71120 shares respectively were issued under the ESPP plan.
17.
18. Concentration of Credit Risk
The Company’s cash and cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with financial institutions that management believes are of high credit quality. Accounts receivable are derived from revenue earned from customers located in the U.S. and internationally and generally do not require collateral. The Company’s trade receivables do not represent a significant concentration of credit risk at June 30,December 31, 2020 and September 30, 20192020 due to the wide variety of customers and markets into which products are sold and their dispersion across geographic areas. The Company does perform ongoing credit evaluations of its customers and maintains an allowance for potential credit losses on trade receivables. As of and for the three and nine months ended June 30,December 31, 2020 and 2019, no customer accounted for more than 10% of net sales or net accounts receivable.
The Company operates predominantly in 10 countries worldwide and provides a wide range of proven product brands and advanced water and wastewater treatment technologies, mobile and emergency water supply solutions and service contract options through its Integrated Solutions and Services and Applied Product Technologies segments. The Company is a multi-national business but its sales and operations are primarily in the U.S. Sales to unaffiliated customers are based on the Company locations that maintain the customer relationship and transacts the external sale.
18.19. Related‑Party Transactions
The Company reimbursed AEA, Investors LP (“AEA”), the Company’s private equity sponsor, for normal and customary expenses incurred by AEA on behalf of the Company. The Company notes that these related-party transactions havewere not been significant in the three and nine months ended June 30,December 31, 2020 and 2019.
19. Leases
Lessee Accounting
As discussed in Note 2, “Summary of Significant Accounting Policies” the Company adopted ASU 2016-02 on October 1, 2019. ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right-of-use (“ROU”) asset and a corresponding lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease using the discount rate determined at lease commencement and including any optional renewal periods that were determined to be reasonably certain to be exercised. The ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial indirect costs incurred by the lessee, less any unamortized lease incentives received. ROU assets are periodically reviewed for impairment whenever events or changes in circumstances arise. During the nine months ended June 30, 2020, the Company incurred no impairment charges on ROU assets.
The discount rate utilized in calculating the lease liability is the rate implicit in the lease, if known, otherwise, the incremental borrowing rate (“IBR”) for the expected lease term is used. Generally, the Company cannot determine the interest rate implicit in the lease. The Company’s IBR approximates the rate the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.
The Company occupies certain facilities and operates certain equipment and vehicles under non‑cancelable lease arrangements. Lease agreements may contain lease escalation clauses and purchase and renewal options. At the inception of a contract, the Company determines whether the arrangement is or contains a lease. A lease is determined to exist if there is an identified asset, the Company has the right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset. Once a lease is determined to exist, the Company determines the lease classification at lease commencement. Leases are classified as operating or finance leases based on specific criteria. Operating lease expense is recognized on a straight-line basis on the Unaudited Consolidated Statements of Operations. Finance lease expense have front-loaded expense recognition that is recognized as depreciation expense and interest expense on the Unaudited Consolidated Statements of Operations. On the Consolidated Statements of Changes in Cash Flows, payments for operating leases are included in operating activities and payments for finance leases are included in financing activity, with the interest component included in operating activities.
The Company’s real estate leases often include options to extend the lease term; however, the Company has not included the renewal options in the ROU asset and lease liability because the likelihood of renewal was not reasonably certain. In addition, the Company has leases that include variable lease payments, for items such as maintenance or other operating expenses, which are expensed as incurred as variable lease expense.
Adoption of ASU 2016-02, Leases (Topic 842)
The Company applied Topic 842 to all existing leases at October 1, 2019 using the modified retrospective approach. As a result, prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 840. The Company has elected the following package of practical expedients which exempts the Company from having to reassess: (i) whether expired or existing contracts contain a lease, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company elected to separate lease and non-lease components for all asset classes, did not elect to use hindsight to determine the lease term and made an accounting policy election for short-term leases which does not require the capitalization of leases with terms of 12 months or less.
As a result of adoption of Topic 842 on October 1, 2019, the Company recognized $42,073 of ROU assets related to operating leases in Operating lease right-of-use assets, net and $42,904 of corresponding lease liabilities, of which $13,596 is included in Accrued expenses and other liabilities and $29,308 is included in Obligation under operating leases on the Consolidated Balance Sheets. The difference is attributable to deferred rent balance as of September 30, 2019 that reduced the ROU asset balance on October 1, 2019, of which $73 was removed from Prepaid and other current assets and the remainder was recognized in Retained deficit on the Consolidated Balance Sheets. In addition, the Company recorded an ROU asset related to finance leases in Property, plant, and equipment, net of $2,812 and $3,245 in corresponding lease liabilities included in Other non‑current liabilities on the Consolidated Balance Sheets, with the difference recognized in Retained deficit. See Note 2, “Summary of Significant Accounting Policies” for further information on the impact of adoption.
The following represents the components of lease cost for the three and nine months ended June 30, 2020 and other information for both operating and finance leases for the nine months ended June 30, 2020:
|
| | | | | | | |
| Three Months Ended June 30, 2020 | | Nine Months Ended June 30, 2020 |
Lease cost | | | |
Finance lease cost: | | | |
Amortization of ROU assets | $ | 3,359 |
| | $ | 10,190 |
|
Interest on lease liabilities | 490 |
| | 1,501 |
|
Operating lease cost | 3,944 |
| | 12,075 |
|
Short-term lease cost | 2,774 |
| | 4,690 |
|
Variable lease cost | — |
| | — |
|
Sublease income | (14 | ) | | (42 | ) |
Total lease cost | $ | 10,553 |
| | $ | 28,414 |
|
|
| | | |
Other information | |
(Gains)/losses on sale and leaseback transactions, net | $ | — |
|
Cash paid for amounts included in the measurement of lease liabilities | |
Operating cash flows from finance leases | $ | 1,504 |
|
Operating cash flows from operating leases | 12,003 |
|
Financing cash flows from finance leases | 9,991 |
|
ROU assets obtained in exchange for new finance lease liabilities | 8,411 |
|
ROU assets obtained in exchange for new operating lease liabilities | 5,668 |
|
ROU asset remeasurement | 125 |
|
Weighted average remaining lease term - finance leases | 3.9 years |
|
Weighted average remaining lease term - operating leases | 5.0 years |
|
Weighted average discount rate - finance leases | 4.7 | % |
Weighted average discount rate - operating leases | 4.5 | % |
The following table reconciles future minimum undiscounted rental commitments for operating leases to operating lease liabilities record on the Consolidated Balance Sheet as of June 30, 2020:
|
| | | |
Fiscal Year | |
Remainder of 2020 | $ | 3,886 |
|
2021 | 13,455 |
|
2022 | 9,763 |
|
2023 | 7,481 |
|
2024 | 5,288 |
|
Thereafter | 9,938 |
|
Total undiscounted lease payments | $ | 49,811 |
|
Present value adjustment | (5,810 | ) |
Operating lease liabilities | 44,001 |
|
Less current installments of obligations under operating leases | 12,993 |
|
Obligations under operating leases, excluding current installments | $ | 31,008 |
|
The gross and net carrying values of the equipment under finance leases as of June 30, 2020 and September 30, 2019 was as follows:
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Gross carrying amount | $ | 84,151 |
| | $ | 69,760 |
|
Net carrying amount | 36,194 |
| | 36,337 |
|
The following table reconciles future minimum undiscounted rental commitments for finance leases to the finance lease liabilities recorded on the Consolidated Balance Sheet as of June 30, 2020:
|
| | | |
Fiscal Year | |
Remainder of 2020 | $ | 3,582 |
|
2021 | 12,222 |
|
2022 | 9,770 |
|
2023 | 7,187 |
|
2024 | 4,874 |
|
Thereafter | 3,449 |
|
Total undiscounted lease payments | 41,084 |
|
Present value adjustment | (3,776 | ) |
Finance lease liabilities | 37,308 |
|
Less current installments of obligations under finance leases | 11,456 |
|
Obligations under finance leases, excluding current installments | $ | 25,852 |
|
The current installments of obligations under finance leases are included in Accrued expenses and other liabilities. Obligations under finance leases, excluding current installments, are included in Other non-current liabilities.
Lessor Accounting
The Company is a lessor to multiple parties. In certain instances, the Company enters into a contract with a customer but must construct the underlying asset prior to its lease. At the time of contract inception, the Company determines if an arrangement is or contains a lease. These contracts generally contain both lease and non-lease components, including installation, maintenance and monitoring services of the Company owned equipment, in addition to sale of certain constructed assets. In situations where arrangements contain multiple elements, contract consideration is allocated based on relative standalone selling price. Lease components associated to underlying assets that have an alternative use are classified as
operating leases with revenue recognized over time throughout the lease term, within Revenue from services on the Unaudited Consolidated Statements of Operations. Lease components associated to underlying assets that have no alternative use are classified as sales-type leases, with point in time revenue recognition at the on-set of the lease. In order for a component to be separate, the Customer would be able to benefit from the right of use of the component separately or with other resources readily available to the Customer and the right of the use is not highly dependent or highly interrelated with the other rights to use the other underlying assets or components.
As of June 30, 2020, future minimum lease payments receivable under operating leases are as follows:
|
| | | |
Fiscal year | |
Remainder of 2020 | $ | 41,173 |
|
2021 | 78,159 |
|
2022 | 48,401 |
|
2023 | 35,193 |
|
2024 | 24,133 |
|
Thereafter | 91,454 |
|
Future minimum lease payments | $ | 318,513 |
|
20. Commitments and Contingencies
Guarantees
From time to time, the Company is required to provide letters of credit, bank guarantees, or surety bonds in support of its commitments and as part of the terms and conditions on water treatment projects. In addition, the Company is required to provide letters of credit or surety bonds to the Department of Environmental Protection or equivalent in some states in order to maintain its licenses to handle toxic substances at certain of its water treatment facilities.
These financial instruments typically expire after all Company commitments have been met, a period typically ranging from twelve months to ten years, or more in some circumstances. The letters of credit, bank guarantees, or surety bonds are arranged through major banks or insurance companies. In the case of surety bonds, the Company generally indemnifies the issuer for all costs incurred if a claim is made against the bond.
The following summarizes the Company’s outstanding letters of credit and surety bonds as of June 30,December 31, 2020 and September 30, 2019,2020, respectively.
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Revolving credit capacity | $ | 45,000 |
| | $ | 45,000 |
|
Letters of credit outstanding | 11,872 |
| | 12,956 |
|
Remaining revolving credit capacity | $ | 33,128 |
| | $ | 32,044 |
|
| | | |
Surety capacity | $ | 230,000 |
| | $ | 220,000 |
|
Surety issuances | 148,108 |
| | 144,717 |
|
Remaining surety available | $ | 81,892 |
| | $ | 75,283 |
|
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Revolving credit capacity | $ | 45,000 | | | $ | 45,000 | |
Letters of credit outstanding | 11,824 | | | 12,963 | |
Remaining revolving credit capacity | $ | 33,176 | | | $ | 32,037 | |
| | | |
Surety capacity | $ | 230,000 | | | $ | 230,000 | |
Surety issuances | 144,647 | | | 152,990 | |
Remaining surety available | $ | 85,353 | | | $ | 77,010 | |
| | | |
| | | |
| | | |
| | | |
The longest maturity date of letters of credit and surety bonds in effect as of June 30,December 31, 2020 was March 20, 2030.
Litigation
From time to time, the Company is subject to various claims, charges and litigation matters that arise in the ordinary course of business. The Company believes these actions areas a normal incident of the nature and kind of business in which the Company is engaged.engaged, various claims or charges are asserted and litigation is commenced against it arising from or related to: product liability; personal injury; trademarks, trade secrets or other intellectual property; shareholder disputes; labor and employee disputes; commercial or contractual disputes; breach of warranty; or environmental matters. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. While it is not feasible to predict the outcome of these matters with certainty, and some lawsuits, claims or proceedings may be disposed or decided unfavorably, the Company does
not believeexpect that any asserted or unassertedun-asserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations, or prospects.financial condition.
21. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Salaries, wages and other benefits | $ | 44,735 |
| | $ | 35,206 |
|
Obligation under operating leases | 12,993 |
| | — |
|
Obligation under finance leases | 11,456 |
| | 17,859 |
|
Insurance liabilities | 7,570 |
| | 4,895 |
|
Third party commissions | 9,434 |
| | 11,394 |
|
Taxes, other than income | 5,029 |
| | 5,215 |
|
Provisions for litigation | 2,718 |
| | 1,533 |
|
Severance payments | 1,044 |
| | 655 |
|
Option and Purchase Right | 506 |
| | — |
|
Earn-outs related to acquisitions | 91 |
| | 611 |
|
Other | 28,440 |
| | 24,471 |
|
| $ | 124,016 |
| | $ | 101,839 |
|
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Salaries, wages and other benefits | $ | 45,716 | | | $ | 67,766 | |
Obligation under operating leases | 12,890 | | | 12,767 | |
Obligation under finance leases | 11,611 | | | 11,362 | |
Third party commissions | 8,490 | | | 9,270 | |
Insurance liabilities | 3,773 | | | 3,954 | |
Fair value of liability derivatives | 3,756 | | | 4,716 | |
Taxes, other than income | 3,425 | | | 5,316 | |
Provisions for litigation | 2,071 | | | 2,580 | |
Severance payments | 1,121 | | | 970 | |
| | | |
Earn-outs related to acquisitions | 295 | | | 295 | |
Other | 27,520 | | | 24,393 | |
| $ | 120,668 | | | $ | 143,389 | |
22. Business Segments
The Company’s reportable operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. The key factors used to identify these reportable operating segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type.
The Company has 2 reportable operating segments, Integrated Solutions and Services and Applied Product Technologies. The business segments are described as follows:
Integrated Solutions and Services is a group entirely focused on engaging directly with end users through direct sales with a market vertical focus. Integrated Solutions and Services provides tailored services and solutions in collaboration with the customers backed by life‑cycle services including on‑demand water, outsourced water, recycle / reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance. Key offerings within this segment also include equipment systems for industrial needs (influent water, boiler feed water, ultrahigh purity, process water, wastewater treatment and recycle / reuse), full-scale outsourcing of operations and maintenance, and municipal services, including odor and corrosion control services.
Applied Product Technologies is focused on developing product platforms to be sold primarily through third party channels. This segment primarily engages in indirect sales through independent sales representatives, distributors and aftermarket channels. Applied Product Technologies provides a range of highly differentiated and scalable products and technologies specified by global water treatment designers, OEMs,original equipment manufacturers (“OEMs”), engineering firms and integrators. Key offerings within this segment include filtration and separation, disinfection, wastewater solutions, anode and electrochlorination technology and aquatics technologies and solutions for the global recreational and commercial pool market.
The Company evaluates its business segments’ operating results based on earnings before interest, taxes, depreciation and amortization, and certain other charges that are specific to the activities of the respective segments. Corporate activities include general corporate expenses, elimination of inter-segment transactions, interest income and expense and certain other charges. Certain other charges may include restructuring and other business transformation charges that have been
undertaken to align and reposition the Company to the current reporting structure, acquisition related costs (including transaction costs and certain integration costs and recognition of backlog intangible assets recorded in purchase accounting)costs) and share-based compensation charges.
Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the below table are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.
Reportable operating segment sales and operating profit for the three months ended December 31, 2020 and 2019 were as follows: | | | Three Months Ended June 30, | | Nine Months Ended June 30, | | | Three Months Ended December 31, |
| 2020 | | 2019 | | 2020 | | 2019 | | | 2020 | | 2019 |
Total sales | | | | | | | | Total sales | | | | |
Integrated Solutions and Services | $ | 230,314 |
| | $ | 227,815 |
| | $ | 702,938 |
| | $ | 669,031 |
| Integrated Solutions and Services | | $ | 216,753 | | | $ | 231,800 | |
Applied Product Technologies | 136,350 |
| | 158,526 |
| | 404,303 |
| | 437,196 |
| Applied Product Technologies | | 123,581 | | | 138,529 | |
Total sales | 366,664 |
| | 386,341 |
| | 1,107,241 |
| | 1,106,227 |
| Total sales | | 340,334 | | | 370,329 | |
Intersegment sales | | | | | | | | Intersegment sales | | | | |
Integrated Solutions and Services | 1,603 |
| | 2,386 |
| | 8,204 |
| | 6,240 |
| Integrated Solutions and Services | | 2,036 | | | 3,662 | |
Applied Product Technologies | 17,234 |
| | 23,612 |
| | 53,442 |
| | 68,014 |
| Applied Product Technologies | | 16,105 | | | 20,562 | |
Total intersegment sales | 18,837 |
| | 25,998 |
| | 61,646 |
| | 74,254 |
| Total intersegment sales | | 18,141 | | | 24,224 | |
Sales to external customers | | | | | | | | Sales to external customers | | | | |
Integrated Solutions and Services | 228,711 |
| | 225,429 |
| | 694,734 |
| | 662,791 |
| Integrated Solutions and Services | | 214,717 | | | 228,138 | |
Applied Product Technologies | 119,116 |
| | 134,914 |
| | 350,861 |
| | 369,182 |
| Applied Product Technologies | | 107,476 | | | 117,967 | |
Total sales | 347,827 |
| | 360,343 |
| | 1,045,595 |
| | 1,031,973 |
| Total sales | | $ | 322,193 | | | $ | 346,105 | |
| | Operating profit (loss) | | | | | | | | Operating profit (loss) | | |
Integrated Solutions and Services | 32,608 |
| | 37,345 |
| | 102,457 |
| | 102,282 |
| Integrated Solutions and Services | | $ | 26,357 | | | $ | 33,154 | |
Applied Product Technologies | 23,588 |
| | 22,524 |
| | 110,480 |
| | 38,362 |
| Applied Product Technologies | | 13,380 | | | 63,142 | |
Corporate | (23,130 | ) | | (32,778 | ) | | (89,024 | ) | | (108,444 | ) | Corporate | | (23,503) | | | (26,604) | |
Total operating profit | 33,066 |
| | 27,091 |
| | 123,913 |
| | 32,200 |
| Total operating profit | | 16,234 | | | 69,692 | |
Interest expense | (10,485 | ) | | (14,842 | ) | | (37,320 | ) | | (43,759 | ) | Interest expense | | (8,673) | | | (13,583) | |
Income (loss) before income taxes | 22,581 |
| | 12,249 |
| | 86,593 |
| | (11,559 | ) | |
Income tax (expense) benefit | (740 | ) | | (7,959 | ) | | (3,336 | ) | | 1,134 |
| |
Net income (loss) | $ | 21,841 |
| | $ | 4,290 |
| | $ | 83,257 |
| | $ | (10,425 | ) | |
Depreciation and amortization | | | | | | | | |
Integrated Solutions and Services | $ | 17,745 |
| | $ | 14,035 |
| | $ | 50,702 |
| | $ | 42,307 |
| |
Applied Product Technologies | 3,556 |
| | 4,350 |
| | 10,673 |
| | 13,142 |
| |
Corporate | 6,241 |
| | 5,760 |
| | 18,681 |
| | 15,948 |
| |
Total depreciation and amortization | $ | 27,542 |
| | $ | 24,145 |
| | $ | 80,056 |
| | $ | 71,397 |
| |
Capital expenditures | | | | | | | | |
Integrated Solutions and Services | $ | 23,734 |
| | $ | 19,646 |
| | $ | 56,918 |
| | $ | 53,303 |
| |
Applied Product Technologies | 1,040 |
| | 1,720 |
| | 4,407 |
| | 5,988 |
| |
Corporate | 2,391 |
| | 1,900 |
| | 4,599 |
| | 4,657 |
| |
Total capital expenditures | $ | 27,165 |
| | $ | 23,266 |
| | $ | 65,924 |
| | $ | 63,948 |
| |
Income before income taxes | | Income before income taxes | | 7,561 | | | 56,109 | |
Income tax expense | | Income tax expense | | (1,084) | | | (2,603) | |
Net income | | Net income | | $ | 6,477 | | | $ | 53,506 | |
|
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Assets | | | |
Integrated Solutions and Services | $ | 836,389 |
| | $ | 762,707 |
|
Applied Product Technologies | 589,721 |
| | 657,879 |
|
Corporate | 351,786 |
| | 317,262 |
|
Total assets | $ | 1,777,896 |
| | $ | 1,737,848 |
|
Goodwill | | | |
Integrated Solutions and Services | $ | 222,669 |
| | $ | 222,013 |
|
Applied Product Technologies | 170,758 |
| | 170,877 |
|
Total goodwill | $ | 393,427 |
| | $ | 392,890 |
|
31
| | | | | | | | | | | |
| December 31, 2020 | | September 30, 2020 |
Assets | | | |
Integrated Solutions and Services | $ | 846,707 | | | $ | 835,307 | |
Applied Product Technologies | 599,543 | | | 598,701 |
Corporate | 397,416 | | | 410,450 |
Total assets | $ | 1,843,666 | | | $ | 1,844,458 | |
| | | |
| | | |
| | | |
| | | |
23. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) from continuing operations per common share (in thousands, except per share amounts):
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
Numerator: | | | | | | | |
Numerator for basic and diluted earnings per common share—Net income attributable to Evoqua Water Technologies Corp. | | | | | $ | 6,433 | | | $ | 53,145 | |
Denominator: | | | | | | | |
Denominator for basic net income per common share—weighted average shares | | | | | 117,768 | | 115,586 |
Effect of dilutive securities: | | | | | | | |
Share‑based compensation | | | | | 3,790 | | | 5,443 | |
Denominator for diluted net income per common share—adjusted weighted average shares | | | | | 121,558 | | | 121,029 | |
Basic earnings attributable to Evoqua Water Technologies Corp. per common share | | | | | $ | 0.05 | | | $ | 0.46 | |
Diluted earnings attributable to Evoqua Water Technologies Corp. per common share | | | | | $ | 0.05 | | | $ | 0.44 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Numerator: | | | | | | | |
Numerator for basic and diluted earnings (loss) per common share—Net income (loss) attributable to Evoqua Water Technologies Corp. | $ | 21,384 |
| | $ | 4,135 |
| | $ | 82,341 |
| | $ | (11,211 | ) |
Denominator: | | | | | | | |
Denominator for basic net income (loss) per common share—weighted average shares | 116,621 |
| | 114,653 |
| | 116,621 |
| | 114,653 |
|
Effect of dilutive securities: | | | | | | | |
Share‑based compensation | 3,595 |
| | 4,781 |
| | 4,432 |
| | — |
|
Denominator for diluted net income (loss) per common share—adjusted weighted average shares | 120,216 |
| | 119,434 |
| | 121,053 |
| | 114,653 |
|
Basic earnings (loss) attributable to Evoqua Water Technologies Corp. per common share | $ | 0.18 |
| | $ | 0.04 |
| | $ | 0.71 |
| | $ | (0.10 | ) |
Diluted earnings (loss) attributable to Evoqua Water Technologies Corp. per common share | $ | 0.18 |
| | $ | 0.03 |
| | $ | 0.68 |
| | $ | (0.10 | ) |
24. Subsequent Events
None.
Since the Company was in a net loss position for the nine months ended June 30, 2019, there was no difference between the number of shares used to calculate basic and diluted loss per share. Because of their anti-dilutive effect, 4,358 common share equivalents, comprised of employee stock options, have been excluded from the diluted EPS calculation for the nine months ended June 30, 2019.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Unaudited Consolidated Financial Statements, including the notes, included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this “Report”), and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019,2020, as filed with the SEC on November 25, 2019 and as amended on December 4, 201920, 2020 (the “2019“2020 Annual Report”). You should review the disclosures in Part I, Item 1A. “Risk Factors” in the 20192020 Annual Report, in Part II, Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC on May 6, 2020, as well as any cautionary language in this report,Report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless otherwise indicated or the context otherwise requires, all references to “the Company,” “Evoqua,” “Evoqua Water Technologies Corp.,” “EWT Holdings I Corp.,” “we,” “us,” “our” and similar terms refer to Evoqua Water Technologies Corp., together with its consolidated subsidiaries. Unless otherwise specified, all dollar amounts in this section are referred to in millions.
Overview and Background
We are a leading provider of mission critical water and wastewater treatment solutions, offering a broad portfolio of products, services and expertise to support industrial, municipal and recreational customers who value water. With over 200,000 installations worldwide, we hold leading positions in the industrial, commercial and municipal water treatment markets in North America. We offer a comprehensive portfolio of differentiated, proprietary technology solutions sold under a number ofseveral market‑leading and well‑established brands to our global customer base. We have worked to protect water, the environment and our employees for over 100 years. As a result, we have earned a reputation for quality, safety and reliability and are sought out by our customers to solve the full range of their water treatment needs, and maintaining our reputation is critical to the success of our business.
Our solutions are designed to ensure that our customers have the quantity and quality of water that meets their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations, and support their regulatory compliance and environmental sustainability. We deliver and maintain these mission critical solutions through the largest service network in North America, assuring our customers continuous uptime with 92 service branches as of June 30,December 31, 2020. We have an extensive service and support network, and as a result, a certified Evoqua Service Technician is generally no more than a two‑hourtwo-hour drive from more than 90% of our North American customers’ sites.
Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers, performance and sustainable” foster a corporate culture that is focused on establishing a workforce that is enabled, empowered and accountable, which creates a highly entrepreneurial and dynamic work environment. Our purpose is “Transforming water. Enriching life.” We draw from a long legacy of water treatment innovations and industry firsts, supported by more than 1,1001,300 granted or pending patents, which in aggregate are imperative to our business. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals, and we are able to achieve purification levels whichthat are 1,000 times greater than typical drinking water.
Business Segments
We serve our customers through two segments: Integrated Solutions and Services, a group focused on engaging directly with end users, and Applied Product Technologies, a group focused on developing product platforms to be sold primarily through third party channels. Our business is organized by customer base and offerings into two reportable operating segments that each draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes and corporate philosophies. Our reportable operating segments consist of: (i) our Integrated Solutions and Services segment and (ii) our Applied Product Technologies segment. The key factors used to identify these reportable operating segments are the organization and alignment of our internal operations, the nature of the products and services and customer type.
•Within the Integrated Solutions and Services segment, we primarily provide tailored solutions in collaboration with our customers backed by life‑cycle services including on‑demand water, outsourced water, recycle and reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance.
•Within the Applied Product Technologies segment, we provide a highly differentiated and scalable range of products and technologies specified by global water treatment designers, OEMs, engineering firms and integrators.
We evaluate our business segments’ operating results based on income from operations and EBITDA or Adjusted EBITDAnet income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization (“EBITDA”) on a segment basis. EBITDA and Adjusted EBITDA are non-GAAP financial measures. For more information regarding EBITDA and Adjusted EBITDA, including a reconciliation to the most directly comparable GAAP financial measure, please see the section titled “How We Assess the Performance of Our Business”. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and certain other charges, which have not been allocated to business segments. As such, the segment results provided herein may not be comparable to other companies. In addition, our chief operating decision maker uses adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments. Adjusted EBITDA of the reportable segments does not include certain unallocated charges that are presented within Corporate activities. These unallocated charges include certain restructuring and other business transformation charges that have been incurred to align and reposition the Company to the current reporting structure, acquisition related costs (including transaction costs and certain integration costs) and share-based compensation charges. EBITDA and adjusted EBITDA are non-GAAP financial measures. For more information regarding EBITDA and adjusted EBITDA, including a reconciliation to the most directly comparable GAAP financial measure, please see the section titled “How We Assess the Performance of Our Business”.
Organic Growth Drivers
Market Growth
We maintain a leading position among customers in growing industries that utilize water as a critical part of their operations or production processes, including pharmaceuticals and health sciences, microelectronics, food and beverage, hydrocarbon and chemical processing, power, general manufacturing, municipal drinking and wastewater, marine and aquatics. Water treatment is an essential, non‑discretionary market that is growing in importance as access to clean water has become an international priority. Underpinning this growth are a number of global, long‑term trends that have resulted in increasingly stringent effluent regulations, along with a growing demand for cleaner and sustainable waste streams for reuse. These trends include the growing global population, increasing levels of urbanization and continued global economic growth, and we have seen these trends manifest themselves within our various end markets creating multiple avenues of growth. For example, within the industrial market, water is an integral and meaningful component in the production of a wide‑range of goods spanning from consumer electronics to automobiles. We anticipate that the COVID-19 pandemic and the resulting economic downturn may cause some near-term contraction in certain end markets that we serve, and we continue to monitor macroeconomic trends closely. However, we do not expect that the pandemic will significantly alter these long-term trends.
Our Existing Customer Base
We believe our strong brands, leading position in highly fragmented markets, scalable and global offerings, leading installed base and unique ability to provide complete treatment solutions will enable us to capture a larger share of our existing customers’ water treatment spend while expanding with existing and new customers into adjacent end‑markets and underpenetratedunder-penetrated regions, including by investing in our sales force and cross‑selling to existing customers. We believe that we are uniquely positioned to further penetrate our core markets, with over 200,000 installations across over 38,000 global customers. We maintain a customer‑intimate business model with strong brand value and provide solutions‑focused offerings capable of serving a customer’s full lifecycle water treatment needs, both in current and new geographic regions.
Our Service Model
We selectively target high value projects with opportunities for recurring business through service, parts and other aftermarket opportunities over the lifecycle of the process or capital equipment. In particular, we have developed internet‑connected monitoring technologies through the deployment of our WaterOne®Water One® service platform, which enables customers to outsource their water treatment systems and focus on their core business, offering customers system optimization, predictive and proactive service, and simplified billing and pricing. Our WaterOne®Water One® platform also enables us to transition our customers to pricing models based on usage, which otherwise would not have been possible without technological advancement. Our technology solutions provide customers with increased stability and predictability in water‑related costs, while enabling us to optimize our service route network and on demand offerings through predictive analytics, which we believe will result in market share gains, improved service levels, increased barriers to entry and reduced costs.
Product and Technology Development
We develop our technologies through in‑house research, development and engineering and targeted tuck‑in, vertical market and geography‑expanding, technology-enhancing acquisitions. We have a reservoir of recently launched technologies and a strong pipeline of new offerings designed to provide customers with innovative, value‑enhancing solutions. Furthermore, since April 2016, we have successfully completed thirteenseveral acquisitions andover the acquisition of a 60% interest in Frontier Water Systems LLC (“Frontier”), each of which expands our vertical markets and geographic reach and enhance our technologies, strengthening our existing capabilities andpast five years, adding new capabilities and cross selling opportunities in areas such as mobile wastewater treatment, soil and air treatment, regenerative media filtration, anodes, UV and ozone disinfection, aerobic and anaerobic biological treatment technologies and electrochemical and electrochlorination cells. We are able to rapidly scale new technologies using our leading direct and third‑party sales channels and our relationships with key influencers, including municipal representatives, engineering firms, designers and other system specifiers. We believe our continued investment in driving penetration of our recently launched technologies, robust pipeline of new capabilities and best‑in‑class channels to market will allow us to continue to address our customer needs across the water lifecycle.
Operational Excellence
We believe that continuous improvement of our operations, processes and organizational structure is a key driver of our earnings growth. We have separately identified and are pursuing a number ofseveral discrete initiatives which,that, if successful, we expect could result in additional cost savings over the next two years. These initiatives include our supply chain improvement program to consolidate and manage global spending, our improved logistics and transportation management program, capturing benefits of our WaterOne®Water One® platform and further optimizing our engineering cost structure, our global shared services organization and our sales, inventory and operations planning.planning, including footprint rationalization. These improvements focus on creating value for customers through reduced lead times,leadtimes, improved quality and superior customer support, while also creating value for shareholders through enhanced earnings growth. Furthermore, as a result of significant investments we have made and plan to continue to make in our footprint and facilities, we believe we have the capacity to support our planned growth without commensurate increaseincreases in fixed costs.
Acquisitions and Divestitures
We believe that capex-like, tuck‑in acquisitions present a key opportunity within our overall growth strategy, which we will continue to evaluate strategically. These strategic acquisitions are expected towill enable us to accelerate our growth by extending ourthe critical mass in existing markets as well as expandexpanding in new geographies and new end market verticals. Our existing customer relationships, best‑in‑class channels to market and ability to rapidly commercialize technologies provide a strong platform to drive rapid growth in the businesses we acquire. To capitalize on these opportunities, we have built an experienced team dedicated to mergers and acquisitions that has, since April 2016, successfully completed thirteenfifteen acquisitions and the acquisition of a 60% interest in Frontier each of which expandsWater Systems LLC, expanding our vertical markets and geographic reach and enhanceenhancing our technologies, with purchase prices ranging from approximately $2.6$2.0 million to approximately $283.7 million, and pre‑acquisition revenues ranging from approximately $3.1$2.1 million to approximately $55.7 million. During the three months ended December 31, 2020, we acquired the industrial water business of Ultrapure & Industrial Services, LLC (“Ultrapure”). See Note 4, “Acquisitions” in Item 1 in this Report for a complete discussion.
OnDuring the three months ended December 31, 2019, we completed the sale of the Memcor product line to DuPont de Nemours, Inc. (DuPont)(“DuPont”). The aggregate purchase price paid by DuPont was $110.0 million in cash, subject to certain adjustments. Following adjustments for cash and net working capital, gross proceeds paid by DuPont were $131.0 million. The Company recognized a $49.0 million net pre-tax benefit on the sale of the Memcor product line, net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred induring the three months ended December 31, 2019. As a result of net working capital adjustments, the Company recognized an additional $9.0 million net pre-tax benefit in the three months ended March 31, 2020. The Company and DuPont have a history of collaboration, and following the sale, DuPont
We will continue to supply the Companyactively evaluate acquisition opportunities that are consistent with Memcor® products.our business strategy. We maintain a robust pipeline of potential acquisition targets, developed by our management team as well as various outside industry experts and consultants.
Key Factors and Trends Affecting Our Business and Financial Statements
Various trends and other factors affect or have affected our operating results, including:
Impact of the COVID-19 pandemic. In response to the challenges created by the COVID-19 pandemic, we have continued to prioritize protecting the safety of our employees and stakeholders, taking actions to ensure the resiliency of our business and managing the business for liquidity. Our business has been considered essential under federal and local standards, and we have maintained business continuity at our critical service branches and manufacturing facilities.facilities to
date. We have taken measures to protect our employees, including implementation of remote working practices where possible and enhanced safety procedures for employees on site at our facilities and our customers’ facilities, as well as managing our supply chain to ensure that necessary personal protective equipment is available to our personnel. These measures have resulted in incremental costs and reductions in service productivity. We have also taken certain cost reduction actions, some of which are temporary in nature, such as reduction of marketing and travel activity as well as deferment of headcount additions, to offset increased costs and preserve liquidity andliquidity. Finally, we have reallocated existing resources to maintain productivity levels where feasible.
In general, we have seen increased demand for services from customers in pharmaceuticaladdition to the incremental costs and laboratory industries through the period ended June 30, 2020, as the impact ofcost reduction actions described above, to date, the pandemic broadened. However, we also continuehas impacted volume across our business, due primarily to see uneven demand for our productssite access restrictions, temporary site closures, and services fromtemporary delays in annual maintenance activities by customers in certain other industries, such as oilend markets. We have emphasized our focus on collections, and, gas, refining and aquatics. Customer site shut-downs and project delays created by the pandemic contributed to a declinedate, we have not experienced any downturn in revenuecollections from services in the quarter.our customers. We continue to evaluate the impact of the pandemic on our business particularly how social distancing guidelines and government-imposed restrictions might continue to affect our access to our customers’ sites and how the economic downturn resulting from the pandemic might affect our customers’ willingness to make capital expenditures and our ability to collect from our customers. Given the evolving nature of the unprecedented pandemic, the overall impact on our operations over the remainder of the fiscal year cannot be reasonably estimated at this time.
For more information regarding factors and events that may impact our business, results of operations and financial condition from the effectsas a result of the COVID-19 pandemic, see Part II,“Risk Factors-Risks Related to the COVID-19 Pandemic” included in Item 1A. “Risk Factors” of our Quarterly Report on Form 10-Q forin the quarter ended March 31, 2020 as filed with the SEC on May 6, 2020.Annual Report.
Overall economic trends. The overall economic environment and related changes in industrial, commercial and municipal spending impact our business. In general, positive conditions in the broader economy promote industrial, commercial and municipal customer spending, while economic weakness results in a reduction of new industrial, commercial and municipal project activity. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include population growth, total water consumption, municipal budgets, employment rates, business conditions, the availability of credit or capital, interest rates, tax rates, imposition of tariffs and regulatory changes. Since the businesses of our customers vary in cyclicality, periodic downturns in any specific sector typically have modest impacts on our overall business. For example, the currentrecent weakness in global oil markets has created, and we expect willmay continue to create, some weakness in demand from customers that we serve in the oil and gas industry. Additionally, the COVID-19 pandemic has increased economic uncertainty and has caused an economic slowdown that is likely to continue and may result in a sustained global recession.
Changes in costs and availability. We have significant exposures to certain commodities, including steel, caustic, carbon, calcium nitrate and iridium, and volatility in the market price and availability of these commodity input materials has a direct impact on our costs and our business. For example, restrictions on international trade, including tariffs imposed by the U.S. government and other governments, as well as supply chain disruptions caused by the COVID-19 pandemic, have increased and could further increase the cost of certain materials and have restricted and could further restrict availability of certain commodities, which may result in delays in our execution of projects.projects or margin erosion. Although we have offset a portion of these cost increases through price increases, there can be no assurance that we will be able to continue to recuperate additional cost increases from our customers through product price increases. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross profit and gross margin. Further, additional potential acquisitions and international expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our management systems, financial and management controls and information systems. We will also be required to hire, train and retain operational and sales personnel, which affects our operating margins.
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in costs due to commodity cost increases or general inflationinflation. We anticipate some inflationary pressure in fiscal 2021, which could lead to a reduction in our revenues as well as greater margin pressure, as increased costs may not be able to be passed on to customers. We actively monitor changes in cost and respond as we deem appropriate to attempt to mitigate the impact to our results.
Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including funding, readiness of projects, regulatory approvals and significant weather events. In addition, our contracts for
large capital water treatment projects, systems and solutions for industrial, commercial and municipal applications are generally fixed‑price contracts with milestone billings. As a result of these factors, our working capital requirements and demands on our distribution and delivery network may fluctuate during the year.
New products and technologies. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling array of products, services and solutions responsive to evolving customer innovations, preferences and specifications. We expect that increased use of water in industrial and commercial processes will drive increased customer demand in the future, and our ability to grow will depend in part on effectively responding to innovation in our customers’ processes and systems. Further, our ability to provide products that comply with evolving government regulations will also be a driver of the appeal of our products, services and solutions to industrial and commercial customers.
Government policies. Decaying water systems in the United States (“U.S.”) will require critical drinking water and wastewater repairs, often led by municipal governments. Further, as U.S. states increase regulation on existing and emerging contaminants, we expect that our customers will increasingly require sustainable solutions to their water‑related needs. In general, increased infrastructure investment and more stringent municipal, state and federal regulations promote increased spending on our products, services and solutions, while a slowdown in investment in public infrastructure or the elimination of key environmental regulations could result in lower industrial and municipal spending on water systems and products.
Availability of water. In general, we expect demand for our products and services to increase as the availability of clean water from public sources decreases. Secular trends that will drive demand for water across a multitude of industrial, commercial and municipal applications include global population growth, urbanization, industrialization and overall economic growth. In addition, the supply of clean water could be adversely impacted by factors including an aging water infrastructure within North America and increased levels of water stress from seasonal rainfall, inadequate water storage options or treatment technologies. Because water is a critical component and byproduct of many processes, including in manufacturing and product development, we expect that, as global consumption patterns evolve and water shortages persist, demand for our equipment and services will continue to increase.
Operational investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. Activities related to operational investments include employee training and development, integrating acquired businesses, implementing enhanced information systems, research, development and engineering investments and other activities to enable us to support our operating model.
Our ability to source and distribute products effectively. Our revenues are affected by our ability to purchase our inputs in sufficient quantities at competitive prices. While we believe our suppliers have adequate capacity to meet our current and anticipated demand, our level of revenues could be adversely affected in the event of constraints in our supply chain, including the inability of our suppliers to produce sufficient quantities of raw materials in a manner that is able to match demand from our customers.
Contractual relationships with customers. Due to our large installed base and the nature of our contractual relationships with our customers, we have high visibility into a large portion of our revenue. The one‑ to twenty‑year terms of many of our service contracts and the regular delivery and replacement of many of our products help to insulate us from the negative impact of any typical economic decline.
Exchange rates. The reporting currency for our Unaudited Consolidated Financial Statements is the U.S. dollar. We operate in numerous countries around the world and therefore, certain of our assets, liabilities, revenues and expenses are denominated in functional currencies other than the U.S. dollar, primarily in the euro, U.K. sterling, Chinese renminbi, Canadian dollar, Australian dollar and Singapore dollar. To prepare our Unaudited Consolidated Financial Statements we must translate those assets, liabilities, revenues and expenses into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in our Unaudited Consolidated Financial Statements, even if their value has not changed in the functional currency. While we believe that we are not susceptible to any material impact on our results of operations caused by fluctuations in exchange rates because our operations are primarily conducted in the U.S., if we expand our foreign operations in the future, substantial increases or decreases in the value of the U.S. dollar relative to these other currencies could have a significant impact on our results of operations.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenue, gross profit, gross margin, operating expenses, net income (loss) and Adjustedadjusted EBITDA (which is a non-GAAP financial measure)measure, as described more fully and reconciled to the most directly comparable GAAP financial measure below).
Revenue
Our sales are a function of sales volumes and selling prices, each of which is a function of the mix of product and service sales, and consist primarily of:
•sales of tailored light industry technologies, heavy industry technologieswater treatment solutions and environmental products, services and solutions in collaboration withto our industrial customers, backed by lifecycle services including emergency response services and outsourced water alternatives, to a broad group of industrial customers in our U.S., Canada and Singapore markets;
•sales of products, services and solutions to engineering firms and municipalities to purify drinking water and treat wastewater globally; and
•sales of a wide variety of differentiated products and technologies, to an array of OEM, distributor, end‑user, engineering firm and integrator customers in all of our geographic markets and aftermarket channels.
Cost of Sales, Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of product sales and cost of services from our product and services revenue. Gross margin measures gross profit as a percentage of our combined product and services revenue.
Cost of product sales consists of all manufacturing costs required to bring a product to a ready for sale condition, including direct and indirect materials, direct and indirect labor costs including benefits, freight, depreciation, information technology, rental and insurance, repair and maintenance, utilities, other manufacturing costs, warranties and third party commissions.
Cost of services primarily consists of the cost of personnel and travel for our field service, supply chain and technicians, depreciation of equipment and field service vehicles and freight costs.
Operating Expenses
Operating expenses consist primarily of general and administrative, sales and marketing and research and development expenses.the following:
General and Administrative. General and administrative expenses (“G&A expense”) consist of fixed overhead personnel expenses associated with our corporate functions and our service organization (including district and branch managers, customer service, contract renewals and regeneration plant management). We expect our general and administrative expenses to increase due to the anticipated growth of our business and related infrastructure as well as due to the legal, accounting, insurance, investor relations and other costs associated with being a public company.
Sales and Marketing. Sales and marketing expenses (“S&M expense”) consist primarily of advertising and marketing promotions of our products, services and solutions and related personnel expenses (including all Evoqua sales and application employees’ base compensation and incentives), as well as sponsorship costs, consulting and contractor expenses, travel, display expenses and related amortization. We expect our sales and marketing expenses to increase as we continue to actively promote our products, services and solutions.
Research and Development. Research and development expenses (“R&D expense”) consist primarily of personnel expenses related to research and development, patents, sustaining engineering, consulting and contractor expenses, tooling and prototype materials and overhead costs allocated to such expenses. Substantially all of our research and development expenses are related to developing new products and services and improving our existing products and services. To date, research and development expenses have been expensed as incurred, because the period between
achieving technological
feasibility and the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant.
R&D expense can fluctuate depending on our determination to invest in developing new products, services and solutions and enhancing our existing products, services and solutions versus adding these capabilities through a mergers and acquisitions strategy. R&D expenditures are concentrated in our products businesses.
Net Income (Loss)
Net income (loss) is determined by subtracting operating expenses and interest expense from, and adding other operating income (expense), equity income from our partnership interest in Treated Water Outsourcing and income tax benefit (expense) to, gross profit. For more information on how we determine gross profit, see “Gross Profit.”
Adjusted EBITDA
Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary metrics used by management to evaluate the financial performance of our business. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, purchase accounting adjustment costs, non-cash share-based compensation, transaction costs and other gains, losses and expenses. We present Adjustedadjusted EBITDA, which is not a recognized financial measure under accounting principles generally accepted in the United States (“GAAP”), because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results and provides greater clarity and comparability period over period to management and our investors regarding the operational impact of long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjustedadjusted EBITDA to supplement GAAP measures of performance as follows:
•to assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance;
•in our management incentive compensation, which is based in part on components of Adjustedadjusted EBITDA;
•in certain calculations under our senior secured credit facilities, which use components of Adjustedadjusted EBITDA;
•to evaluate the effectiveness of our business strategies;
•to make budgeting decisions; and
•to compare our performance against that of other peer companies using similar measures.
In addition to the above, our chief operating decision maker uses EBITDA and Adjustedadjusted EBITDA of each reportable operating segment to evaluate the operating performance of such segments. EBITDA and Adjustedadjusted EBITDA of the reportable operating segments do not include certain charges that are presented within corporate activities. These charges include certain restructuring and other business transformation charges that have been incurred to align and reposition the Company to the current reporting structure, acquisition related costs (including transaction costs and integration costs and recognition of backlog intangible assets recorded in purchase accounting)costs) and share-based compensation charges.
You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjustedadjusted EBITDA, you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of Adjustedadjusted EBITDA. Our presentation of Adjustedadjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non‑recurring items. In addition, Adjustedadjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
The following is a reconciliation of our Net income (loss) to Adjustedadjusted EBITDA (unaudited, amounts in millions):
| | | | | | | | | | | | | Three Months Ended December 31, | |
| Three Months Ended June 30, | | Nine Months Ended June 30, | |
| 2020 | | 2019 | | 2020 | | 2019 | |
Net income (loss) | $ | 21.8 |
| | $ | 4.3 |
| | $ | 83.3 |
| | $ | (10.4 | ) | |
Income tax expense (benefit) | 0.8 |
| | 7.9 |
| | 3.3 |
| | (1.2 | ) | |
(In millions) | | (In millions) | | 2020 | | 2019 | | % Variance |
Net income | | Net income | | $ | 6.5 | | | $ | 53.5 | | | (87.9) | % |
Income tax expense | | Income tax expense | | 1.1 | | | 2.6 | | | (57.7) | % |
Interest expense | 10.5 |
| | 14.9 |
| | 37.3 |
| | 43.8 |
| Interest expense | | 8.7 | | | 13.6 | | | (36.0) | % |
Operating profit | 33.1 |
| | 27.1 |
| | 123.9 |
| | 32.2 |
| Operating profit | | 16.3 | | | 69.7 | | | (76.6) | % |
Depreciation and amortization | 27.6 |
| | 24.1 |
| | 80.1 |
| | 71.4 |
| Depreciation and amortization | | 27.4 | | | 25.1 | | | 9.2 | % |
EBITDA | 60.7 |
| | 51.2 |
| | 204.0 |
| | 103.6 |
| EBITDA | | 43.7 | | | 94.8 | | | (53.9) | % |
Restructuring and related business transformation costs (a) | 3.1 |
| | 4.5 |
| | 11.0 |
| | 18.5 |
| Restructuring and related business transformation costs (a) | | 1.8 | | | 1.7 | | | 5.9 | % |
| Share-based compensation (b) | 2.6 |
| | 5.0 |
| | 8.6 |
| | 14.3 |
| Share-based compensation (b) | | 3.1 | | | 3.7 | | | (16.2) | % |
| Transaction costs (c) | 0.3 |
| | 1.0 |
| | 1.0 |
| | 5.5 |
| Transaction costs (c) | | 0.6 | | | 0.2 | | | 200.0 | % |
Other (gains) losses and expenses (d) | (2.9 | ) | | (1.1 | ) | | (60.5 | ) | | 13.8 |
| Other (gains) losses and expenses (d) | | (4.4) | | | (56.8) | | | (92.3) | % |
Adjusted EBITDA | $ | 63.8 |
| | $ | 60.6 |
| | $ | 164.1 |
| | $ | 155.7 |
| Adjusted EBITDA | | $ | 44.8 | | | $ | 43.6 | | | 2.8 | % |
(a)Restructuring and related business transformation costs
Adjusted EBITDA is calculated prior to considering certain restructuring or business transformation events. These events may occur over extended periods of time, and in some cases it is reasonably possible that they could reoccur in future periods based on reorganizations of the business, cost reduction or productivity improvement needs, or in response to economic conditions. For the periods presented such events include the following:
| |
(i) | Certain costs and expenses in connection with various restructuring initiatives, including severance costs, relocation costs, recruiting expenses, and third-party consultant costs to assist with these initiatives. This includes: |
| |
(A) | amounts related to the Company’s restructuring initiatives to reduce the cost structure and rationalize location footprint following the sale of the Memcor product line; |
| |
(B) | amounts related to the Company’s transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide; and |
| |
(C) | amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure. |
(i)Certain costs and expenses in connection with various restructuring initiatives, including severance costs, relocation costs, recruiting expenses, and third-party consultant costs to assist with these initiatives. This includes:
(A)amounts related to the Company’s restructuring initiatives to reduce the cost structure and rationalize location footprint following the sale of the Memcor product line;
(B)amounts related to the Company’s transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide; and
(C)amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure.
| | | | | | | | | | | | | Three Months Ended December 31, |
| Three Months Ended June 30, | | Nine Months Ended June 30, | |
(In millions) | | (In millions) | | 2020 | | 2019 |
| 2020 | | 2019 | | 2020 | | 2019 | |
Post Memcor divestiture restructuring(1) | $ | 1.2 |
| | $ | — |
| | $ | 4.9 |
| | $ | — |
| Post Memcor divestiture restructuring(1) | | $ | 0.9 | | | $ | — | |
Cost of product sales and services ("Cost of sales") | 0.8 |
| | — |
| | 3.7 |
| | — |
| Cost of product sales and services ("Cost of sales") | | 0.8 | | | — | |
| S&M expense | (0.1 | ) | | — |
| | — |
| | — |
| S&M expense | | 0.2 | | | — | |
G&A expense | 0.5 |
| | — |
| | 1.2 |
| | — |
| |
| Other operating (income) expense | | Other operating (income) expense | | (0.1) | | | — | |
Two-segment restructuring(2) | $ | 0.6 |
| | $ | 2.9 |
| | $ | 1.9 |
| | $ | 9.9 |
| Two-segment restructuring(2) | | $ | 0.2 | | | $ | 1.0 | |
Cost of sales | 0.4 |
| | 1.4 |
| | 1.0 |
| | 4.1 |
| Cost of sales | | — | | | 0.3 | |
R&D expense | — |
| | — |
| | — |
| | 0.1 |
| |
S&M expense | — |
| | 0.3 |
| | — |
| | 0.9 |
| |
| G&A expense | 0.2 |
| | 1.2 |
| | 0.9 |
| | 4.8 |
| G&A expense | | 0.2 | | | 0.3 | |
Other operating (income) expense | | Other operating (income) expense | | — | | | 0.4 | |
Various other initiatives(3) | $ | 0.5 |
| | $ | 0.6 |
| | $ | 1.0 |
| | $ | 1.3 |
| Various other initiatives(3) | | $ | — | | | $ | 0.2 | |
Cost of sales | 0.3 |
| | 0.2 |
| | 0.7 |
| | 0.7 |
| Cost of sales | | — | | | 0.1 | |
S&M expense | 0.1 |
| | — |
| | 0.1 |
| | — |
| |
| G&A expense | 0.1 |
| | 0.4 |
| | 0.2 |
| | 0.6 |
| G&A expense | | — | | | 0.1 | |
| Total | $ | 2.3 |
| | $ | 3.5 |
| | $ | 7.8 |
| | $ | 11.2 |
| Total | | $ | 1.1 | | | $ | 1.2 | |
| |
(1)(1)all of which is reflected in restructuring charges in Note 14, “Restructuring and Related Charges,” in Part I, Item 1 of this Quarterly Report on Form 10-Q (the “Restructuring Footnote”) in the three months ended December 31, 2020. (2)of which $0.2 million and $0.7 million is reflected in the Restructuring Footnote in the three months ended December 31, 2020 and 2019, respectively. (3)all of which is reflected in the Restructuring Footnote in the three months ended December 31, 2019. (ii)Legal settlement costs and intellectual property related fees associated with legacy matters prior to the AEA Acquisition, including fees and settlement costs related to product warranty litigation on MEMCOR® products and certain discontinued products. This includes: | | | | | | | | | | | | | | | | | | | Three Months Ended December 31, | (In millions) | | | | | 2020 | | 2019 | Cost of sales | | | | | $ | — | | | $ | 0.1 | | G&A expense | | | | | 0.1 | | | — | | Total | | | | | $ | 0.1 | | | $ | 0.1 | |
(iii)Expenses associated with our information technology and functional infrastructure transformation subsequent to the AEA Acquisition, including activities to optimize information technology systems and functional infrastructure processes. This includes: | | | | | | | | | | | | | | | | | | | Three Months Ended December 31, | (In millions) | | | | | 2020 | | 2019 | Cost of sales | | | | | $ | — | | | $ | 0.1 | | | | | | | | | | G&A expense | | | | | 0.2 | | | 0.3 | | | | | | | | | | Total | | | | | $ | 0.2 | | | $ | 0.4 | |
(iv)Costs associated with the secondary public offering of common stock held by certain shareholders of the Company, as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs. This includes: | of which $4.8 million is reflected in restructuring charges in Note 13, “Restructuring and Related Charges” in Part I, Item 1 of this Quarterly Report on Form 10-Q (the “Restructuring Footnote”) in the nine months ended June 30, 2020. |
| |
(2)
| of which $1.9 million and $9.3 million is reflected in the Restructuring Footnote in the nine months ended June 30, 2020 and 2019, respectively. |
| |
(3)
| all of which is reflected in the Restructuring Footnote in the nine months ended June 30, 2020 and 2019, respectively. |
| |
(ii) | legal settlement costs and intellectual property related fees associated with legacy matters prior to the AEA Acquisition, including fees and settlement costs related to product warranty litigation on Memcor products and certain discontinued products. This includes: |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Cost of sales | $ | 0.3 |
| | $ | 0.1 |
| | $ | 0.5 |
| | $ | 0.2 |
|
G&A expense | 0.1 |
| | 0.2 |
| | 0.3 |
| | 0.7 |
|
Total | $ | 0.4 |
| | $ | 0.3 |
| | $ | 0.8 |
| | $ | 0.9 |
|
| |
(iii) | expenses associated with our information technology and functional infrastructure transformation subsequent to the AEA Acquisition, including activities to optimize information technology systems and functional infrastructure processes. This includes: |
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
(In millions) | | | | | 2020 | | 2019 |
G&A expense | | | | | $ | 0.4 | | | $ | — | |
Total | | | | | $ | 0.4 | | | $ | — | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Cost of sales | $ | — |
| | $ | 0.3 |
| | $ | 0.1 |
| | $ | 0.4 |
|
G&A expense | (0.1 | ) | | 0.9 |
| | 0.6 |
| | 5.9 |
|
Total | $ | (0.1 | ) | | $ | 1.2 |
| | $ | 0.7 |
| | $ | 6.3 |
|
(b)Share-based compensation
| |
(iv) | costs associated with the secondary public offering of common stock held by certain shareholders of the Company, as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs. This includes: |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
G&A expense | $ | 0.5 |
| | $ | (0.5 | ) | | $ | 1.7 |
| | $ | 0.1 |
|
Total | $ | 0.5 |
| | $ | (0.5 | ) | | $ | 1.7 |
| | $ | 0.1 |
|
| |
(b) | Share-based compensation |
Adjusted EBITDA is calculated prior to considering non‑cash share‑based compensation expenses related to equity awards. See Note 16,17, “Share-Based Compensation”Compensation,” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail.
| |
(c) | Transaction related costs |
(c)Transaction related costs
Adjusted EBITDA is calculated prior to considering transaction, integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred as a result of the transaction decision. Such costs may include, without limitation, consulting and legal costs associated with due diligence and closing a transaction, restructuring and integration costs such as severance, facility consolidation costs, product rationalization or inventory obsolescence charges, system integration or conversion costs, fair value changes associated with contingent consideration, and costs associated with any litigation matters that arise subsequent to our acquisition of a business for which the matter in question preceded the transaction, but was not known, not probable or unresolved at the date of acquisition. We believe that viewing earnings prior to considering these charges provides investors with useful additional perspective because the significant costs incurred in connection with business combinations result primarily from the need to eliminate duplicate assets, activities or employees - a natural result of acquiring or disposing a fully integrated set of activities. Integration and restructuring costs associated with a business combination may occur over several years. This includes:
| | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
(In millions) | | | | | 2020 | | 2019 |
Cost of sales | | | | | $ | 0.1 | | | $ | 0.1 | |
G&A expense | | | | | 0.5 | | | 0.4 | |
Other operating (income) expense | | | | | — | | | (0.3) | |
Total | | | | | $ | 0.6 | | | $ | 0.2 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Cost of sales | $ | 0.1 |
| | $ | 0.1 |
| | $ | (0.1 | ) | | $ | 1.4 |
|
G&A expense | 0.2 |
| | 0.9 |
| | 1.1 |
| | 4.1 |
|
Total | $ | 0.3 |
| | $ | 1.0 |
| | $ | 1.0 |
| | $ | 5.5 |
|
(d)Other (gains), losses and expenses | |
(d) | Other (gains), losses and expenses |
Adjusted EBITDA is calculated prior to considering certain other significant (gains), losses and expenses. Such significant items represent substantive and/or unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and qualitative aspects of their nature and they may be highly variable and difficult to predict. Unusual items may represent items that are not part of our ongoing business, items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis, items that would be non-recurring, or items related to products we no longer sell. While not all-inclusive, examples of items that could be included as other (gains), losses and expenses would be amounts related to non-cash foreign currency exchange gains and losses on intercompany loans, significant warranty events, and certain disposals of businesses, products or facilities that do not qualify as discontinued operations under GAAP. For the periods presented such events include the following:
| |
(i) | impact of foreign exchange gains and losses; |
| |
(ii) | foreign exchange impact related to headquarter allocations; |
(i)impact of foreign exchange gains and losses;
| |
(iii) | expenses on disposal related to maintaining non‑operational business locations, net of gain on sale; |
| |
(iv) | expenses(ii)foreign exchange impact related to headquarter allocations; (iii)net expense reduction related to the remediation of manufacturing defects caused by a third-party vendor for which partial restitution was received;
(iv)charges incurred by the Company related to product rationalization in its electro-chlorination business; (v)trailing costs incurred in the three months ended December 31, 2020 related to the prior year sale of the Memcor product line and the Company related to the remediation of manufacturing defects caused by a third- party vendor; |
| |
(v) | charges incurred by the Company related to product rationalization in its electro-chlorination business; |
| |
(vi) | net pre-tax benefit on the sale of the Memcor product line, which is net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred in the nine months ended June 30, 2020 and gain on the sale of property in the three and nine months ended June 30, 2019; |
| |
(vii) | expenses incurred by the Company related to the write-off of inventory associated with product rationalization and facility consolidation; and |
| |
(viii) | expenses incurred by the Company as a result of the COVID-19 pandemic, including additional charges for personal protective equipment, increased costs for facility sanitization and one-time payments to certain employees. |
Other (gains), losses and expenses include the following for the periods presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2020 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | (viii) | | Total |
Cost of sales | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | — |
| | $ | 0.7 |
| | $ | 0.8 |
|
G&A expense | (4.0 | ) | | (0.1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | 0.4 |
| | (3.7 | ) |
Total | $ | (4.0 | ) | | $ | (0.1 | ) | | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | — |
| | $ | 1.1 |
| | $ | (2.9 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended June 30, 2019 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | (viii) | | Total |
Cost of sales | $ | 0.2 |
| | $ | — |
| | $ | — |
| | $ | 0.4 |
| | $ | 0.2 |
| | $ | — |
| | $ | (0.1 | ) | | $ | — |
| | $ | 0.7 |
|
G&A expense | (1.4 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1.4 | ) |
Other operating (income) expense | — |
| | — |
| | — |
| | — |
| | — |
| | (0.4 | ) | | — |
| | — |
| | (0.4 | ) |
Total | $ | (1.2 | ) | | $ | — |
| | $ | — |
| | $ | 0.4 |
| | $ | 0.2 |
| | $ | (0.4 | ) | | $ | (0.1 | ) | | $ | — |
| | $ | (1.1 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended June 30, 2020 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | (viii) | | Total |
Cost of sales | $ | (0.1 | ) | | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | 0.4 |
| | $ | 0.2 |
| | $ | — |
| | $ | 0.7 |
| | $ | 1.3 |
|
G&A expense | (2.4 | ) | | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | — |
| | 0.4 |
| | (1.9 | ) |
Other operating (income) expense | — |
| | — |
| | — |
| | (1.6 | ) | | — |
| | (58.3 | ) | | — |
| | — |
| | (59.9 | ) |
Total | $ | (2.5 | ) | | $ | — |
| | $ | — |
| | $ | (1.5 | ) | | $ | 0.4 |
| | $ | (58.0 | ) | | $ | — |
| | $ | 1.1 |
| | $ | (60.5 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Months Ended June 30, 2019 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | (viii) | | Total |
Cost of sales | $ | 0.2 |
| | $ | — |
| | $ | 0.5 |
| | $ | 1.7 |
| | $ | 3.2 |
| | $ | — |
| | $ | 5.0 |
| | $ | — |
| | $ | 10.6 |
|
G&A expense | 3.6 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3.6 |
|
Other operating (income) expense | — |
| | — |
| | — |
| | — |
| | — |
| | (0.4 | ) | | — |
| | — |
| | (0.4 | ) |
Total | $ | 3.8 |
| | $ | — |
| | $ | 0.5 |
| | $ | 1.7 |
| | $ | 3.2 |
| | $ | (0.4 | ) | | $ | 5.0 |
| | $ | — |
| | $ | 13.8 |
|
Immaterial rounding differences may be present in the tables above.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | | | 2020 | | 2019 | | |
(In millions, except per share amounts) | | | % of Revenue | | | | % of Revenue | | % Variance | | | | % of Revenue | | | | % of Revenue | | % Variance |
Revenue | $ | 347.8 |
| | 100.0 | % | | $ | 360.3 |
| | 100.0 | % | | (3.5 | )% | | $ | 1,045.6 |
| | 100.0 | % | | $ | 1,032.0 |
| | 100.0 | % | | 1.3 | % |
Cost of product sales and services | (237.6 | ) | | (68.3 | )% | | (249.0 | ) | | (69.1 | )% | | (4.6 | )% | | (718.4 | ) | | (68.7 | )% | | (736.4 | ) | | (71.4 | )% | | (2.4 | )% |
Gross profit | 110.2 |
| | 31.7 | % | | 111.3 |
| | 30.9 | % | | (1.0 | )% | | 327.2 |
| | 31.3 | % | | 295.6 |
| | 28.6 | % | | 10.7 | % |
General and administrative expense | (44.9 | ) | | (12.9 | )% | | (49.6 | ) | | (13.8 | )% | | (9.5 | )% | | (152.8 | ) | | (14.6 | )% | | (152.6 | ) | | (14.8 | )% | | 0.1 | % |
Sales and marketing expense | (29.8 | ) | | (8.6 | )% | | (31.9 | ) | | (8.9 | )% | | (6.6 | )% | | (101.8 | ) | | (9.7 | )% | | (103.5 | ) | | (10.0 | )% | | (1.6 | )% |
Research and development expense | (2.8 | ) | | (0.8 | )% | | (3.3 | ) | | (0.9 | )% | | (15.2 | )% | | (9.7 | ) | | (0.9 | )% | | (11.4 | ) | | (1.1 | )% | | (14.9 | )% |
Other operating income (expense), net | 0.4 |
| | 0.1 | % | | 0.6 |
| | 0.2 | % | | (33.3 | )% | | 61.0 |
| | 5.8 | % | | 4.1 |
| | 0.4 | % | | 1,387.8 | % |
Interest expense | (10.5 | ) | | (3.0 | )% | | (14.9 | ) | | (4.1 | )% | | (29.5 | )% | | (37.3 | ) | | (3.6 | )% | | (43.8 | ) | | (4.2 | )% | | (14.8 | )% |
Income (loss) before income taxes | 22.6 |
| | 6.5 | % | | 12.2 |
| | 3.4 | % | | (85.2 | )% | | 86.6 |
| | 8.3 | % | | (11.6 | ) | | (1.1 | )% | | 846.6 | % |
Income tax (expense) benefit | (0.8 | ) | | (0.2 | )% | | (7.9 | ) | | (2.2 | )% | | 89.9 | % | | (3.3 | ) | | (0.3 | )% | | 1.2 |
| | 0.1 | % | | (375.0 | )% |
Net income (loss) | 21.8 |
| | 6.3 | % | | 4.3 |
| | 1.2 | % | | 407.0 | % | | 83.3 |
| | 8.0 | % | | (10.4 | ) | | (1.0 | )% | | 901.0 | % |
Net income attributable to non‑controlling interest | 0.4 |
| | 0.1 | % | | 0.2 |
| | 0.1 | % | | 100.0 | % | | 1.0 |
| | 0.1 | % | | 0.8 |
| | 0.1 | % | | 25.0 | % |
Net income (loss) attributable to Evoqua Water Technologies Corp. | $ | 21.4 |
| | 6.2 | % | | $ | 4.1 |
| | 1.1 | % | | 422.0 | % | | $ | 82.3 |
| | 7.9 | % | | $ | (11.2 | ) | | (1.1 | )% | | 834.8 | % |
| | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | |
Basic | 116.6 |
| | | | 114.7 |
| | | | | | 116.6 |
| | | | 114.7 |
| | | | |
Diluted | 120.2 |
| | | | 119.4 |
| | | | | | 121.1 |
| | | | 114.7 |
| | | | |
Earnings (loss) per share | | | | | | | | | | | | | | | | | | | |
Basic | $ | 0.18 |
| | | | $ | 0.04 |
| | | | | | $ | 0.71 |
| | | | $ | (0.10 | ) | | | | |
Diluted | $ | 0.18 |
| | | | $ | 0.03 |
| | | | | | $ | 0.68 |
| | | | $ | (0.10 | ) | | | | |
| | | | | | | | | | | | | | | | | | | |
Other financial data: | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA(1) | $ | 63.8 |
| | 18.3 | % | | $ | 60.6 |
| | 16.8 | % | | 5.3 | % | | $ | 164.1 |
| | 15.7 | % | | $ | 155.7 |
| | 15.1 | % | | 5.4 | % |
| |
(1) | For the definition of Adjusted EBITDA (a non-GAAP financial measure) and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.” |
Consolidated Results
Revenues-Revenues decreased $12.5 million, or 3.5%, to $347.8 million in the three months ended June 30, 2020 from $360.3 million in the three months ended June 30, 2019. Revenues increased $13.6 million, or 1.3%, to $1,045.6 million in the nine months ended June 30, 2020 from $1,032.0 million in the nine months ended June 30, 2019.
The following table provides the change in revenues from product sales and revenues from services, respectively:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | % Variance | | 2020 | | 2019 | | % Variance |
| | | % of Revenue | | | | % of Revenue | | | | | | % of Revenue | | | | % of Revenue | | |
Revenue from product sales | $ | 207.6 |
| | 59.7 | % | | $ | 210.3 |
| | 58.4 | % | | (1.3 | )% | | $ | 610.1 |
| | 58.3 | % | | $ | 597.3 |
| | 57.9 | % | | 2.1 | % |
Revenue from services | 140.2 |
| | 40.3 | % | | 150.0 |
| | 41.6 | % | | (6.5 | )% | | 435.5 |
| | 41.7 | % | | 434.7 |
| | 42.1 | % | | 0.2 | % |
| $ | 347.8 |
| | 100.0 | % | | $ | 360.3 |
| | 100.0 | % | | (3.5 | )% | | $ | 1,045.6 |
| | 100.0 | % | | $ | 1,032.0 |
| | 100.0 | % | | 1.3 | % |
Revenues from product sales decreased $2.7 million, or 1.3%, to $207.6 million in the three months ended June 30, 2020 from $210.3 million in the three months ended June 30, 2019. The decrease was related to a decline in aftermarket revenues of $17.5 million, of which $15.2 million was driven by the divestiture of the Memcor product line as well as site closures and delays due to COVID-19. This decline was partially offset by increased capital revenues of $14.8 million derived primarily from activity in the microelectronics end market.
Revenues from product sales increased $12.8 million, or 2.1%, to $610.1 million in the nine months ended June 30, 2020 from $597.3 million in the nine months ended June 30, 2019. The increase was driven by additional capital revenues of $37.5 million, primarily related to projects in the microelectronics end market as well as $1.0 million related to the acquisitions of ATG UV and Frontier, partially offset by a decrease in aftermarket revenues of $24.8 million, related to the divestiture of the Memcor product line as well as site closures and delays due to COVID-19.
Revenues from services decreased $9.8 million, or 6.5%, to $140.2 million in the three months ended June 30, 2020 from $150.0 million in the three months ended June 30, 2019. This decrease was evenly driven by the timing of completion of certain large projects in the prior year as well as the impact of COVID-19 shut-downs and delays, primarily in refining and oil and gas end markets, offset somewhat by price realization related to established service contracts.
Revenues from services increased $0.8 million, or 0.2%, to $435.5 million in the nine months ended June 30, 2020 from $434.7 million in the nine months ended June 30, 2019. This increase was driven by strong organic service growth, which was augmented by price realization, offset by the decline in the three months ended June 30, 2020 due to the factors mentioned above.
Cost of Sales and Gross Margin-Total gross margin increased to 31.7% in the three months ended June 30, 2020 from 30.9% in the three months ended June 30, 2019. Total gross margin increased to 31.3% in the nine months ended June 30, 2020 from 28.6% in the nine months ended June 30, 2019.
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | Gross Margin % | | | | Gross Margin % | | | | Gross Margin % | | | | Gross Margin % |
Cost of product sales | $ | (143.5 | ) | | 30.9 | % | | $ | (148.4 | ) | | 29.4 | % | | $ | (428.1 | ) | | 29.8 | % | | $ | (438.9 | ) | | 26.5 | % |
Cost of services | (94.1 | ) | | 32.9 | % | | (100.6 | ) | | 32.9 | % | | (290.4 | ) | | 33.3 | % | | (297.5 | ) | | 31.6 | % |
| $ | (237.6 | ) | | 31.7 | % | | $ | (249.0 | ) | | 30.9 | % | | $ | (718.4 | ) | | 31.3 | % | | $ | (736.4 | ) | | 28.6 | % |
Gross margin from product sales increased by 1.5% to 30.9% in the three months ended June 30, 2020 from 29.4% in the three months ended June 30, 2019. The increase in gross margin was driven by improved plant productivity and operational execution as the Company continues to realize the benefits of restructuring efforts along with some impact from product mix and price realization.
Gross margin from product sales increased by 3.3% to 29.8% in the nine months ended June 30, 2020 from 26.5% in the nine months ended June 30, 2019. The increase in gross margin was primarily driven by costs incurred in the prior year of $10.6 million related to restructuring and product rationalization, that did not reoccur in the current year.
Gross margin from services remained flat at 32.9% in the three months ended June 30, 2020 as compared to 2019. The operational impacts of declining revenue volume and productivity challenges were neutralized by improved pricing. Gross margin from services also increased approximately 1.7% to 33.3% in the nine months ended June 30, 2020 from 31.6% in the nine months ended June 30, 2019. This increase is mainly driven by price realization recognized in revenue as well as continued focus on labor productivity even as previous increases in revenue volumes were offset in the current period.
Operating Expenses-Operating expenses decreased $7.3 million, or 8.6%, to $77.5 million in the three months ended June 30, 2020 from $84.8 million in the three months ended June 30, 2019. The change in foreign currency translation, most of which is related to intercompany loans, resulted in a net decrease in operating expenses of $3.0 million period over period. The remaining decrease is due to various efforts taken by the Company to reduce costs across various areas in response to COVID-19 uncertainties, such as reduced travel and other employee costs.
Operating expenses decreased $3.2 million, or (1.2)%, to $264.3 million in the nine months ended June 30, 2020 from $267.5 million in the nine months ended June 30, 2019. This decrease is mainly due to favorable change in foreign currency translation on the intercompany loans of $6.7 million, partially offset by increased costs of $3.8 million related to the addition of operating expenses as a result of the ATG UV and Frontier acquisitions, mainly due to amortization expense on purchased intangibles. The remaining decrease is due to various efforts taken by the Company to reduce costs across various areas in response to COVID-19 uncertainties, such as reduced travel and other employee costs.
A discussion of operating expenses by category is as follows:
Research and Development Expense - Research and development expenses decreased $0.5 million during the three months ended June 30, 2020 as compared to June 30, 2019, and decreased $1.7 million during the nine months ended of the same periods due to the Company’s continued efforts to reduce spending, offset partially by increased expenses by the addition of the Frontier acquisition.
Sales and Marketing Expense - Sales and marketing expenses had a decrease of $2.1 million during the three months ended June 30, 2020 and a decrease of $1.7 million during the nine months ended June 30, 2020, respectively, mainly due to a reduction in certain marketing initiatives and travel related expenses, offset by increased costs by the addition of the Frontier acquisition.
General and Administrative Expense - General and administrative expenses decreased $4.7 million, or 9.5%, to $44.9 million in the three months ended June 30, 2020 from $49.6 million in the three months ended June 30, 2019. This decrease in general and administrative expenses was primarily due to the favorable change in foreign currency translation on the intercompany loans, as described above, of $2.9 million, in addition to a reduction in travel related expenses of $1.8 million.
General and administrative expenses increased $0.2 million, or 0.1%, to $152.8 million in the nine months ended June 30, 2020 from $152.6 million in the nine months ended June 30, 2019. The increase is due to:
increased employee related expenses of $3.1 million;
increased costs of $3.3 million related to the addition of the Frontier acquisition;
| |
• | costs incurred related to the secondary public offering of shares of common stock held by certain shareholders of the Company of $1.6 million; and
|
transaction costs related to the sale of the Memcor product line of $1.0 million.
The above increases were partially offset by:
favorable change in foreign currency translation on the intercompany loans of $6.3 million;
reduction in travel expenses of $2.5 million.
Other operating income (expense)-Other operating income (expense) decreased slightly by $0.2 million, to income of $0.4 million in the three months ended June 30, 2020 from income of $0.6 million in the three months ended June 30, 2019.
Other operating income (expense) increased $56.9 million to income of $61.0 million in the nine months ended June 30, 2020 from income of $4.1 million in the nine months ended June 30, 2019. The increase is mainly due to the net pre-tax benefit on sale of the Memcor product line of $58.0 million, which is net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred in the first quarterthree months ended December 31, 2019;
(vi)expenses incurred by the Company as a result of 2020.the COVID-19 pandemic, including additional charges for personal protective equipment, increased costs for facility sanitization and one-time payments to certain employees; and
(vii)legal fees incurred in excess of amounts covered by the Company’s insurance related to the Securities Litigation and SEC investigation.
Other (gains), losses and expenses include the following for the periods presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended December 31, 2020 |
| Other Adjustments |
(In millions) | (i) | | (ii) | | | | (iii) | | (iv) | | (v) | | | | (vi) | | (vii) | | Total |
Cost of sales | $ | — | | | $ | — | | | | | $ | — | | | $ | 0.2 | | | $ | 0.2 | | | | | $ | — | | | $ | — | | | $ | 0.4 | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
G&A expense | (6.8) | | | — | | | | | — | | | — | | | — | | | | | 0.1 | | | 1.9 | | | (4.8) | |
| | | | | | | | | | | | | | | | | | | |
Total | $ | (6.8) | | | $ | — | | | | | $ | — | | | $ | 0.2 | | | $ | 0.2 | | | | | $ | 0.1 | | | $ | 1.9 | | | $ | (4.4) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended December 31, 2019 |
| Other Adjustments |
(In millions) | (i) | | (ii) | | | | (iii) | | (iv) | | (v) | | | | (vi) | | (vii) | | Total |
Cost of sales | $ | (0.4) | | | $ | — | | | | | $ | 0.2 | | | $ | 0.1 | | | $ | 0.1 | | | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
G&A expense | (6.2) | | | 0.1 | | | | | — | | | — | | | 0.9 | | | | | — | | | — | | | (5.2) | |
Other operating (income) expense | — | | | — | | | | | (1.6) | | | — | | | (50.0) | | | | | — | | | — | | | (51.6) | |
Total | $ | (6.6) | | | $ | 0.1 | | | | | $ | (1.4) | | | $ | 0.1 | | | $ | (49.0) | | | | | $ | — | | | $ | — | | | $ | (56.8) | |
Immaterial rounding differences may be present in the tables above.
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | | | 2020 | | 2019 | | |
(In millions, except per share amounts) | | | | | | | | | | | | | % of Revenue | | | | % of Revenue | | % Variance |
Revenue from product sales and services | | | | | | | | | | | $ | 322.2 | | | 100.0 | % | | $ | 346.1 | | | 100.0 | % | | (6.9) | % |
Cost of product sales and services | | | | | | | | | | | (226.9) | | | (70.4) | % | | (240.4) | | | (69.5) | % | | (5.6) | % |
Gross profit | | | | | | | | | | | 95.3 | | | 29.6 | % | | 105.7 | | | 30.5 | % | | (9.8) | % |
General and administrative expense | | | | | | | | | | | (42.3) | | | (13.1) | % | | (45.8) | | | (13.2) | % | | (7.6) | % |
Sales and marketing expense | | | | | | | | | | | (33.9) | | | (10.5) | % | | (38.0) | | | (11.0) | % | | (10.8) | % |
Research and development expense | | | | | | | | | | | (3.1) | | | (1.0) | % | | (3.7) | | | (1.1) | % | | (16.2) | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Other operating income, net | | | | | | | | | | | 0.3 | | | 0.1 | % | | 51.5 | | | 14.9 | % | | (99.4) | % |
Interest expense | | | | | | | | | | | (8.7) | | | (2.7) | % | | (13.6) | | | (3.9) | % | | (36.0) | % |
Income before income taxes | | | | | | | | | | | 7.6 | | | 2.4 | % | | 56.1 | | | 16.2 | % | | 86.5 | % |
Income tax expense | | | | | | | | | | | (1.1) | | | (0.3) | % | | (2.6) | | | (0.8) | % | | (57.7) | % |
Net income | | | | | | | | | | | 6.5 | | | 2.0 | % | | 53.5 | | | 15.5 | % | | 87.9 | % |
Net income attributable to non‑controlling interest | | | | | | | | | | | 0.1 | | | — | % | | 0.4 | | | 0.1 | % | | (75.0) | % |
Net income attributable to Evoqua Water Technologies Corp. | | | | | | | | | | | $ | 6.4 | | | 2.0 | % | | $ | 53.1 | | | 15.3 | % | | 87.9 | % |
| | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | 117.8 | | | | | 115.6 | | | | | |
Diluted | | | | | | | | | | | 121.6 | | | | | 121.0 | | | | | |
Earnings per share | | | | | | | | | | | | | | | | | | | |
Basic | | | | | | | | | | | $ | 0.05 | | | | | $ | 0.46 | | | | | |
Diluted | | | | | | | | | | | $ | 0.05 | | | | | $ | 0.44 | | | | | |
| | | | | | | | | | | | | | | | | | | |
Other financial data: | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA(1) | | | | | | | | | | | $ | 44.8 | | | 13.9 | % | | $ | 43.6 | | | 12.6 | % | | 2.8 | % |
(1)For the definition of adjusted EBITDA (a non-GAAP financial measure) and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.”
Consolidated Results
Revenues-Revenues decreased $23.9 million, or 6.9%, to $322.2 million in the three months ended December 31, 2020, from $346.1 million in the three months ended December 31, 2019.
The following table provides the change in revenues from product sales and revenues from services, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | | | 2020 | | 2019 | | % Variance |
(In millions) | | | | | | | | | | | | | % of Revenue | | | | % of Revenue | | |
Revenue from product sales | | | | | | | | | | | $ | 180.0 | | | 55.9 | % | | $ | 196.6 | | | 56.8 | % | | (8.4) | % |
Revenue from services | | | | | | | | | | | 142.2 | | | 44.1 | % | | 149.5 | | | 43.2 | % | | (4.9) | % |
| | | | | | | | | | | $ | 322.2 | | | 100.0 | % | | $ | 346.1 | | | 100.0 | % | | (6.9) | % |
Revenues from product sales decreased $16.6 million, or 8.4%, to $180.0 million in the three months ended December 31, 2020, from $196.6 million in the three months ended December 31, 2019. The decrease was related to a decline in aftermarket revenues of $14.6 million, of which $7.0 million was driven by the divestiture of the Memcor
product line that occurred in the prior period. The remainder of the decrease was mainly due to temporary site closures and delays due to the COVID-19 pandemic in the current period. In addition to the decrease in aftermarket revenue, capital revenues declined by $2.0 million in the current period. This decline was primarily related to the divestiture of the Memcor product line, which represented capital revenues of $6.9 million in the prior period, as well as a net decline across our end markets, driven primarily by microelectronics. This was partially offset by an increase in revenues in the Asia Pacific region of the Applied Product Technologies segment.
Revenues from services decreased $7.3 million, or 4.9%, to $142.2 million in the three months ended December 31, 2020, from $149.5 million in the three months ended December 31, 2019. This decrease was primarily driven by temporary delays in annual maintenance in the oil and gas refining end market, the timing of completion of certain large projects in the prior year and shutdowns and delays due to the COVID-19 pandemic. Price realization related to established service contracts as well as service growth in the healthcare and pharmaceuticals end markets partially offset these declines.
Cost of Sales and Gross Margin-Total gross margin decreased to 29.6% in the three months ended December 31, 2020, from 30.5% in the three months ended December 31, 2019.
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
(In millions) | | | | | | | | | | | Gross Margin % | | | | Gross Margin % |
Cost of product sales | | | | | | | | | $ | (131.1) | | | 27.2 | % | | $ | (140.5) | | | 28.5 | % |
Cost of services | | | | | | | | | (95.8) | | | 32.6 | % | | (99.9) | | | 33.2 | % |
| | | | | | | | | $ | (226.9) | | | 29.6 | % | | $ | (240.4) | | | 30.5 | % |
Gross margin from product sales decreased by 1.3% to 27.2% in the three months ended December 31, 2020, from 28.5% in the three months ended December 31, 2019. The decrease in gross margin was primarily driven by lower volume and product mix, both of which were influenced by delays and closures related to the COVID-19 pandemic, coupled with timing of large projects, which was partially offset by positive price realization.
Gross margin from services decreased approximately 0.6% to 32.6% in the three months ended December 31, 2020, from 33.2% in the three months ended December 31, 2019. This decrease is mainly driven by lower volume, as well as decreased labor productivity due to COVID-19 factors.
Operating Expenses-Operating expenses decreased $8.2 million, or 9.4%, to $79.3 million in the three months ended December 31, 2020, from $87.5 million in the three months ended December 31, 2019. The decrease is mainly due to various efforts taken by the Company to reduce costs across various areas in response to uncertainties related to the COVID-19 pandemic, such as reduced travel, employee related costs, and consulting costs. The change in foreign currency translation, most of which is related to intercompany loans, also resulted in a net decrease in operating expenses of $0.3 million period over period.
A discussion of operating expenses by category is as follows:
Research and Development Expense - Research and development expenses decreased $0.6 million during the three months ended December 31, 2020 as compared to December 31, 2019 due to the Company’s timing of research and development projects.
Sales and Marketing Expense - Sales and marketing expenses decreased $4.1 million during the three months ended December 31, 2020 mainly due to a $3.4 million reduction in travel-related expenses, certain marketing initiatives, and employee-related expenses. In addition, improved collection experience in the current period resulted in a decrease to bad debt expense of $0.6 million.
General and Administrative Expense - General and administrative expenses decreased $3.5 million, or 7.6%, to $42.3 million in the three months ended December 31, 2020, from $45.8 million in the three months ended December 31, 2019. The decrease is primarily due to:
•reduction in employee-related expenses of $2.2 million;
•reduction in travel expenses of $2.1 million;
•net reductions in costs associated with timing and cost controls of $0.8 million; and
•favorable change in foreign currency translation on the intercompany loans of $0.5 million
The above decreases were partially offset by:
•a benefit of $1.3 million in the prior year related to changes in the estimate of certain acquisitions achieving their earn-out targets;
•increased amortization expense of $1.0 million driven by continued acquisitions
Other operating income, net-Other operating income, net decreased $51.2 million to $0.3 million in the three months ended December 31, 2020, from $51.5 million in the three months ended December 31, 2019. The decrease is mainly due to the inclusion in the prior year period of the net pre-tax benefit on sale of the Memcor product line of $49.0 million, which was net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred in the three months ended December 31, 2019.
Interest Expense-Interest expense decreased $4.4$4.9 million, or 29.5%36.0%, to $10.5$8.7 million in the three months ended June 30,December 31, 2020, from $14.9$13.6 million in the three months ended June 30, 2019. Interest expense decreased $6.5 million, or 14.8%, to $37.3 million in the nine months ended June 30, 2020 from $43.8 million in the nine months ended June 30,December 31, 2019. The decrease in interest expense was primarily driven by a reduction in the spread and LIBOR year over year, in addition to a $100$100.0 million debt repaymentprepayment that occurred in the three months ended June 30, 2019, partially offset by a write-off of deferred financing fees related to the debt paydown and interest expense associated with additional equipment financings.January 2020.
Income tax (expense) benefitexpense-Income tax expense of $0.8$1.1 million and income tax expense of $7.9$2.6 million werewas recorded for the three months ended June 30,December 31, 2020 and 2019, respectively. The decrease in tax expense from the prior year was principally due to the favorable impact to the projected annual effective tax rate of the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of the U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles, as compared to the prior year in which the quarter reflected the year-to-date cumulative tax impact of a profitable quarter while remaining in a year-to-date loss.
Income tax expense of $3.3 million and an income tax benefit of $1.2 million was recorded for the nine months ended June 30, 2020 and 2019, respectively. The increase in tax expense from the prior year was principally due to the significant income earned in the currentprior year, primarily from the sale of the Memcor product line, as compared to a loss in the priorcurrent year.
Net Income-Net income increaseddecreased by $17.5$47.0 million, or 407.0%87.9%, to $21.8net income of $6.5 million for the three months ended June 30,December 31, 2020, from net income of $4.3$53.5 million in the three months ended June 30, 2019. The main driver of this increase wasDecember 31, 2019, as a net decrease in income tax expense in the current year period based on the projected effective tax rate for the fiscal year of $7.1 million. Additionally, there was a reduction in interest of expense of $4.4 million and a favorable change in foreign currency translation resulting in a net gain of $3.1 million. The remaining increase in net income is due to overall contributions of revenue volume and mix, operational efficiency and cost savings.
Net income increased by $93.7 million, or 901.0%, to net income of $83.3 million for the nine months ended June 30, 2020 from a net loss of $10.4 million in the nine months ended June 30, 2019. The main driver of this increase was the saleresult of the Memcor product line, which resulted in a gain on sale of $67.3 million, less amounts paid for discretionary bonuses of $8.3 million and transaction costs of $1.0 million incurred in the nine months ended June 30, 2020. The resulting net pre-tax benefit was $58.0 million. In addition to the net benefit of the sale, we saw overall contributions of revenue volume and mix as well as operational efficiencies of $26.4 million and a favorable change in foreign currency translation resulting in a net gain of $7.3 million. Finally, interest expense decreased by $6.5 million. These increases were offset by an increase in income tax expense of $4.5 million.variances noted above.
Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the three months ended June 30,December 31, 2020 was $63.8increased by $1.2 million, to $44.8 million, as compared to $60.6$43.6 million for the three months ended June 30,December 31, 2019. Adjusted EBITDA for the quarter as compared to the prior year period was driven primarily by operational efficiencies and cost savings, offset by the changes as compared to the prior year period in non-recurring expenses and benefits.
Adjusted EBITDA increased $8.4 million, or 5.4%, to $164.1 million for the nine months ended June 30, 2020 from $155.7 million for the nine months ended June 30, 2019. The increase in Adjusted EBITDA as compared to the prior year period was primarily driven by increased revenue volume and favorable change in mix as well as operational efficiencies.
Segment Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | | | 2020 | | 2019 | | % Variance |
(In millions) | | | | | | | | | | | | | % of Revenue | | | | % of Revenue | | |
Revenues | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 214.7 | | | 66.6 | % | | $ | 228.1 | | | 65.9 | % | | (5.9) | % |
Applied Product Technologies | | | | | | | | | | | 107.5 | | | 33.4 | % | | 118.0 | | | 34.1 | % | | (8.9) | % |
Total Consolidated | | | | | | | | | | | 322.2 | | | 100.0 | % | | 346.1 | | | 100.0 | % | | (6.9) | % |
Operating profit (loss) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | 26.4 | | | 8.2 | % | | 33.2 | | | 9.6 | % | | (20.5) | % |
Applied Product Technologies | | | | | | | | | | | 13.4 | | | 4.2 | % | | 63.1 | | | 18.2 | % | | (78.8) | % |
Corporate | | | | | | | | | | | (23.5) | | | (7.3) | % | | (26.6) | | | (7.7) | % | | (11.7) | % |
Total Consolidated | | | | | | | | | | | 16.3 | | | 5.1 | % | | 69.7 | | | 20.1 | % | | (76.6) | % |
EBITDA | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | 43.2 | | | 13.4 | % | | 48.8 | | | 14.1 | % | | (11.5) | % |
Applied Product Technologies | | | | | | | | | | | 17.0 | | | 5.3 | % | | 66.7 | | | 19.3 | % | | (74.5) | % |
Corporate and unallocated costs | | | | | | | | | | | (16.5) | | | (5.1) | % | | (20.7) | | | (6.0) | % | | (20.3) | % |
Total Consolidated | | | | | | | | | | | $ | 43.7 | | | 13.6 | % | | $ | 94.8 | | | 27.4 | % | | (53.9) | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | % Variance | | 2020 | | 2019 | | % Variance |
| | | % of Revenue | | | | % of Revenue | | | | | | % of Revenue | | | | % of Revenue | | |
Revenues | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | $ | 228.7 |
| | 65.8 | % | | $ | 225.4 |
| | 62.6 | % | | 1.5 | % | | $ | 694.7 |
| | 66.4 | % | | $ | 662.8 |
| | 64.2 | % | | 4.8 | % |
Applied Product Technologies | 119.1 |
| | 34.2 | % | | 134.9 |
| | 37.4 | % | | (11.7 | )% | | 350.9 |
| | 33.6 | % | | 369.2 |
| | 35.8 | % | | (5.0 | )% |
Total Consolidated | 347.8 |
| | 100.0 | % | | 360.3 |
| | 100.0 | % | | (3.5 | )% | | 1,045.6 |
| | 100.0 | % | | 1,032.0 |
| | 100.0 | % | | 1.3 | % |
Operating profit (loss) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | 32.6 |
| | 9.4 | % | | 37.4 |
| | 10.4 | % | | (12.8 | )% | | 102.5 |
| | 9.8 | % | | 102.3 |
| | 9.9 | % | | 0.2 | % |
Applied Product Technologies | 23.6 |
| | 6.8 | % | | 22.5 |
| | 6.2 | % | | 4.9 | % | | 110.5 |
| | 10.6 | % | | 38.4 |
| | 3.7 | % | | 187.8 | % |
Corporate | (23.1 | ) | | (6.6 | )% | | (32.8 | ) | | (9.1 | )% | | (29.6 | )% | | (89.1 | ) | | (8.5 | )% | | (108.5 | ) | | (10.5 | )% | | (17.9 | )% |
Total Consolidated | 33.1 |
| | 9.5 | % | | 27.1 |
| | 7.5 | % | | 22.1 | % | | 123.9 |
| | 11.8 | % | | 32.2 |
| | 3.1 | % | | 284.8 | % |
EBITDA | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | 50.4 |
| | 14.5 | % | | 51.4 |
| | 14.3 | % | | (1.9 | )% | | 153.2 |
| | 14.7 | % | | 144.6 |
| | 14.0 | % | | 5.9 | % |
Applied Product Technologies | 27.1 |
| | 7.8 | % | | 26.9 |
| | 7.5 | % | | 0.7 | % | | 121.2 |
| | 11.6 | % | | 51.5 |
| | 5.0 | % | | 135.3 | % |
Corporate and unallocated costs | (16.8 | ) | | (4.8 | )% | | (27.1 | ) | | (7.5 | )% | | (38.0 | )% | | (70.4 | ) | | (6.7 | )% | | (92.5 | ) | | (9.0 | )% | | (23.9 | )% |
Total Consolidated | $ | 60.7 |
| | 17.5 | % | | $ | 51.2 |
| | 14.2 | % | | 18.6 | % | | $ | 204.0 |
| | 19.5 | % | | $ | 103.6 |
| | 10.0 | % | | 96.9 | % |
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA on a segment basis is defined as earnings before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. The following is a reconciliation of our segment Adjustedadjusted EBITDA to operating profit, its most directly comparable financial measure presented in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended December 31, |
| | | | | 2020 | | 2019 |
(In millions) | | | | | | | | | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies |
Operating Profit | | | | | | | | | $ | 26.4 | | | $ | 13.4 | | | $ | 33.2 | | | $ | 63.1 | |
Depreciation and amortization | | | | | | | | | 16.8 | | | 3.6 | | | 15.6 | | | 3.6 | |
EBITDA | | | | | | | | | $ | 43.2 | | | $ | 17.0 | | | $ | 48.8 | | | $ | 66.7 | |
Restructuring and related business transformation costs (a) | | | | | | | | | — | | | 1.6 | | | — | | | 0.7 | |
Transaction costs (b) | | | | | | | | | — | | | — | | | — | | | (1.3) | |
Other losses (gains) and expenses (c) | | | | | | | | | — | | | 0.4 | | | — | | | (50.3) | |
Adjusted EBITDA (d) | | | | | | | | | $ | 43.2 | | | $ | 19.0 | | | $ | 48.8 | | | $ | 15.8 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies |
Operating Profit | $ | 32.6 |
| | $ | 23.6 |
| | $ | 37.4 |
| | $ | 22.5 |
| | $ | 102.5 |
| | $ | 110.5 |
| | $ | 102.3 |
| | $ | 38.4 |
|
Depreciation and amortization | 17.8 |
| | 3.5 |
| | 14.0 |
| | 4.4 |
| | 50.7 |
| | 10.7 |
| | 42.3 |
| | 13.1 |
|
EBITDA | $ | 50.4 |
| | $ | 27.1 |
| | $ | 51.4 |
| | $ | 26.9 |
| | $ | 153.2 |
| | $ | 121.2 |
| | $ | 144.6 |
| | $ | 51.5 |
|
Restructuring and related business transformation costs (a) | 0.2 |
| | 1.6 |
| | — |
| | 0.2 |
| | 0.3 |
| | 5.6 |
| | 0.4 |
| | 0.7 |
|
Transaction costs (b) | — |
| | 0.1 |
| | — |
| | — |
| | — |
| | (1.2 | ) | | 0.5 |
| | 0.7 |
|
Other losses (gains) and expenses (c) | — |
| | 0.1 |
| | — |
| | 0.2 |
| | — |
| | (59.1 | ) | | 0.1 |
| | 9.6 |
|
Adjusted EBITDA (d) | $ | 50.6 |
| | $ | 28.9 |
| | $ | 51.4 |
| | $ | 27.3 |
| | $ | 153.5 |
| | $ | 66.5 |
| | $ | 145.6 |
| | $ | 62.5 |
|
| |
(a) | (a)Represents costs and expenses in connection with restructuring initiatives distinct to our Applied Product Technologies segment in the three months ended December 31, 2020 and 2019, respectively. Such expenses are primarily composed of severance and relocation costs. (b)Represents costs associated with a change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in a decrease to the fair valued amount of the earn-out recorded upon acquisition, in the three months ended December 31, 2019, distinct to our Applied Product Technologies segment. (c)Other losses, (gains) and expenses as discussed above in “How We Assess the Performance of Our Business-Adjusted EBITDA” distinct to our Integrated Solutions and Services and Applied Product Technologies segments include the following: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended December 31, | | | | | | 2020 | | 2019 | (In millions) | | | | | | | | | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies | Trailing costs from the sale of the Memcor product line | | | | | | | | | $ | — | | | $ | 0.2 | | | $ | — | | | $ | — | | Net pre-tax benefit on sale of the Memcor product line | | | | | | | | | — | | | — | | | — | | | (49.0) | | Remediation of manufacturing defects | | | | | | | | | — | | | — | | | — | | | (1.4) | | Product rationalization in electro-chlorination business | | | | | | | | | — | | | 0.2 | | | — | | | 0.1 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | | | | | | $ | — | | | $ | 0.4 | | | $ | — | | | $ | (50.3) | |
(d)For the definition of adjusted EBITDA (a non-GAAP financial measure) and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.” Immaterial rounding differences may be present in the tables above. Integrated Solutions and Services and Applied Product Technologies segments in the three and nine months ended June 30, 2020 and 2019, respectively. Such expenses are primarily composed of severance and relocation costs. |
| |
(b) | Represents costs associated with a change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in a (decrease) increase to the fair valued amount of the earn-out recorded upon acquisition, in the three and nine months ended June 30, 2020 and 2019, respectively, distinct to our Integrated Solutions and Services and Applied Product Technologies segments. |
| |
(c) | Other losses, (gains) and expenses as discussed above in “How We Assess the Performance of Our Business-Adjusted EBITDA” distinct to our Integrated Solutions and Services (“ISS”) and Applied Product Technologies (“APT”) segments include the following: |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
(In millions) | ISS | | APT | | ISS | | APT | | ISS | | APT | | ISS | | APT |
Net pre-tax benefit on sale of the Memcor product line | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (58.0 | ) | | $ | — |
| | $ | — |
|
Gain on sale of property | — |
| | — |
| | — |
| | (0.4 | ) | | — |
| | — |
| | — |
| | (0.4 | ) |
Remediation of manufacturing defects | — |
| | — |
| | — |
| | 0.4 |
| | — |
| | (1.5 | ) | | — |
| | 1.7 |
|
Product rationalization in electro-chlorination business | — |
| | 0.1 |
| | — |
| | 0.3 |
| | — |
| | 0.4 |
| | — |
| | 3.2 |
|
Expenses related to maintaining non-operational business locations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.1 |
| | — |
|
Write-off of inventory | — |
| | — |
| | — |
| | (0.1 | ) | | — |
| | — |
| | — |
| | 5.0 |
|
Foreign exchange impact related to headquarter allocations | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 0.1 |
|
Total | $ | — |
| | $ | 0.1 |
| | $ | — |
| | $ | 0.2 |
| | $ | — |
| | $ | (59.1 | ) | | $ | 0.1 |
| | $ | 9.6 |
|
| |
(d) | For the definition of Adjusted EBITDA (a non-GAAP financial measure) and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.” Immaterial rounding differences may be present in the tables above. |
Integrated Solutions and Services
Revenues in the Integrated Solutions and Services segment increased $3.3decreased $13.4 million, or 1.5%5.9%, to $228.7$214.7 million in the three months ended June 30,December 31, 2020, from $225.4$228.1 million in the three months ended June 30,December 31, 2019. The increaseService revenue declined by $6.9 million, primarily related to temporary delays in revenue was mainly driven by growth in capital revenue of $11.7 million, exclusive of the Frontier acquisition. These increases were primarily driven by continued strong demand for water solutions and systemsannual maintenance in the microelectronicsoil and gas refining end market. The Frontier acquisition resulted in another increase of $1.4 million of revenue. These increases were offset by a decline in service revenue of $8.8 million. The decline was evenly driven bymarket, the timing of completion of certain large projects in the prior year as well as the impact of COVID-19 shut downand shutdowns and delays primarily indue to the refining and oil and gas end markets, offset somewhat by priceCOVID-19 pandemic. Price realization related to established service contracts. Finally, aftermarket revenue saw a decline of $1.0 million.
Revenuescontracts and service growth in the Integrated Solutionshealthcare and Services segment increased $31.9pharmaceuticals end markets partially offset the period over period decline. In addition, there was a net decline in
capital revenues of $4.0 million, or 4.8%, to $694.7 million in the nine months ended June 30, 2020 from $662.8 million in the nine months ended June 30, 2019. The increase in revenue was driven by stronger capital growth of $30.0 million, exclusive of acquisitions, primarily related to the timing of projects in the microelectronics end market. In addition, service growth of $1.0 million was a combination of price realizationmarket, partially offset by
timing new projects across a variety of large projects completed in the prior year as well as the impact of COVID-19 shut-downs and delays, primarily in the refining and oil and gas end markets. Our recent investment in Frontier resulted in an additional increase of $3.7 million of revenue. These increases were offset by a reduction inThe remaining decline was due to reduced aftermarket revenue of $2.8$2.5 million.
There was an immaterial impact on revenue from foreign currency translation and acquisitions compared to the prior period.
Operating profit in the Integrated Solutions and Services segment decreased $4.8$6.8 million, or 12.8%20.5%, to $32.6$26.4 million in the three months ended June 30,December 31, 2020, from $37.4$33.2 million in the three months ended June 30,December 31, 2019. Segment profitability was impacteddecreased by $2.8$7.3 million of operational variancesas compared to the prior year period related to volume and mix impacts, lower service volumes and productivity due to customer shutdowns and enhanced safety protocols as well as $2.9 million related toa result of the COVID-19 pandemic, and increased employee related expenses,operating costs based on changes in allocation methodologies for corporate expenses. These declines were partially offset by $2.1 million of cost containment measures implementedadditional price realization in response to the uncertainties of COVID-19. Additionally, highercurrent period. In addition, depreciation and amortization expense resulted in another reduction of profit of $3.8 million. These decreases were partially offsetincreased by $2.6 million profit in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing.
Operating profit in the Integrated Solutions and Services segment increased $0.2 million, or 0.2%, to $102.5$1.2 million in the nine months ended June 30, 2020 from $102.3 million in the nine months ended June 30, 2019. Segment profitability improved $16.7 million in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing, offset by $2.8 million of operational variances in the current quarter related to lower service volumes and productivity due to customer shutdowns and enhanced safety protocols. The current period negative impacts were somewhat mitigated by $2.1 million of cost containment measures implemented in response to the uncertainties of COVID-19. Profitability in the current year was also favorably impacted by the non-recurrence of $0.5 million of charges related to the achievement of earn-out targets associated with the Pure Water acquisition, in addition to the non-recurrence of other charges noted in the prior year of approximately $0.2 million related to restructuring and inactive sites. Negativeperiod. Positive drivers to profitability were increased employee related expensesassociated with decreased travel and discretionary spending of $8.1 million and higher depreciation and amortization expense of $8.4$1.7 million.
EBITDA in the Integrated Solutions and Services segment decreased $1.0$5.6 million, or 1.9%11.5%, to $50.4$43.2 million in the three months ended June 30,December 31, 2020, compared to $51.4$48.8 million in the three months ended June 30, 2019 and increased $8.6 million, or 5.9%, to $153.2 million in the nine months ended June 30, 2020, compared to $144.6 million in the nine months ended June 30,December 31, 2019.
Applied Product Technologies
Revenues in the Applied Product Technologies segment decreased $15.8$10.5 million, or 11.7%8.9%, to $119.1$107.5 million in the three months ended June 30,December 31, 2020, from $134.9$118.0 million in the three months ended June 30,December 31, 2019. The impact from the divestiture of the Memcor product line reduced revenue by $14.4 million as compared to the prior year period. Organic revenue increased by $1.7 million, driven by $6.0 million growth in the Asia Pacific region related to the Anodes and the acquisition of ATG UV resulted in a net reduction in revenue of $11.1 million. The segment also saw an unfavorable foreign currency translation impact of $1.4 million. Additionally, revenue declinedElectro-deionization product lines, partially offset by declines across multiple product lines in both the Americas and
EMEA regions by $3.6of $0.6 million and $1.7$3.7 million, respectively, mainly due to COVID-19 relatedcontinued customer site closures and delays. These decreases were partially offset by organic revenue growth by an increase in Asia Pacific of $2.0 million, driven by volume in the Anodes and Aquatics product lines, as demand improved in the region as it recovers from COVID-19.
Revenues in the Applied Product Technologies segment decreased $18.3 million to $350.9 million in the nine months ended June 30, 2020 from $369.2 million in the nine months ended June 30, 2019. The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction in revenue of $15.2 million. Additionally, organic revenues were down $3.3 million and $1.2 million in the Americas and Asia Pacific regions, respectfully, predominantly due to COVID-19 slow downaccess challenges and delays. The segment also saw an unfavorablea favorable foreign currency translation impact of $3.5 million. These declines were partially offset by organic revenue growth in EMEA of $4.9$2.2 million.
Operating profit in the Applied Product Technologies segment increased $1.1decreased $49.7 million, or 4.9%78.8%, to $23.6$13.4 million in the three months ended June 30,December 31, 2020, from $22.5$63.1 million in the three months ended June 30,December 31, 2019. The increase isdecrease was mainly driven by mix performance and price of $3.2 million, operational performance improvements of $1.0 million, employee & other cost variances of $0.7 million, in additionrelated to lower depreciation of $0.9 million. These increases were offset by a volume impact of $2.3 million. The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction of $0.8 million, and $0.2 million in unfavorable foreign currency.
Further operating profit decreases were due to one-time costs of $1.8 million related to:
An increase in restructuring charges of $1.4 million primarily due to costs incurred following the sale of the Memcor product line;
A gain on sale recordedinclusion in the prior year period of $0.4 million, which did not reoccur in the current year; and
An increase of $0.1 million related to charges related to the achievement of earn-out targets on a prior acquisition.
These decreases were partially offset by:
A reduction in costs incurred by the Company in the prior year from a settlement with a third-party vendor associated with remediation of manufacturing defects caused by the vendor of $0.4 million.
| |
• | Other non-recurring charges related to product rationalization that declined by $0.1 million as compared to the prior year period.
|
Operating profit in the Applied Product Technologies segment increased $72.1 million, or 187.8%, to $110.5 million in the nine months ended June 30, 2020 from $38.4 million in the nine months ended June 30, 2019. The increase is mainly due to the net pre-tax benefit on sale of the Memcor product line of $58.0$49.0 million, which iswas net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred. Increasedincurred in the three months ended December 31, 2019. Operating profit was also drivenimpacted by $1.2 million related to the reduction in revenue volume and mix performance, augmented by improved pricing,as a result of $9.0 million, in addition to a $0.3 million net benefit from the divestituresale of the Memcor product line, as well as inflation and the acquisitionemployee related costs of ATG UV and lower depreciation of $2.4$0.9 million. Further increasesdecreases in operating profit were due to net reductions in nonrecurring costs of $5.3$3.8 million related to:
Reduction in costs incurred by the Company related to the write–off•A net recovery of inventory in the prior year of $5.0 million associated with product rationalization and facility consolidation;
A reduction in costs incurred by the Company from a settlement with a third-party vendor associated with remediation of manufacturing defects caused by the vendor in an amount of $3.2 million;$1.3 million in the prior period;
•Reductions in costs in the prior period related to the achievement of earn-out targets associated with certain acquisitions in an amount of $1.9$1.3 million;
Reductions
•Increase in product rationalization costs related to charges incurred by the Company in its electro-chlorination business in an amount of $2.8$0.1 million;
A gain on
•Trailing costs associated with the sale recordedof the Memcor product line in the prior yearan amount of $0.4$0.2 million which did not reoccur in the current year;period; and
•Increases in restructuring charges in an amount of $4.9$0.9 million primarily due to costs incurred following the sale of the Memcor product line;line.
Organic revenue volume as well as operational efficiencies and
Release cost containment measures, partially offset by the impact of an acquisition related contingency duevariances in product mix, contributed a net $4.7 million in profitability as compared to the passage of time in the prior year for $2.8 million.
period. Operating profit was reduced by inflation and employee related costs increased $0.6also benefited $0.5 million from favorable foreign currency of $0.5 million, and operational variances of $1.6 million.translation.
EBITDA in the Applied Product Technologies segment increased $0.2decreased $49.7 million, or 0.7%74.5%, to $27.1$17.0 million in the three months ended June 30,December 31, 2020, compared to $26.9$66.7 million in the three months ended June 30, 2019. EBITDA in the Applied Product Technologies segment increased $69.7 million, or 135.3%, to $121.2 million in the nine months ended June 30, 2020, compared to $51.5 million in the nine months ended June 30,December 31, 2019.
Liquidity and Capital Resources
Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.
Our principal sources of liquidity are our cash generated by our operating activities, and borrowings under the $125.0 million revolving credit facility (the “Revolver”) available to us under our RevolvingFirst Lien Credit Facility.Agreement (as modified, amended or supplemented from time to time, the “Credit Agreement”) and financing arrangements related to capital expenditures for equipment used to provide services to our customers. Historically, we have financed our operations primarily from cash generated from operations and periodic borrowings under our $125.0 million Revolving Credit Facility.these sources. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness, to fund working capital requirements and to make capital expenditures.
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including occasionally extending payment terms. We also facilitate a voluntary supply chain finance program (the “program”) to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. The June 30 year to date amounts settled through the program and paid to participating financial institutions were $24.1$2.7 million and $0.2$9.3 million in the three months ended December 31, 2020 and 2019, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit to participation in the program.
We expect to continue to finance our liquidity requirements through internally generated funds, borrowings under our Revolving Credit Facilitythe Revolver and equipment financing arrangements. We believe that our projected cash flows generated from operations, together with borrowings under our Revolving Credit Facilitythe Revolver and other financing arrangements are sufficient to fund our principal debt payments, interest expense, our working capital needs and our expected capital expenditures for the next twelve months. Our capital expenditures for the ninethree months ended June 30,December 31, 2020 and 2019 were $65.9$17.3 million and $63.9$17.6 million, respectively. However, our budgeted capital expenditures can vary from period to period based on the nature of capital intensive project awards. Our focus on customer outsourced water projects will continue to be a driver of capital expenditures. From time to time, we may enter into financing arrangements related
to capital expenditures for
equipment used to provide services to our customers. In addition, we may draw on our Revolving Credit Facilitythe Revolver from time to time to fund or partially fund an acquisition.
As of June 30,December 31, 2020, we had total indebtedness of $879.9$887.6 million, including $821.6$816.9 million of term loan borrowings under the First Lien Term Loan Facility,Credit Agreement, no borrowings under our Revolving Credit Facility, $56.0the Revolver, $70.1 million in borrowings related to equipment financing $0.7and $0.6 million of notes payable related to certain equipment related contracts and $1.6 million related to a mortgage.contracts. We also had $11.9$11.8 million of letters of credit issued under our $125.0 million Revolving Credit Facilitythe Revolver and an additional $51$33 thousand of letters of credit issued under a separate uncommitted facility as of June 30,December 31, 2020.
Our senior secured credit facilities containCredit Agreement contains a number of covenants imposing certain restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on our business operations, include limitations on our or our subsidiaries’ ability to:
•incur or guarantee additional indebtedness;
•make certain investments;
•pay dividends or make distributions on our capital stock;
•sell assets, including capital stock of restricted subsidiaries;
•agree to payment restrictions affecting our restricted subsidiaries;
•consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
•enter into transactions with our affiliates;
•incur liens; or
•designate any of our subsidiaries as unrestricted subsidiaries.
We areEvoqua Water Technologies Corp. is a holding company and dodoes not conduct any business operations of ourits own. As a result, our ability to pay cash dividends on our common stock, if any, is dependent upon cash dividends and distributions and other transfers from our operating subsidiaries. Under the terms of our senior secured credit facilities,the Credit Agreement, our operating subsidiaries are currently limited in their ability to pay cash dividends to us, and we expect these limitations to continue in the future under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.
In addition, our Revolving Credit Facility,Revolver, but not the First Lien Term Loan Facility,Credit Agreement, contains a financial covenant which requires us to comply with the maximum first lien net leverage ratio of 5.55 to 1.00 as of the last day of any quarter on which the aggregate amount of revolving loans and letters of credit outstanding under the Revolving Credit FacilityRevolver (net of cash collateralized letters of credit and undrawn outstanding letters of credit in an amount of up to 50% of the Revolving Credit Facility)Revolver) exceeds 25% of the total commitments thereunder.
As of June 30,December 31, 2020 and September 30, 2019,2020, we were in compliance with the covenants contained in the senior secured credit facilities.Credit Agreement, including the Revolver.
Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations.
Cash Flows
The following table summarizes the changes to our cash flows for the periods presented:
| | | Nine Months Ended June 30, | | Three Months Ended December 31, |
(In millions) | 2020 | | 2019 | (In millions) | 2020 | | 2019 |
Statement of Cash Flows Data | | Statement of Cash Flows Data | |
Net cash provided by operating activities | $ | 82.5 |
| | $ | 54.4 |
| Net cash provided by operating activities | $ | 15.6 | | | $ | 4.7 | |
Net cash provided by (used in) investing activities | 41.8 |
| | (68.7 | ) | |
Net cash used in financing activities | (92.2 | ) | | (6.6 | ) | |
Net cash (used in) provided by investing activities | | Net cash (used in) provided by investing activities | (26.0) | | | 80.2 | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 12.3 | | | (1.8) | |
Effect of exchange rate changes on cash | 0.8 |
| | (0.3 | ) | Effect of exchange rate changes on cash | 3.0 | | | 1.9 | |
| Change in cash and cash equivalents | $ | 32.9 |
| | $ | (21.2 | ) | Change in cash and cash equivalents | $ | 4.9 | | | $ | 85.0 | |
Operating Activities
Cash flows from operating activities can fluctuate significantly from period‑to‑period as working capital needs and the timing of payments for restructuring activities and other items impact reported cash flows.
Net cash provided by operating activities increased to a source of $82.5totaled $15.6 million in the ninethree months ended June 30,December 31, 2020 from a source of $54.4and $4.7 million in the ninethree months ended June 30,December 31, 2019.
•Operating cash flows in the ninethree months ended June 30,December 31, 2020 reflect an increasea decrease in net earnings of $93.7$47.0 million as compared to the ninethree months ended June 30,December 31, 2019, primarily driven by the sale of the Memcor product line.
•The add back of non‑cash items increased operating cash flows by $20.9$24.8 million in the ninethree months ended June 30,December 31, 2020, as compared to an increasea decrease to operating cash flows of $86.9$35.3 million in the ninethree months ended June 30,December 31, 2019, resulting in an overall reductionincrease of $65.9$60.1 million. This reductionincrease was primarily driven byrelated to the adjustment fornon-recurrence of gain on sale of business, offset by an increasethe Memcor product line, which was reflected as a reduction of operating cash flows in the prior year, as well as increased depreciation and amortization expense.in the current period. Non-cash changes also include the foreign currency translation gain or loss and share-based compensation.
•The aggregate of receivables, inventories, contract assets and liabilities and accounts payable used $17.3provided $23.3 million in operating cash flows in the ninethree months ended June 30,December 31, 2020, compared to a use of $6.8$6.9 million in operating cash flows in the ninethree months ended June 30,December 31, 2019.
| |
◦ | Accounts receivable and payable was a source of $12.9 millionAccounts receivable and payable was a source of $5.4 million.
◦Inventories was a source of $3.1 million. ◦Contract assets and liabilities was a source of $21.8 million. |
| |
◦ | Inventories had a use of $7.9 million
|
| |
◦ | Contract assets and liabilities had a use of $15.5 million
|
The amount of cash flow generated from or used by the above mentioned accounts depends upon how effectively we manage our cash conversion cycle, which is a representation of the number of days that elapse from the date of purchase of raw materials and components to the collection of cash from customers. Our cash conversion cycle can be significantly impacted by the timing of collections and payments in a period.
| |
•Income taxes used $1.3 million during the three months ended December 31, 2020, as compared to providing $1.4 million during the three months ended December 31, 2019, resulting in a decrease to cash flows of $2.7 million as compared to the prior year period.
• | Income taxes provided $1.6 million during the nine months ended June 30, 2020, as compared to using $6.8 million during the nine months ended June 30, 2019, resulting in an increase to cash flows of $8.4 million.
|
The aggregate of the remaining assets and liabilities used $6.0$37.7 million of operating cash flows in the ninethree months ended June 30,December 31, 2020 compared to $8.4$7.9 million in the ninethree months ended June 30,December 31, 2019. This is mainly due to timing of payments.
| |
◦ | Prepaids and other current assets and Other non‑current assets and liabilities provided $13.9 million during the nine months ended June 30, 2020, as compared to $11.1 million during the nine months ended June 30, 2019, resulting in an increase to cash flows of $2.8 million.
|
◦Prepaids and other current assets and Other non‑current assets and liabilities used $5.3 million during the three months ended December 31, 2020, as compared to providing $1.5 million during the three months ended December 31, 2019, resulting in a decrease to cash flows of $6.8 million as compared to the prior year period.
| |
◦ | Accrued expenses and other liabilities used $19.9 million in operating cash flows in the nine months ended June 30, 2020 compared to a use of $19.6 million in the nine months ended June 30, 2019, resulting in a decrease to cash flows of $0.3 million. |
◦Accrued expenses and other liabilities used $32.4 million in operating cash flows in the three months ended December 31, 2020, compared to a use of $9.4 million in the three months ended December 31, 2019, resulting in a decrease to cash flows of $23.0 million as compared to the prior year period. This decrease was primarily related to payouts in the current period associated with employee incentive compensation and the defined contribution 401(k) plan.Investing Activities
Net cash provided byused in investing activities increased $110.4 million to $41.8was $26.0 million in the ninethree months ended June 30,December 31, 2020 from a useas compared to providing cash of $68.7$80.2 million in the ninethree months ended June 30, 2019.December 31, 2019, resulting in a net decrease of $106.2 million as compared to the prior year period. This increasedecrease was largely driven by proceeds from the sale of the Memcor product line during the ninethree months ended June 30, 2020,December 31, 2019, partially offset by lower cash outflow associated with the FrontierUltrapure acquisition in the current year period than the Frontier acquisition that occurred in the prior period. Other activity related to purchase of capital or intangible assets remained relatively consistent with the prior period.
Financing Activities
Net cash used inprovided by financing activities increased $85.6was $12.3 million in the three months ended December 31, 2020 as compared to a use of $92.2$1.8 million in the ninethree months ended June 30, 2020 fromDecember 31, 2019, resulting in a usenet increase of $6.6$14.1 million inas compared to the nine months ended June 30, 2019.prior year period. This additional amount of cash used inprovided by financing activities for the ninethree months ended June 30,December 31, 2020 was primarily due to increased cash received from the $100 million debt paymentissuance of common stock in connection with the exercise of stock options and increased distributionthe issuance of debt. In addition, there was a decrease in the amount of distributions of dividends to non-controlling interest in the current period. These cash inflows were partially offset by cash received from common stock.higher repayments of debt in the current period.
Seasonality
Our business has historically exhibited seasonality resulting from our customers’ increasing demand for our products and services during the spring and summer months as compared to the fall and winter months. For example, our business servicing municipal customers experiences increased demand for our odor control product lines and services in the warmer months which, together with other factors, has historically resulted in improved performance in the second half of our fiscal year. Inclement weather, such as hurricanes, droughts and floods, can also drive increased demand for our products and services. As a result, our results from operations may vary from period to period.
Seasonal trends historically displayed by our business could behave been impacted by the COVID-19 pandemic, and past performance should not be considered indicative of future results. For example, decreased customer demand resulting from the economic slowdown caused by the pandemic and the measures taken to control its spread could negatemitigated the seasonal factors that have historically resulted in improved performance in the second half of our fiscal year.year in fiscal 2020 and could have a similar impact in fiscal 2021.
Off‑Balance Sheet Arrangements
As of June 30,We had the following outstanding under our credit arrangements at December 31, 2020 and September 30, 2019, we had letters of credit totaling $11.9 million and $13.5 million, respectively, and surety bonds totaling $148.1 million and $144.7 million, respectively, outstanding under our credit arrangements. 2020:
| | | | | | | | | | | |
(In millions) | December 31, 2020 | | September 30, 2020 |
Letters of credit | $ | 11.9 | | | $ | 13.0 | |
Surety bonds | $ | 144.6 | | | $ | 153.0 | |
The longest maturity date of the letters of credit and surety bonds in effect as of June 30,December 31, 2020 was March 20, 2030.
Critical Accounting Policies and Estimates
SeeThe Company’s significant accounting policies are described in Item 8., Note 2, “Summary of Significant Accounting Policies” included in the Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the SEC on November 20, 2020. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the Notes to the Unaudited Consolidated Financial Statements in Item 1 of this Report. The application of the Company’s accounting policies may require the use of estimates and assumptions. Management uses historical experience and all available information to make these estimates and assumptions. Estimates are revised as additional information becomes available. Actual results could differ from these estimates.
See Note 2, “Recent Accounting Pronouncements” in the Unaudited Consolidated Financial Statements in Item 1 of this Report for a complete discussion of our significantrecently issued accounting policies and recent accounting pronouncements.guidance.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We have market risk exposure arising from changes in interest rates on our senior secured credit facilities, which bear interest at rates that are benchmarked against LIBOR. In the third quarter of 2020, the Company entered into an interest rate swap to mitigate risks associated with variable rate debt. The interest rate swap has a five-year term to hedge the variability of interest payments on the first $500.0 million of the Company’s senior secured debt and fixes the variable LIBOR rate to 0.5455%.
Based on our overall interest rate exposure to variable rate debt outstanding of $821.6 million as of June 30, 2020, a 1% increase or decrease in interest rates would decrease or increase income (loss) before income taxes by approximately $8.3 million. By comparison, based on our overall interest rate exposure to variable rate debt outstanding of $931.1 million as of June 30, 2019, a 1% increase or decrease in interest rates would have decreased or increased income (loss) before income taxes by approximately $9.4 million.
For a discussion of the Company’s exposure to market risk related to inflation, tariffs and foreign currency exchange rates, please refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the SEC on November 25, 2019. There have been no material changes to the Company’s exposure to these market risks during the first nine monthsquarter of fiscal 2020.2021.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended)amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”) and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this ReportReport. Based on that evaluation, the CEO and based on their evaluation, haveCFO concluded that the Company’s disclosure controls and procedures were effective as of such date.
While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes toin Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarterly period ended June 30,December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
From time to time, we are subject to various claims, charges and litigation matters that arise in the ordinary course of business. We believe these actions are a normal incident of the nature and kind of business in which we are engaged. While it is not feasible to predict the outcome of these matters with certainty, we do not believe that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or prospects.
On or aroundIn November 6, 2018, a purported shareholder of the Company filed a class action lawsuit, captioned McWilliams v. Evoqua Water Technologies Corp., Case No. 1:18-CV-10320, in the U.S.United States District Court for the Southern District of New York captioned McWilliams v. Evoqua Water Technologies Corp., et al., Case No. 1:18-CV-10320, alleging that the Company and senior management violated federal securities laws. Onlaws by issuing false, misleading, and/or omissive disclosures in the period leading up to the Company’s October 30, 2018 announcement of, among other things, (a) preliminary results for the full-year fiscal 2018 that were below previous expectations and (b) a transition from a three-segment structure to a two-segment operating model. In January 31, 2019, the court appointed lead plaintiffs and lead counsel in connection withand re-captioned the action and captioned the action “as In re Evoqua Water Technologies Corp. Securities Litigation” Master File No. 1:18-CV-10320. On(the “Securities Litigation”). In March 28, 2019, lead plaintiffs filed an amended complaint, which asserts claims pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities Act”) against the Company, members of the Company’s Boardboard of Directors,directors, senior management, other executives and/or employees,a former executive, AEA, Investors LP and a number of its affiliated entities, and the underwriters of the Company’s initial public offeringIPO and secondary public offering. The amended complaint alleges that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s integration of acquired companies, the Company’s reduction-in-force, and the Company’s accounting practices.financial results of operations. The lawsuit seeks compensatory damages in an unspecified amount to be proved at trial,and an award of reasonable costs and expenses to the plaintiff and class counsel, and such other relief as the court may deem just and proper. On June 26, 2019, the defendants filed motions to dismiss the amended complaint. Briefing in connection with the motions to dismiss was completed on October 4, 2019. Oncounsel. In March 30, 2020, the Court granted the motionsdefendants’ motion to dismiss a portion of the claims, dismissing all claims predicated on supposedly intentional misstatements or omissions, which were brought under the Securities Exchange Act of 1934. The claims and denied the motions to dismissthat remain are those brought under the Securities Act claims.of 1933. The Company has filed an answer denying the material allegations of the complaint, and discovery is now underway. The Company believes that this lawsuit is without merit and intends to vigorously defend itself against the allegations.
On or aroundIn April 10, 2019, aanother purported shareholder of the Company filed a shareholder derivative lawsuit ostensibly on behalf of the Company in the U.S.United States District Court for the Western District of Pennsylvania, captioned Dallas Torgersen derivatively on behalf of Evoqua Water Technologies Corp. v. Ronald C. Keating et al., Case No. 2:19-CV-410. The complaint names as defendants the Company’s CEO the Company’s& CFO, andas well as members of the Company’s Boardboard of Directors,directors, and it names the Company as a nominal defendant. The complaint alleges, among other things, that the individual defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures in the period leading up to the Company’s October 30, 2018 disclosuredisclosures, and that they breached their fiduciary duties to the Company. The lawsuit seeks compensatory damages in an unspecified amount, to be proved at trial, an award of reasonable costs and expenses, restitution from the individual defendants, and an order directing the Company and the individual defendants to take all necessaryunspecified actions to reform and improve the Company’s corporate governance and internal procedures to comply with the law and to prevent the events alleged from reoccurring, including by putting forth for shareholder vote certain resolutions for amendments to the Company’s charter or bylaws, and such other relief as the court may deem just and proper. On June 14, 2019, the Court entered an order staying the lawsuit pending resolution of the In re Evoqua Water Technologies Corp. Securities Litigation lawsuit described above.procedures. The Company believes that this lawsuit is without merit and intends to vigorously defend itself against the allegations. In June 2019, the Court entered an order staying the lawsuit pending resolution of the Securities Litigation.
On or aroundIn July 27, 2020, a different purported shareholder of the Company filed a second shareholder derivative lawsuit ostensibly on behalf of the Company in the U.S.United States District Court for the Western District of Pennsylvania, captioned Robert Hyams derivatively on behalf of Evoqua Water Technologies Corp. v. Ronald C. Keating et al.,, Case No. 2:20-CV-1112. The complaint is similar to the one in Torgersen but also names as defendants the Company’s CEO, the Company’s CFO, members of the Company’s Board of Directors, and AEA Investors LP and a number of its affiliated entities,entities. In September 2020, the court issued an order consolidating the Torgersen and it namesHyams cases under the caption In re Evoqua Water Technologies Corp. Derivative Litigation (the “Derivative Litigation”), and staying the consolidated lawsuit pending resolution of the Securities Litigation.
In February 2020, yet another purported shareholder of the Company assent a nominal defendant. The complaint alleges, among other things,letter to the board of directors demanding that it investigate and bring claims against various directors and officers for the same matters that were already the subject of the Securities Litigation and the Torgersen derivative litigation. Although no lawsuit has yet been filed by this purported shareholder, the shareholder agreed to stay matters on terms similar to what was agreed in the Derivative Litigation.
In October 2020, the Company learned that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosuresSEC and the United States Attorney’s Office for the District of Massachusetts are investigating whether financial misstatements were made in the period leading upCompany’s public filings and earnings announcements prior to October 2018, similar to what is alleged in the Company’s October 30, 2018 disclosure and that they breached their fiduciary duties to the Company.Securities Litigation. The lawsuit seeks compensatory damages in an unspecified amount to be proved at trial, an award of reasonable costs and expenses, restitution from the individual defendants, an order directingCompany is cooperating with those investigations. Although the Company andis unable to predict the individual defendants to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures to comply with the law and to prevent the events alleged from reoccurring, including by putting forth
for shareholder vote certain resolutions for amendments to the Company’s charteroutcome or bylaws, and such other relief as the court may deem just and proper. The Company believesreasonably estimate any potential loss, we currently believe that this lawsuit is without merit and intends to vigorously defend itself against the allegations.matter will not have a material adverse effect on our business, financial condition, results of operations or prospects.
Item 1A. Risk Factors
There have been no material changes to the information concerning risk factors as stated in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019,2020, as filed with the SEC on November 25, 2019, as amended on December 4, 2019, and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, as filed with the SEC on May 6,20, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
Item 6. Exhibits
The following exhibits are filed or furnished as a part of this report:
|
| | | | |
Exhibit No. | Exhibit Description |
31.1*10.1 | |
31.1* | |
31.2* | |
32.1** | |
32.2** | |
101.INS* | Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
101.SCH* | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the(formatted as Inline XBRL document (includedand contained in Exhibit 101). |
† Indicates a management contract or compensatory plan or arrangement.
* Filed herewith
** Furnished herewith
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.
|
| | | | | | | |
| EVOQUA WATER TECHNOLOGIES CORP. |
| |
| |
| |
| |
| |
August 4, 2020February 2, 2021 | /s/ RONALD C. KEATING |
| By: | Ronald C. Keating |
| | Chief Executive Officer (Principal Executive Officer) |
| |
| |
| |
| |
| |
August 4, 2020February 2, 2021 | /s/ BENEDICT J. STAS |
| By: | Benedict J. Stas |
| | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
| | |