The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company receives payments from customers based on a billing schedule as established in its contracts.
Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contract assets and liabilities are due to the Company’s performance under the contract.
The tables below provide a roll-forward of contract assets and contract liabilities balances for the periods presented:
The following table presents the Company’s financial assets and liabilities at fair value. The fair values related to the pension plan assets are determined using net asset value (“NAV”) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value. The reported carrying amounts of deferred compensation plan assets and liabilities and debt approximate their fair values. The Company uses interest rates and other relevant information generated by market transactions involving similar instruments to fair value these assets and liabilities, therefore all are classified as Level 2 within the valuation hierarchy.
The pension plan assets and liabilities and deferred compensation plan assets and liabilities are included in Other non‑current assets and Other non‑current liabilities at June 30, 20202021 and September 30, 2019.2020. The unrealized gain on mutual funds was $532 at June 30, 2021.
The Company records contingent consideration arrangements at fair value on a recurring basis, and the associated balances presented as of June 30, 20202021 and September 30, 20192020 are earn-outs related to acquisitions. The fair value of earn-outs related to acquisitions is based on significant unobservable inputs including the achievement of certain performance
metrics. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the earn-out each period until the related contingency has been resolved. Changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Unaudited Consolidated Statements of Operations.
7.8. Inventories
The major classes of Inventories, net are as follows:
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Raw materials and supplies | $ | 86,604 |
| | $ | 75,223 |
|
Work in progress | 19,544 |
| | 14,741 |
|
Finished goods and products held for resale | 62,380 |
| | 58,223 |
|
Costs of unbilled projects | 4,553 |
| | 2,347 |
|
Reserves for excess and obsolete | (13,635 | ) | | (13,370 | ) |
Inventories, net | $ | 159,446 |
| | $ | 137,164 |
|
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Raw materials and supplies | $ | 85,671 | | | $ | 78,319 | |
Work in progress | 19,489 | | | 15,654 | |
Finished goods and products held for resale | 63,493 | | | 56,435 | |
Costs of unbilled projects | 3,789 | | | 3,438 | |
Reserves for excess and obsolete | (11,214) | | | (11,467) | |
Inventories, net | $ | 161,228 | | | $ | 142,379 | |
8.9. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
|
| | | | | | | |
| June 30, 2020 | | September 30, 2019 |
Machinery and equipment | $ | 341,606 |
| | $ | 316,390 |
|
Rental equipment | 201,379 |
| | 172,534 |
|
Land and buildings | 69,313 |
| | 64,165 |
|
Construction in process | 54,975 |
| | 40,599 |
|
| 667,273 |
| | 593,688 |
|
Less: accumulated depreciation | (310,849 | ) | | (260,104 | ) |
| $ | 356,424 |
| | $ | 333,584 |
|
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Machinery and equipment | $ | 386,458 | | | $ | 357,650 | |
Rental equipment | 238,953 | | | 221,953 | |
Land and buildings | 70,591 | | | 70,245 | |
Construction in process | 53,975 | | | 48,325 | |
| 749,977 | | | 698,173 | |
Less: accumulated depreciation | (377,578) | | | (333,712) | |
| $ | 372,399 | | | $ | 364,461 | |
The Company entered into secured financing agreements that require providing a security interest in specified equipment. As of June 30, 20202021 and September 30, 2019,2020, the gross and net amounts of those assets are as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2020 | | September 30, 2019 |
| Gross | | Net | | Gross | | Net |
Machinery and equipment | $ | 59,307 |
| | $ | 49,959 |
| | $ | 48,288 |
| | $ | 42,162 |
|
Construction in process | 3,724 |
| | 3,724 |
| | 2,531 |
| | 2,531 |
|
| $ | 63,031 |
| | $ | 53,683 |
| | $ | 50,819 |
| | $ | 44,693 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
| Gross | | Net | | Gross | | Net |
Machinery and equipment | $ | 71,012 | | | $ | 55,956 | | | $ | 63,305 | | | $ | 52,620 | |
Construction in process | 22,760 | | | 22,760 | | | 8,098 | | | 8,098 | |
| $ | 93,772 | | | $ | 78,716 | | | $ | 71,403 | | | $ | 60,718 | |
Depreciation expense and maintenance and repairs expense for the three and nine months ended June 30, 20202021 and 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Depreciation expense | $ | 19,170 | | | $ | 18,992 | | | $ | 56,450 | | | $ | 54,480 | |
Maintenance and repair expense | 4,603 | | | 4,601 | | | 14,565 | | | 15,915 | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Depreciation expense | $ | 18,992 |
| | $ | 15,979 |
| | $ | 54,480 |
| | $ | 47,334 |
|
Maintenance and repair expense | 4,601 |
| | 6,144 |
| | 15,915 |
| | 18,192 |
|
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 and divestitures | 10,349 | | | 0 | | | 10,349 | |
Measurement period adjustment | (3,194) | | | 0 | | | (3,194) | |
Foreign currency translation | 3,232 | | | 2,164 | | | 5,396 | |
Balance at June 30, 2021 | $ | 234,768 | | | $ | 174,988 | | | $ | 409,756 | |
As of June 30, 20202021 and September 30, 2019, $152,0242020, $159,620 and $151,880,$153,004, respectively, of goodwill was deductible for tax purposes.
10.11. Debt
Long‑term debt consists of the following:
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
2021 Term Loan, due April 1, 2028 (1) | $ | 475,000 | | | $ | 0 | |
2021 Revolving Credit Facility, due April 1, 2026 (1) | 95,000 | | | 0 | |
2014 Term Loan, due December 20, 2024 (1) | 0 | | | 819,276 | |
2014 Revolving Credit Facility (1) | 0 | | | 0 | |
Securitization Facility, due April 1, 2024 | 148,151 | | | 0 | |
Equipment Financing, due September 30, 2023 to July 5, 2029, interest rates ranging from 3.13% to 8.07% | 83,255 | | | 63,918 | |
Notes Payable, due July 31, 2023 | 455 | | | 611 | |
Mortgage (2) | 0 | | | 1,665 | |
Total debt | 801,861 | | | 885,470 | |
Less unamortized deferred financing fees | (12,217) | | | (9,436) | |
Total net debt | 789,644 | | | 876,034 | |
Less current portion | (11,474) | | | (14,339) | |
Total long‑term debt | $ | 778,170 | | | $ | 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 April 1, 2021, the Company paid off the outstanding balance of the 2014 Term Loan (as defined below) and entered into the 2021 Credit Agreement (as defined below).Term Facilities and Revolving(2)In November 2020, the Company paid off the outstanding balance of the mortgage due June 30, 2028.
2014 Credit FacilityAgreement
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 “2014 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 2014 Credit Agreement also made available to the Company utilized $100,000a revolving credit facility (the “ 2014 Revolving Credit Facility”) of up to $125,000, with a letter of credit sublimit of up to $45,000. The term loan outstanding under the 2014 Credit Agreement (the “2014 Term Loan”) was scheduled to mature on December 20, 2024, and the 2014 Revolving Credit Facility was scheduled to mature on December 20, 2022. As described below, on April 1, 2021, we completed a refinancing of the proceeds fromoutstanding 2014 Term Loan and terminated the sale of the Memcor product line 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. 2014 Credit Agreement.
2021 Credit Agreement
On February 18, 2020,April 1, 2021, EWT III entered into Amendment No. 7a Credit Agreement (the “Amendment”“2021 Credit Agreement”), among EWT III, as the borrower, EWT Holdings II, Corp., as parent guarantor, the subsidiary guarantorslenders from time to time party thereto, the financial institutions party thereto, and Credit Suisse AG,JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, relating to theand ING Capital, LLC, as sustainability coordinator. The 2021 Credit Agreement. AsAgreement provides for 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 Loansmulti-currency senior secured revolving credit facility in an aggregate principal amount not to exceed the U.S. dollar equivalent of approximately $826,000$350,000 (the “Existing“2021 Revolving Credit Facility”) and a discounted senior secured term (the “2021 Term Loans”Loan”) werein the amount of $475,000 (together with the 2021 Revolving Credit Facility, the “Senior Facilities”). The 2021 Credit Agreement also provides for a letter of credit sub-facility not to exceed $60,000. The Senior Facilities are guaranteed by EWT II and certain existing and future direct or indirect wholly-owned domestic subsidiaries of EWT III (together with EWT III, collectively, the “Loan Parties”), and collateralized by a first lien on substantially all of the assets of the Loan Parties, with certain exceptions. In connection with entering into the 2021 Credit Agreement, on April 1, 2021, EWT III repaid all outstanding indebtedness under the Credit Agreement. Pursuant to the Amendment, the Existing Term Loans were refinanced with the proceeds of the refinancing term loans. Additionally, the Amendment amended the2014 Credit Agreement to, among other things:and terminated that facility.
| |
(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. |
The Company makes quarterly principal payments of $2,369. At June 30, 2020, the interest rate on borrowings was 3.45%, comprised of 0.70% LIBOR plus the 2.75% spread.
Total deferred 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.
The following summarizes the Company’s outstanding borrowings under the Revolver and outstanding letters of credit as of June 30, 2020 and September 30, 2019, 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 |
|
The First Lien2021 Credit Agreement contains limitations on incremental borrowings, is subjectcustomary representations, warranties, affirmative covenants, and negative covenants, each substantially similar to those included in the 2014 Credit Agreement, including, among other things, a springing maximum first lien leverage ratios and allows for optional prepayments. Under certain circumstances, the Company may be requiredratio of 5.55 to remit excess cash flows as defined based upon exceeding certain leverage ratios.1.00. The Company did not exceed such ratiosthis ratio during the ninethree months ended June 30, 2020,2021, does not anticipate exceeding such ratiosthis ratio during the year ending September 30, 2020,2021, and therefore does not anticipate any additional repayments during the year ending September 30, 2021. In addition, the Company did not exceed this ratio as noted in the 2014 Credit Agreement during the six months ended March 31, 2021.
With respect to the 2021 Revolving Credit Facility, EWT III is required to pay a commitment fee based on the daily unused portion of the 2021 Revolving Credit Facility, as well as certain other fees to the agents and the arrangers under the Senior Facilities. Amounts outstanding under the Senior Facilities, at EWT III’s option, bear interest at either (i) a Base Rate determined in accordance with the terms of the 2021 Credit Agreement, (ii) with respect to any amounts denominated in U.S. dollars or Sterling, LIBOR, or replacement thereof, as determined in accordance with the terms of the 2021 Credit Agreement, or (iii) with respect to amounts denominated in Euros, the EURIBOR, or replacement thereof, as determined in accordance with the terms of the 2021 Credit Agreement. In the case of the 2021 Revolving Credit Facility, an applicable margin based on the consolidated total leverage of EWT III and its restricted subsidiaries, as calculated in accordance with the terms of the 2021 Credit Agreement, will be added to the interest rate elected by EWT III; provided that the interest rate may be adjusted if EWT III meets certain metrics for a sustainability price adjustment prior to December 31, 2021. In the case of the 2021 Term Loan, a fixed applicable margin, calculated in accordance with the terms of the 2021 Credit Agreement, will be added to the interest rate elected by EWT III.
On April 1, 2021, EWT III borrowed the full amount of $475,000 under the 2021 Term Loan and $105,000 under the 2021 Revolving Credit Facility. The 2021 Term Loan was issued at a discount of $2,375, which is recorded as a contra-liability to the carrying amount of debt issued, and is being amortized to interest expense using the effective interest method. The net proceeds of these borrowings under the Senior Facilities, together with the net proceeds of the Receivables Securitization Program (as defined below) and cash on hand, were used to repay all outstanding indebtedness, in an aggregate principal amount of approximately $814,538, under the 2014 Credit Agreement. The proceeds of the 2021 Revolving Credit Facility may also be used to finance or refinance the working capital and capital expenditures needs of EWT III and certain of its subsidiaries and for general corporate purposes.
The 2021 Term Loan matures on April 1, 2028 and requires quarterly principal payments of $1,188 starting in the fourth quarter of 2021. Subject to the terms of the 2021 Credit Agreement, to the extent not previously paid, any amount owed under the 2021 Revolving Credit Facility will become due and payable in full on April 1, 2026.
At June 30, 2021, the Company had (a) $475,000 outstanding under the 2021 Term Loan at an interest rate of 2.63%, comprised of 0.13% LIBOR plus the 2.50% spread, and (b) $95,000 outstanding under the 2021 Revolving Credit Facility at an interest rate of 2.38%, comprised of 0.13% LIBOR plus the 2.25% spread.
The following table summarizes the amount of the Company’s outstanding borrowings and outstanding letters of credit under the 2021 Revolving Credit Facility as of June 30, 2021, and under the 2014 Revolving Credit Facility as of September 30, 2020.
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Borrowing availability | $ | 350,000 | | | $ | 125,000 | |
Outstanding borrowings | 95,000 | | | 0 | |
Outstanding letters of credit | 11,504 | | | 12,963 | |
Unused amounts | $ | 243,496 | | | $ | 112,037 | |
| | | |
Additional letters of credit under a separate arrangement | $ | 0 | | | $ | 52 | |
Receivables Securitization Program
On April 1, 2021, Evoqua Finance LLC (“Evoqua Finance”), an indirect wholly-owned subsidiary of the Company, entered into an accounts receivable securitization program (the “Receivables Securitization Program”) consisting of, among other agreements, (i) a Receivables Financing Agreement (the “Receivables Financing Agreement”) among Evoqua Finance, as the borrower, the lenders from time to time party thereto (the “Receivables Financing Lenders”), PNC Bank, National Association (“PNC Bank”), as administrative agent, Evoqua Water Technologies LLC (“EWT LLC”), an indirect wholly-owned subsidiary of the Company, as initial servicer, and PNC Capital Markets LLC (“PNC Markets”), as structuring agent, pursuant to which the lenders have made available to Evoqua Finance a receivables finance facility (the “Securitization Facility”) in an amount up to $150,000 and (ii) a Sale and Contribution Agreement (the “Sale Agreement”) among Evoqua Finance, as purchaser, EWT LLC, as initial servicer and as an originator, and Neptune Benson, Inc., an indirectly wholly-owned subsidiary of the Company, as an originator (together with EWT LLC, the “Originators”). Under the Receivables Securitization Program, the Originators, pursuant to the Sale Agreement, are required to sell substantially all of their domestic trade receivables and certain related rights to payment and obligations of the Originators with respect to such receivables (the “Receivables”) to Evoqua Finance, which, in turn, will obtain loans secured by the Receivables from the Receivables Financing Lenders pursuant to the Receivables Financing Agreement. The Receivables underlying any borrowings will continue to be included in Accounts receivable, net, in the Consolidated Balance Sheets of the Company. On April 1, 2021, Evoqua Finance borrowed $142,200 under the Securitization Facility. During the third quarter of 2021, Evoqua Finance borrowed an additional amount under the Securitization Facility and had $148,151 outstanding at June 30, 2021 which includes $51 of accrued interest.
The Receivables Securitization Program contains certain customary representations, warranties, affirmative covenants, and negative covenants, subject to certain cure periods in some cases, including the eligibility of the Receivables being sold by the Originators and securing the loans made by the Receivables Financing Lenders, as well as customary reserve requirements, events of default, termination events, and servicer defaults. The Company was in compliance with all covenants during the three months ended June 30, 2021, does not anticipate becoming noncompliant during the year ending September 30, 2021, and therefore does not anticipate any additional repayments during the year ending September 30, 2021.
The Receivables Financing Lenders under the Receivables Securitization Program receive interest at LIBOR or LMIR as selected by Evoqua Finance. The Receivables Financing Agreement contains customary LIBOR benchmark replacement language. The interest rate on the Securitization Facility was 1.35% as of June 30, 2021, comprised of 0.10% LIBOR plus the 1.25% spread. The Receivables Securitization Program matures on April 1, 2024.
Equipment Financings
During the nine months ended June 30, 2021, the Company completed the following equipment financings:
| | | | | | | | | | | | | | | | | | | | |
Date Entered | | Due | | Interest Rate at 6/30/2021 | | Principal Amount |
June 30, 2021 | | June 30, 2028 | | 3.85 | % | | $ | 1,348 | |
June 30, 2021 | | July 31, 2029(1) | | 4.75 | % | | 8,378 | |
June 30, 2021 | | June 30, 2029 | | 4.09 | % | | 1,653 | |
March 31, 2021 | | March 31, 2028 | | 3.85 | % | | 3,630 | |
March 31, 2021 | | June 30, 2029 | | 4.09 | % | | 2,559 |
December 31, 2020 | | June 30, 2029 | | 4.09 | % | | 3,899 |
December 30, 2020 | | December 30, 2027 | | 3.73 | % | | 3,905 |
| | | | | | $ | 25,372 | |
(1) Represents an advance received from the lender on a multiple draw term loan in which the Company is making interest only payments through August 1, 2022 based on a 1.00% LIBOR floor plus a 3.75% spread. The Company entered into an interest rate swap with an effective date of August 1, 2022 to mitigate risk associated with this variable rate equipment financing, see Note 12, “Derivative Financial Instruments” for further discussion.
Deferred Financing Fees and Discounts
Deferred financing fees and discounts related to the Company’s long-term debt were included as a contra liability to debt on the Consolidated Balance Sheets as follows:
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Current portion of deferred financing fees and discounts (1) | $ | (1,791) | | | $ | (2,112) | |
Long-term portion of deferred financing fees and discounts (2) | (10,426) | | | (7,324) | |
Total deferred financing fees and discounts | $ | (12,217) | | | $ | (9,436) | |
(1)Included in Current portion of debt, net of deferred financing fees and discounts on the Consolidated Balance Sheets.
(2)Included in Long-term debt, net of deferred financing fees and discounts on the Consolidated Balance Sheets.
As a result of the refinancing on April 1, 2021, the Company wrote off approximately $1,333 of deferred financing fees related to the 2014 Term Loan. In addition, the Company incurred approximately $4,985 of fees, of which approximately $1,931 were recorded as deferred financing fees on the Consolidated Balance Sheets and approximately $3,054 were expensed. During the nine months ended June 30, 2021, the Company incurred approximately $822 of fees related to the Receivables Securitization Program and $467 of fees related to an equipment financing which were recorded as deferred financing fees on the Consolidated Balance Sheets.
Amortization of deferred financing fees and discounts included in interest expense were $437 and $277 for the three months ended June 30, 2021 and 2020, respectively and $1,481 and $1,213 for the nine months ended June 30, 2021 and 2020, respectively.
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, 2020,2021, 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 | $ | 3,372 | |
2022 | 13,612 | |
2023 | 14,536 | |
2024 | 161,158 | |
2025 | 14,579 | |
Thereafter | 594,604 | |
Total | $ | 801,861 | |
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 as well as variable rate equipment financings, 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 June 30, 2021, the Company entered into an interest rate swap duringwith an effective date of August 1, 2022 to mitigate risk associated with a variable rate equipment financing. The interest rate swap provides for a fixed rate of 5.25%, has a notional amount of $31,000 and a term of seven years. The interest rate swap has been designated as a cash flow hedge.
On May 22, 2020, the third quarter of fiscal 2020Company entered into an interest rate swap 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 fixed ratefixes LIBOR 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 AOCI on the Consolidated Balance Sheets. As interest payments are made, the realized gain or loss on the payments are 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.hedge.
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, 2020,2021, the notional amount of the forward contracts held to sell foreign currencies was $17,866.$7,392.
Commodity Price Risk Management
The Company is subject to changes in index pricing of platinum. To mitigate price risk of certain platinum purchase contracts, the Company has entered into a financially settled platinum swap designated as a cash flow hedge.
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, “DerivativesDerivatives and Hedging” (TopicHedging (“Topic No. 815)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 cap isswaps are 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. The Company’s platinum swap is valued using the LBMA Platinum Price PM Index 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 AOCIAccumulated other comprehensive income (loss), net of tax (“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 | | June 30, 2021 | | September 30, 2020 |
Interest rate swaps | Prepaid and other current assets | | $ | 2,443 | | | $ | 0 | |
| | | | | |
Foreign currency forward contracts | Prepaid and other current assets | | 48 | | | 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 Derivatives |
| Balance Sheet Location | | June 30, 2021 | | September 30, 2020 |
Interest rate swaps | Accrued expenses and other current liabilities | | $ | 376 | | | $ | 4,669 | |
Foreign currency forward contracts | Accrued expenses and other current liabilities | | 113 | | | 47 | |
Commodity swaps | Accrued expenses and other current liabilities | | 16 | | | 0 | |
The following represents the amount of (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 June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Interest rate swaps | $ | (4,157) | | | $ | (3,258) | | | $ | 5,111 | | | $ | (3,258) | |
Interest rate cap | 0 | | | (20) | | | 0 | | | (19) | |
Foreign currency forward contracts | 67 | | | 10 | | | (265) | | | (150) | |
Commodity swaps | (16) | | | 0 | | | (16) | | | 0 | |
| $ | (4,106) | | | $ | (3,268) | | | $ | 4,830 | | | $ | (3,427) | |
The following represents the amount of (loss) gain on foreign currency forward contracts(loss) 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 | ) |
28
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, |
Location of (Loss) Gain | | 2021 | | 2020 | | 2021 | | 2020 |
Cost of product sales and services | | $ | 9 | | | $ | (2) | | | $ | (4) | | | $ | (8) | |
General and administrative expense | | 0 | | | 48 | | | (72) | | | $ | 78 | |
Selling and marketing expense | | 0 | | | 0 | | | (39) | | | 28 | |
| | | | | | | | |
Interest expense | | (591) | | | 0 | | | (1,624) | | | 0 | |
| | $ | (582) | | | $ | 46 | | | $ | (1,739) | | | $ | 98 | |
Based on the fair value amounts of the Company’s cash flow hedges at June 30, 2020,2021, the Company expects that approximately $187$56 of pre-tax net losses 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 | | June 30, 2020 | | September 30, 2019 |
Foreign currency forward contracts | Prepaid and other current assets | | $ | 27 |
| | $ | 9 |
|
| | | | | | | | | | | | | | | | | |
| | | Asset Derivatives |
| Balance Sheet Location | | June 30, 2021 | | September 30, 2020 |
Foreign currency forward contracts | Prepaid and other current assets | | $ | 11 | | | $ | 7 | |
| | | | | |
| | | Liability Derivatives |
| Balance Sheet Location | | June 30, 2021 | | September 30, 2020 |
Foreign currency forward contracts | Accrued expenses and other current liabilities | | $ | 7 | | | $ | 0 | |
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 |
| Nine Months Ended June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Balance at beginning of the period | $ | 6,115 | | | $ | 4,922 | | | $ | 1,724 | | | $ | 2,332 | |
| | | | | | | |
Warranty provision for sales | 5,680 | | | 2,496 | | | 1,577 | | | 481 | |
Settlement of warranty claims | (3,826) | | | (3,243) | | | (701) | | | (1,298) | |
Amounts related to sale of the Memcor product line | 0 | | | 795 | | | 0 | | | 136 | |
Foreign currency translation and other | 94 | | | 276 | | | 29 | | | (51) | |
Balance at end of the period | $ | 8,063 | | | $ | 5,246 | | | $ | 2,629 | | | $ | 1,600 | |
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 announced a transition 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, 2018 and combined 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 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. The Company expects to incur up to $1,500 of expense during the final phase of this transition.
Beginning in the second quarter of fiscal 2020, the Company undertookhas undertaken various restructuring initiatives, including undertaking activities to reduce the cost 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, and various initiatives within the Integrated Solutions and Services segment to drive efficiency and effectiveness in certain divisions.
The Company currently expects to incur approximately $1,300 to $2,300 of costs through the remainder of fiscal 2021 related to restructuring charges following the sale of the Memcor product line. The Company currently expects to incur approximately $3,000$200 to $5,000$400 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 $1,000 to $1,400 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 |
|
| | | | | | | | | | | |
| Nine Months Ended June 30, |
| 2021 | | 2020 |
Balance at beginning of the period | $ | 970 | | | $ | 655 | |
Restructuring charges following the sale of the Memcor product line | 4,649 | | 4,758 | |
Restructuring charges related to two-segment realignment | 830 | | 1,866 | |
Restructuring charges related to other initiatives | 1,856 | | 1,141 |
Release of prior reserves | (296) | | | (62) |
Write off charges | (966) | | | 0 | |
Cash payments | (6,349) | | | (7,314) |
Other adjustments | 8 | | | 0 |
Balance at end of the period | $ | 702 | | | $ | 1,044 | |
The balances for accrued restructuring liabilities at June 30, 20202021 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, 20202021 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 |
|
| | | | | | | | | | | |
| Nine Months Ended June 30, |
| 2021 | | 2020 |
Cost of product sales and services | $ | 4,341 | | | $ | 5,198 | |
General and administrative expense | 1,675 | | | 2,310 | |
Sales and marketing expense | 348 | | | 173 | |
Research and development expense | (15) | | | 22 | |
Other operating expense, net | 690 | | | 0 | |
| $ | 7,039 | | | $ | 7,703 | |
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 June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Service cost | $ | 287 | | | $ | 259 | | | $ | 858 | | | $ | 779 | |
Interest cost | 81 | | | 67 | | | 240 | | | 203 | |
Expected return on plan assets | (88) | | | (30) | | | (262) | | | (89) | |
Amortization of actuarial losses | 266 | | | 235 | | | 640 | | | 706 | |
Pension expense for defined benefit plans | $ | 546 | | | $ | 531 | | | $ | 1,476 | | | $ | 1,599 | |
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 updated PAETR, which excludes the impact of discrete items, was 3.9%19.7% and 38.9%3.9% as of the nine months ended June 30, 20202021 and 2019,2020, respectively. For the nine months ended June 30, 2020,2021, the PAETR of 3.9% was lower than the U.SU.S. federal statutory rate of 21.0% primarily due to the gainimpact of maintaining a U.S. valuation allowance that is provided on U.S. deferred tax assets offset by changes in the mix of earnings between countries, some of which have higher statutory rates, and it is higher than the prior year’s rate which included the impact of the sale of the Memcor product line the U.S. valuation allowance provided on U.S. deferred tax assets as well asand the impact ofon 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 allowance 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 yearperiod ending SeptemberJune 30, 20202021 as a result of pretax losses incurred since the Company’s inception in early 2014. The Company reported positive U.S. pre-tax earnings for the first time in 2017 and again in 2020 and is projecting positive pre-tax earnings in 2020,2021, however, the Company generated pre-tax losses in all other years andyears. The Company was in a three-year cumulative loss position at September 30, 2019.2019, but was no longer in a three-year cumulative loss position at September 30, 2020. 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, 2021, the Company recognized income tax expense of $3,887 on pretax income of $17,086. The rate of 22.7% differed from the U.S. statutory rate of 21.0% principally due to the impact of higher earnings in non-U.S. tax jurisdictions, some with higher statutory rates, which increases overall tax expense, and lower earnings in the U.S., which does not impact tax expense due to the U.S. valuation allowance.
For the three months ended June 30, 2020, the Company recognized income tax expense of $740 on pretax income of $22,581. The rate of 3.3% 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 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 threenine months ended June 30, 2019,2021, the Company recognized income tax expense of $7,959$7,672 on a pretax income of $12,249.$32,430. The rate of 65%23.7% differed from the U.S. statutory rate of 21%21.0% principally due to the unfavorable impact of discrete items related to an adjustment for prior periods and recording an uncertain tax position related to a tax audit in a foreign jurisdiction, as well as the impact of higher earnings in non-U.S. tax jurisdictions, which increases overall tax expense, and lower forecasted earnings in the U.S., which does not impact tax expense 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.U.S. valuation allowance.
For the nine months ended June 30, 2020, the Company recognized income tax expense of $3,336 on pretax income of $86,593. The rate of 3.9% 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 endedAt 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 30,2021 and 2020, the Company had gross unrecognized tax benefits of $1,313.$1,805 and $1,313 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, 2020,2021, there were approximately 1,7042,177 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.
On May 18, 2021 (the “Grant Date”), the Compensation Committee of the Board approved and the Company granted special one-time awards of 234 restricted stock units (“Special RSUs”) and 469 performance share units (“Special PSUs”) under the Equity Incentive Plan to certain executive officers of the Company. Subject to the applicable executive officer’s continued employment with the Company and the terms and conditions of the Equity Incentive Plan and the related award agreement, the Special RSUs will vest ratably over a three-year period on each annual anniversary of the Grant Date, and the Special PSUs will be earned incrementally in three tranches of 25%, 25%, and 50% after one-, two-, and three-year performance periods, respectively, and will cumulatively be paid, if earned, after the end of the three-year performance period ending on May 18, 2024, based on the Company’s total stockholder return (“TSR”) compared to peer water companies, including certain U.S.-listed companies included in the S&P Global Water Index (the “Peer Companies”). Each tranche of the Special PSUs reflects the right to receive between 50% and 100% of the shares underlying such tranche based on the Company’s TSR as compared to the Peer Companies (“Relative TSR”) for the applicable performance period. Subject to certain exceptions provided in the award agreements in the event of death, disability, or change in control, for each tranche, Special PSUs will be earned as follows: 100% if Relative TSR for the period is at the 80th percentile or above; 50% if Relative TSR for the period is at the 60th percentile; and 0% if Relative TSR is below the 60th percentile. Linear interpolation will be used to determine the percentage of each tranche earned when Relative TSR is between the 60th percentile and the 80th percentile for the applicable performance period. The payout for each tranche of the Special PSUs is capped at 100% even if Relative TSR exceeds the 80th percentile for the applicable period. If the Company’s TSR is negative for any performance period, the number of Special PSUs that may vest for the corresponding tranche will be capped at 50% of the amount that otherwise would have been earned for the period.
As of June 30, 2020,2021, there were approximately 5,9634,336 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 1,159 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, 20202021 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 | 611 | | | 24.76 | | | | | |
Exercised | (2,548) | | | 6.50 | | | | | |
| | | | | | | |
Forfeited | (42) | | | 20.70 | | | | | |
| | | | | | | |
Outstanding at June 30, 2021 | 5,450 | | | $ | 13.61 | | | 6.1 years | | $ | 109,936 | |
Options exercisable at June 30, 2021 | 3,505 | | | $ | 9.66 | | | 4.9 years | | $ | 84,548 | |
Options vested and expected to vest at June 30, 2021 | 5,388 | | | $ | 13.50 | | | 6.1 years | | $ | 109,276 | |
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 nine months ended June 30, 20202021 was $26,051.$51,448.
A summary of the status of the Company's non-vested stock options as of and for the nine months ended June 30, 20202021 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 | 611 | | | 8.98 | |
Vested | (790) | | | 5.53 | |
Forfeited | (42) | | | 6.73 | |
Nonvested at end of period | 1,945 | | | $ | 6.62 | |
The total fair value of options vested during the nine months ended June 30, 2020,2021, was $3,673.$4,371.
Restricted Stock Units
The following is a summary of the RSU activity for the nine months ended June 30, 2020.2021.
| | | | | | | | | | | |
(In thousands, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value/Share |
Outstanding at September 30, 2020 | 750 | | | $ | 17.86 | |
Granted | 729 | | | 25.94 | |
Vested | (239) | | | 17.55 | |
Forfeited | (23) | | | 20.38 | |
| | | |
Cancelled | (7) | | | 21.22 | |
Outstanding at June 30, 2021 | 1,210 | | | $ | 22.72 | |
Expected to vest at June 30, 2021 | 1,147 | | | $ | 22.57 | |
|
| | | | | | |
(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 |
|
The following is a summary of the Special PSU activity for the nine months ended June 30, 2021.
| | | | | | | | | | | |
(In thousands, except per share amounts) | Shares | | Weighted Average Grant Date Fair Value/Share |
| | | |
Granted | 469 | | | $ | 16.92 | |
| | | |
| | | |
Nonvested at end of period | 469 | | | $ | 16.92 | |
Expected to vest | 422 | | | $ | 16.92 | |
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$5,526 and $4,985$2,542 during the three months ended June 30, 20202021 and 2019,2020, respectively, of which $2,520$4,228 and $4,978$2,520 was non-cash, respectively. Total share-based compensation expense was $8,559$11,816 and $14,308$8,559 during the nine months ended June 30, 20202021 and 2019,2020, respectively, of which $8,504$10,461 and $14,248$8,504 was non-cash, respectively. The unrecognized compensation expense related to stock options, RSUs, and restricted stock unitsSpecial PSUs was $10,140$10,309, $22,934 and $11,972,$7,611, respectively at June 30, 2020,2021, and is expected to be recognized over a weighted average period of 2.3 years, 2.4 years and 2.9 years, respectively. The Company received $17,949$18,096 from the exercise of stock options during the nine months ended June 30, 2020. The remaining stock options exercised during the nine months ended June 30, 2020 were effected via a cashless net exercise.2021.
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-monthsix-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, 20202021 and 2019,2020, the Company incurred compensation expense of $227$249 and $293,$153, respectively, in salaries and wages inwith respect ofto the ESPP, representing the fair value of the discounted price of the shares. During the nine months ended June 30, 2021 and 2020, the Company incurred compensation expense of $652 and $227, respectively. These amounts are included in the total share-based compensation expense above. On October 1, 20192, 2020 and April 1, 2020, 562021, 120 and 7162 shares, respectively, were issued under the ESPP plan.ESPP.
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, 20202021 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, 20202021 and 2019,2020, 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 transactstransact the external sale.
18. 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 have not been significant in the three and nine months ended June 30, 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, 20202021 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 |
|
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Revolving credit capacity | $ | 60,000 | | | $ | 45,000 | |
Letters of credit outstanding | 11,504 | | | 12,963 | |
Remaining revolving credit capacity | $ | 48,496 | | | $ | 32,037 | |
| | | |
Surety capacity | $ | 250,000 | | | $ | 230,000 | |
Surety issuances | 141,837 | | | 152,990 | |
Remaining surety available | $ | 108,163 | | | $ | 77,010 | |
| | | |
| | | |
| | | |
| | | |
The longest maturity date of letters of credit and surety bonds in effect as of June 30, 20202021 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.
As of June 30, 2021, an accrued liability of $16,650 relating to the proposed settlement of securities litigation and a corresponding asset for the related insurance coverage of $16,650 is included in Accrued expenses and other liabilities and Prepaid and other current assets on the Consolidated Balance Sheets, respectively. See Part II, Item 1, “Legal Proceedings,” for additional information regarding legal proceedings in which the Company is engaged. 21.
20. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Salaries, wages and other benefits | $ | 67,648 | | | $ | 67,766 | |
Provisions for litigation(1) | 19,439 | | | 2,580 | |
Obligation under operating leases | 13,293 | | | 12,767 | |
Obligation under finance leases | 12,097 | | | 11,362 | |
Third party commissions | 9,415 | | | 9,270 | |
Taxes, other than income | 5,675 | | | 5,316 | |
Insurance liabilities | 3,377 | | | 3,954 | |
Earn-outs related to acquisitions | 1,056 | | | 295 | |
| | | |
Severance payments | 702 | | | 970 | |
Fair value of liability derivatives | 512 | | | 4,716 | |
Other | 31,913 | | | 24,393 | |
| $ | 165,127 | | | $ | 143,389 | |
|
| | | | | | | |
| 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 |
|
(1) At June 30, 2021, provisions for litigation includes an accrued liability of $16,650 relating to the proposed settlement of securities litigation. See Note 19, “Commitments and Contingencies” for further discussion.22.21. 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)) 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 revenue and operating profit for the three and nine months ended June 30, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Total revenue | | | | | | | |
Integrated Solutions and Services | $ | 245,414 | | | $ | 230,314 | | | $ | 690,370 | | | $ | 702,938 | |
Applied Product Technologies | 149,434 | | | 136,350 | | | 419,122 | | | 404,303 | |
Total revenue | 394,848 | | | 366,664 | | | 1,109,492 | | | 1,107,241 | |
Intersegment revenue | | | | | | | |
Integrated Solutions and Services | 5,727 | | | 1,603 | | | 11,832 | | | 8,204 | |
Applied Product Technologies | 19,440 | | | 17,234 | | | 59,222 | | | 53,442 | |
Total intersegment revenue | 25,167 | | | 18,837 | | | 71,054 | | | 61,646 | |
Revenue to external customers | | | | | | | |
Integrated Solutions and Services | 239,687 | | | 228,711 | | | 678,538 | | | 694,734 | |
Applied Product Technologies | 129,994 | | | 119,116 | | | 359,900 | | | 350,861 | |
Total revenue | $ | 369,681 | | | $ | 347,827 | | | $ | 1,038,438 | | | $ | 1,045,595 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating profit (loss) | | | | | | | |
Integrated Solutions and Services | $ | 37,793 | | | $ | 32,608 | | | $ | 94,934 | | | $ | 102,457 | |
Applied Product Technologies | 22,735 | | | 23,588 | | | 54,218 | | | 110,480 | |
Corporate | (32,218) | | | (23,130) | | | (88,430) | | | (89,024) | |
Total operating profit | 28,310 | | | 33,066 | | | 60,722 | | | 123,913 | |
Interest expense | (11,224) | | | (10,485) | | | (28,292) | | | (37,320) | |
Income before income taxes | 17,086 | | | 22,581 | | | 32,430 | | | 86,593 | |
Income tax expense | (3,887) | | | (740) | | | (7,672) | | | (3,336) | |
Net income | $ | 13,199 | | | $ | 21,841 | | | $ | 24,758 | | | $ | 83,257 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | |
| June 30, 2021 | | September 30, 2020 |
Assets | | | |
Integrated Solutions and Services | $ | 862,288 | | | $ | 835,307 | |
Applied Product Technologies | 611,785 | | | 598,701 |
Corporate | 369,085 | | | 410,450 |
Total assets | $ | 1,843,158 | | | $ | 1,844,458 | |
| | | |
| | | |
| | | |
| | | |
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
Total sales | | | | | | | |
Integrated Solutions and Services | $ | 230,314 |
| | $ | 227,815 |
| | $ | 702,938 |
| | $ | 669,031 |
|
Applied Product Technologies | 136,350 |
| | 158,526 |
| | 404,303 |
| | 437,196 |
|
Total sales | 366,664 |
| | 386,341 |
| | 1,107,241 |
| | 1,106,227 |
|
Intersegment sales | | | | | | | |
Integrated Solutions and Services | 1,603 |
| | 2,386 |
| | 8,204 |
| | 6,240 |
|
Applied Product Technologies | 17,234 |
| | 23,612 |
| | 53,442 |
| | 68,014 |
|
Total intersegment sales | 18,837 |
| | 25,998 |
| | 61,646 |
| | 74,254 |
|
Sales to external customers | | | | | | | |
Integrated Solutions and Services | 228,711 |
| | 225,429 |
| | 694,734 |
| | 662,791 |
|
Applied Product Technologies | 119,116 |
| | 134,914 |
| | 350,861 |
| | 369,182 |
|
Total sales | 347,827 |
| | 360,343 |
| | 1,045,595 |
| | 1,031,973 |
|
Operating profit (loss) | | | | | | | |
Integrated Solutions and Services | 32,608 |
| | 37,345 |
| | 102,457 |
| | 102,282 |
|
Applied Product Technologies | 23,588 |
| | 22,524 |
| | 110,480 |
| | 38,362 |
|
Corporate | (23,130 | ) | | (32,778 | ) | | (89,024 | ) | | (108,444 | ) |
Total operating profit | 33,066 |
| | 27,091 |
| | 123,913 |
| | 32,200 |
|
Interest expense | (10,485 | ) | | (14,842 | ) | | (37,320 | ) | | (43,759 | ) |
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 |
|
|
| | | | | | | |
| 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 |
|
23.22. 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 June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Numerator: | | | | | | | |
Numerator for basic and diluted earnings per common share—Net income attributable to Evoqua Water Technologies Corp. | $ | 13,155 | | | $ | 21,384 | | | $ | 24,624 | | | $ | 82,341 | |
Denominator: | | | | | | | |
Denominator for basic net income per common share—weighted average shares | 119,015 | | 116,621 | | 119,015 | | 116,621 |
Effect of dilutive securities: | | | | | | | |
Share‑based compensation | 3,245 | | | 3,595 | | | 3,312 | | | 4,432 | |
Denominator for diluted net income per common share—adjusted weighted average shares | 122,260 | | | 120,216 | | | 122,327 | | | 121,053 | |
Basic earnings attributable to Evoqua Water Technologies Corp. per common share | $ | 0.11 | | | $ | 0.18 | | | $ | 0.21 | | | $ | 0.71 | |
Diluted earnings attributable to Evoqua Water Technologies Corp. per common share | $ | 0.11 | | | $ | 0.18 | | | $ | 0.20 | | | $ | 0.68 | |
|
| | | | | | | | | | | | | | | |
| 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 | ) |
23. 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 criticalmission-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 marketsmarkets. We are headquartered in North America.Pittsburgh, Pennsylvania, with locations across ten countries. We offerhave a comprehensive portfolio of differentiated, proprietary technology solutions soldtechnologies offered under a number of market‑leading and well‑established brands to our global customer base. We have worked to protectbrands. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through 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 rangeaddition of their water treatment needs, and maintaining our reputation is critical to the success of our business.chemicals.
Our solutions are designed to ensure thatprovide our customers havewith the quantity and quality of water that meetsnecessary to meet their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations and supportwhile supporting their regulatory compliance and environmental sustainability.sustainability requirements. We deliver and maintain these mission critical solutions through the largestour extensive North American service network, in North America, assuringand we sell our customers continuous uptime with 92 branches as of June 30, 2020.products and technologies internationally through direct and indirect sales channels. We have an extensive serviceworked to protect water, the environment, and support network, and asour employees for more than 100 years. As a result, we have earned a certified Evoqua Service Technician is generally no more thanreputation for quality, safety and reliability around the world. Our employees are united by a two‑hour drive from more than 90% of our North American customers’ sites.common purpose: Transforming water. Enriching life.®
Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers, performancesustainable, and sustainable”performance” foster a corporate culture that is focused on establishing a workforce that is enabled, empowered and accountable, which createscreating a highly entrepreneurial and dynamic work environment. Our purpose is “Transforming water. Enriching life.”
We draw fromserve our customers through the following two segments:
•Integrated Solutions and Services segment, which provides application-specific solutions and full lifecycle services for critical water and wastewater applications across numerous end markets, including on‑demand water, outsourced water, recycle and reuse, and emergency response service alternatives to improve operational reliability, performance and environmental compliance; and
•Applied Product Technologies segment, which provides a long legacyhighly differentiated and scalable range of water treatment innovations and industry firsts, supported by more than 1,100 grantedwastewater products and technologies that can be stand-alone or pending patents, whichas components in aggregate are imperativeintegrated solutions to our business. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them througha diverse set of system specifiers, integrators, and end-users around the addition of chemicals, and we are able to achieve purification levels which are 1,000 times greater than typical drinking water.
Business Segmentsglobe.
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 We expect to drive growth 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 evaluatesegments through market expansion, leveraging our business segments’ operating results based on income from operations and EBITDA or Adjusted 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.
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 installedexisting customer base and unique ability to provide complete treatment solutions will enable us to capturerecurring service model, innovation through new product technology development, a larger sharefocus on operational excellence, and strategic acquisitions. For a detailed discussion of our existing customers’ water treatment spend while expanding with existing and new customers into adjacent end‑markets and underpenetrated regions, including by investing ingrowth drivers, see 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.2020 Annual Report.
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® 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® 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 thirteen acquisitions and 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 and 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 of discrete initiatives which, 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® platform and further optimizing our engineering cost structure, our global shared services organization and our sales, inventory and operations planning. These improvements focus on creating value for customers through reduced lead times, 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 capacity to support our planned growth without commensurate increase 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 to enable us to accelerate our growth by extending our critical mass in existing markets, as well as expand 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 thirteen acquisitions and the acquisition of a 60% interest in Frontier, each of which expands our vertical markets and geographic reach and enhance our technologies, with purchase prices ranging from approximately $2.6 million to approximately $283.7 million, and pre‑acquisition revenues ranging from approximately $3.1 million to approximately $55.7 million.
On December 31, 2019 we completed the sale of the Memcor product line to DuPont de Nemours, Inc. (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 in 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 will continue to supply the Company with Memcor® products.
Recent Developments, Key Factors and Trends Affecting Our Business and Financial Statements
VariousOur 2020 Annual Report includes a discussion of various key factors and trends and other factors affect orthat we believe have affected or may affect our operating results, including:
results. The following discussion highlights recent developments, as well as significant changes in these key factors and trends.
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 throughout the duration of the pandemic to protect our employees, including implementation of remote working practices where possible and managingenhanced safety procedures for employees on site at our facilities and our customers’ facilities, and to manage our supply chain to ensure that necessary personal protective equipment is available to our personnel. WeThese measures have also takenresulted in additional incremental costs and reductions in service productivity over the course of the pandemic, although neither had a significant impact on our financial results in the three months ended June 30, 2021.
To date, the pandemic has negatively impacted volume across our business, due primarily to customer site access restrictions, temporary customer site closures, and temporary delays in annual maintenance activities by customers in certain end markets, although we have started to see volume rebound in certain end markets during the third quarter, as further discussed below in the discussion of our results of operations. Along with this increase in volume, in the third quarter we experienced increases in certain discretionary costs that were the subject of cost reduction actions such as reduction of marketingearlier in the pandemic, particularly employee travel expenses. We have continued to focus on collecting outstanding customer account balances, and, travel activity as well as deferment of headcount additions to preserve liquidity and reallocated existing resources to maintain productivity levels where feasible.
In general,through June 30, 2021, we have seen increased demand for servicesnot experienced any deterioration in collections from customers in pharmaceutical and laboratory industries through the period ended June 30, 2020, as the impact of the pandemic broadened. However, we also continue to see uneven demand for our products and services from customers in certain other industries, such as oil and gas, refining and aquatics. Customer site shut-downs and project delays created by the pandemic contributed to a decline in revenue from services in the quarter.customers. We continue to evaluate the impact of the pandemic on our business particularly how social distancing guidelines and government-imposed restrictions mightthe potential effects of recent spikes in COVID-19 cases in certain regions, as well as challenges created by the macro-economic conditions associated with the reopening and reacceleration of global economies. These challenges include disruptions in our supply chain, material price inflation, shortages of and delays in obtaining certain materials and component parts, labor shortages, and wage inflation. We have taken and continue to affect our accesstake measures to our customers’ sites and howmitigate 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 natureimpact of the unprecedented pandemic, the overall impactthese challenges, but if sustained, they could have a material adverse effect on our operations over the remainderresults of the fiscal year cannot be reasonably estimated at this time.operations.
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 “Risk Factors-Risks Related to the COVID-19 Pandemic” included in Part II,I, Item 1A. “Risk Factors” in the 2020 Annual Report.
Acquisitions and divestitures. On December 17, 2020, we acquired the industrial water business of our Quarterly ReportUltrapure & Industrial Services, LLC (“Ultrapure”) for $8.7 million cash paid at closing. On April 1, 2021, we paid an additional $0.3 million as a result of net working capital adjustments. Ultrapure, based out of Texas, provides customers across multiple end markets with a variety of water treatment products and services, including service deionization, reverse osmosis, UV, and ozonation. Ultrapure will strengthen the Company’s service capabilities in the Houston and Dallas markets and is a part of the Integrated Solutions and Services segment. During the nine months ended June 30, 2021, the Company incurred approximately $0.2 million in acquisition costs, which are included in General and administrative expense on Form 10-Qthe Unaudited Consolidated Statements of Operations.
On March 1, 2021, we completed the divestiture of the Lange containment system, geomembrane, and geosynthetic liner product line (the “Lange Product Line”) for $0.9 million in cash at closing. The Lange Product Line was a part of the quarterIntegrated Solutions and Services segment. During the nine months ended MarchJune 30, 2021, the Company recognized a loss of $0.2 million on the divestiture.
On April 1, 2021, we acquired Water Consulting Specialists, Inc (“WCSI”) for $12.0 million cash paid at closing. In addition, we recorded a liability of $0.8 million associated with an earn-out related to the acquisition, which is included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. WCSI is a leader in the design, manufacturing, and service of industrial high-purity water treatment systems. The acquisition strengthens the Company’s portfolio of high-purity water treatment systems and provides the opportunity to further expand its digitally enabled solutions and services in key industrial markets. WCSI is a part of the Integrated Solutions and Services segment. During the nine months ended June 30, 2021, the Company incurred approximately $0.1 million in acquisition costs, which are included in General and administrative expense on the Unaudited Consolidated Statements of Operations.
On December 31, 2020, as filed2019, we completed the sale of the Memcor product line to DuPont de Nemours, Inc. 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 SEC on May 6, 2020.
Overall economic trends. The overall economic environmenttransaction and related changes$1.0 million in industrial, commercial and municipal spending impact our business. In general, positive conditionstransaction costs incurred in the broader economy promote industrial, commercialnine months ended June 30, 2020.
On October 1, 2019, we acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”), which included an agreement to purchase the remaining 40% interest in Frontier on or prior to March 30, 2024. This agreement gave holders of the remaining 40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately 10% of the outstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners between January 1, 2021 and municipal customer spending, while economic weakness resultsFebruary 28, 2021 (the “Option”). The Minority Owners exercised the Option, and on April 8, 2021, the Company completed the purchase of an additional 8% of the outstanding equity in Frontier for approximately $1.5 million. As 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,result, the availability of credit or capital, interest rates, tax rates, imposition of tariffs and regulatory changes. Since the businesses of our customers varyCompany’s ownership position in cyclicality, periodic downturns in any specific sector typically have modest impacts on our overall business. For example, the current weakness in global oil markets has created, and we expect willFrontier increased to 68%.
We continue to create, some weakness in demand from customersactively evaluate acquisition opportunities 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 inare consistent with our business strategy. We maintain 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 availabilityrobust pipeline of these commodity input materials has a direct impact onpotential acquisition targets, developed by our costs and our business. For example, restrictions on international trade, including tariffs imposed by the U.S. government and other governments,management team as well as supply chain disruptions caused byvarious outside industry experts and consultants.
Debt refinancing.On April 1, 2021, we completed the COVID-19 pandemic, have increasedrefinancing of the term loan (the “2014 Term Loan”) outstanding under our First Lien Credit Agreement dated January 15, 2014 (as modified, amended or supplemented from time to time, the “2014 Credit Agreement”), among EWT Holdings III Corp. (“EWT III”), EWT Holdings II Corp. (“EWT II”), the lenders party thereto and could further increaseCredit Suisse AG as administrative agent and collateral agent. On April 1, 2021, EWT III entered into a Credit Agreement (the “2021 Credit Agreement”) among EWT III, as borrower, EWT II, as parent guarantor, the cost of certain materialslenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and have restrictedcollateral agent, and could further restrict availability of certain commodities,ING Capital, LLC, as sustainability coordinator, which may result in delays in our execution of projects. Although we have offsetprovides for (i) 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 inflation which could leadsenior secured term loan facility relating 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 demandterm loan (the “2021 Term Loan”) in the future,amount of $475.0 million maturing on April 1, 2028, and our ability(ii) a multi-currency senior secured revolving credit facility in an aggregate principal amount not 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 thanexceed the U.S. dollar primarilyequivalent of $350.0 million (the “2021 Revolving Credit Facility”) maturing on April 1, 2026.
On April 1, 2021, Evoqua Finance LLC (“Evoqua Finance”) entered into an accounts receivable securitization program (the “Receivables Securitization Program”) consisting of, among other agreements, (i) a Receivables Financing Agreement (the “Receivables Financing Agreement”) among Evoqua Finance, as the borrower, the lenders from time to time party thereto (the “Receivables Financing Lenders”), PNC Bank, National Association (“PNC Bank”), as administrative agent, Evoqua Water Technologies LLC (“EWT LLC”), an indirect wholly-owned subsidiary of the Company, as initial servicer, and PNC Capital Markets LLC (“PNC Markets”), as structuring agent, pursuant to which the lenders have made available to Evoqua Finance a receivables finance facility (the “Securitization Facility”) in an amount up to $150.0 million maturing on April 1, 2024, and (ii) a Sale and Contribution Agreement (the “Sale Agreement”) among Evoqua Finance, as purchaser, EWT LLC, as initial servicer and as an originator, and Neptune Benson, Inc., an indirectly wholly-owned subsidiary of the Company, as an originator (together with EWT LLC, the “Originators”).
On April 1, 2021, we borrowed $475.0 million under the 2021 Term Loan, $105.0 million under the 2021 Revolving Credit Facility and $142.2 million under the Securitization Facility. The net proceeds of these facilities, together with cash on hand, were used to repay all outstanding indebtedness under our 2014 Credit Agreement, in an aggregate principal amount of approximately $814.5 million. The reduction 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 theoutstanding principal amount of these items recordedour term loan of approximately $340.0 million was funded by draws on the 2021 Revolving Credit Facility, the Securitization Facility and $100.0 million of cash on hand. In addition to extending the maturities of our term loan and previous revolving credit facility, the refinancing reduced our weighted average cash borrowing cost and improved liquidity. See “Liquidity and Capital Resources” below for additional information. At June 30, 2021, the Company had $475.0 million outstanding under the 2021 Term Loan, $95.0 million outstanding on the 2021 Revolving Credit Facility, and $148.2 million outstanding under the Securitization Facility.
Legal Settlement. As of June 30, 2021, an accrued liability of $16.7 million relating to the proposed settlement of securities litigation and a corresponding asset for the related insurance coverage of $16.7 million is included in our UnauditedAccrued expenses and other liabilities and Prepaid and other current assets on the Consolidated Financial Statements, even if their value has not changedBalance Sheets, respectively. See Part II, Item 1, “Legal Proceedings,” for additional information regarding legal proceedings in the functional currency. While we believe thatwhich 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.engaged.
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 consolidated business are revenue, gross profit, gross margin, operating expenses,and net income (loss). Management utilizes these financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) when reviewing the Company’s performance and Adjusted EBITDA (which is amaking financial, operational, and strategic decisions, and believes they are useful metrics for investors that help with performance comparability period over period. In addition, we consider certain non-GAAP financial measure).measures such as adjusted EBITDA, as described more fully below. We evaluate our business segments’ operating results based on revenue, income from operations (“operating profit”) and adjusted EBITDA on a segment basis. We believe these financial measures are helpful in understanding and evaluating the segments’ core operating results and facilitates comparison of our performance on a consistent basis period over period.
Revenue
Our sales arerevenue is a function of sales volumes and selling prices, eachprices. We report revenue by segment and by source which includes revenue from product sales (capital projects and aftermarket) and revenue from service. Revenue is used by management to evaluate the performance of whichour business. Organic revenue is a functiondefined as revenue excluding the impact of foreign currency translation and inorganic revenue. Inorganic revenue represents the impact from acquisitions and divestitures during the first 12 months following the closing of the mix of product and service sales, and consist primarily of:
acquisition or divestiture. Divestitures include sales of tailored light industry technologies, heavy industry technologies and environmental products, services and solutions in collaboration withinsignificant portions of our industrial customers, backedbusiness that did not meet the criteria for classification as a discontinued operation. Management believes that reporting organic revenue provides useful information to investors by lifecycle services including emergency response services and outsourced water alternatives, to a broad group of industrial customershelping identify underlying growth trends in our U.S., Canadacore business 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 allfacilitating easier comparisons of our geographic marketsrevenue performance with prior and aftermarket channels.future periods and to our peers. We exclude the effect of foreign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. We exclude the effect of acquisitions and divestitures because they can obscure underlying business trends and make comparisons of long-term performance difficult between the Company and its peers due to the varying nature, size and number of transactions from period to period. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of organic revenue.
Cost of Sales,
Gross Profitprofit and Gross Margingross 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 Gross profit and gross margin provide a comparable metric to bring a product to a ready for sale condition, including directhelp investors evaluate the cost efficiency 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 consistsability 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.Company to convert revenue to profit.
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.
Net Income (Loss)income (loss)
Net income (loss) is determined by subtracting operating expenses and interest expense from, and adding other operating income (expense), equity income (loss) 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.”Net income (loss) is used by the Company to measure profitability as well as the overall health of the business.
Adjusted EBITDA
Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary metrics used by management to evaluate the strength and financial performance of our core 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.expenses that we believe do not directly reflect our underlying business operations. We present Adjustedadjusted EBITDA because we believe it is frequently used by analysts, investors and other interested parties to evaluate and compare operating performance and value companies inwithin 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. In addition, adjusted EBITDA highlights true business performance by removing the impact of certain items that management believes do not directly
reflect our underlying operations and provides investors with greater visibility into the ongoing organic drivers of our business performance.
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. Adjusted EBITDA on a segment basis is defined as earnings before depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. Adjusted 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.
Adjusted EBITDA should not be considered a substitute for, or superior to, financial measures prepared in accordance with GAAP. The financial results prepared in accordance with GAAP and the reconciliations from these results should be carefully evaluated. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA. 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‑recurringnon-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.
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
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| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2021 | | 2020 | | | | 2021 | | 2020 | | |
(In millions, except per share amounts) | | | % of Revenue | | | | % of Revenue | | % Variance | | | | % of Revenue | | | | % of Revenue | | % Variance |
Revenue from product sales and services | $ | 369.7 | | | 100.0 | % | | $ | 347.8 | | | 100.0 | % | | 6.3 | % | | $ | 1,038.4 | | | 100.0 | % | | $ | 1,045.6 | | | 100.0 | % | | (0.7) | % |
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Gross profit | $ | 117.0 | | | 31.6 | % | | $ | 110.2 | | | 31.7 | % | | 6.2 | % | | $ | 318.3 | | | 30.7 | % | | $ | 327.2 | | | 31.3 | % | | (2.7) | % |
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Total operating expenses | $ | (90.1) | | | (24.4) | % | | $ | (77.5) | | | (22.3) | % | | 16.3 | % | | $ | (259.6) | | | (25.0) | % | | $ | (264.3) | | | (25.3) | % | | (1.8) | % |
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Other operating income, net | $ | 1.4 | | | 0.4 | % | | $ | 0.4 | | | 0.1 | % | | 250.0 | % | | $ | 2.0 | | | 0.2 | % | | $ | 61.0 | | | 5.8 | % | | (96.7) | % |
Interest expense | $ | (11.2) | | | (3.0) | % | | $ | (10.5) | | | (3.0) | % | | 6.7 | % | | $ | (28.3) | | | (2.7) | % | | $ | (37.3) | | | (3.6) | % | | (24.1) | % |
Income before income taxes | $ | 17.1 | | | 4.6 | % | | $ | 22.6 | | | 6.5 | % | | (24.3) | % | | $ | 32.4 | | | 3.1 | % | | $ | 86.6 | | | 8.3 | % | | (62.6) | % |
Income tax expense | $ | (3.9) | | | (1.1) | % | | $ | (0.8) | | | (0.2) | % | | 387.5% | | $ | (7.7) | | | (0.7) | % | | $ | (3.3) | | | (0.3) | % | | 133.3 | % |
Net income | $ | 13.2 | | | 3.6 | % | | $ | 21.8 | | | 6.3 | % | | (39.4) | % | | $ | 24.7 | | | 2.4 | % | | $ | 83.3 | | | 8.0 | % | | (70.3) | % |
Net income attributable to non‑controlling interest | $ | — | | | — | % | | $ | 0.4 | | | 0.1 | % | | (100.0) | % | | $ | 0.1 | | | — | % | | $ | 1.0 | | | 0.1 | % | | (90.0) | % |
Net income attributable to Evoqua Water Technologies Corp. | $ | 13.2 | | | 3.6 | % | | $ | 21.4 | | | 6.2 | % | | (38.3) | % | | $ | 24.6 | | | 2.4 | % | | $ | 82.3 | | | 7.9 | % | | (70.1) | % |
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Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | |
Basic | 119.0 | | | | | 116.6 | | | | | | | 119.0 | | | | | 116.6 | | | | | |
Diluted | 122.3 | | | | | 120.2 | | | | | | | 122.3 | | | | | 121.1 | | | | | |
Earnings per share | | | | | | | | | | | | | | | | | | | |
Basic | $ | 0.11 | | | | | $ | 0.18 | | | | | | | $ | 0.21 | | | | | $ | 0.71 | | | | | |
Diluted | $ | 0.11 | | | | | $ | 0.18 | | | | | | | $ | 0.20 | | | | | $ | 0.68 | | | | | |
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Other financial data: | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA(1) | $ | 66.2 | | | 17.9 | % | | $ | 63.8 | | | 18.3 | % | | 3.8 | % | | $ | 169.0 | | | 16.3 | % | | $ | 164.1 | | | 15.7 | % | | 3.0 | % |
(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
Consolidated Results for the Three Months Ended June 30, 2021 and 2020
Revenue-Revenue increased $21.9 million, or 6.3%, to $369.7 million in the three months ended June 30, 2021, from $347.8 million in the three months ended June 30, 2020. Revenue from product sales increased $10.8 million, or 5.2%, to $218.4 million in the three months ended June 30, 2021, from $207.6 million in the three months ended June 30, 2020. Revenue from services increased $11.1 million, or 7.9%, to $151.3 million in the three months ended June 30, 2021, from $140.2 million in the three months ended June 30, 2020.
The following tables provide the change in revenue by offering and the change in revenue by driver during the three months ended June 30, 2021 and 2020:
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| Three Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | | | | | | | | | | | | | | | | | | | | | |
Capital | $ | 156.0 | | | 42.2 | % | | $ | 150.4 | | | 43.2 | % | | $ | 5.6 | | | 3.7 | % | | | | | | | | | | |
Aftermarket | 62.4 | | | 16.9 | % | | 57.2 | | | 16.4 | % | | 5.2 | | | 9.1 | % | | | | | | | | | | |
Revenue from services | 151.3 | | | 40.9 | % | | 140.2 | | | 40.3 | % | | 11.1 | | | 7.9 | % | | | | | | | | | | |
| $ | 369.7 | | | 100.0 | % | | $ | 347.8 | | | 100.0 | % | | $ | 21.9 | | | 6.3 | % | | | | | | | | | | |
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| Three Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 358.1 | | | 96.9 | % | | $ | 347.0 | | | 99.8 | % | | $ | 11.1 | | | 3.2 | % | | | | | | | | | | |
Inorganic | 4.1 | | | 1.1 | % | | 0.8 | | | 0.2 | % | | 3.3 | | | 0.9 | % | | | | | | | | | | |
Foreign currency translation | 7.5 | | | 2.0 | % | | n/a | | n/a | | 7.5 | | | 2.1 | % | | | | | | | | | | |
| $ | 369.7 | | | 100.0 | % | | $ | 347.8 | | | 100.0 | % | | $ | 21.9 | | | 6.3 | % | | | | | | | | | | |
The increase in organic revenue was primarily driven by increased pricing across all offerings. The increase was also driven by higher service sales volume as demand improved, primarily in North America, following economic closures and delays that occurred in the prior year period due to the COVID-19 pandemic. In addition, higher sales volume from product sales across multiple product lines, primarily in the Asia Pacific and EMEA regions, partially offset a decline in capital sales volume from projects in the microelectronics end market as compared to the prior year period. Revenue also increased due to contributions from acquisitions and favorable foreign currency translation.
Cost of sales and gross margin-Total gross margin decreased slightly to 31.6% in the three months ended June 30, 2021, from 31.7% in the three months ended June 30, 2020.
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
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| Three Months Ended June 30, | | |
| 2021 | | 2020 | | | | |
(In millions) | | | Gross Margin | | | | Gross Margin | | | | | | | | |
Cost of product sales | $ | (152.6) | | | 30.1 | % | | $ | (143.5) | | | 30.9 | % | | | | | | | | |
Cost of services | (100.1) | | | 33.8 | % | | (94.1) | | | 32.9 | % | | | | | | | | |
| $ | (252.7) | | | 31.6 | % | | $ | (237.6) | | | 31.7 | % | | | | | | | | |
Gross margin from product sales decreased by 80 basis points (“bps”) to 30.1% in the three months ended June 30, 2021, from 30.9% in the three months ended June 30, 2020. This decrease was primarily driven by product mix, which was influenced by delays and economic closures related to the COVID-19 pandemic, coupled with timing of large projects. This was partially offset by positive price realization.
Gross margin from services increased by 90 bps to 33.8% in the three months ended June 30, 2021, from 32.9% in the three months ended June 30, 2020. This increase was primarily driven by increased service productivity as negative impacts from the COVID-19 pandemic lessened in the current year period.
Operating expenses-Operating expenses increased $12.6 million, or 16.3%, to $90.1 million in the three months ended June 30, 2021, from $77.5 million in the three months ended June 30, 2020. Operating expenses are comprised of the following:
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| Three Months Ended June 30, | | | | |
| 2021 | | 2020 | | | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | % Variance | | | | | | | | | | |
General and administrative expense | $ | (50.8) | | | (13.7) | % | | $ | (44.9) | | | (12.9) | % | | 13.1 | % | | | | | | | | | | |
Sales and marketing expense | (35.9) | | | (9.7) | % | | (29.8) | | | (8.6) | % | | 20.5 | % | | | | | | | | | | |
Research and development expense | (3.4) | | | (0.9) | % | | (2.8) | | | (0.8) | % | | 21.4 | % | | | | | | | | | | |
Total operating expenses | $ | (90.1) | | | (24.4) | % | | $ | (77.5) | | | (22.3) | % | | 16.3 | % | | | | | | | | | | |
The increase period over period in operating expenses was primarily due to increased employee related expenses as well as a reduction in foreign currency translation gains from the prior period, most of which is related to intercompany loans. In addition, there was an increase in amortization expense from acquisitions in the current period, increased sales and marketing expenses, and higher consulting expenses. The above increases were partially offset by reduced spending across various areas as well as favorable settlement on outstanding insurance claims in the current period.
Other operating income, net-Other operating income, net increased $1.0 million to $1.4 million in the three months ended June 30, 2021, from $0.4 million in the three months ended June 30, 2020. This increase was primarily due to COVID-19 pandemic subsidies received from the Canadian government.
Interest expense-Interest expense increased $0.7 million, or 6.7%, to $11.2 million in the three months ended June 30, 2021, from $10.5 million in the three months ended June 30, 2020. The increase in interest expense was primarily due to an additional $3.1 million of fees incurred as a result of the April 2021 refinancing of our senior credit facility, which also resulted in the write off of $1.3 million of deferred financing fees. This was partially offset by a reduction in ongoing interest expense due to the change in the interest rate spread and LIBOR year over year as well as debt reduction undertaken in the April 2021 refinancing.
Income tax expense-Income tax expense increased to $3.9 million in the three months ended June 30, 2021, as compared to income tax expense of $0.8 million in the three months ended June 30, 2020. The increase in tax expense was primarily due to higher earnings in non-U.S. tax jurisdictions, which increases tax expense, and lower earnings in the U.S., which does not impact tax expense due to the U.S. valuation allowance. Additionally, the prior period benefited from the impact of the Memcor disposal, which created a low PAETR and tax expense for the three months ended June 30, 2020.
Net income-Net income decreased $8.6 million, or 39.4%, to $13.2 million in the three months ended June 30, 2021, from $21.8 million in the three months ended June 30, 2020, as a result of the variances noted above.
Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the three months ended June 30, 2021 increased by $2.4 million, or 3.8%, to $66.2 million, as compared to $63.8 million for the three months ended June 30, 2020, primarily driven by higher sales volume in the current period. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Segment Results
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| Three Months Ended June 30, | | | | |
| 2021 | | 2020 | | | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | % Variance | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | $ | 239.7 | | | 64.8 | % | | $ | 228.7 | | | 65.8 | % | | 4.8 | % | | | | | | | | | | |
Applied Product Technologies | 130.0 | | | 35.2 | % | | 119.1 | | | 34.2 | % | | 9.2 | % | | | | | | | | | | |
Total Consolidated | $ | 369.7 | | | 100.0 | % | | $ | 347.8 | | | 100.0 | % | | 6.3 | % | | | | | | | | | | |
Operating profit (loss) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | $ | 37.8 | | | 10.2 | % | | $ | 32.6 | | | 9.4 | % | | 16.0 | % | | | | | | | | | | |
Applied Product Technologies | 22.7 | | | 6.1 | % | | 23.6 | | | 6.8 | % | | (3.8) | % | | | | | | | | | | |
Corporate | (32.2) | | | (8.7) | % | | (23.1) | | | (6.6) | % | | 39.4 | % | | | | | | | | | | |
Total Consolidated | $ | 28.3 | | | 7.7 | % | | $ | 33.1 | | | 9.5 | % | | (14.5) | % | | | | | | | | | | |
Adjusted EBITDA (1) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | $ | 56.3 | | | 15.2 | % | | $ | 50.6 | | | 14.5 | % | | 11.3 | % | | | | | | | | | | |
Applied Product Technologies | 28.4 | | | 7.7 | % | | 28.9 | | | 8.3 | % | | (1.7) | % | | | | | | | | | | |
Corporate | (18.5) | | | (5.0) | % | | (15.7) | | | (4.5) | % | | 17.8 | % | | | | | | | | | | |
Total Consolidated | $ | 66.2 | | | 17.9 | % | | $ | 63.8 | | | 18.3 | % | | 3.8 | % | | | | | | | | | | |
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(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to segment operating profit (loss), its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
Integrated Solutions and Services
Revenue in the Integrated Solutions and Services segment increased $11.0 million, or 4.8%, to $239.7 million in the three months ended June 30, 2021, from $228.7 million in the three months ended June 30, 2020.
The following tables provide the change in revenue by offering and the change in revenue by driver during the three months ended June 30, 2021 and 2020 for the Integrated Solutions and Services segment:
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| Three Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | | | | | | | | | | | | | | | | | | | | | |
Capital | $ | 63.3 | | | 26.4 | % | | $ | 64.7 | | | 28.3 | % | | $ | (1.4) | | | (2.2) | % | | | | | | | | | | |
Aftermarket | 31.9 | | | 13.3 | % | | 29.1 | | | 12.7 | % | | 2.8 | | | 9.6 | % | | | | | | | | | | |
Revenue from services | 144.5 | | | 60.3 | % | | 134.9 | | | 59.0 | % | | 9.6 | | | 7.1 | % | | | | | | | | | | |
| $ | 239.7 | | | 100.0 | % | | $ | 228.7 | | | 100.0 | % | | $ | 11.0 | | | 4.8 | % | | | | | | | | | | |
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| Three Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 234.1 | | | 97.7 | % | | $ | 227.9 | | | 99.7 | % | | $ | 6.2 | | | 2.7 | % | | | | | | | | | | |
Inorganic | 4.1 | | | 1.7 | % | | 0.8 | | | 0.3 | % | | 3.3 | | | 1.4 | % | | | | | | | | | | |
Foreign currency translation | 1.5 | | | 0.6 | % | | n/a | | n/a | | 1.5 | | | 0.7 | % | | | | | | | | | | |
| $ | 239.7 | | | 100.0 | % | | $ | 228.7 | | | 100.0 | % | | $ | 11.0 | | | 4.8 | % | | | | | | | | | | |
The increase in organic revenue was driven by higher sales volume across a variety of end markets, primarily in service and aftermarket revenue as demand improved following economic closures and delays that occurred in the prior
year period due to the COVID-19 pandemic. Favorable pricing also contributed to the increase. Lower capital sales volume was driven by a decline in projects in the microelectronics end market, which was mostly offset by new projects primarily in the chemical processing end market as compared to the prior year period.
Operating profit in the Integrated Solutions and Services segment increased $5.2 million, or 16.0%, to $37.8 million in the three months ended June 30, 2021, from $32.6 million in the three months ended June 30, 2020.
Operating profit was favorably impacted by higher sales volume, favorable price/cost, and productivity improvements as the negative impacts from the COVID-19 pandemic lessened in the current year period. Operating profit was unfavorably impacted by higher employee-related expenses, which included increased compensation and travel spending as compared to the prior year period, partially offset by favorable settlement of insurance claims.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Integrated Solutions and Services segment increased $5.7 million, or 11.3%, to $56.3 million in the three months ended June 30, 2021, compared to $50.6 million in the three months ended June 30, 2020. The increase was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization, and also excludes restructuring and other non-recurring activity recognized in the period. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Applied Product Technologies
Revenue in the Applied Product Technologies segment increased $10.9 million, or 9.2%, to $130.0 million in the three months ended June 30, 2021, from $119.1 million in the three months ended June 30, 2020.
The following tables provide the change in revenue by offering and the change in revenue by driver during the three months ended June 30, 2021 and 2020 for the Applied Product Technologies segment:
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| Three Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | | | | | | | | | | | | | | | | | | | | | |
Capital | $ | 92.7 | | | 71.3 | % | | $ | 85.7 | | | 72.0 | % | | $ | 7.0 | | | 8.2 | % | | | | | | | | | | |
Aftermarket | 30.5 | | | 23.5 | % | | 28.1 | | | 23.6 | % | | 2.4 | | | 8.5 | % | | | | | | | | | | |
Revenue from services | 6.8 | | | 5.2 | % | | 5.3 | | | 4.5 | % | | 1.5 | | | 28.3 | % | | | | | | | | | | |
| $ | 130.0 | | | 100.0 | % | | $ | 119.1 | | | 100.0 | % | | $ | 10.9 | | | 9.2 | % | | | | | | | | | | |
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| Three Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 124.0 | | | 95.4 | % | | $ | 119.1 | | | 100.0 | % | | $ | 4.9 | | | 4.2 | % | | | | | | | | | | |
Inorganic | — | | | — | % | | — | | | — | % | | — | | | — | % | | | | | | | | | | |
Foreign currency translation | 6.0 | | | 4.6 | % | | n/a | | n/a | | 6.0 | | | 4.9 | % | | | | | | | | | | |
| $ | 130.0 | | | 100.0 | % | | $ | 119.1 | | | 100.0 | % | | $ | 10.9 | | | 9.2 | % | | | | | | | | | | |
The increase in organic revenue as compared to the prior year period was primarily due to price realization. The increase was also due to sales volume increases in the Asia Pacific and EMEA regions, compared to the prior year period resulting from growth across multiple product lines, which was offset by sales volume declines in the Americas region due to continued customer site access challenges and delays.
Operating profit in the Applied Product Technologies segment decreased $0.9 million, or 3.8%, to $22.7 million in the three months ended June 30, 2021, from $23.6 million in the three months ended June 30, 2020.
The decline in operating profit was primarily due to unfavorable operational variances, including additional warranty reserves and production variances, offsetting favorable price/cost and product mix. Higher employee related expenses also reduced segment profitability as compared to the prior year period, which was driven by increased compensation and travel spending.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment decreased $0.5 million, or 1.7%, to $28.4 million in the three months ended June 30, 2021, compared to $28.9 million in the three months ended June 30, 2020. The decrease was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization, and also excludes restructuring and other non-recurring activity. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Corporate
Operating loss in Corporate increased $9.1 million, or 39.4%, to $32.2 million in the three months ended June 30, 2021, from $23.1 million in the three months ended June 30, 2020. The increase period over period was primarily due to higher employee related expenses as compared to the prior year period. In addition, there were lower foreign currency translation gains compared to the prior period, most of which is related to intercompany loans. Finally, share-based compensation expenses increased compared to the prior period due primarily to special one-time restricted stock unit and performance share unit awards granted to our executive leadership team in May 2021 to promote retention, reward performance and incentivize further stockholder return.
Consolidated Results for the Nine Months Ended June 30, 2021 and 2020
Revenue-Revenue decreased $7.2 million, or 0.7%, to $1,038.4 million in the nine months ended June 30, 2021, from $1,045.6 million in the nine months ended June 30, 2020. Revenue from product sales decreased $9.2 million, or 1.5%, to $600.9 million in the nine months ended June 30, 2021, from $610.1 million in the nine months ended June 30, 2020. Revenue from services increased $2.0 million, or 0.5%, to $437.5 million in the nine months ended June 30, 2021, from $435.5 million in the nine months ended June 30, 2020.
The following tables provide the change in revenue by offering and the change in revenue by driver during the nine months ended June 30, 2021 and 2020:
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| Nine Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | | | | | | | | | | | | | | | | | | | | | |
Capital | $ | 425.9 | | | 41.0 | % | | $ | 421.2 | | | 40.3 | % | | $ | 4.7 | | | 1.1 | % | | | | | | | | | | |
Aftermarket | 175.0 | | | 16.9 | % | | 188.9 | | | 18.1 | % | | (13.9) | | | (7.4) | % | | | | | | | | | | |
Revenue from services | 437.5 | | | 42.1 | % | | 435.5 | | | 41.7 | % | | 2.0 | | | 0.5 | % | | | | | | | | | | |
| $ | 1,038.4 | | | 100.0 | % | | $ | 1,045.6 | | | 100.0 | % | | $ | (7.2) | | | (0.7) | % | | | | | | | | | | |
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| Nine Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 1,017.0 | | | 97.9 | % | | $ | 1,030.3 | | | 98.5 | % | | $ | (13.3) | | | (1.3) | % | | | | | | | | | | |
Inorganic | 6.5 | | | 0.6 | % | | 15.3 | | | 1.5 | % | | (8.8) | | | (0.8) | % | | | | | | | | | | |
Foreign currency translation | 14.9 | | | 1.4 | % | | n/a | | n/a | | 14.9 | | | 1.4 | % | | | | | | | | | | |
| $ | 1,038.4 | | | 100.0 | % | | $ | 1,045.6 | | | 100.0 | % | | $ | (7.2) | | | (0.7) | % | | | | | | | | | | |
The decrease in organic revenue was driven by lower sales volume, primarily in product sales in the Americas and EMEA regions, due to continued customer site access challenges and delays in the first half of fiscal 2021 as a result of the COVID-19 pandemic. In addition, lower sales volume in capital revenue was related to the timing of completion of prior year projects in the microelectronics end market. These decreases were partially offset by sales volume growth from product sales in the Asia Pacific region across multiple product lines, as demand improved following prior year economic closures, and favorable price realization related to established service contracts.
Favorable foreign currency translation more than offset the reduction in revenue due to the prior year divestiture of the Memcor product line.
Cost of sales and gross margin-Total gross margin decreased to 30.7% in the nine months ended June 30, 2021, from 31.3% in the nine months ended June 30, 2020.
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
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| | | Nine Months Ended June 30, |
| | | | | 2021 | | 2020 |
(In millions) | | | | | | | | | | | Gross Margin | | | | Gross Margin |
Cost of product sales | | | | | | | | | $ | (428.2) | | | 28.7 | % | | $ | (428.0) | | | 29.8 | % |
Cost of services | | | | | | | | | (291.9) | | | 33.3 | % | | (290.4) | | | 33.3 | % |
| | | | | | | | | $ | (720.1) | | | 30.7 | % | | $ | (718.4) | | | 31.3 | % |
Gross margin from product sales decreased by 110 bps to 28.7% in the nine months ended June 30, 2021, from 29.8% in the nine months ended June 30, 2020. The decrease in gross margin was primarily driven by product mix, which was influenced by delays and economic closures related to the COVID-19 pandemic, coupled with timing of large projects. This was partially offset by positive price realization.
Gross margin from services was 33.3% in both the nine months ended June 30, 2021 and 2020.
Operating expenses-Operating expenses decreased $4.7 million, or 1.8%, to $259.6 million in the nine months ended June 30, 2021, from $264.3 million in the nine months ended June 30, 2020. Operating expenses are comprised of the following:
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| | | Nine Months Ended June 30, | | |
| | | | | | | 2021 | | 2020 | | |
(In millions) | | | | | | | | | | | | | % of Revenue | | | | % of Revenue | | % Variance |
General and administrative expense | | | | | | | | | | | $ | (146.1) | | | (14.1) | % | | $ | (152.8) | | | (14.6) | % | | (4.4) | % |
Sales and marketing expense | | | | | | | | | | | (103.6) | | | (10.0) | % | | (101.8) | | | (9.7) | % | | 1.8 | % |
Research and development expense | | | | | | | | | | | (9.9) | | | (1.0) | % | | (9.7) | | | (0.9) | % | | 2.1 | % |
Total operating expenses | | | | | | | | | | | $ | (259.6) | | | (25.0) | % | | $ | (264.3) | | | (25.3) | % | | (1.8) | % |
The decrease period over period in operating expenses was primarily due to efforts taken by the Company to reduce spending across various areas in response to uncertainties related to the COVID-19 pandemic, such as reduced travel, particularly in the first half of fiscal 2021. In addition, there was improved collection experience in the current period, as well as a write off of accounts receivable that occurred in the prior year, which did not reoccur in the current year. Finally, general and administrative expenses include foreign currency translation gains of approximately $4.6 million in the nine months ended June 30, 2021 compared to foreign currency translation gains of approximately $2.4 million in the prior year period, most of which were related to intercompany loans. These decreases were partially offset by increased employee related expenses, increased amortization expense due to acquisitions in the current period, an increase in external legal fees, as well as a benefit in the prior year related to changes in the estimates of certain acquisitions achieving their earn-out targets.
Other operating income, net-Other operating income, net decreased $59.0 million to $2.0 million in the nine months ended June 30, 2021, from $61.0 million in the nine months ended June 30, 2020. The decrease is primarily due to the net pre-tax benefit on the 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 quarter of 2020. In the nine months ended June 30, 2021, other operating income, net includes COVID-19 pandemic subsidies received from the Canadian government.
Interest expense-Interest expense decreased $9.0 million, or 24.1%, to $28.3 million in the nine months ended June 30, 2021, from $37.3 million in the nine months ended June 30, 2020. The decrease in interest expense was primarily driven by a reduction in the interest rate spread and LIBOR year over year, in addition to a $100.0 million debt prepayment that occurred in January 2020 and decreased debt as a result of the April 2021 refinancing of our senior credit facility.
Income tax expense-Income tax expense increased $4.4 million to $7.7 million in the nine months ended June 30, 2021, from $3.3 million in the nine months ended June 30, 2020. Income tax expense increased due to the recognition of discrete items in the current period related to an adjustment for prepaid income taxes and an uncertain tax position in connection with a tax audit in a foreign jurisdiction, Additionally, income tax expense increased due to higher earnings innon-U.S. tax jurisdictions, which increases tax expense, and lower earnings in the U.S., which does not impact tax expense due to the U.S. valuation allowance.
Net income-Net income decreased $58.6 million, or 70.3%, to $24.7 million in the nine months ended June 30, 2021, from $83.3 million in the nine months ended June 30, 2020, as a result of the variances noted above.
Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the nine months ended June 30, 2021 increased by $4.9 million, or 3.0%, to $169.0 million, as compared to $164.1 million for the nine months ended June 30, 2020, primarily driven by operational efficiencies and cost savings, offset by the changes as compared to the prior year period in non-recurring expenses and benefits. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Segment Results
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| | | Nine Months Ended June 30, | | |
| | | | | | | 2021 | | 2020 | | |
(In millions) | | | | | | | | | | | | | % of Revenue | | | | % of Revenue | | % Variance |
Revenue | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 678.5 | | | 65.3 | % | | $ | 694.7 | | | 66.4 | % | | (2.3) | % |
Applied Product Technologies | | | | | | | | | | | 359.9 | | | 34.7 | % | | 350.9 | | | 33.6 | % | | 2.6 | % |
Total Consolidated | | | | | | | | | | | $ | 1,038.4 | | | 100.0 | % | | $ | 1,045.6 | | | 100.0 | % | | (0.7) | % |
Operating profit (loss) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 94.9 | | | 9.1 | % | | $ | 102.5 | | | 9.8 | % | | (7.4) | % |
Applied Product Technologies | | | | | | | | | | | 54.2 | | | 5.2 | % | | 110.5 | | | 10.6 | % | | (51.0) | % |
Corporate | | | | | | | | | | | (88.4) | | | (8.5) | % | | (89.1) | | | (8.5) | % | | (0.8) | % |
Total Consolidated | | | | | | | | | | | $ | 60.7 | | | 5.8 | % | | $ | 123.9 | | | 11.8 | % | | (51.0) | % |
Adjusted EBITDA (1) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 148.8 | | | 14.3 | % | | $ | 153.5 | | | 14.7 | % | | (3.1) | % |
Applied Product Technologies | | | | | | | | | | | 72.6 | | | 7.0 | % | | 66.5 | | | 6.4 | % | | 9.2 | % |
Corporate | | | | | | | | | | | (52.4) | | | (5.0) | % | | (55.9) | | | (5.3) | % | | (6.3) | % |
Total Consolidated | | | | | | | | | | | $ | 169.0 | | | 16.3 | % | | $ | 164.1 | | | 15.7 | % | | 3.0 | % |
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(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to segment operating profit (loss), its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
Integrated Solutions and Services
Revenue in the Integrated Solutions and Services segment decreased $16.2 million, or 2.3%, to $678.5 million in the nine months ended June 30, 2021, from $694.7 million in the nine months ended June 30, 2020.
The following tables provide the change in revenue by offering and the change in revenue by driver during the nine months ended June 30, 2021 and 2020 for the Integrated Solutions and Services segment:
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| Nine Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | | | | | | | | | | | | | | | | | | | | | |
Capital | $ | 166.0 | | | 24.5 | % | | $ | 185.4 | | | 26.7 | % | | $ | (19.4) | | | (10.5) | % | | | | | | | | | | |
Aftermarket | 91.5 | | | 13.5 | % | | 90.7 | | | 13.1 | % | | 0.8 | | | 0.9 | % | | | | | | | | | | |
Revenue from services | 421.0 | | | 62.0 | % | | 418.6 | | | 60.3 | % | | 2.4 | | | 0.6 | % | | | | | | | | | | |
| $ | 678.5 | | | 100.0 | % | | $ | 694.7 | | | 100.0 | % | | $ | (16.2) | | | (2.3) | % | | | | | | | | | | |
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| Nine Months Ended June 30, | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 670.0 | | | 98.7 | % | | $ | 693.8 | | | 99.9 | % | | $ | (23.8) | | | (3.4) | % | | | | | | | | | | |
Inorganic | 6.5 | | | 1.0 | % | | 0.9 | | | 0.1 | % | | 5.6 | | | 0.8 | % | | | | | | | | | | |
Foreign currency translation | 2.0 | | | 0.3 | % | | n/a | | n/a | | 2.0 | | | 0.3 | % | | | | | | | | | | |
| $ | 678.5 | | | 100.0 | % | | $ | 694.7 | | | 100.0 | % | | $ | (16.2) | | | (2.3) | % | | | | | | | | | | |
The decrease in organic revenue was driven by lower sales volume, primarily in capital revenue, related to the timing of completion of projects in the microelectronics end market and temporary customer site closures and delays in annual maintenance in the oil and gas refining end markets in the first half of fiscal 2021 due to the COVID-19 pandemic in North America. This was partially offset by growth in service and aftermarket revenue, including sales volume growth in a variety of end markets, as well as favorable price realization related to established service contracts.
Operating profit in the Integrated Solutions and Services segment decreased $7.6 million, or 7.4%, to $94.9 million in the nine months ended June 30, 2021, from $102.5 million in the nine months ended June 30, 2020.
Operating profit was unfavorably impacted by sales volume and mix, lower productivity due to customer shutdowns and enhanced safety protocols as a result of the COVID-19 pandemic in the first half of fiscal 2021, as well as some challenges filling open positions. In addition, operating profit was negatively impacted by increased operating costs based on changes in allocation methodologies for corporate expenses. These declines were partially offset by favorable price/cost and reductions in travel and other discretionary spending in the current period.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Integrated Solutions and Services segment decreased $4.7 million, or 3.1%, to $148.8 million in the nine months ended June 30, 2021, compared
to $153.5 million in the nine months ended June 30, 2020. The decline was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization, and also excludes restructuring and other non-recurring activity. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Applied Product Technologies
Revenue in the Applied Product Technologies segment increased $9.0 million, or 2.6%, to $359.9 million in the nine months ended June 30, 2021, from $350.9 million in the nine months ended June 30, 2020.
The following tables provide the change in revenue by offering and the change in revenue by driver during the nine months ended June 30, 2021 and 2020 for the Applied Product Technologies segment:
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| Nine Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | | | | | | | | | | | | | | | | | | | | | |
Capital | $ | 259.9 | | | 72.2 | % | | $ | 235.8 | | | 67.2 | % | | $ | 24.1 | | | 10.2 | % | | | | | | | | | | |
Aftermarket | 83.5 | | | 23.2 | % | | 98.2 | | | 28.0 | % | | (14.7) | | | (15.0) | % | | | | | | | | | | |
Revenue from services | 16.5 | | | 4.6 | % | | 16.9 | | | 4.8 | % | | (0.4) | | | (2.4) | % | | | | | | | | | | |
| $ | 359.9 | | | 100.0 | % | | $ | 350.9 | | | 100.0 | % | | $ | 9.0 | | | 2.6 | % | | | | | | | | | | |
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| Nine Months Ended June 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 347.0 | | | 96.4 | % | | $ | 336.5 | | | 95.9 | % | | $ | 10.5 | | | 3.1 | % | | | | | | | | | | |
Inorganic | — | | | — | % | | 14.4 | | | 4.1 | % | | (14.4) | | | (4.1) | % | | | | | | | | | | |
Foreign currency translation | 12.9 | | | 3.6 | % | | n/a | | n/a | | 12.9 | | | 3.6 | % | | | | | | | | | | |
| $ | 359.9 | | | 100.0 | % | | $ | 350.9 | | | 100.0 | % | | $ | 9.0 | | | 2.6 | % | | | | | | | | | | |
The increase in organic revenue was driven by sales volume growth from product sales in the Asia Pacific region across multiple product lines, as demand improved following economic closures that occurred in the prior year due to the COVID-19 pandemic. This growth was partially offset by declines across multiple product lines in the Americas and EMEA regions as a result of continued customer site access challenges and delays. In addition, the divestiture of the Memcor product line reduced revenue by $14.4 million as compared to the prior year period while foreign currency was favorable by $12.9 million.
Operating profit in the Applied Product Technologies segment decreased $56.3 million, or 51.0%, to $54.2 million in the nine months ended June 30, 2021, from $110.5 million in the nine months ended June 30, 2020.
The decline in operating profit was primarily related to the net pre-tax benefit on the sale of the Memcor product line of $58.0 million recognized in the prior year, 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. Operating profit was also impacted by the reduction in sales volume as a result of the sale of the Memcor product line. These declines were partially offset by favorable organic sales volume, product mix and price, which offset inflation, as well as improvement in operational efficiencies due to global plant consolidations and cost containment measures.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment increased $6.1 million, or 9.2%, to $72.6 million in the nine months ended June 30, 2021, compared to $66.5 million in the nine months ended June 30, 2020. The increase was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization, and also excludes other non-recurring activity, including the $58.0 million gain recognized in the prior year related to the divestiture of the Memcor product line. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Corporate
Operating loss in Corporate decreased $0.7 million, or 0.8%, to $88.4 million in the nine months ended June 30, 2021, from $89.1 million in the nine months ended June 30, 2020. The decrease period over period was primarily due to foreign currency translation gains of approximately $5.1 million in the nine months ended June 30, 2021 compared to foreign currency translation gains of approximately $2.5 million in the prior year period, most of which were related to intercompany loans. Additionally, the decrease was driven by reductions in discretionary spending compared to the prior period. This was partially offset by increases in expenses associated with share-based compensation and shareholder litigation in the current period.
Non-GAAP Reconciliations
The following is a reconciliation of total revenue to organic revenue for the three months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | Foreign Currency | | Inorganic Revenue(1) | | Organic Revenue |
| Three Months Ended June 30, | % Variance | | Three Months Ended June 30, | % Variance | | Three Months Ended June 30, | % Variance | | Three Months Ended June 30, | % Variance |
(In millions) | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 |
Evoqua Water Technologies | $347.8 | $369.7 | 6.3 | % | | n/a | $7.5 | 2.1 | % | | $0.8 | $4.1 | 0.9 | % | | $347.0 | $358.1 | 3.2 | % |
Integrated Solutions & Services | $228.7 | $239.7 | 4.8 | % | | n/a | $1.5 | 0.7 | % | | $0.8 | $4.1 | 1.4 | % | | $227.9 | $234.1 | 2.7 | % |
Applied Product Technologies | $119.1 | $130.0 | 9.2 | % | | n/a | $6.0 | 4.9 | % | | $— | $— | — | % | | $119.1 | $124.0 | 4.2 | % |
(1)Includes divestiture of the Lange Product Line on March 1, 2021, acquisition of Aquapure Technologies on September 3, 2020, acquisition of Ultrapure & Industrial Services on December 17, 2020 and acquisition of WCSI on April 1, 2021.
The following is a reconciliation of total revenue to organic revenue for the nine months ended June 30, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | Foreign Currency | | Inorganic Revenue(1) | | Organic Revenue |
| Nine Months Ended June 30, | % Variance | | Nine Months Ended June 30, | % Variance | | Nine Months Ended June 30, | % Variance | | Nine Months Ended June 30, | % Variance |
(In millions) | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 |
Evoqua Water Technologies | $1,045.6 | $1,038.4 | (0.7) | % | | n/a | $14.9 | 1.4 | % | | $15.3 | $6.5 | (0.8) | % | | $1,030.3 | $1,017.0 | (1.3) | % |
Integrated Solutions & Services | $694.7 | $678.5 | (2.3) | % | | n/a | $2.0 | 0.3 | % | | $0.9 | $6.5 | 0.8 | % | | $693.8 | $670.0 | (3.4) | % |
Applied Product Technologies | $350.9 | $359.9 | 2.6 | % | | n/a | $12.9 | 3.6 | % | | $14.4 | $— | (4.1) | % | | $336.5 | $347.0 | 3.1 | % |
(1)Includes divestiture of the Memcor product line on December 31, 2019, divestiture of the Lange Product Line on March 1, 2021, acquisition of Aquapure Technologies on September 3, 2020, acquisition of Ultrapure & Industrial Services on December 17, 2020 and acquisition of WCSI on April 1, 2021.
The following is a reconciliation of our Net income (loss) to Adjusted EBITDA (unaudited, amounts in millions):adjusted EBITDA. Amounts excluded relate to items that management believes do not reflect the underlying, ongoing operational performance of the business as a result of their nature or size and/or are non-recurring and would not be expected to occur as part of our normal business on a regular basis:
| | | | | | | | | | | | Three Months Ended June 30, | | Nine Months Ended June 30, |
| 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) | 2021 | | 2020 | | % Variance | | 2021 | | 2020 | | % Variance |
Net income | | Net income | $ | 13.2 | | | $ | 21.8 | | | (39.4) | % | | $ | 24.8 | | | $ | 83.3 | | | (70.2) | % |
Income tax expense | | Income tax expense | 3.9 | | | 0.8 | | | 387.5% | | 7.7 | | | 3.3 | | | 133.3 | % |
Interest expense | 10.5 |
| | 14.9 |
| | 37.3 |
| | 43.8 |
| Interest expense | 11.2 | | | 10.5 | | | 6.7 | % | | 28.3 | | | 37.3 | | | (24.1) | % |
Operating profit | 33.1 |
| | 27.1 |
| | 123.9 |
| | 32.2 |
| Operating profit | $ | 28.3 | | | $ | 33.1 | | | (14.5) | % | | $ | 60.8 | | | $ | 123.9 | | | (50.9) | % |
Depreciation and amortization | 27.6 |
| | 24.1 |
| | 80.1 |
| | 71.4 |
| Depreciation and amortization | 29.1 | | | 27.6 | | | 5.4 | % | | 83.6 | | | 80.1 | | | 4.4 | % |
EBITDA | 60.7 |
| | 51.2 |
| | 204.0 |
| | 103.6 |
| EBITDA | $ | 57.4 | | | $ | 60.7 | | | (5.4) | % | | $ | 144.4 | | | $ | 204.0 | | | (29.2) | % |
Restructuring and related business transformation costs (a) | 3.1 |
| | 4.5 |
| | 11.0 |
| | 18.5 |
| Restructuring and related business transformation costs (a) | 1.8 | | | 3.1 | | | (41.9) | % | | 9.0 | | | 11.0 | | | (18.2) | % |
| Share-based compensation (b) | 2.6 |
| | 5.0 |
| | 8.6 |
| | 14.3 |
| Share-based compensation (b) | 5.5 | | | 2.6 | | | 111.5 | % | | 11.8 | | | 8.6 | | | 37.2 | % |
| Transaction costs (c) | 0.3 |
| | 1.0 |
| | 1.0 |
| | 5.5 |
| Transaction costs (c) | 0.3 | | | 0.3 | | | — | % | | 1.6 | | | 1.0 | | | 60.0 | % |
Other (gains) losses and expenses (d) | (2.9 | ) | | (1.1 | ) | | (60.5 | ) | | 13.8 |
| |
Other losses (gains) and expenses (d) | | Other losses (gains) and expenses (d) | 1.2 | | | (2.9) | | | (141.4) | % | | 2.2 | | | (60.5) | | | (103.6) | % |
Adjusted EBITDA | $ | 63.8 |
| | $ | 60.6 |
| | $ | 164.1 |
| | $ | 155.7 |
| Adjusted EBITDA | $ | 66.2 | | | $ | 63.8 | | | 3.8 | % | | $ | 169.0 | | | $ | 164.1 | | | 3.0 | % |
(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 and other employee-related costs, relocation and facility consolidation costs, 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 June 30, | | Nine Months Ended June 30, |
(In millions) | | (In millions) | 2021 | | 2020 | | 2021 | | 2020 |
| Post Memcor divestiture restructuring(1) | | $ | 0.7 | | | $ | 1.2 | | | $ | 4.6 | | | $ | 4.9 | |
Cost of product sales and services (“Cost of sales”) | | Cost of product sales and services (“Cost of sales”) | 0.3 | | | 0.8 | | | 3.4 | | | 3.7 | |
| Sales and marketing expense (“S&M expense”) | | Sales and marketing expense (“S&M expense”) | — | | | (0.1) | | | 0.2 | | | — | |
General and administrative expense (“G&A expense”) | | General and administrative expense (“G&A expense”) | 0.4 | | | 0.5 | | | 0.7 | | | 1.2 | |
Other operating (income) expense | | Other operating (income) expense | — | | | — | | | 0.3 | | | — | |
Two-segment restructuring | | Two-segment restructuring | $ | 0.2 | | | $ | 0.6 | | | $ | 0.8 | | | $ | 1.9 | |
Cost of sales | | Cost of sales | 0.1 | | | 0.4 | | | 0.3 | | | 1.0 | |
| Three Months Ended June 30, | | Nine Months Ended June 30, | |
| 2020 | | 2019 | | 2020 | | 2019 | |
Post Memcor divestiture restructuring(1) | $ | 1.2 |
| | $ | — |
| | $ | 4.9 |
| | $ | — |
| |
Cost of product sales and services ("Cost of sales") | 0.8 |
| | — |
| | 3.7 |
| | — |
| |
G&A expense | | G&A expense | 0.1 | | | 0.2 | | | 0.5 | | | 0.9 | |
Other operating (income) expense | | Other operating (income) expense | — | | | — | | | — | | | — | |
Various other initiatives | | Various other initiatives | $ | 0.5 | | | $ | 0.5 | | | $ | 2.0 | | | $ | 1.0 | |
Cost of sales | | Cost of sales | 0.5 | | | 0.3 | | | 1.0 | | | 0.7 | |
| S&M expense | (0.1 | ) | | — |
| | — |
| | — |
| S&M expense | 0.1 | | | 0.1 | | | 0.2 | | | 0.1 | |
G&A expense | 0.5 |
| | — |
| | 1.2 |
| | — |
| G&A expense | — | | | 0.1 | | | 0.4 | | | 0.2 | |
Two-segment restructuring(2) | $ | 0.6 |
| | $ | 2.9 |
| | $ | 1.9 |
| | $ | 9.9 |
| |
Cost of sales | 0.4 |
| | 1.4 |
| | 1.0 |
| | 4.1 |
| |
R&D expense | — |
| | — |
| | — |
| | 0.1 |
| |
S&M expense | — |
| | 0.3 |
| | — |
| | 0.9 |
| |
G&A expense | 0.2 |
| | 1.2 |
| | 0.9 |
| | 4.8 |
| |
Various other initiatives(3) | $ | 0.5 |
| | $ | 0.6 |
| | $ | 1.0 |
| | $ | 1.3 |
| |
Cost of sales | 0.3 |
| | 0.2 |
| | 0.7 |
| | 0.7 |
| |
S&M expense | 0.1 |
| | — |
| | 0.1 |
| | — |
| |
G&A expense | 0.1 |
| | 0.4 |
| | 0.2 |
| | 0.6 |
| |
Total | $ | 2.3 |
| | $ | 3.5 |
| | $ | 7.8 |
| | $ | 11.2 |
| |
Other operating (income) expense | | Other operating (income) expense | (0.1) | | | — | | | 0.4 | | | — | |
Total(1) | | Total(1) | $ | 1.4 | | | $ | 2.3 | | | $ | 7.4 | | | $ | 7.8 | |
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.years and include, but are not limited to, consulting fees, legal fees, certain employee-related costs, facility consolidation and product rationalization costs, and fair value changes associated with contingent consideration. This includes: