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(Exact name of registrant as specified in its charter)
iDelaware
i46-4132761
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i210 Sixth Avenue
i15222
iPittsburgh,
iPennsylvania
(Address of principal executive offices)
(Zip Code)
(i724)
i772-0044
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
iCommon Stock, par value $0.01 per share
iAQUA
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
There were i121,282,642
shares of the registrant’s common stock, par value $0.01 per share, outstanding as of April 29, 2022.
This Quarterly Report on Form 10-Q (this “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward‑looking statements by our use of forward‑looking terminology such as “aim,”“anticipate,”“assume,”“believe,”“continue,”“could,”“estimate,”“expect,”“goal,”“intend,”“may,”“might,”“plan,”“progress,”“potential,”“predict,”“projection,”“seek,”“should,”“will,” or “would,” or the negative thereof, or other variations thereon or comparable
terminology. In particular, statements about the markets in which we operate, including growth of our various markets, our expectations, beliefs, plans, strategies, objectives, prospects, assumptions, or future events or performance, statements regarding our restructuring actions and expected restructuring charges and cost savings, statements regarding our cash requirements, working capital needs and expected capital expenditures, statements regarding our expectations for fiscal 2022, customer demand, supply chain challenges, material availability, price/cost, labor shortages, inflation, and general macroeconomic conditions, and statements related to the COVID-19 pandemic and its ongoing impact on our business contained in this Report are forward‑looking statements.
All of these forward‑looking statements are based on our current expectations, assumptions, estimates and projections. While we believe these expectations,
assumptions, estimates and projections are reasonable, such forward‑looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as filed with the Securities and Exchange Commission (“SEC”) on November 17, 2021, and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Report may cause our actual results, performance or achievements to differ materially from any future results, performance, or achievements expressed or implied by these forward‑looking statements or could affect our share price. Some of the factors that could cause actual
results to differ materially from those expressed or implied by the forward‑looking statements include, among other things:
•general global economic and business conditions, including the impacts of the COVID-19 pandemic and geopolitical conflicts, such as the conflict between Russia and Ukraine;
•our ability to execute projects on budget and on schedule;
•material, freight, and labor inflation, commodity and component availability constraints, and disruptions in global supply chains and transportation services;
•the potential for us to incur liabilities to customers as a result of warranty claims or failure to meet performance guarantees;
•our
ability to meet our own and our customers’ safety standards;
•failure to effectively treat emerging contaminants;
•our ability to continue to develop or acquire new products, services, and solutions that allow us to compete successfully in our markets;
•our ability to implement our growth strategy, including acquisitions, and our ability to identify suitable acquisition targets;
•our ability to operate or integrate any acquired businesses, assets, or product lines profitably;
•our ability to achieve the expected benefits of our restructuring actions;
•delays in enactment
or repeals of environmental laws and regulations;
•the potential for us to become subject to claims relating to handling, storage, release, or disposal of hazardous materials;
•our ability to retain our senior management, skilled technical, engineering, sales, and other key personnel and to attract and retain key talent in increasingly competitive labor markets;
•risks associated with international sales and operations;
1
•our ability to adequately protect our intellectual property from third-party infringement;
•risks
related to our contracts with federal, state, and local governments, including risk of termination or modification prior to completion;
•risks associated with product defects and unanticipated or improper use of our products;
•our ability to accurately predict the timing of contract awards;
•risks related to our substantial indebtedness;
•our increasing dependence on the continuous and reliable operation of our information technology systems;
•risks related
to foreign, federal, state and local environmental, health and safety laws and other applicable laws and regulations and the costs associated therewith;
•our ability to execute on our strategies related to environmental, social, and governance (“ESG”) matters, and achieve related goals and targets, including as a result of evolving standards, laws, regulations, processes, and assumptions, delayed scientific and technological developments, increased costs, and changes in carbon markets; and
•other risks and uncertainties, including those listed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as filed with the SEC on November 17, 2021, and in other filings
we may make from time to time with the SEC.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward‑looking statements. The forward‑looking statements contained in this Report are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward‑looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward‑looking statements contained in this Report, they may not be predictive of results or developments in future periods.
Any forward‑looking statement that we make in this Report speaks only
as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward‑looking statements, whether as a result of new information, future events, or otherwise, after the date of this Report.
2
Part I - Financial Information
Item 1. Financial Statements
INDEX
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Long-term
debt, net of deferred financing fees and discounts
i920,343
i730,430
Product
warranties
i3,191
i2,966
Obligation
under operating leases
i39,995
i37,935
Other
non‑current liabilities
i83,418
i92,909
Deferred
income taxes
i16,704
i16,443
Total
liabilities
$
i1,494,490
$
i1,286,672
Commitments
and Contingent Liabilities (Note 19)
i
i
Shareholders’ equity
Common
stock, par value $ii0.01/: authorized ii1,000,000/
shares; issued i122,766 shares, outstanding i121,102 at March 31, 2022; issued i122,173
shares, outstanding i120,509 at September 30, 2021
See
accompanying notes to these Unaudited Consolidated Financial Statements
9
Evoqua Water Technologies Corp.
Notes to Unaudited Consolidated Financial Statements
(In thousands, except per share data)
1. iDescription
of the Company and Basis of Presentation
Background
Evoqua Water Technologies Corp. (referred to herein as the “Company” or “EWT”) is a holding company and does not conduct any business operations of its own. The Company was incorporated on October 7, 2013. On November 6, 2017, the Company completed its initial public offering (“IPO”).
The Business
EWT provides a wide range of product brands and advanced water
and wastewater treatment systems and technologies, as well as mobile and emergency water supply solutions and service contract options through its branch network. Headquartered in Pittsburgh, Pennsylvania, EWT is a multinational corporation with operations in the United States (“U.S.”), Canada, the United Kingdom (“UK”), the Netherlands, Germany, Australia, the People’s Republic of China, Singapore and India.
The Company is organizationally structured into itwo
reportable operating segments for the purpose of making operational decisions and assessing financial performance: (i) Integrated Solutions and Services and (ii) Applied Product Technologies.
i
Basis of Presentation
The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All intercompany transactions have been eliminated. Unless otherwise specified, all dollar and share amounts in these notes are referred to in thousands.
The
interim Unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. In our opinion, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021, as filed with the SEC on November 17, 2021 (“2021 Annual Report”), in preparing these Unaudited Consolidated
Financial Statements, with the exception of accounting standard updates described in Note 2, “Recent Accounting Pronouncements.” These Unaudited Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes included in our 2021 Annual Report. Certain prior period amounts have been reclassified to conform to the current period presentation.
10
2. iiRecent
Accounting Pronouncements/
Accounting Pronouncements Not Yet Adopted
In October 2021, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends Accounting Standards Codification (“ASC”) 805 to require an
acquirer to, at the date of acquisition, recognize and measure contract assets and contract liabilities acquired in accordance with ASU 2014-9, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), as if the entity had originated the contracts, rather than adjust them to fair value at the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2022 and is to be applied prospectively to business combinations occurring
on or after the effective date of the amendments. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and also issued subsequent amendments to the initial guidance (collectively, “Topic 848”). Topic 848 became effective immediately and expires on December 31, 2022. Topic 848 allows eligible contracts that are modified
to be accounted for as a continuation of those contracts, permits companies to preserve their hedge accounting during the transition period and enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. Topic 848 provides optional expedients and exceptions for contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform if certain criteria are met. The Company is currently assessing the impact of adoption on the
Company’s Unaudited Consolidated Financial Statements and related disclosures.
3. iVariable Interest Entities
Treated Water Outsourcing (“TWO”) is a joint venture between the Company and Nalco Water, an Ecolab company (“Nalco”), in which the
Company held a i50% partnership interest as of March 31, 2022. The Company is obligated to absorb all risk of loss up to i100%
of the joint venture partner’s equity. As such, the Company fully consolidates TWO as a variable interest entity (“VIE”) under ASC Topic No. 810, Consolidation. The Company has not provided, and is not contractually required to provide, additional financial support to this entity, and the Company does not have the ability to use the assets of TWO to settle obligations of the Company’s other subsidiaries.
On
April 1, 2022, the Company acquired the remaining 50% partnership interest in TWO from Nalco. See Note 23, “Subsequent Events” for further discussion.
11
On October 1, 2019, the Company acquired a i60%
investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”). The Frontier acquisition is a VIE because it has insufficient equity to finance its activities due to key assets being assigned to the Company upon acquisition. The Company is the primary beneficiary of Frontier because the Company has the power to direct the activities that most significantly affect Frontier’s economic performance.
In addition, the Company entered into an agreement to purchase the remaining i40%
interest in Frontier on or prior to March 30, 2024. This agreement (a) gave holders of the remaining i40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately i10%
of the outstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners between January 1, 2021 and February 28, 2021 (the “Option”), and (b) obligates the Company to purchase and the Minority Owners to sell all of the Minority Owners’ remaining interest in Frontier at the fair market value at the time of sale on or prior to March 30, 2024 (the “Purchase Right”). The Purchase Right may be exercised early by the Minority Owners. The agreement to purchase the remaining interest was determined to be a financing due to the mandatory Purchase Right, as per ASC Topic 480, Distinguishing Liabilities From Equity, and as such, the
Company recognized a liability for the remaining i40% interest. The Minority Owners exercised the Option, and on April 8, 2021, the Company completed the purchase of an additional i8%
of the outstanding equity in Frontier for approximately $i1,490. As a result, the Company’s ownership position in Frontier increased to i68%.
In January 2022, the Minority Owners exercised the Purchase Right, and on April 1, 2022, the Company purchased the remaining outstanding equity in Frontier. See Note 23, “Subsequent Events” for further discussion.
Additionally, the Company fully consolidates Frontier as a VIE under ASC Topic No. 810, Consolidation.
The following provides a summary of Frontier’s balance sheet as of March 31, 2022 and September 30, 2021, and summarized financial information for the three and six months ended March 31,
2022 and 2021.
Acquisitions support the Company’s strategy of delivering a broad solutions portfolio with robust technology across multiple geographies and end markets. The Company continues to evaluate potential strategic acquisitions of businesses, assets and product lines and believes that capex-like,
tuck-in acquisitions present key opportunities within its overall growth strategy.
12
On December 20, 2021, the Company and its indirect wholly-owned subsidiaries Evoqua Water Technologies LLC (“EWT LLC”) and Evoqua Water Technologies Ltd. (together with EWT LLC, the “Buyer”) entered into an Asset Purchase Agreement (the “Agreement”) with Cantel Medical LLC, Mar Cor Purification, Inc., and certain of their affiliates (collectively, the “Sellers”), each wholly-owned subsidiaries
of Steris plc, pursuant to which the Buyer agreed to acquire certain assets of the Sellers and assume certain liabilities of the Sellers that are owned or used or arise in connection with the global operation of the Sellers’ renal business (the “Mar Cor Business”) for an aggregate purchase price of $i196,300 in cash at closing (the “Purchase Price”), subject to customary adjustments, including for working capital (the “Transaction”). On January 3, 2022, we completed
the Transaction to acquire the Mar Cor Business for $i194,976 paid in cash at closing, following adjustments. The Company utilized cash on hand and borrowed an additional $i160,000
under our 2021 Revolving Credit Facility (as defined below) to fund the Transaction. The Mar Cor Business is included within the Integrated Solutions and Services segment.
The Purchase Price includes a $i12,300 earn out, which is being held in escrow and will be paid, pro rata, to the Sellers if the Mar Cor Business meets certain sales performance goals through December 31, 2022 (the “Earn Out”). Any portion of the Earn Out
not paid to the Sellers during the first year following closing of the Transaction will be returned to the Buyer. A Monte Carlo simulation was performed to determine the fair value of an Earn Out asset for the amount expected to be received back from escrow based on the forecasted achievement of the sales performance goals associated with the Earn Out. See Note 6, Fair Value Measurements, for further discussion. In addition, approximately $i12,965 of the Purchase Price was placed into an escrow account, of which $i9,815
is to secure general indemnification claims against the Sellers and $i3,150 is for net working capital adjustments. During the three and six months ended March 31, 2022, the Company incurred approximately $i2,116
and $i3,178, respectively, in acquisition costs, which are included in General and administrative expense on the Unaudited Consolidated Statements of Operations.
The acquisition of the Mar Cor Business has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. The table below summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed as of the acquisition date. iThese
preliminary estimates are subject to revision during the measurement period as additional analyses are performed and third-party valuations are finalized, and these differences could have a material impact on the accounting for the business combination.
Receivables, net
$
i21,418
Inventories,
net
i32,560
Earn Out asset
i7,824
Other
current assets
i1,732
Property, plant, and equipment, net
i18,747
Goodwill
i68,370
Intangible
assets, net
i57,152
Other non-current assets
i7,434
Total
assets acquired
i215,237
Current liabilities
(i14,719)
Non-current
liabilities
(i5,542)
Total liabilities assumed
(i20,261)
Net
assets acquired
$
i194,976
During the three months ended March 31, 2022, the Company completed the divestiture of the resin regeneration assets
in Germany (the “Germany Regen Business”) for $i356 in cash at closing, resulting in a gain of $i193 recognized on the sale. The Germany Regen Business was a part of the Applied
Product Technologies segment.
13
5. iRevenue
Performance Obligations
The
Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations if the product has an alternative use and the Company does not have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. The Company maintains a backlog of confirmed orders, which totaled approximately $i269,814
at March 31, 2022. This backlog represents the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that the majority of these performance obligations will be satisfied within the next twelve to itwenty-four months.
Disaggregation
of Revenue
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into source of revenue, reportable operating segment, and geographical regions. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606, which is to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
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.
15
i
The
tables below provide a roll-forward of contract assets and contract liabilities balances for the periods presented:
Amounts
in beginning balance reclassified to revenue
(i44,292)
(i20,703)
Current
period amounts reclassified to revenue
(i130,629)
(i127,684)
Foreign
currency
i113
i570
Balance
at end of period
$
i55,593
$
i36,894
/
6.
iFair Value Measurements
As of March 31, 2022 and September 30, 2021, the fair values of cash and cash equivalents, accounts receivable, and accounts payable approximated carrying values due to the short maturity of these items.
The Company measures the fair value of pension plan assets and liabilities, deferred compensation
plan assets and liabilities on a recurring basis pursuant to ASC Topic No. 820, Fair Value Measurement. ASC Topic No. 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs in which little or no market data is available, therefore requiring an entity to develop its own assumptions.
iThe
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 measure the fair value of 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 March 31, 2022 and September 30, 2021. The unrealized loss on mutual funds was $i418 at March 31, 2022.
The Company records contingent consideration arrangements at fair value on a recurring basis, and the associated
balances presented as of March 31, 2022 and September 30, 2021 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 and assets 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. During the three and six months ended March 31, 2022, the
Company recorded a decrease in the fair value of the earn-out liability related to the prior year acquisition of Water Consulting Specialists, Inc. (“WCSI”) of $i25 and $i125,
respectively. As a result of the Mar Cor Business acquisition on January 3, 2022, the Company recorded an Earn Out asset for $i7,824 which represents the fair value of amounts expected to be received back from escrow based on the forecasted achievement of certain sales performance goals. As of March 31, 2022 and September 30,
2021, earn-out liabilities related to acquisitions totaled $ii25/
and $i150, respectively, and are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. As of March 31, 2022 and September 30, 2021, earn-out assets related to acquisitions total $i7,824
and $i0, respectively, and are included in Prepaid and other current assets on the Consolidated Balance Sheets.
18
As of March 31, 2022, the Company had a liability recorded for the Purchase Right to purchase the remaining i32%
interest of Frontier. The fair value of this right is based upon significant unobservable inputs including future earnings and other market factors. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of this right each period until the purchase of the remaining interest has occurred. Changes in the fair value can result from earnings achieved over the passage of time and will be recorded in Interest expense in the Unaudited Consolidated Statements of Operations. On April 1, 2022, the Minority Owners exercised the Purchase Right, and the Company purchased the remaining i32%
interest in Frontier for $i10,396. See Note 23, “Subsequent Events” for further discussion. As a result, during the three and six months ended March 31, 2022, the Company recorded an increase in the fair value of the Purchase Right liability of $i2,091,
which was recorded to Interest expense on the Unaudited Consolidated Statements of Operations. As of March 31, 2022 and September 30, 2021, $i10,396 and $i0,
respectively, is included in Accrued expenses and other liabilities related to the Purchase Right on the Consolidated Balance Sheets. As of March 31, 2022 and September 30, 2021, $i0 and $i8,305,
respectively is included in Other non‑current liabilities related to the Purchase Right on the Consolidated Balance Sheets.
The
Company entered into secured financing agreements that require providing a security interest in specified equipment and, in some cases, the underlying contract. As of March 31, 2022 and September 30, 2021, the gross and net amounts of those assets are as follows:
(1)The
interest rate on the 2021 Term Loan was i2.75% as of March 31, 2022, comprised of i0.25% LIBOR plus the i2.50%
spread. Includes accrued interest of $i0 and $i25 at March 31, 2022 and September 30, 2021, respectively.
(2)The
2021 Revolving Credit Facility includes $i187,000 with an interest rate of i2.20% as of March 31, 2022, comprised of
i0.25% LIBOR plus the i1.95% spread, and $i34,000
with an interest rate of i4.45%. as of March 31, 2022, comprised of i3.50% Prime Rate plus the i0.95%
spread. During the three months ended March 31, 2022, the spread on the 2021 Revolving Credit Facility was reduced from i2.25% at September 30, 2021 as a result of a Sustainability Pricing Adjustment per the 2021 Credit Agreement. Includes accrued interest of $i106
and $i268, at March 31, 2022 and September 30, 2021, respectively.
(3)The interest rate on the Securitization Facility was i1.70%
as of March 31, 2022, comprised of i0.45% LIBOR plus the i1.25% spread. Includes accrued interest of $i78
and $i61 at March 31, 2022 and September 30, 2021, respectively.
(4)In March 2022, the outstanding balance of the Notes Payable due July 31, 2023, was repaid in conjunction with the Company’s acquisition of TWO. See Note 23, “Subsequent Events” for further discussion.
/
21
2021
Credit Agreement
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 lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and ING Capital, LLC, as sustainability coordinator. The 2021 Credit Agreement provides for a multi-currency senior secured revolving credit facility in an aggregate principal amount not to exceed the U.S. dollar equivalent of $i350,000
(the “2021 Revolving Credit Facility”) and a discounted senior secured term (the “2021 Term Loan”) in the amount of $i475,000 (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 $i60,000.
The 2021 Credit Agreement contains customary representations, warranties, affirmative covenants, and negative covenants, including, among other things, a springing maximum first lien leverage ratio of 5.55 to 1.00. The Company did not exceed this ratio during the six months ended March 31, 2022, does not anticipate exceeding this ratio during the year ending September 30, 2022, and therefore does not anticipate any additional repayments during the year ending September 30, 2022.
i
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 March 31, 2022 and September 30, 2021.
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, EWT LLC, 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 $i150,000 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”).
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 six months ended March 31, 2022, does not anticipate becoming noncompliant during the year ending September 30, 2022, and therefore, subject to limitations arising from collateral availability, does not anticipate any additional repayments during the year ending September 30, 2022.
22
Equipment
Financings
i
During the six months ended March 31, 2022, the Company completed the following equipment financings:
(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 i1.00% LIBOR floor plus a i3.75%
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
i
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:
Current portion of deferred financing fees and discounts(1)
$
(i1,883)
$
(i1,866)
Long-term
portion of deferred financing fees and discounts(2)
(i8,929)
(i9,872)
Total
deferred financing fees and discounts
$
(i10,812)
$
(i11,738)
(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.
Amortization of deferred financing fees and discounts included in interest expense was $i459
and $i518 for the three months ended March 31, 2022 and 2021 and $i926 and $i1,044
for the six months ended March 31, 2022 and 2021, respectively.
23
Repayment Schedule
i
Aggregate maturities of all long‑term debt, including current portion of long‑term debt and excluding finance lease obligations as of March 31,
2022, are presented below:
Fiscal Year
Remainder of 2022
$
i7,886
2023
i16,748
2024
i165,512
2025
i17,100
2026
i20,417
Thereafter
i717,711
Total
$
i945,374
/
12.
iDerivative 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. As of March 31, 2022, the notional amount of the Company’s interest rate swaps was $i531,000.
Foreign Currency Risk Management
The
Company’s functional currency is the U.S. dollar. By operating internationally, the Company is subject to foreign currency translation risk associated with converting the foreign operations’ financial statements into U.S. dollars transactions denominated in currencies other than the U.S. dollar (“foreign currencies”). The Company is also subject to currency risk from transactions denominated in 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 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 March 31, 2022, the notional amount of the forward contracts was $i9,460.
Equity
Price Risk Management
The Company is exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Equity price movements affect the compensation expense as certain investments made by the Company’s employees in the deferred compensation plan are revalued. Although not designated as accounting hedges, the Company utilizes derivatives such as total return swaps to economically hedge a portion of this exposure and offset the related compensation expense. As of March 31, 2022, the notional amount of the total return swaps was $i5,488.
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.
24
Derivatives Designated as Cash Flow Hedges
i
The following represents the fair
value recorded for derivatives designated as cash flow hedges for the periods presented:
The
following represents the amount of gain (loss) recognized in Accumulated other comprehensive income (loss) (“AOCI”) (net of tax) during the periods presented:
The
following represents the amount of (loss) gain reclassified from AOCI into earnings during the periods presented:
Three Months Ended March 31,
Six Months Ended March 31,
Location of (Loss) Gain
2022
2021
2022
2021
Cost
of product sales and services
$
i6
$
(i13)
$
(i79)
$
(i13)
General
and administrative expense
i—
(i40)
(i7)
(i72)
Selling
and marketing expense
(i1)
(i39)
i—
(i39)
Interest
expense
(i550)
(i523)
(i1,167)
(i1,033)
$
(i545)
$
(i615)
$
(i1,253)
$
(i1,157)
/
Based
on the fair value amounts of the Company’s cash flow hedges at March 31, 2022, the Company expects that approximately $i76 of pre-tax net gains will be reclassified from AOCI into earnings during the next itwelve
months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle.
25
Derivatives Not Designated as Hedging Instruments
The following represents the fair value recorded for derivatives not designated as cash flow hedges for the periods presented:
To better align its resources with its growth strategies and reduce its cost structure, the Company commits to various restructuring plans as necessary. The Company has undertaken various restructuring initiatives, including activities to reduce the cost structure and rationalize location
footprint following the sale of the Memcor product line, transitioning from a ithree-segment structure to a itwo-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 in future periods approximately $i100 to $i1,100
of costs related to restructuring programs initiated in prior periods.
26
The table below sets forth the amounts accrued for the restructuring components and related activity:
Restructuring
charges following the sale of the Memcor product line
i754
i3,808
Restructuring
charges related to two-segment realignment
i297
i562
Restructuring
charges related to other initiatives
i1,817
i1,444
Release
of prior reserves
(i66)
(i283)
Write
off charges
i—
(i966)
Cash
payments
(i2,220)
(i4,359)
Other
adjustments
i2
i9
Balance
at end of the period
$
i888
$
i1,185
/
The
balances for accrued restructuring liabilities at March 31, 2022 and September 30, 2021, 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 relocation expenses. The Company expects to pay the remaining amounts accrued as of March 31, 2022 during the remainder of fiscal 2022.
The table below sets forth the location of amounts recorded above on the Unaudited Consolidated Statements of Operations:
The
Company continues to evaluate restructuring activities that may result in additional charges in the future.
15. iEmployee 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.
27
i
The components of net periodic benefit cost for the plans were as follows:
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.
16. iIncome Taxes
Year-to-date income tax expense (benefit) is the product of the most current projected annual effective tax rate (“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.
Annual Effective Tax Rate
The PAETR, which excludes the impact of discrete items, was i22.6%
and i14.6% as of the six months ended March 31, 2022 and 2021, respectively. For the six months ended March 31, 2022, the PAETR was higher than the U.S. federal statutory rate of i21.0%
primarily due to the mix of earnings between countries, most of which have higher statutory rates than the U.S., which was mostly offset by the impact of maintaining a valuation allowance that is provided on U.S. deferred tax assets. The current year PAETR was higher than the prior year’s rate due to an increase in projected pretax book income in countries with higher statutory tax rates.
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 period ending March 31, 2022 as a result of pretax losses incurred since the Company’s inception in early
2014. 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.
Current and Prior Period Tax Expense
For the three months ended March 31, 2022, the Company recognized income tax expense of $i2,248
on pretax income of $i9,622. The rate of i23.4%
differed from the U.S. statutory rate of i21.0% as the mix of earnings between countries, most of which have higher statutory tax rates than the U.S., was mostly offset by the impact of maintaining a U.S. valuation allowance that is provided on U.S. deferred tax assets.
For the three months ended March 31, 2021, the Company recognized
income tax expense of $i2,701 on pretax income of $i7,783.
The rate of i34.7% differed from the U.S. statutory rate of i21.0% principally due to the impact of maintaining
a U.S. valuation allowance against U.S. deferred tax assets.
For the six months ended March 31, 2022, the Company recognized income tax expense of $i3,869 on pretax income of $i17,331.
The rate of i22.3% differed from the U.S. statutory rate of i21.0% as the mix of earnings between countries,
most of which have higher statutory tax rates than the U.S., was mostly offset by the impact of maintaining a U.S. valuation allowance that is provided on U.S. deferred tax assets.
28
For the six months ended March 31, 2021, the Company recognized income tax expense of $i3,785
on pretax income of $i15,344. The rate of i24.7%
differed from the U.S. statutory rate of i21.0% 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 which were partially offset by the impact of maintaining a U.S. valuation allowance against U.S. deferred tax assets.
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 Board.
The Company established the Evoqua Water Technologies Corp. Stock Option Plan (the “Stock Option Plan”) on March 6, 2014. The plan allows certain management employees and the Board to purchase shares in the Company. Under the Stock Option Plan, the number of shares available for award was i11,083.
As of March 31, 2022, there were approximately i2,177 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 (the “Equity Incentive Plan”), under which equity awards may be granted in the form of options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, dividend equivalent rights, share awards, and performance-based awards (including performance share units and performance-based restricted stock).
During the six months ended March 31, 2022, the Company granted RSUs and performance share units (measured at a target award level) under the Equity Incentive Plan to certain employees of the Company. The final number of performance share
units that may be earned is dependent on the Company’s achievement of performance goals related to organic revenue growth dollars and average adjusted EBITDA margin over a three-year measurement period ending September 30, 2024. The final number of performance share units that may be earned is also subject to a total stockholder return (“TSR”) modifier, which operates by increasing or decreasing the total number of shares earned by up to 25% based on the Company’s TSR relative to the TSR of the U.S. constituents of the S&P Global Water Index. In order to receive shares earned at the end of the performance period, the recipient must remain employed by the
Company and its subsidiaries through the end of the three-year period (except in the event of retirement, death, disability or, in certain circumstances, related to change in control).
As of March 31, 2022, there were approximately i3,950
shares available for grants under the Equity Incentive Plan.
Outstanding option awards vest ratably at i25% per year, and are exercisable at the time of vesting. The options granted have a ten-year contractual term.
29
i
A
summary of the stock option activity as of March 31, 2022 is presented below:
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 six months ended March 31, 2022 was $i6,873.
i
A
summary of the status of the Company's unvested stock options as of and for the six months ended March 31, 2022 is presented below.
(In thousands, except per share amounts)
Shares
Weighted Average Grant Date Fair Value/Share
Unvested at beginning of period
i1,901
$
i6.69
Granted
i2
i24.22
Vested
(i812)
i6.55
Forfeited
(i28)
i6.60
Unvested
at end of period
i1,063
$
i6.87
/
The
total fair value of options vested during the six months ended March 31, 2022, was $i5,317.
30
i
The
following is a summary of the RSU activity for the six months ended March 31, 2022.
The
following is a summary of the performance share unit activity for the six months ended March 31, 2022, assuming target award level.
(In thousands, except per share amounts)
Shares
Weighted Average Grant Date Fair Value/Share
Unvested at beginning of period
i469
$
i16.92
Granted
i124
i52.50
Unvested
at end of period
i593
$
i23.39
Expected
to vest
i546
$
i23.28
/
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 $i6,068 and $i3,214
during the three months ended March 31, 2022 and 2021, respectively, of which $i5,386 and $i3,214
was non-cash, respectively. Total share-based compensation expense was $i11,402 and $i6,290
during the six months ended March 31, 2022 and 2021, respectively, of which $i10,589 and $i6,233
was non-cash, respectively. The unrecognized compensation expense related to stock options, RSUs, and performance share units (measured at a target award level) was $i6,565, $i27,863
and $i11,063, respectively at March 31, 2022, and is expected to be recognized over a weighted average period of i1.9
years, i2.2 years and i2.3
years, respectively. The Company received $i5,274 from the exercise of stock options during the six months ended March 31, 2022.
Employee Stock Purchase Plan
Effective October 1, 2018, the
Company implemented an employee stock purchase plan (the “ESPP”) which allows employees to purchase shares of the Company’s stock at i85% of the lower of the fair market value on the first or last business day of the applicable six-month offering period. These purchases are offered twice throughout each fiscal year, and are paid by employees through payroll deductions
over the respective six month purchase period, at the end of which the stock is transferred to the employees. On December 21, 2018, the Company registered i11,297 shares of common stock, par value $i0.01
per share, of which i5,000 are available for future issuance under the ESPP. During the three months ended March 31, 2022 and 2021, the Company incurred compensation expense of $i198
and $i187, respectively, in salaries and wages with respect to the ESPP, representing the fair value of the discounted price of the shares. During the six months ended March 31, 2022 and 2021, the Company incurred compensation expense of $i419
and $i403, respectively. These amounts are included in the total share-based compensation expense above. On October 1, 2021 and April 1, 2022, i60
and i48 shares, respectively, were issued under the ESPP.
18. iConcentration
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
31
generally do not require collateral. The Company’s trade receivables do not represent a significant concentration of credit risk at March 31, 2022
and September 30, 2021 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 six months ended March 31, 2022 and 2021, no customer accounted for more than 10% of net sales or net accounts receivable.
The Company operates predominantly in inine
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 transacted with the Company location that maintains the customer relationship.
19. iCommitments
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 itwelve
months to iten 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
longest maturity date of letters of credit and surety bonds in effect as of March 31, 2022 was iMarch 20, 2030.
Litigation
From time to time, as a normal incident of the nature and kind of business in which the Company is 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 expect that any asserted or un-asserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its results of operations, or financial condition.
32
20.
iAccrued Expenses and Other Liabilities
i
Accrued expenses and other liabilities consisted
of the following:
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 itwo 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, 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.
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 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.
33
i
Reportable
operating segment revenue and operating profit for the three and six months ended March 31, 2022 and 2021 were as follows:
The following table sets forth the computation of basic and diluted earnings from continuing operations per common share (in thousands, except per
share amounts):
Numerator
for basic and diluted earnings per common share—Net income attributable to Evoqua Water Technologies Corp.
$
i7,330
$
i5,036
$
i13,317
$
i11,469
Denominator:
Denominator
for basic net income per common share—weighted average shares
i120,942
i118,882
i120,785
i118,882
Effect
of dilutive securities:
Share‑based compensation
i4,012
i3,041
i4,145
i3,393
Denominator
for diluted net income per common share—adjusted weighted average shares
i124,954
i121,923
i124,930
i122,275
Basic
earnings attributable to Evoqua Water Technologies Corp. per common share
$
i0.06
$
i0.04
$
i0.11
$
i0.10
Diluted
earnings attributable to Evoqua Water Technologies Corp. per common share
$
i0.06
$
i0.04
$
i0.11
$
i0.09
/
23.
iSubsequent Events
On iApril 1, 2022, the
Company acquired the remaining i32% interest in Frontier from the Minority Owners for an aggregate purchase price of $i10,396, which
is included in Accrued expenses and other liabilities on the Consolidated Balance Sheets at March 31, 2022.
Also on iApril 1, 2022, the Company acquired the remaining i50%
partnership interest in TWO from Nalco for an aggregate purchase price of $i1,099.
35
Item 2. Management’s Discussion and Analysis ofFinancial 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, 2021, as filed with the SEC on November 17, 2021 (the “2021 Annual Report”). You should review the disclosures in Part I, Item 1A, “Risk Factors” in the 2021 Annual Report, as well as any cautionary language in this 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.,”“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
We are a leading provider of mission-critical water and wastewater treatment solutions, offering a broad portfolio of products, services, and expertise to support customers
across various end markets. We are headquartered in Pittsburgh, Pennsylvania, with locations across nine countries. We have a comprehensive portfolio of differentiated, proprietary technologies offered under market‑leading and well‑established brands. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals.
Our solutions are designed to provide our customers with the quantity and quality of water necessary to meet their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations while supporting their regulatory compliance and environmental sustainability requirements. We deliver and maintain these mission critical solutions through our extensive North American service network, and we sell our products and technologies internationally through direct
and indirect sales channels. We have worked to protect water, the environment, and our employees for more than 100 years. As a result, we have earned a reputation for quality, safety, and reliability around the world. Our employees are united by a common purpose: Transforming water. Enriching life.®
Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers, sustainable, and performance” foster a culture that is focused on establishing a workforce that is enabled, empowered and accountable, creating a highly dynamic work environment.
We serve 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 outsourced water service contracts, capital systems, and related recurring aftermarket services, parts and consumables, and emergency services to enable recycle and reuse, improve operational reliability and performance, and promote environmental compliance; and
•Applied Product Technologies segment, which provides highly differentiated and scalable water and wastewater products and technologies as stand-alone offerings or components in integrated solutions to a diverse set of system integrators and end-users globally.
Our segments draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes,
and corporate philosophies. 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.
Recent Developments, Key Factors and Trends Affecting Our Business and Financial Statements
Our 2021 Annual Report includes a discussion of various key factors and trends that we believe have affected or may affect our operating results. The following discussion highlights recent developments, as well as significant changes in these key factors and trends.
36
Impact
of the COVID-19 pandemic. We continue to monitor the ongoing effects of the COVID-19 pandemic, particularly as new shutdowns and restrictions in parts of China have recently been imposed in response to an increase in the spread of COVID-19 variants. These shutdowns and restrictions did not have a material adverse effect on our operations or financial results for the three and six months ended March 31, 2022. However, if the duration of these shutdowns and restrictions extends, or if similar shutdowns and restrictions are imposed in other regions, it could impact our sales into those regions and our ability to source materials from those regions.
Although the pandemic negatively impacted sales volume across our business in earlier periods, due primarily to customer site access restrictions,
temporary customer site closures, and temporary delays in annual maintenance activities by customers in certain end markets, these factors did not have a material adverse effect on our results of operations for the three and six months ended March 31, 2022. Vaccination requirements imposed by certain of our customers to allow our employees to enter their sites may increase our costs or delay our performance of services for our customers, however this has not materially impacted our results to date.
For more information regarding factors and events that may impact our business, results of operations and financial condition as a result of the COVID-19 pandemic, see “Risk Factors-The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations, and prospects”
included in Part I, Item 1A, “Risk Factors” in the 2021 Annual Report.
Inflation, material availability and labor shortages.Material, freight, and labor inflation resulted in increased costs in the first half of fiscal 2022, and we expect this trend will continue throughout fiscal 2022. Although we have offset a portion of these increased costs through price increases and operational efficiencies to date, there can be no assurance that we will be able to continue to do so. 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 in future periods. Additionally, supply chain disruptions and labor shortages have restricted and could further restrict availability
of certain commodities and materials, which may result in delays in our execution of projects in fiscal 2022 and negatively impact revenues. Tight labor markets have resulted in longer times to fill open positions and labor inflation. Continued delays in filling open positions, particularly among our service technician population, could impact our ability to provide timely service to our customers. Although these factors did not have a material adverse effect on our results of operations for the three and six months ended March 31, 2022, if sustained, they could have a material adverse effect on our results of operations going forward.
Russia-Ukraine war. We have no operations in Russia or Ukraine, and our sales into these regions are minimal. However, the conflict in Ukraine has exacerbated
the material inflation and availability challenges described above, particularly with respect to the impact it has had on energy and fuel prices and the price of steel and other precious metals that we procure in our supply chain. Although these factors did not have a material adverse effect on our results of operations for the three and six months ended March 31, 2022, we expect the inflationary impact on energy, fuel and steel prices to continue throughout fiscal 2022. If these factors are sustained, or if the duration of the conflict is extended or the conflict spreads into a larger geographic portion of Europe, our results of operations in future periods could be materially and adversely impacted.
Acquisitions and Divestitures. On December 20, 2021, the
Company and its indirect wholly-owned subsidiaries Evoqua Water Technologies LLC (“EWT LLC”) and Evoqua Water Technologies Ltd. (together with EWT LLC, the “Buyer”), entered into an Asset Purchase Agreement (the “Agreement”) with Cantel Medical LLC, Mar Cor Purification, Inc., and certain of their affiliates (collectively, the “Sellers”), each wholly-owned subsidiaries of Steris plc, pursuant to which the Buyer agreed to acquire certain assets of the Sellers and assume certain liabilities of the Sellers that are owned or used or arise in connection with the global operation of the Sellers’ renal business (the “Mar Cor Business”) for an aggregate purchase price of $196.3 million in cash at closing (the “Purchase Price”), subject to customary
adjustments, including for working capital (the “Transaction”). On January 3, 2022, we completed the Transaction to acquire the Mar Cor Business for $195.0 million paid in cash at closing, following adjustments. We utilized cash on hand and borrowed an additional $160.0 million under our 2021 Revolving Credit Facility (as defined below) to fund the Transaction. The Purchase Price includes a $12.3 million earn out, which is being held in escrow and will be paid, pro rata, to the Sellers if the Mar Cor Business meets certain sales performance goals (the “Earn Out”). Any portion of the Earn Out not paid to the Sellers during the first year following closing of the Transaction will be returned to us. In addition, approximately $13.0 million of the Purchase Price was placed into an escrow account, of which $9.8 million is to secure general indemnification claims against the Sellers and $3.2 million is for net
working capital adjustments. The Mar Cor Business
37
is a leading manufacturer and servicer of medical water, commercial and industrial solutions in North America. Headquartered in Plymouth, Minnesota, the Mar Cor Business has 27 service and regeneration facilities in the U.S. and Canada. The Mar Cor Business offers significant technical expertise in designing, building, and servicing high-purity water treatment systems. The addition of the business expands our service footprint in North America, furthering our reach into the healthcare vertical market. During the six months ended March 31, 2022, we incurred approximately $3.2 million in acquisition costs, which are included in General and administrative expense on the Unaudited
Consolidated Statements of Operations. On January 18, 2022, we paid $2.3 million for a success fee to a third party, which was due upon consummation of the Transaction. Additionally, we expect to incur between $18.0 million to $20.0 million in one-time integration costs within the following 18 to 24 months. The Mar Cor Business is included within the Integrated Solutions and Services segment.
During the three months ended March 31, 2022, we completed the divestiture of certain resin regeneration assets in Germany (the “Germany Regen Business”) for $0.4 million in cash at closing, resulting in a gain of $0.2 million recognized on the sale. The Germany Regen Business was a part of the Applied
Product Technologies segment.
On April 1, 2022, we acquired the remaining 32% equity interest in Frontier Water Systems, LLC (“Frontier”) for an aggregate purchase price of $10.4 million, making Frontier a wholly-owned subsidiary of the Company. This followed our initial acquisition of a 60% equity interest in Frontier in October 2019 and our acquisition of an additional 8% equity interest in Frontier in April 2021. San Diego-based Frontier is a leading supplier of engineered equipment packages for high-rate treatment of selenium, nitrate, and metals in water and wastewater. The business adds to Evoqua’s portfolio of advanced wastewater treatment technologies and is part of our Integrated Solutions and Services segment.
Also
on April 1, 2022, we acquired the remaining 50% partnership interest in Treated Water Outsourcing, a joint venture between the Company and Nalco Water, an Ecolab company (“Nalco”), from Nalco for an aggregate purchase price of $1.1 million.
We continue to actively evaluate acquisition opportunities that are consistent with our business strategy. We maintain a robust pipeline of potential acquisition targets, developed by our management team as well as various outside industry experts and consultants.
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, 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 making 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 measures such as adjusted EBITDA and organic revenue, 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 and Organic Revenue
Our revenue is a function of sales volumes and selling prices. 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 our business. Organic revenue, which is a non-GAAP financial measure, is defined 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 acquisition or divestiture. Divestitures include
sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. 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 during the first 12 months following the closing of the acquisition or divestiture 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. Management believes that reporting organic revenue provides useful information to
38
investors
by helping identify underlying growth trends in our core business and facilitating easier comparisons of our revenue performance with prior and future periods and to our peers. See “Non-GAAP Reconciliations” in this Item 2 for a reconciliation of organic revenue to revenue.
EBITDA and Adjusted EBITDA
EBITDA, which is a non-GAAP financial measure, is defined as net income (loss) before interest expense, income tax benefit (expense), and depreciation and amortization. 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, share-based compensation, transaction costs, and other gains, losses, and expenses that we believe do not directly reflect our underlying business operations. We present adjusted EBITDA because we believe it is frequently used by analysts, investors, and other interested parties to evaluate and compare operating performance and value companies within 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 drivers of our business performance.
Management uses adjusted 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 adjusted EBITDA;
•in certain calculations under our senior secured credit facilities, which use components of adjusted 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 adjusted EBITDA of each reportable operating segment as a supplement to segment income from operations and segment revenue 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 share-based compensation charges.
EBITDA and adjusted EBITDA should not be considered substitutes 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 this Item 2 for a reconciliation of EBITDA and adjusted EBITDA to net income. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating adjusted EBITDA, you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of adjusted EBITDA. Our presentation of adjusted EBITDA should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items. In addition, other companies in our industry or across different industries may calculate adjusted EBITDA differently.
39
Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
Net
income attributable to non‑controlling interest
$
0.2
—
%
$
0.1
—
%
100.0
%
Net
income attributable to Evoqua Water Technologies Corp.
$
13.3
1.7
%
$
11.5
1.7
%
15.7
%
Weighted
average shares outstanding
Basic
120.8
118.9
Diluted
124.9
122.3
Earnings
per share
Basic
$
0.11
$
0.10
Diluted
$
0.11
$
0.09
Other
financial data:
Adjusted EBITDA(1)
$
127.5
16.1
%
$
102.8
15.4
%
24.0
%
40
(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.
Revenue-Revenue increased $80.1 million, or 23.1%, to $426.7 million in the three months ended March 31, 2022, from $346.6 million in the three months ended March 31, 2021. Revenue from product sales increased $57.3 million, or 28.3%, to $259.8 million in the three months ended March 31, 2022, from $202.5 million in
the three months ended March 31, 2021. Revenue from services increased $22.8 million, or 15.8%, to $166.9 million in the three months ended March 31, 2022, from $144.1 million in the three months ended March 31, 2021.
The following tables provide the change in revenue by offering and the change in revenue by driver during the three months ended March 31, 2022 and 2021:
(1)Organic
revenue is a non-GAAP financial measure. For a reconciliation to total revenue, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
The increase in organic revenue was primarily driven by improved sales volume and favorable price realization across most product lines and regions.
Revenue in future periods could be negatively impacted by commodity and material availability constraints caused by global supply chain disruptions, skilled labor shortages, and the timing of projects.
Cost of sales and gross margin-Total gross margin decreased slightly to 30.2% in the three months ended March 31, 2022, from 30.6% in the three months ended March 31,
2021.
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The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
Gross
margin from product sales increased by 10 basis points (“bps”) to 28.7% in the three months ended March 31, 2022, from 28.6% in the three months ended March 31, 2021. This increase was primarily driven by favorable volume, mix, and positive price realization, which was offset by labor inflation and increased material costs.
Gross margin from services decreased by 60 bps to 32.6% in the three months ended March 31, 2022, from 33.2% in the three months ended March 31, 2021. This decrease was driven by labor resource constraints resulting in increased labor rates.
We expect continued pressure on gross margin in future periods due to material, freight and labor inflation. Although
we expect to continue to partially offset those increasing costs with positive price realization, there can be no assurance that we will be able to do so.
Operating expenses-Operating expenses increased $20.5 million, or 22.8%, to $110.6 million in the three months ended March 31, 2022, from $90.1 million in the three months ended March 31, 2021. Operating expenses are comprised of the following:
The
increase period over period in operating expenses was primarily due to increased employee related expenses as well as increased operating and amortization expense due to the acquisition in the current period. In addition, there were increased consulting and travel expenses, as well as an increase in external legal fees compared to the prior period. The above increases were partially offset by a decrease in foreign currency translation losses in the current period, compared to the prior period, most of which is related to intercompany loans.
Other operating income, net-Other operating income, net, increased $0.9 million to $1.3 million in the three months ended March 31, 2022, from $0.4 million in the three months ended March 31, 2021. This increase was driven by income from the
disposal of fixed assets, as well as an increase in income from precious metal sales, mainly from scrapped anodes in China. Additionally, we received a refund of certain taxes paid from the Chinese government in the current period, which partially offset COVID-19 pandemic subsidies received from the Canadian government in the prior period, which did not reoccur in the current period.
Interest expense-Interest expense increased $1.6 million, or 19.0%, to $10.0 million in the three months ended March 31, 2022, from $8.4 million in the three months ended March 31, 2021. The increase in interest expense was primarily driven by a fair value increase of $2.1 million in the Purchase Right Liability to acquire the remaining equity interest of Frontier. This increase was partially offset by a reduction in interest
expense associated with the $100.0 million debt prepayment in conjunction with the April 2021 refinancing/ of our senior credit facility.
42
Income tax expense-Income tax expense decreased to $2.2 million in the three months ended March 31, 2022, as compared to income tax expense of $2.7 million in the three months ended March 31, 2021. The decrease in tax expense was primarily due to discreet tax expense in the prior year that did not reoccur in the current year which was partially offset by 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.
Net income-Net income increased $2.3 million, or 45.1%, to $7.4 million in the three months ended March 31, 2022, from $5.1 million in the three months ended March 31, 2021, 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 March 31, 2022 increased by $15.2 million, or 26.2%, to $73.2 million, as compared to $58.0 million for the three months ended March 31, 2021, primarily driven by sales volume and related gross profit. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation
of adjusted EBITDA.
(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 $70.6 million, or 31.5%, to $294.8 million in the three months ended March 31, 2022, from $224.2 million in the three months ended March 31, 2021.
The following tables provide the change in revenue by offering and the change in revenue by driver during the three months ended March 31, 2022 and 2021 for
the Integrated Solutions and Services segment:
(1)Segment
organic revenue is a non-GAAP financial measure. For a reconciliation to total segment revenue, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
The increase in organic revenue was driven by higher sales volume, primarily related to aftermarket revenue across most end markets, capital revenue in microelectronics, life sciences, and food and beverage end markets, and service revenue in life sciences and light and general industry end markets. Organic revenue also benefited from favorable price realization.
Operating profit in the Integrated Solutions and Services segment increased $7.3 million, or 23.7%, to $38.1 million in the three months ended March 31, 2022, from $30.8 million in the three months
ended March 31, 2021.
Operating profit was favorably impacted by higher organic sales volume and favorable price/cost, partially offset by labor inflation and higher discretionary spending. Acquisitions also contributed to the increase in operating profit, primarily associated with the impact of the Mar Cor Business.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Integrated Solutions and Services segment increased $14.5 million, or 29.4%, to $63.8 million in the three months ended March 31, 2022, compared to $49.3 million in the three months ended March 31, 2021. The
increase was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization. Segment adjusted EBITDA 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 $9.5 million, or 7.8%, to $131.9 million in the three months ended March 31, 2022, from $122.4 million in the three months ended March 31, 2021.
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The following tables provide the change
in revenue by offering and the change in revenue by driver during the three months ended March 31, 2022 and 2021 for the Applied Product Technologies segment:
(1)Segment
organic revenue is a non-GAAP financial measure. For a reconciliation to total segment revenue, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
The increase in organic revenue was driven by strong sales volume and price realization in North America and Asia Pacific, which was partially offset by a decline in revenue in the Europe, Middle East, and Africa (“EMEA”) region and unfavorable foreign currency translation.
Operating profit in the Applied Product Technologies segment increased $4.9 million, or 27.1%, to $23.0 million in the three months ended March 31, 2022, from $18.1 million in the three months ended March 31, 2021.
The
increase in operating profit was primarily due to favorable sales volume and mix across multiple product lines and regions, which were partially offset by unfavorable operational variances, labor inflation, and price/cost driven by material inflation.
45
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment increased $2.0 million, or 7.9%, to $27.3 million in the three months ended March 31, 2022, compared to $25.3 million in the three months ended March 31, 2021. The increase was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization. Segment adjusted EBITDA also
excludes 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 $8.8 million, or 26.9%, to $41.5 million in the three months ended March 31, 2022, from $32.7 million in the three months ended March 31, 2021. The increase period over period was primarily due to increased employment expenses, including share-based compensation, and higher costs associated with legal matters in the current year.
Revenue-Revenue increased $124.2 million, or 18.6%, to $793.0 million in the six months ended March 31, 2022, from $668.8 million in the six months ended March 31, 2021. Revenue from product sales increased $89.8 million, or 23.5%, to $472.3 million in the six months ended March 31, 2022, from $382.5 million in the six months ended March 31, 2021. Revenue from services increased $34.4 million, or 12.0%, to $320.7 million in the six months ended March 31, 2022, from $286.3 million in the six months ended March 31, 2021.
The
following tables provide the change in revenue by offering and the change in revenue by driver during the six months ended March 31, 2022 and 2021:
(1)Organic
revenue is a non-GAAP financial measure. For a reconciliation to total revenue, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
The increase in organic revenue was driven by higher sales volume across most product lines and regions, as well as favorable price realization.
Cost of sales and gross margin-Total gross margin increased to 30.2% in the six months ended March 31, 2022, from 30.1% in the six months ended March 31, 2021.
46
The following table provides the change
in cost of product sales and cost of services, respectively, along with related gross margins:
Gross
margin from product sales increased by 30 bps to 28.2% in the six months ended March 31, 2022, from 27.9% in the six months ended March 31, 2021. The increase in gross margin was primarily driven by favorable price realization and product mix. These factors were partially offset by increased material and freight costs, as well as labor inflation.
Gross margin from services increased by 10 bps to 33.1% in the six months ended March 31, 2022, from 33.0% in the six months ended March 31, 2021.
Operating expenses-Operating expenses increased $38.8 million, or 22.9%, to $208.3 million in the six months ended March 31, 2022,
from $169.5 million in the six months ended March 31, 2021. Operating expenses are comprised of the following:
The
increase period over period in operating expenses was primarily due to increased employee related expenses as well as foreign currency translation losses in the current period, compared to foreign currency translation gains in the prior period, most of which is related to intercompany loans. In addition, there were increased consulting and travel expenses, increased amortization expense due to acquisitions in the current period, as well as an increase in external legal fees compared to the prior period.
Fluctuations in foreign currency translation and labor inflation could impact operating expenses in future periods.
Other operating income, net-Other operating income, net, increased $2.2 million to $2.8 million in the six months ended March 31, 2022, from $0.6 million in the six months ended March 31,
2021. This increase was driven by gains on the disposal of fixed assets, as well as an increase in income from precious metal sales, mainly from scrapped anodes in China, compared to the prior period. Additionally, we received a refund of certain taxes paid from the Chinese government in the current period, which partially offset COVID-19 pandemic subsidies received from the Canadian government in the prior period, which did not reoccur in the current period.
Interest expense-Interest expense decreased $0.6 million, or 3.5%, to $16.5 million in the six months ended March 31, 2022, from $17.1 million in the six months ended March 31, 2021. The decrease in interest expense was primarily driven by a $100.0 million debt prepayment in conjunction with the April 2021 refinancing of our senior credit facility,
as well as a reduction in the interest rate spread and LIBOR year over year. This decrease was partially offset by a fair value increase of $2.1 million in the Purchase Right Liability to acquire the remaining equity interest of Frontier.
Income tax expense-Income tax expense increased $0.2 million to $3.9 million in the six months ended March 31, 2022, from $3.7 million in the six months ended March 31, 2021. 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
47
impact tax expense due
to the U.S. valuation allowance, partially offset by discreet tax expense in the prior year that did not reoccur in the current year.
Net income-Net income increased $1.9 million, or 16.4%, to $13.5 million in the six months ended March 31, 2022, from $11.6 million in the six months ended March 31, 2021, as a result of the variances noted above.
Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the six months ended March 31, 2022 increased by $24.7 million, or 24.0%, to $127.5 million, as compared to $102.8 million for the six months ended March 31, 2021, primarily
driven by sales volume and related gross profit. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
(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 $101.0 million, or 23.0%, to $539.9 million in the six months ended March 31, 2022, from $438.9 million in the six months ended March 31, 2021.
The following tables provide the change in revenue by offering and the change in revenue by driver during the six months ended March 31, 2022 and 2021 for the
Integrated Solutions and Services segment:
(1)Segment
organic revenue is a non-GAAP financial measure. For a reconciliation to total segment revenue, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
The increase in organic revenue was driven by higher sales volume across capital, aftermarket, and service, as well as favorable price realization.
Operating profit in the Integrated Solutions and Services segment increased $16.3 million, or 28.5%, to $73.4 million in the six months ended March 31, 2022, from $57.1 million in the six months ended March 31, 2021.
Operating
profit growth was driven by higher organic sales volume and mix as well as favorable price realization. These increases were partially offset by increased material and freight costs as well as labor inflation and higher discretionary spending. Acquisitions also contributed to the increase in operating profit, primarily associated with the impact of the Mar Cor Business.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Integrated Solutions and Services segment increased $24.8 million, or 26.8%, to $117.3 million in the six months ended March 31, 2022, compared to $92.5 million in the six months ended March 31, 2021. 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 $23.2 million, or 10.1%, to $253.1 million in the six months ended March 31, 2022, from $229.9 million in the six months ended March 31, 2021.
49
The following tables provide the change in revenue by offering and the change in revenue by driver during the six months ended March 31, 2022 and 2021 for
the Applied Product Technologies segment:
(1)Segment
organic revenue is a non-GAAP financial measure. For a reconciliation to total segment revenue, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
The increase in organic revenue was driven by sales mix, volume growth, and price across all regions and multiple product lines.
Operating profit in the Applied Product Technologies segment increased $9.3 million, or 29.5%, to $40.8 million in the six months ended March 31, 2022, from $31.5 million in the six months ended March 31, 2021.
The increase in
operating profit was primarily due to favorable sales volumes and mix across multiple product lines and regions, partially offset by unfavorable operational variances, supply chain challenges, project variances, labor inflation, and price/cost driven by material inflation.
50
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment increased $5.0 million, or 11.3%, to $49.2 million in the six months ended March 31, 2022, compared to $44.2 million in the six months ended March 31, 2021. 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. See “Non-GAAP Reconciliations” in Item 2 of this Report for a reconciliation of adjusted EBITDA.
Corporate
Operating loss in Corporate increased $24.1 million, or 42.9%, to $80.3 million in the six months ended March 31, 2022, from $56.2 million in the six months ended March 31, 2021. The increase was primarily due to foreign currency translation losses in the current period, compared to foreign currency translation gains in the prior period, most of which is related to intercompany loans. Additionally, there were increased employment expenses, including share-based compensation, and higher costs associated with legal matters in the current year.
Non-GAAP
Reconciliations
The following is a reconciliation of total revenue to organic revenue for the three months ended March 31, 2022:
Total
Revenue
Foreign Currency
Inorganic Revenue(1)
Organic Revenue
Three Months Ended March 31,
% Variance
Three Months Ended March 31,
% Variance
Three Months Ended March 31,
% Variance
Three
Months Ended March 31,
% Variance
(In millions)
2022
2021
2022
2021
2022
2021
2022
2021
Evoqua Water Technologies
$426.7
$346.6
23.1
%
$(1.7)
n/a
(0.5)
%
$45.4
$0.3
13.0
%
$383.0
$346.3
10.6
%
Integrated
Solutions & Services
$294.8
$224.2
31.5
%
$(0.1)
n/a
—
%
$45.4
$0.3
20.1
%
$249.5
$223.9
11.4
%
Applied
Product Technologies
$131.9
$122.4
7.8
%
$(1.6)
n/a
(1.3)
%
$—
$—
—
%
$133.5
$122.4
9.1
%
(1)Includes
divestiture of the Lange Product Line on March 1, 2021, acquisition of WCSI on April 1, 2021 and the acquisition of the Mar Cor Business on January 3, 2022.
The following is a reconciliation of total revenue to organic revenue for the six months ended March 31, 2022:
Total
Revenue
Foreign Currency
Inorganic Revenue(1)
Organic Revenue
Six Months Ended March 31,
% Variance
Six Months Ended March 31,
% Variance
Six Months Ended March 31,
% Variance
Six
Months Ended March 31,
% Variance
(In millions)
2022
2021
2022
2021
2022
2021
2022
2021
Evoqua Water Technologies
$793.0
$668.8
18.6
%
$(1.3)
n/a
(0.1)
%
$47.7
$0.7
7.0
%
$746.6
$668.1
11.7
%
Integrated
Solutions & Services
$539.9
$438.9
23.0
%
$0.2
n/a
—
%
$47.7
$0.7
10.7
%
$492.0
$438.2
12.3
%
Applied
Product Technologies
$253.1
$229.9
10.1
%
$(1.5)
n/a
(0.6)
%
$—
$—
—
%
$254.6
$229.9
10.7
%
51
(1)Includes
divestiture of the Lange product line on March 1, 2021, acquisition of Ultrapure & Industrial Services on December 17, 2020, acquisition of WCSI on April 1, 2021, and the acquisition of the Mar Cor Business on January 3, 2022.
The following is a reconciliation of our Net income to 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 March 31,
Six Months Ended March 31,
(In millions)
2022
2021
% Variance
2022
2021
% Variance
Net income
$
7.4
$
5.1
45.1
%
$
13.5
$
11.6
16.4
%
Income
tax expense
2.2
2.7
(18.5)
%
3.9
3.7
5.4
%
Interest expense
10.0
8.4
19.0
%
16.5
17.1
(3.5)
%
Operating
profit
$
19.6
$
16.2
21.0
%
$
33.9
$
32.4
4.6
%
Depreciation and amortization
32.6
27.1
20.3
%
61.2
54.6
12.1
%
EBITDA
$
52.2
$
43.3
20.6
%
$
95.1
$
87.0
9.3
%
Restructuring
and related business transformation costs(a)
1.8
5.4
(66.7)
%
3.2
7.2
(55.6)
%
Purchase accounting adjustment costs(b)
2.6
—
n/a
2.6
—
n/a
Share-based
compensation(c)
6.1
3.2
90.6
%
11.4
6.3
81.0
%
Transaction
costs(d)
4.0
0.7
471.4
%
4.9
1.3
276.9
%
Other losses (gains) and expenses(e)
6.5
5.4
20.4
%
10.3
1.0
930.0
%
Adjusted
EBITDA
$
73.2
$
58.0
26.2
%
$
127.5
$
102.8
24.0
%
(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 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.
52
Three
Months Ended March 31,
Six Months Ended March 31,
(In millions)
2022
2021
2022
2021
Post Memcor divestiture restructuring
$
0.6
$
3.0
$
0.8
$
3.9
Cost
of product sales and services (“Cost of sales”)
0.1
2.3
0.1
3.1
Sales and marketing expense (“S&M expense”)
—
—
—
0.2
General
and administrative expense (“G&A expense”)
0.5
0.3
0.7
0.3
Other operating (income) expense
—
0.4
—
0.3
Two-segment
restructuring
$
0.1
$
0.4
$
0.3
$
0.6
Cost of sales
—
0.2
0.1
0.2
G&A
expense
0.1
0.2
0.2
0.4
Various other initiatives
$
1.0
$
1.5
$
1.7
$
1.5
Cost
of sales
0.5
0.5
0.7
0.5
S&M expense
—
0.1
—
0.1
G&A
expense
0.3
0.4
0.8
0.4
Other operating (income) expense
0.2
0.5
0.2
0.5
Total(1)
$
1.7
$
4.9
$
2.8
$
6.0
(1)Of
which $2.8 million and $5.5 million for the six months ended March 31, 2022 and 2021, respectively, is reflected in restructuring charges in Note 14, “Restructuring and Related Charges,” in Part I, Item 1 of this Report.
(ii)Legal settlement costs and intellectual property related fees including fees and settlement costs associated with legacy matters, related to product warranty litigation on MEMCOR® products and certain discontinued products. This includes:
Three
Months Ended March 31,
Six Months Ended March 31,
(In millions)
2022
2021
2022
2021
Cost of sales
$
0.1
$
0.2
$
0.2
$
0.2
G&A
expense
—
0.1
0.2
0.2
Total
$
0.1
$
0.3
$
0.4
$
0.4
(iii)Expenses
associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes. This includes:
Three Months Ended March 31,
Six Months Ended March 31,
(In
millions)
2022
2021
2022
2021
Cost of sales
$
—
$
0.1
$
—
$
0.1
G&A
expense
—
(0.1)
$
—
$
0.1
Total
$
—
$
—
$
—
$
0.2
53
(iv)Costs
associated with the secondary public offering of common stock held by certain shareholders of the Company, as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs. This includes:
Three Months
Ended March 31,
Six Months Ended March 31,
(In millions)
2022
2021
2022
2021
G&A expense
$
—
$
0.2
$
—
$
0.6
Total
$
—
$
0.2
$
—
$
0.6
(b)Purchase
accounting adjustment costs
Adjusted EBITDA is calculated prior to considering adjustments for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the acquisition of the Mar Cor Business. See Note 4, “Acquisitions,” in Part I, Item 1 of this Report for further detail.
(c)Share-based compensation
Adjusted EBITDA is calculated prior to considering share‑based compensation expenses related to equity awards. See Note 17, “Share-Based Compensation,” in Part I, Item 1 of this Report for further detail.
(d)Transaction related costs
Adjusted EBITDA is calculated prior to considering transaction, integration
and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred as a result of the transaction decision. Integration and restructuring costs associated with a business combination may occur over several 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:
Three
Months Ended March 31,
Six Months Ended March 31,
(In millions)
2022
2021
2022
2021
Cost of sales
$
0.5
$
0.1
$
0.5
$
0.2
G&A
expense
3.5
0.6
4.4
1.1
Total
$
4.0
$
0.7
$
4.9
$
1.3
(e)Other
losses, (gains) and expenses
Adjusted EBITDA is calculated prior to considering certain other significant losses, (gains), and expenses. For the periods presented such events include the following:
(i)impact of foreign exchange gains and losses;
(ii)charges incurred by the Company related to product rationalization in its electro-chlorination business;
(iii)amounts related to the sale of the Memcor product line;
(iv)expenses incurred by the Company as a result of the COVID-19 pandemic,
including additional charges for personal protective equipment, increased costs for facility sanitization and one-time payments to certain employees;
(v)legal fees incurred in excess of amounts covered by the Company’s insurance related to the Securities Litigation and SEC investigation; and
54
(vi)loss on divestiture of the Lange product line.
Other losses, (gains) and expenses include the following for the periods presented below:
We
do not present net income on a segment basis because we do not allocate interest expense or income tax benefit (expense) to our segments, making operating profit the most comparable GAAP metric. The following is a reconciliation of our segment EBITDA and segment adjusted EBITDA to operating profit, their most directly comparable financial measure presented in accordance with GAAP:
Three
Months Ended March 31,
$ Variance
% Variance
2022
2021
(In millions)
Integrated Solutions and Services
Applied Product Technologies
Integrated Solutions and Services
Applied Product Technologies
Integrated
Solutions and Services
Applied Product Technologies
Integrated Solutions and Services
Applied Product Technologies
Operating profit
$
38.1
$
23.0
$
30.8
$
18.1
$
7.3
$
4.9
24
%
27
%
Depreciation
and amortization
21.4
3.4
17.2
3.6
4.2
(0.2)
24
%
(6)
%
EBITDA
$
59.5
$
26.4
$
48.0
$
21.7
$
11.5
$
4.7
24
%
22
%
Restructuring
and related business transformation costs (a)
0.2
0.9
1.1
2.9
(0.9)
(2.0)
(82)
%
(69)
%
Purchase
accounting adjustment costs (b)
2.6
—
—
—
2.6
—
n/a
n/a
Transaction costs (c)
1.5
—
—
—
1.5
—
n/a
n/a
Other
losses (gains) and expenses (d)
—
—
0.2
0.7
(0.2)
(0.7)
(100)
%
(100)
%
Adjusted
EBITDA
$
63.8
$
27.3
$
49.3
$
25.3
$
14.5
$
2.0
29
%
8
%
Six
Months Ended March 31,
$ Variance
% Variance
2022
2021
(In millions)
Integrated Solutions and Services
Applied Product Technologies
Integrated Solutions and Services
Applied Product Technologies
Integrated
Solutions and Services
Applied Product Technologies
Integrated Solutions and Services
Applied Product Technologies
Operating profit
$
73.4
$
40.8
$
57.1
$
31.5
$
16.3
$
9.3
29
%
30
%
Depreciation
and amortization
39.2
6.9
34.1
7.1
5.1
(0.2)
15
%
(3)
%
EBITDA
$
112.6
$
47.7
$
91.2
$
38.6
$
21.4
$
9.1
23
%
24
%
Restructuring
and related business transformation costs (a)
0.7
1.5
1.1
4.5
(0.4)
(3.0)
(36)
%
(67)
%
Purchase
accounting adjustment costs (b)
2.6
—
—
—
2.6
—
n/a
n/a
Transaction costs (c)
1.4
—
—
—
1.4
—
n/a
n/a
Other
losses (gains) and expenses (d)
—
—
0.2
1.1
(0.2)
(1.1)
(100)
%
(100)
%
Adjusted
EBITDA
$
117.3
$
49.2
$
92.5
$
44.2
$
24.8
$
5.0
27
%
11
%
(a)Represents
costs and expenses in connection with restructuring initiatives in the three and six months ended March 31, 2022 and 2021, respectively. Such expenses are primarily composed of severance, relocation, and facility consolidation costs.
(b)Represents adjustments for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the acquisition of the Mar Cor Business.
(c)Represents costs associated with a change in the current estimate of certain acquisitions achieving their earn-out targets, as well as certain costs associated with the integration of the Mar Cor Business.
56
(d)Other
losses, (gains), and expenses as discussed above, distinct to our Integrated Solutions and Services (“ISS”) and Applied Product Technologies (“APT”) segments include the following:
Trailing
costs from the sale of the Memcor product line
$
—
$
—
$
—
$
—
$
—
$
—
$
—
$
0.2
Product
rationalization in electro-chlorination business
—
—
—
0.7
—
—
—
0.9
Loss
on divestiture of Lange product line
—
—
0.2
—
—
—
0.2
—
Total
$
—
$
—
$
0.2
$
0.7
$
—
$
—
$
0.2
$
1.1
Immaterial
rounding differences may be present in the tables above.
Liquidity and Capital Resources
Liquidity describes the ability of a company to borrow or generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. Our principal sources of liquidity are cash generated by our operating activities, borrowings under the 2021 Revolving Credit Facility, and financing arrangements related to capital expenditures for equipment used to provide services to our customers. Historically, we have financed our operations primarily from these sources. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness,
to fund working capital requirements, and to make capital expenditures.
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. Although neither moderate increases in net working capital nor the COVID-19 pandemic have materially impacted our liquidity to date, we plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary spending, and strategic investments. We believe we are currently well-positioned to manage our business and have the ability and sufficient capacity to meet our cash requirements by using available cash, internally generated funds, and borrowing under the 2021 Revolving Credit Facility.
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions,
including occasionally extending payment terms. We also facilitate a voluntary supply chain finance program (the “program”) to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payments on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. The amounts settled through the program and paid to participating financial institutions were $20.4 million and $13.9 million in the six months ended March 31,
2022 and 2021, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit to participation in the program.
We expect to continue to finance our liquidity requirements through internally generated funds, borrowings under the 2021 Revolving Credit Facility and equipment financing arrangements. We believe that our projected cash flows generated from operations, together with borrowings under the 2021 Revolving Credit Facility, and other financing arrangements are sufficient to fund our principal debt payments, interest expense, our working capital needs, and our expected capital expenditures for the next twelve months. Our capital expenditures for the six months ended March 31, 2022 and 2021
were $36.3 million and $36.3 million, respectively. However, our budgeted capital expenditures can vary from period to period based on the nature of capital intensive project awards. Our focus on customer outsourced water projects will continue to be a driver of capital expenditures. From time to time, we may enter into financing arrangements related to capital expenditures for equipment used to provide services to our customers. During the six months ended March 31, 2022 and 2021, we entered into equipment financing arrangements totaling $13.9 million and $14.0 million, respectively. In addition, we may draw on the 2021 Revolving Credit Facility from time to time to fund or partially fund an acquisition.
57
As
of March 31, 2022, we had total indebtedness of $945.4 million, including $471.4 million of term loan borrowings under the 2021 Credit Agreement, $221.1 million outstanding under the 2021 Revolving Credit Facility, $150.1 million outstanding under the Securitization Facility, which includes $0.1 million of accrued interest and $102.8 million in borrowings related to equipment financing. We also had $9.6 million of letters of credit issued under our 2021 Revolving Credit Facility as of March 31, 2022.
As of March 31, 2022 and September 30, 2021, we were in compliance with the covenants contained in the 2021 Credit Agreement, including the 2021 Revolving Credit Facility.
2021 Credit
Agreement
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 lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and ING Capital, LLC, as sustainability coordinator. The 2021 Credit Agreement provides for a multi-currency senior secured revolving credit facility in an aggregate principal amount not to exceed the U.S. dollar equivalent of $350.0 million (the “2021 Revolving Credit Facility”) and a discounted senior secured term (the “2021 Term Loan”) in the amount of $475.0 million (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 $60.0 million.
The
2021 Credit Agreement contains customary representations, warranties, affirmative covenants, and negative covenants, including, among other things, a springing maximum first lien leverage ratio of 5.55 to 1.00. The Company did not exceed this ratio during the six months ended March 31, 2022, does not anticipate exceeding this ratio during the year ending September 30, 2022, and therefore does not anticipate any additional repayments during the year ending September 30, 2022.
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, EWT LLC, 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 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”).
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 six months ended March 31, 2022, does not anticipate becoming noncompliant
during the year ending September 30, 2022, and therefore, subject to collateral availability, does not anticipate any additional repayments during the year ending September 30, 2022.
Evoqua Water Technologies Corp. is a holding company and does not conduct any business operations of its own. As a result, our ability to pay cash dividends on our common stock, if any, is dependent upon cash dividends and distributions and other transfers from our operating subsidiaries. Under the terms of the 2021 Credit Agreement, our operating subsidiaries are currently limited in their ability to pay cash dividends to us, and we expect these limitations to continue
in the future under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.
Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk, and prevent us from meeting our obligations.
58
Contractual Obligations
We presented our contractual obligations in Part II, Item 7, “Liquidity and Capital Resources” in our Annual Report on Form 10-K for the fiscal year ended September 30,
2021, as filed with the SEC on November 17, 2021. There were no significant changes in our contractual obligations during the six months ended March 31, 2022.
On January 3, 2022, we borrowed an additional $160 million under the 2021 Revolving Credit Facility. We are 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 agents and the arrangers under the Senior Facilities. 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.
Cash
Flows
The following table summarizes the changes to our cash flows for the periods presented:
Six Months Ended March 31,
(In millions)
2022
2021
Statement of Cash Flows Data
Net cash provided by operating activities
$
29.1
$
63.1
Net
cash used in investing activities
(230.6)
(44.0)
Net cash provided by financing activities
183.9
8.3
Effect of exchange rate changes on cash
0.9
2.3
Change
in cash and cash equivalents
$
(16.7)
$
29.7
Operating Activities
Cash flows from operating activities can fluctuate significantly from period‑to‑period as working capital needs and the timing of payments for restructuring activities and other items impact reported cash flows.
Net cash provided by operating activities totaled $29.1 million in the six months ended March 31, 2022, and $63.1 million in the six months ended March 31, 2021.
•Operating
cash flows in the six months ended March 31, 2022 reflect an increase in net earnings of $1.9 million as compared to the six months ended March 31, 2021.
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•The add back of non‑cash items increased operating cash flows by $76.7 million in the six months ended March 31, 2022, as compared to an increase to operating cash flows of $59.7 million in the six months ended March 31, 2021, resulting in an increase of $17.0 million. This increase was primarily related to the add back of foreign currency losses in the current period, compared to the deduction
of foreign currency gains in the prior period, as well as an increase in depreciation and amortization, and share-based compensation expenses in the current period. Non-cash changes also include deferred income taxes, amortization of deferred financing fees, gains and losses on sale of businesses, and gains and losses on sale of property, plant, and equipment.
•The aggregate of receivables, inventories, contract assets and liabilities, and accounts payable used $17.8 million in operating cash flows in the six months ended March 31, 2022, compared to providing $28.8 million in the six months ended March 31, 2021, resulting in a decrease to cash flows of $46.6 million as compared to the prior year period.
The
amount of cash flow generated from or used by the above mentioned accounts depends upon how effectively we manage our cash conversion cycle, which is a representation of the number of days that elapse from the date of purchase of raw materials and components to the collection of cash from customers. Our cash conversion cycle can be significantly impacted by the timing of collections and payments in a period.
•The aggregate of the remaining assets and liabilities used $43.3 million of operating cash flows in the six months ended March 31, 2022, compared to using $33.0 million in the six months ended March 31, 2021, resulting in a decrease to cash flows of $10.3 million. This is mainly due to timing of payments and timing of cash receipts on long-term receivables.
•Income
taxes provided $0.1 million during the six months ended March 31, 2022, as compared to using $3.9 million during the six months ended March 31, 2021, resulting in an increase to cash flows of $4.0 million as compared to the prior year period.
Investing Activities
Net cash used in investing activities was $230.6 million in the six months ended March 31, 2022, as compared to net cash used in investing activities of $44.0 million in the six months ended March 31, 2021, resulting in a net decrease of $186.6 million as compared to the prior year period. This decrease was largely driven by cash outflow associated with the acquisition of the Mar Cor Business in the current period.
Financing
Activities
Net cash provided by financing activities was $183.9 million in the six months ended March 31, 2022, as compared to providing $8.3 million in the six months ended March 31, 2021, resulting in a net increase of $175.6 million as compared to the prior year period. The increase in cash provided by financing activities for the six months ended March 31, 2022 was primarily due to an increased issuance of debt compared to the prior period. This increase was partially offset by increased repayments of debt as well as an increase of taxes paid related to net share settlements of share-based compensation awards compared to the prior period. Lastly, cash received from the issuance of common stock in connection with the exercise of stock options declined compared to the prior
period.
Seasonality
Our business may exhibit seasonality resulting from our customers’ increasing demand for our products and services during the spring and summer months as compared to the fall and winter months. For example, we generally experience increased demand for our odor control product lines and services in the warmer months which, together with other factors, typically results in improved performance in the second half of our fiscal year. Inclement weather and extreme weather events, such as hurricanes, winter storms, droughts, and floods, can also have varying impacts on our business. Certain events may cause customer shutdowns that prevent or defer our performance of services or sale of equipment, while other events may drive increased demand for our
products and services, particularly emergency response services. As a result, our results from operations may vary from period to period.
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Seasonal trends historically displayed by our business could be impacted by the COVID-19 pandemic, and past performance should not be considered indicative of future results.
The longest maturity date of the letters of credit and surety bonds in effect as of March 31, 2022 was March 20, 2030.
Critical Accounting Policies and Estimates
The Company’s significant accounting policies are described in Item 8., Note 2, “Summary of Significant
Accounting Policies” and Item 7., “Critical Accounting Policies and Estimates” included in the 2021 Annual Report. Any new accounting policies or updates to existing accounting policies as a result of new accounting pronouncements have been included in the Notes to the Unaudited Consolidated Financial Statements in Part I, Item 1 of this Report. The application of the Company’s accounting policies may require the use of estimates and assumptions. Management uses historical experience and all available information to make these estimates and assumptions. Estimates are revised as additional information becomes available. Actual results could differ from these estimates.
See Note 2, “Recent Accounting Pronouncements”in the Unaudited Consolidated Financial Statements in Item 1 of
this Report for a discussion of recently issued accounting guidance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the information concerning exposure to market risks as stated in Part I, Item 7A of the 2021 Annual Report.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange
Act”)) are designed to confirm that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC and to confirm that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report. Based on that evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of such date.
While
our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the quarterly period ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Part
II - Other Information
Item 1. Legal Proceedings
From time to time, we are subject to various claims, charges, and litigation matters that arise in the ordinary course of business. We believe these actions are a normal incident of the nature and kind of business in which we are engaged. While it is not feasible to predict the outcome of these matters with certainty, we do not believe that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations, or prospects.
In October 2020, the
Company learned that the SEC and the United States Attorney’s Office for the District of Massachusetts are investigating whether financial misstatements were made in the Company’s public filings and earnings announcements prior to October 2018, similar to what was alleged in a class action lawsuit filed in November 2018 captioned In re Evoqua Water Technologies Corp. Securities Litigation (the “Securities Litigation”), which was dismissed in November 2021 following Court approval of a settlement in the amount of $16.65 million, all of which was paid by insurance. The Company is cooperating with those investigations. Although the Company is unable to predict the outcome or reasonably estimate any potential
loss from the ongoing investigations, we currently believe that this matter will not have a material adverse effect on our business, financial condition, results of operations, or prospects.
Item 1A. Risk Factors
There have been no material changes to the information concerning risk factors as stated in our 2021 Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults
Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.
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Item 6. Exhibits
The
following exhibits are filed or furnished as a part of this report:
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
