EVOA WATEPAR 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 endedSeptember 30, 2022 , as filed with theSEC onNovember 16, 2022 (the "2022 Annual Report"). You should review the disclosures in Part I, Item 1A, "Risk Factors" in the 2022 Annual Report, Part II, Item 1A, "Risk Factors" in this Report, and 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 toEvoqua 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 inPittsburgh, Pennsylvania , with locations across nine countries. We have a comprehensive portfolio of differentiated, proprietary technologies offered under marketleading and wellestablished 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 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 reportable 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.
Proposed Merger with Xylem Inc.
OnJanuary 22, 2023 , the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Xylem Inc., anIndiana corporation ("Xylem"), andFore Merger Sub, Inc. , aDelaware corporation and a direct, wholly 38 --------------------------------------------------------------------------------
owned subsidiary of Xylem ("Merger Sub"), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a direct, wholly owned subsidiary of Xylem (the "Merger").
At the effective time of the Merger (the "Effective Time") and upon consummation of the Merger, subject to the terms and conditions set forth in the Merger Agreement, each share of the common stock, par value$0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time (other than treasury shares held by the Company and shares of the Company's common stock owned, directly or indirectly, by Xylem or Merger Sub) will be converted into and become exchangeable for 0.48 shares of common stock, par value$0.01 per share, of Xylem (the "Xylem Shares") to be issued by Xylem as consideration for the Merger. Cash will be issued in lieu of fractional shares. Upon the closing of the Merger, legacy Company stockholders will own approximately 25% and legacy Xylem shareholders will own approximately 75% of the combined company. The consummation of the Merger is subject to the satisfaction or waiver of certain customary mutual conditions, including (a) the receipt of the required approvals from the Company's stockholders and Xylem's shareholders at meetings currently scheduled forMay 11, 2023 , (b) receipt of required regulatory approvals under antitrust and foreign investment laws in applicable jurisdictions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act (collectively, "Regulatory Clearances") (at11:59 p.m. Eastern Time onMarch 6, 2023 , the 30-day Hart-Scott-Rodino waiting period expired without issuance of a Request for Additional Information and Documentary Material), (c) the absence of any temporary or permanent order, injunction, law or other legal restraint prohibiting or making illegal the consummation of the Merger, (d) the Xylem Shares issuable to the stockholders of the Company in connection with the Merger having been approved for listing on theNew York Stock Exchange , subject to official notice of issuance, and (e) Xylem's registration statement on Form S-4 having been declared effective under the Securities Act of 1933 (the registration statement was declared effective by theSEC onApril 6, 2023 ). The obligation of each party to consummate the Merger is also conditioned upon (a) the accuracy of the representations and warranties of the other party as of the date of the Merger Agreement and as of the closing (subject to customary materiality qualifiers) and (b) compliance by the other party in all material respects with its respective pre-closing obligations under the Merger Agreement. Subject to the satisfaction or waiver of the conditions to the closing, the Merger is expected to close in mid-2023. The Merger Agreement contains certain termination rights that may be exercised by either the Company or Xylem. In certain of those cases, we may be required to pay Xylem a termination fee of$225.0 million . In connection with the Merger, the Company recognized costs of$10.0 million and$10.2 million for the three and six months endedMarch 31, 2023 , respectively, included in General and administrative expenses in the Unaudited Consolidated Statements of Operations. These costs primarily relate to legal and consulting fees incurred in connection with the Merger. For further information on the Merger Agreement, refer to the Merger Agreement, a copy of which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed with theSEC onJanuary 23, 2023 .
Other Recent Developments, Key Factors and Trends Affecting Our Business and Financial Statements
Our 2022 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.
Macroeconomic conditions. Material, freight, and labor inflation resulted in
increased costs in the second quarter of fiscal 2023. 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 offset
all or any portion of these increased costs in future periods. 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 2023 and negatively
impact revenues. We have increased inventory levels to meet current order
demand. 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
39
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customers. Although these factors did not have a material adverse effect on our
results of operations for the six months ended March 31, 2023 , if sustained,
they could have a material adverse effect on our results of operations going
forward.
In an effort to combat inflation, central banks began raising interest rates in
the latter half of fiscal 2022, and interest rates are expected to continue to
increase throughout the remainder of fiscal 2023. We do not believe that our
exposure to rising interest rates in the near term will have a material impact
on our business, financial condition, results of operations, or prospects, but
if sustained over longer periods, this could have a material adverse effect on
our results of operations. We plan to continue to evaluate aspects of our
spending, including capital expenditures, discretionary spending, and strategic
investments in the remainder of fiscal 2023.
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 six months ended March 31, 2023 , we expect the inflationary
impact on energy, fuel and steel prices to continue throughout the remainder of
fiscal 2023. 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. During the six months ended March 31, 2023 , we
paid cash of $38 thousand as a result of net working capital adjustments related
to the acquisition of Epicor, Inc. that we completed in fiscal 2022, and we
received cash of $1.8 million as a result of net working capital adjustments
related to the acquisition of the Mar Cor Business that we completed in fiscal
2022, and $12.3 million of cash was released from escrow to the Company related
to the Earn Out asset.
On March 31, 2023 , the Company completed its divestiture of its blood filter and
water filter product lines that are sold into renal and other medical
applications (the "Filtration Business") to Medica USA Inc. , a subsidiary of
Medica S.p.A. ("Medica"), for $67 thousand in cash at closing, resulting in a
loss on sale of $2.9 million , which is included in Other operating expense on
the Consolidated Statements of Operations. The Filtration Business was included
in the Integrated Solutions and Services segment and was determined by
management not to be core to the Company's long-term business strategy or
operations. The Company entered into a supply agreement with Medica under which
the Company will purchase water filters used by its customers in the Company's
dialysis water systems.
On February 28, 2023 , the Company completed its acquisition of the Texas -based
industrial water service business accounts and deionization and carbon tank
assets of Kemco Systems ("Kemco") for $900 thousand in cash at closing. This
acquisition expands the Company's service and aftermarket business in the Texas
market while strengthening the Company's ability to better support and service
its industrial customers in the region. The acquired business is included within
the Integrated Solutions and Services segment.
On February 14, 2023 , the Company entered into a definitive agreement to divest
its carbon reactivation and slurry operations (the "Carbon Business") to Desotec
US LLC , a subsidiary of Desotec N.V. As of March 31, 2023 , the transaction had
not closed and is expected to close in the third quarter of fiscal 2023. Gross
proceeds upon closing of the transaction are anticipated to be $100.0 million
and the Company expects to record a gain on sale. The assets and liabilities of
the Carbon Business met the accounting criteria to be classified as held for
sale on the Consolidated Balance Sheets at March 31, 2023 . The sale of the
Carbon Business will allow the Company to focus on its core service business,
which includes carbon services and the sale of high-quality activated carbon. At
the closing of the transaction, the Company will enter into a supply agreement
with Desotec under which the Company will purchase reactivated carbon to
continue to service its customers. The Carbon Business is included in the
Integrated Solutions and Services segment.
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 inthe 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 EBITDA and adjusted EBITDA, as described more fully below. We evaluate our business segments' operating results based on revenue, income from operations ("operating profit"), and adjusted EBITDA on a segment basis. We believe 40 --------------------------------------------------------------------------------
these financial measures are helpful in understanding and evaluating the segments' core operating results and facilitates comparison of our performance on a consistent basis period over period.
Revenue
Our 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 and aftermarket) and revenue from service. Revenue is used by management to evaluate the performance of our business. Revenue growth is primarily related to organic and inorganic factors. Organic revenue growth, as a component of revenue growth, is defined as period over period revenue growth without (i) the impact from acquisitions and divestitures during the first 12 months following the closing of the acquisition or divestiture, which we refer to as inorganic impact, and (ii) the impact of foreign currency translation. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. We disregard the effect of foreign currency translation from organic revenue growth because foreign currency translation is not under management's control, is subject to volatility and can obscure underlying business trends. The effect of acquisitions and divestitures during the first 12 months following the closing of the acquisition or divestiture are disregarded 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.
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 operating
profit 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
41
--------------------------------------------------------------------------------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.
42
--------------------------------------------------------------------------------Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
Three Months Ended March 31,
2023 2022
(In millions, except per share amounts) % of Revenue % of Revenue % Variance
Revenue from product sales and services$ 477.8 100.0 %$ 426.7 100.0 % 12.0 % Gross profit$ 151.9 31.8 %$ 128.9 30.2 % 17.8 % Total operating expenses$ (125.6) (26.3) %$ (110.6) (25.9) %
13.6 %
Other operating (expense) income, net$ (2.9) (0.6) %$ 1.3 0.3 % (323.1) % Interest expense$ (10.3) (2.2) %$ (10.0) (2.3) % 3.0 % Income before income taxes$ 13.1 2.7 %$ 9.6 2.2 % 36.5 % Income tax expense$ (2.5) (0.5) %$ (2.2) (0.5) % 13.6 % Net income$ 10.6 2.2 %$ 7.4 1.7 % 43.2 % Net income attributable to noncontrolling interest $ - - %$ 0.1 - % $
-
Net income attributable to Evoqua Water Technologies Corp.$ 10.6 2.2 %$ 7.3 1.7 %
45.2 %
Weighted average shares outstanding Basic 122.2 120.9 Diluted 125.8 125.0 Earnings per share Basic$ 0.09 $ 0.06 Diluted$ 0.08 $ 0.06 Other financial data: Adjusted EBITDA(1)$ 88.5 18.5 %$ 73.2 17.2 % 20.9 % Six Months Ended March 31, 2023 2022 (In millions, except per share amounts) % of Revenue % of Revenue %
Variance
Revenue from product sales and services$ 913.6 100.0 %$ 793.0 100.0 % 15.2 % Gross profit$ 282.2 30.9 %$ 239.4 30.2 % 17.9 % Total operating expenses$ (233.9) (25.6) %$ (208.3) (26.3) %
12.3 %
Other operating (expense) income, net$ (1.6) (0.2) %$ 2.8 0.4 % (157.1) % Interest expense$ (20.4) (2.2) %$ (16.5) (2.1) % 23.6 % Income before income taxes$ 26.3 2.9 %$ 17.4 2.2 % 51.1 % Income tax expense$ (6.4) (0.7) %$ (3.9) (0.5) % 64.1 % Net income$ 19.9 2.2 %$ 13.5 1.7 % 47.4 % Net income attributable to noncontrolling interest $ - - %$ 0.2 - % (100.0) % Net income attributable to Evoqua Water Technologies Corp.$ 19.9 2.2 %$ 13.3 1.7 %
49.6 %
Weighted average shares outstanding Basic 122.0 120.8 Diluted 125.5 124.9 Earnings per share Basic$ 0.16 $ 0.11 Diluted$ 0.16 $ 0.11 Other financial data: Adjusted EBITDA(1)$ 161.2 17.6 %$ 127.5 16.1 % 26.4 % 43
-------------------------------------------------------------------------------- (1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to net income, its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report.
Consolidated Results for the Three Months Ended
Revenue-Revenue increased$51.1 million , or 12.0%, to$477.8 million in the three months endedMarch 31, 2023 , from$426.7 million in the three months endedMarch 31, 2022 . Revenue from product sales increased$32.9 million , or 12.7%, to$292.7 million in the three months endedMarch 31, 2023 , from$259.8 million in the three months endedMarch 31, 2022 . Revenue from services increased$18.2 million , or 10.9%, to$185.1 million in the three months endedMarch 31, 2023 , from$166.9 million in the three months endedMarch 31, 2022 . The following tables provide the change in revenue by offering and by the components that contributed to revenue growth during the three months endedMarch 31, 2023 and 2022: Three Months Ended March 31, 2023 2022 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 292.7 61.3 %$ 259.8 60.9 %$ 32.9 12.7 % Capital 187.2 39.2 % 162.5 38.1 % 24.7 15.2 % Aftermarket 105.5 22.1 % 97.3 22.8 % 8.2 8.4 % Revenue from services 185.1 38.7 % 166.9 39.1 % 18.2 10.9 %$ 477.8 100.0 %$ 426.7 100.0 %$ 51.1 12.0 % (In millions) $ Change % Change
Three months ended
n/a
Organic 49.6 11.6 %
Inorganic 5.3 1.2 %
Foreign currency translation (3.8) (0.8) %
Three months ended
The increase in organic revenue was driven by favorable price realization and higher volume, which contributed to growth across most regions and product lines.
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 increased to 31.8% in the
three months ended
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
Three Months Ended March 31,
2023 2022
Gross Gross
(In millions) Margin Margin
Cost of product sales $ (203.1) 30.6 % $
(185.3) 28.7 %
Cost of services (122.8) 33.7 % (112.5) 32.6 %
$ (325.9) 31.8 % $ (297.8) 30.2 %
Gross margin from product sales increased by 190 basis points ("bps") to 30.6%
in the three months ended March 31, 2023 , from 28.7% in the three months ended
March 31, 2022 . This increase was driven by positive price realization,
44
--------------------------------------------------------------------------------favorable volume across most regions and end markets, as well as sales mix, which was partially offset by labor, material, and freight inflation.
Gross margin from services increased by 110 bps to 33.7% in the three months endedMarch 31, 2023 , from 32.6% in the three months endedMarch 31, 2022 . This increase was driven by favorable price realization, partially offset by material and labor inflation as well as field service productivity variances. We expect continued pressure on gross margin in future periods due to material, freight and labor inflation. Although we expect to continue to offset increasing costs with positive price realization, there can be no assurance that we will be able to do so. Operating expenses-Operating expenses increased$15.0 million , or 13.6%, to$125.6 million in the three months endedMarch 31, 2023 , from$110.6 million in the three months endedMarch 31, 2022 . Operating expenses are comprised of the following: Three Months Ended March 31, 2023 2022 (In millions) % of Revenue % of Revenue % Variance General and administrative expense$ (77.8) (16.3) %$ (67.0) (15.7) % 16.1 % Sales and marketing expense (43.2) (9.0) % (39.8) (9.3) % 8.5 % Research and development expense (4.6) (1.0) % (3.8) (0.9) % 21.1 % Total operating expenses$ (125.6) (26.3) %$ (110.6) (25.9) % 13.6 % The increase period over period in operating expenses was primarily due to an increase in external legal fees and other consulting fees, as well as employee related costs and travel. These increases were partially offset by foreign currency translation gains in the current period, compared to foreign currency translation losses in the prior period, most of which is related to intercompany loans, and lower amortization in the current period.
Fluctuations in foreign currency translation and inflation could impact operating expenses in future periods.
Other operating expense, net-Other operating expense, net, decreased$4.2 million to expense of$2.9 million in the three months endedMarch 31, 2023 , from income of$1.3 million in the three months endedMarch 31, 2022 . This decrease was primarily driven by a loss on sale of the Filtration Business of$2.9 million and impairment of certain long-lived assets related to product rationalization in the electro-chlorination business of$1.7 million . These losses were partially offset by gains on the disposal of fixed assets. The prior year period included income from the disposal of fixed assets and precious metal sales, and a refund of certain taxes paid from the Chinese government.
Interest expense-Interest expense increased
Income tax expense-Income tax expense increased to$2.5 million in the three months endedMarch 31, 2023 , as compared to income tax expense of$2.2 million in the three months endedMarch 31, 2022 . The increase in tax expense was primarily due to higher projected annual effective tax rates as well as higher projectedU.S. income, which is no longer offset by maintaining a valuation allowance againstU.S. deferred tax assets. This increase was mostly offset by a favorable discrete item related to the impact of tax deductions greater than those for financial reporting related to equity compensation. Net income-Net income increased$3.2 million , or 43.2%, to$10.6 million in the three months endedMarch 31, 2023 , from$7.4 million in the three months endedMarch 31, 2022 , as a result of the variances noted above. Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the three months endedMarch 31, 2023 increased by$15.3 million , or 20.9%, to$88.5 million , as compared to$73.2 million for the three months endedMarch 31, 2022 , primarily driven by favorable price realization, mix, and sales volume, which was partially offset by inflationary costs. See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of adjusted EBITDA. 45 --------------------------------------------------------------------------------
Segment Results
Three Months Ended March 31,
2023 2022
(In millions) % of Total % of Total % Variance
Revenue
Integrated Solutions and Services $ 328.9 68.8 % $ 294.8 69.1 % 11.6 %
Applied Product Technologies 148.9 31.2 % 131.9 30.9 % 12.9 %
Total Consolidated $ 477.8 100.0 % $ 426.7 100.0 % 12.0 %
Operating profit (loss)
Integrated Solutions and Services $ 43.1 184.2 % $ 38.1 194.4 % 13.1 %
Applied Product Technologies 28.6 122.2 % 23.0 117.3 % 24.3 %
Corporate (48.3) (206.4) % (41.5) (211.7) % 16.4 %
Total Consolidated $ 23.4 100.0 % $ 19.6 100.0 % 19.4 %
Adjusted EBITDA(1)
Integrated Solutions and Services $ 75.9 85.8 % $ 63.8 87.2 % 19.0 %
Applied Product Technologies 33.0 37.3 % 27.3 37.3 % 20.9 %
Corporate (20.4) (23.1) % (17.9) (24.5) % 14.0 %
Total Consolidated $ 88.5 100.0 % $ 73.2 100.0 % 20.9 %
(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
The following tables provide the change in revenue by offering and by the
components that contributed to revenue growth during the three months ended
Three Months Ended March 31,
2023 2022
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 148.6 45.2 % $ 133.0 45.1 % $ 15.6 11.7 %
Capital 87.8 26.7 % 70.7 24.0 % 17.1 24.2 %
Aftermarket 60.8 18.5 % 62.3 21.1 % (1.5) (2.4) %
Revenue from services 180.3 54.8 % 161.8 54.9 % 18.5 11.4 %
$ 328.9 100.0 % $ 294.8 100.0 % $ 34.1 11.6 %
(In millions) $ Change % Change
Three months ended
n/a
Organic 29.6 10.0 %
Inorganic 5.3 1.8 %
Foreign currency translation (0.8) (0.2) %
Three months ended
The increase in organic revenue was primarily driven by favorable price
realization related to service revenue across most end markets. Organic revenue
growth also benefited from increased volume, particularly as it relates to
service and capital revenue. These increases were slightly offset by a decline
in aftermarket volume.
46
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Operating profit in the Integrated Solutions and Services segment increased $5.0
million , or 13.1%, to $43.1 million in the three months ended March 31, 2023 ,
from $38.1 million in the three months ended March 31, 2022 .
[[Image Removed: 6060]]
Operating profit was favorably impacted primarily by increased revenue, which
was partially offset by operational variances. Increased revenue was
attributable to price realization, sales volume, and mix. Operational variances
were driven by material, labor, and freight inflation and availability, and
productivity variances.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the
Integrated Solutions and Services segment increased $12.1 million , or 19.0%, to
$75.9 million in the three months ended March 31, 2023 , compared to $63.8
million in the three months ended March 31, 2022 . The increase was driven by the
same factors that impacted operating profit, other than the change in
depreciation and amortization, and also excludes restructuring and other
non-recurring activity. 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$17.0 million , or 12.9%, to$148.9 million in the three months endedMarch 31, 2023 , from$131.9 million in the three months endedMarch 31, 2022 .
The following tables provide the change in revenue by offering and by the
components that contributed to revenue growth during the three months ended
Three Months Ended March 31,
2023 2022
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 144.1 96.8 % $ 126.8 96.1 % $ 17.3 13.6 %
Capital 99.4 66.8 % 91.8 69.6 % 7.6 8.3 %
Aftermarket 44.7 30.0 % 35.0 26.5 % 9.7 27.7 %
Revenue from services 4.8 3.2 % 5.1 3.9 % (0.3) (5.9) %
$ 148.9 100.0 % $ 131.9 100.0 % $ 17.0 12.9 %
(In millions) $ Change % Change
Three months ended
n/a
Organic 20.0 15.2 %
Inorganic - - %
Foreign currency translation (3.0) (2.3) %
Three months ended
47
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The increase in organic revenue was driven by strong sales volume and price
realization across all regions and end markets. The strongest growth came in the
Operating profit in the Applied Product Technologies segment increased
[[Image Removed: 7460]]
Operating profit was favorably impacted by increased revenue, which was
partially offset by operational variances. Increased revenue was attributable to
sales volume, price realization, and sales mix across most regions and product
lines. Operational variances were driven by labor and material inflation and
availability.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied
Product Technologies segment increased $5.7 million , or 20.9%, to $33.0 million
in the three months ended March 31, 2023 , compared to $27.3 million in the three
months ended March 31, 2022 . The increase was driven by the same factors that
impacted operating profit, other than the change in depreciation and
amortization, and also excludes restructuring and other non-recurring activity.
See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of
adjusted EBITDA.
Corporate
Operating loss in Corporate increased $6.8 million , or 16.4%, to $48.3 million
in the three months ended March 31, 2023 , from $41.5 million in the three months
ended March 31, 2022 . The increase was primarily due to higher legal expenses
associated with various matters and pending transactions, increased third party
consulting fees and the impairment of certain long-lived assets related to
product rationalization in the electro-chlorination business of $1.7 million in
the current year period. These increased costs were partially offset by foreign
currency translation gains in the current period, compared to foreign currency
translation losses in the prior period, most of which is related to intercompany
loans.
Consolidated Results for the Six Months Ended
Revenue-Revenue increased$120.6 million , or 15.2%, to$913.6 million in the six months endedMarch 31, 2023 , from$793.0 million in the six months endedMarch 31, 2022 . Revenue from product sales increased$80.7 million , or 17.1%, to$553.0 million in the six months endedMarch 31, 2023 , from$472.3 million in the six months endedMarch 31, 2022 . Revenue from services increased$39.9 million , or 12.4%, to$360.6 million in the six months endedMarch 31, 2023 , from$320.7 million in the six months endedMarch 31, 2022 . 48 --------------------------------------------------------------------------------
The following tables provide the change in revenue by offering and the change in
revenue by driver during the six months ended
Six Months Ended March 31,
2023 2022
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 553.0 60.5 % $ 472.3 59.6 % $ 80.7 17.1 %
Capital $ 352.9 38.6 % $ 313.5 39.5 % $ 39.4 12.6 %
Aftermarket 200.1 21.9 % 158.8 20.0 % 41.3 26.0 %
Revenue from services 360.6 39.5 % 320.7 40.4 % 39.9 12.4 %
$ 913.6 100.0 % $ 793.0 100.0 % $ 120.6 15.2 %
(In millions) $ Change % Change
Six Months Ended March 31, 2022 total revenue $ 793.0 n/a
Organic 82.8 10.4 %
Inorganic $ 48.2 6.1 %
Foreign currency translation (10.4) (1.3) %
Six Months Ended March 31, 2023 total revenue $ 913.6 15.2 %
The increase in organic revenue was driven by favorable price realization and higher sales volume across most product lines and regions.
Cost of sales and gross margin-Total gross margin increased to 30.9% in the six
months ended
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
Six Months Ended March 31,
2023 2022
Gross Gross
(In millions) Margin Margin
Cost of product sales $(388.1) 29.8 %$ (339.1) 28.2 % Cost of services (243.3) 32.5 % (214.5) 33.1 %$ (631.4) 30.9 %$ (553.6) 30.2 % Gross margin from product sales increased by 160 bps to 29.8% in the six months endedMarch 31, 2023 , from 28.2% in the six months endedMarch 31, 2022 . The increase in gross margin was primarily driven by favorable price realization as well as improved sales volume and product mix. These factors were partially offset by labor, material and freight inflation. Gross margin from services decreased by 60 bps to 32.5% in the six months endedMarch 31, 2023 , from 33.1% in the six months endedMarch 31, 2022 . This decrease was driven by increased labor costs and resource constraints. 49 -------------------------------------------------------------------------------- Operating expenses-Operating expenses increased$25.6 million , or 12.3%, to$233.9 million in the six months endedMarch 31, 2023 , from$208.3 million in the six months endedMarch 31, 2022 . Operating expenses are comprised of the following: Six Months Ended March 31, 2023 2022 (In millions) % of Revenue % of Revenue % Variance General and administrative expense$ (141.8) (15.5) %$ (124.8) (15.7) % 13.6 % Sales and marketing expense (83.7) (9.2) % (76.3) (9.6) % 9.7 % Research and development expense (8.4) (0.9) % (7.2) (0.9) % 16.7 % Total operating expenses$ (233.9) (25.6) %$ (208.3) (26.3) % 12.3 % The increase period over period in operating expenses was primarily due to an increase in legal fees, as well as higher employee related expenses associated with labor inflation. In addition, there were increased consulting and travel expenses. The above increases were partially offset by foreign currency translation gains in the current period, compared to foreign currency translation losses in the prior period, most of which is related to intercompany loan, as well as lower fees associated with recruitment.
Fluctuations in foreign currency translation and inflation could impact operating expenses in future periods.
Other operating expense, net-Other operating expense, net, increased$4.4 million to expense of$1.6 million in the six months endedMarch 31, 2023 , from income of$2.8 million in the six months endedMarch 31, 2022 . This decrease was primarily driven by a loss on sale of the Filtration Business of$2.9 million and impairment of certain long-lived assets related to product rationalization in the electro-chlorination business of$1.7 million . These losses were partially offset by gains on the disposal of fixed assets. The prior year period included income from the disposal of fixed assets and precious metal sales, and a refund of certain taxes paid from the Chinese government. Interest expense-Interest expense increased$3.9 million , or 23.6%, to$20.4 million in the six months endedMarch 31, 2023 , from$16.5 million in the six months endedMarch 31, 2022 . The increase in interest expense was primarily driven by an increase in LIBOR year over year. Income tax expense-Income tax expense increased$2.5 million to$6.4 million in the six months endedMarch 31, 2023 , from$3.9 million in the six months endedMarch 31, 2022 . The increase in tax expense was primarily due to higher projected annual effective tax rates as well as higher projectedU.S. income, which is no longer offset by maintaining a valuation allowance againstU.S. deferred tax assets. This increase was partially offset by a favorable discrete item related to the impact of tax deductions greater than those for financial reporting related to equity compensation.
Net income-Net income increased
Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the six months endedMarch 31, 2023 increased by$33.7 million , or 26.4%, to$161.2 million , as compared to$127.5 million for the six months endedMarch 31, 2022 , 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. 50 --------------------------------------------------------------------------------
Segment Results
Six Months Ended March 31,
2023 2022
(In millions) % of Total % of Total % Variance
Revenue
Integrated Solutions and Services $ 634.3 69.4 % $ 539.9 68.1 % 17.5 %
Applied Product Technologies 279.3 30.6 % 253.1 31.9 % 10.4 %
Total Consolidated $ 913.6 100.0 % $ 793.0 100.0 % 15.2 %
Operating profit (loss)
Integrated Solutions and Services $ 85.8 183.7 % $ 73.4 216.5 % 16.9 %
Applied Product Technologies 49.6 106.2 % 40.8 120.4 % 21.6 %
Corporate (88.7) (189.8) % (80.3) (236.9) % 10.5 %
Total Consolidated $ 46.7 100.0 % $ 33.9 100.0 % 37.8 %
Adjusted EBITDA(1)
Integrated Solutions and Services $ 145.0 90.0 % $ 117.3 92.0 % 23.6 %
Applied Product Technologies 57.5 35.7 % 49.2 38.6 % 16.9 %
Corporate (41.3) (25.6) % (39.0) (30.6) % 5.9 %
Total Consolidated $ 161.2 100.0 % $ 127.5 100.0 % 26.4 %
(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
The following tables provide the change in revenue by offering and the change in revenue by driver during the six months endedMarch 31, 2023 and 2022 for the Integrated Solutions and Services segment: Six Months Ended March 31, 2023 2022 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 283.6 44.7 %$ 229.4 42.5 %$ 54.2 23.6 % Capital 165.4 26.1 % 137.8 25.5 % 27.6 20.0 % Aftermarket 118.2 18.6 % 91.6 17.0 % 26.6 29.0 % Revenue from services 350.7 55.3 % 310.5 57.5 % 40.2 12.9 %$ 634.3 100.0 %$ 539.9 100.0 %$ 94.4 17.5 % (In millions) $ Change % Change Six Months Ended March 31, 2022 total revenue$ 539.9 n/a Organic 48.0 8.9 % Inorganic 48.2 8.9 % Foreign currency translation (1.8) (0.3) % Six Months Ended March 31, 2023 total revenue$ 634.3 17.5 %
The increase in organic revenue was driven by strong price realization across most end markets and higher sales volume. This volume growth was primarily driven by service and capital revenue.
51
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Operating profit in the Integrated Solutions and Services segment increased
[[Image Removed: 5510]]
Operating profit was favorably impacted primarily by increased revenue, which
was partially offset by operational variances. Increased revenue was
attributable to price realization and higher organic sales volume and mix.
Operational variances were driven by labor and material inflation and
availability. Acquisitions also contributed to the increase in operating profit,
primarily associated with the impacts of the Mar Cor Business and Smith
Engineering transactions.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the
Integrated Solutions and Services segment increased $27.7 million , or 23.6%, to
$145.0 million in the six months ended March 31, 2023 , compared to $117.3
million in the six months ended March 31, 2022 . The increase was driven by the
same factors that impacted operating profit, other than the change in
depreciation and amortization, and also excludes restructuring and other
non-recurring activity. 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$26.2 million , or 10.4%, to$279.3 million in the six months endedMarch 31, 2023 , from$253.1 million in the six months endedMarch 31, 2022 . The following tables provide the change in revenue by offering and the change in revenue by driver during the six months endedMarch 31, 2023 and 2022 for the Applied Product Technologies segment: Six Months Ended March 31, 2023 2022 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 269.4 96.5 %$ 242.9 96.0 %$ 26.5 10.9 % Capital$ 187.5 67.2 %$ 175.7 69.4 %$ 11.8 6.7 % Aftermarket 81.9 29.3 % 67.2 26.6 % 14.7 21.9 % Revenue from services 9.9 3.5 % 10.2 4.0 % (0.3) (2.9) %$ 279.3 100.0 %$ 253.1 100.0 %$ 26.2 10.4 % (In millions) $ Change % Change Six Months Ended March 31, 2022 total revenue$ 253.1 n/a Organic 34.8 13.7 % Inorganic - - % Foreign currency translation (8.6) (3.3) %
Six Months Ended
52
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The increase in organic revenue was driven by volume growth and price
realization across all regions and multiple product lines.The strongest growth
came in the
Operating profit in the Applied Product Technologies segment increased
[[Image Removed: 7162]]
Operating profit was favorably impacted primarily by increased revenue, which
was partially offset by operational variances. Increased revenue was
attributable to sales volumes across multiple product lines and regions, as well
as favorable price realization and sales mix. Operational variances were driven
by project variances and labor and material inflation and availability.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied
Product Technologies segment increased $8.3 million , or 16.9%, to $57.5 million
in the six months ended March 31, 2023 , compared to $49.2 million in the six
months ended March 31, 2022 . The increase was driven by the same factors that
impacted operating profit, other than the change in depreciation and
amortization, and also excludes restructuring and other non-recurring activity.
See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of
adjusted EBITDA.
Corporate
Operating loss in Corporate increased $8.4 million , or 10.5%, to $88.7 million
in the six months ended March 31, 2023 , from $80.3 million in the six months
ended March 31, 2022 . The increase was primarily due to higher costs associated
with legal matters, increased share based compensation and the impairment of
certain long-lived assets related to product rationalization in the
electro-chlorination business of $1.7 million in the current year period. These
amounts were partially offset by lower third party consulting fees associated
with acquisitions which occurred in the prior year.
53
--------------------------------------------------------------------------------Non-GAAP Reconciliations
The following is a reconciliation of our Net income to EBITDA and adjusted
EBITDA. See "How We Assess the Performance of Our Business" in this Item 2 for
discussion on management's definition and use of this non-GAAP financial
measure.
Three Months Ended Six Months Ended
March 31, March 31,
(In millions) 2023 2022 % Variance 2023 2022 % Variance
Net income $ 10.6 $ 7.4 43.2 % $ 19.9 $ 13.5 47.4 %
Income tax expense 2.5 2.2 13.6 % 6.4 3.9 64.1 %
Interest expense 10.3 10.0 3.0 % 20.4 16.5 23.6 %
Operating profit $ 23.4 $ 19.6 19.4 % $ 46.7 $ 33.9 37.8 %
Depreciation and amortization 33.4 32.6 2.5 % 66.6 61.2 8.8 %
EBITDA $ 56.8 $ 52.2 8.8 % $ 113.3 $ 95.1 19.1 %
Restructuring and related business
transformation costs(a) 1.4 1.8 (22.2) % 3.1 3.2 (3.1) %
Purchase accounting adjustment
costs(b) - 2.6 (100.0) % - 2.6 (100.0) %
Share-based compensation(c) 6.9 6.1 13.1 % 13.2 11.4 15.8 %
Transaction costs(d) 18.0 4.0 350.0 % 21.3 4.9 334.7 %
Other losses (gains) and
expenses(e) 5.4 6.5 (16.9) % 10.3 10.3 - %
Adjusted EBITDA $ 88.5 $ 73.2 20.9 % $ 161.2 $ 127.5 26.4 %
(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;
(B)amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure.
(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. Memcor is a trademark ofRohm & Haas Electronic Materials Singapore Pte. Ltd.
(iii)Expenses associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes.
54
--------------------------------------------------------------------------------(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.
(c)Share-based compensation
Adjusted EBITDA is calculated prior to considering sharebased 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 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.
(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)legal fees and settlement costs incurred in excess of amounts covered by the
Company's insurance related to securities litigation and
(iii)loss on sale of the Filtration Business within the Integrated Solutions and Services Segment; and
(iv)impairment of certain long-lived assets related to product rationalization in the electro-chlorination business.
55
--------------------------------------------------------------------------------
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,
2023 2022 $ Variance % Variance
Integrated Integrated Integrated Integrated
Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product
(In millions) Services Technologies Services Technologies Services Technologies Services Technologies
Operating profit $ 43.1 $ 28.6 $ 38.1 $ 23.0 $ 5.0 $ 5.6 13 % 24 %
Depreciation and amortization 23.4 3.6 21.4 3.4 2.0 0.2 9 % 6 %
EBITDA $ 66.5 $ 32.2 $ 59.5 $ 26.4 $ 7.0 $ 5.8 12 % 22 %
Restructuring and related
business transformation costs
(a) 0.6 0.5 0.2 0.9 0.4 (0.4) 200 % (44) %
Purchase accounting adjustment
costs (b) - - 2.6 - (2.6) - (100) % n/a
Transaction costs (c) 5.9 0.2 1.5 - 4.4 0.2 293 % n/a
Other losses (gains) and
expenses (d) 2.9 0.1 - - 2.9 0.1 n/a n/a
Adjusted EBITDA $ 75.9 $ 33.0 $ 63.8 $ 27.3 $ 12.1 $ 5.7 19 % 21 %
Six Months Ended March 31,
2023 2022 $ Variance % Variance
Integrated Integrated Integrated Integrated
Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product
(In millions) Services Technologies Services Technologies Services Technologies Services Technologies
Operating profit $ 85.8 $ 49.6 $ 73.4 $ 40.8 $ 12.4 $ 8.8 17 % 22 %
Depreciation and amortization 46.0 7.0 39.2 6.9 6.8 0.1 17 % 1 %
EBITDA $ 131.8 $ 56.6 $ 112.6 $ 47.7 $ 19.2 $ 8.9 17 % 19 %
Restructuring and related
business transformation costs
(a) 2.1 0.6 0.7 1.5 1.4 (0.9) 200 % (60) %
Purchase accounting adjustment
costs (b) - - 2.6 - (2.6) - (100) % n/a
Transaction costs (c) 8.2 0.2 1.4 - 6.8 0.2 486 % n/a
Other losses (gains) and
expenses (d) 2.9 0.1 - - 2.9 0.1 n/a n/a
Adjusted EBITDA $ 145.0 $ 57.5 $ 117.3 $ 49.2 $ 27.7 $ 8.3 24 % 17 %
(a)Represents costs and expenses in connection with restructuring initiatives in
the three and six months ended
(b)Represents 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 divestitures or the integration of recent acquisitions.
(d)Represents loss on sale of the Filtration Business within the Integrated Solutions and Services segment.
Immaterial rounding differences may be present in the tables above.
56
--------------------------------------------------------------------------------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 bank financing and the capital markets. In support of international operations, portions of our cash balances are held in various currencies and may be subject to foreign currency translation and other costs associated with repatriation, if necessary. Neither moderate increases in net working capital nor macroeconomic conditions have materially impacted our liquidity to date. In addition, we do not believe that our exposure to rising interest rates will have a material impact on our business, financial condition, results of operations, or prospects, and we plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary spending, and strategic investments in fiscal 2023. 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$48.3 million and$20.4 million in the six months endedMarch 31, 2023 and 2022, 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 and borrowings under the 2021 Revolving Credit Facility. 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 short-term and long-term principal debt payments, interest expense, working capital needs, and expected capital expenditures for at least the next twelve months and the foreseeable future thereafter. Our capital expenditures for the six months endedMarch 31, 2023 and 2022 were$53.2 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 endedMarch 31, 2023 and 2022, we entered into equipment financing arrangements totaling$16.7 million and$13.9 million , respectively. In addition, we may draw on the 2021 Revolving Credit Facility from time to time to fund or partially fund an acquisition. As ofMarch 31, 2023 , we had total indebtedness of$881.9 million , including$466.7 million of term loan borrowings under the 2021 Credit Agreement,$140.2 million outstanding under the 2021 Revolving Credit Facility,$145.3 million outstanding under the Securitization Facility, which includes$0.3 million of accrued interest, and$129.7 million in borrowings related to equipment financing. We also had$7.4 million of letters of credit issued under our 2021 Revolving Credit Facility as ofMarch 31, 2023 .
As of
57
--------------------------------------------------------------------------------2021 Credit Agreement
OnApril 1, 2021 ,EWT Holdings III Corp. ("EWT III"), a subsidiary of the Company, entered into a Credit Agreement (the "2021 Credit Agreement") among EWT III, as borrower,EWT Holdings II Corp. ("EWT II"), as parent guarantor, the lenders from time to time party thereto,JPMorgan Chase Bank, N.A ., as administrative agent and collateral agent, andING 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 theU.S. dollar equivalent of$350.0 million (the "2021 Revolving Credit Facility") and a discounted senior secured term loan (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 three months endedMarch 31, 2023 , does not anticipate exceeding this ratio during the year endingSeptember 30, 2023 , and therefore does not anticipate any additional repayments during the year endingSeptember 30, 2023 .
Receivables Securitization Program
OnApril 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, andPNC 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, andNeptune Benson, Inc. , an indirectly wholly-owned subsidiary of the Company, as an originator (together withEWT 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 three months endedMarch 31, 2023 , does not anticipate becoming noncompliant during the year endingSeptember 30, 2023 , and therefore, subject to collateral availability, does not anticipate any additional repayments during the year endingSeptember 30, 2023 .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.
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 endedSeptember 30, 2022 , as filed with theSEC onNovember 16, 2022 . There were no significant changes in our contractual obligations during the six months endedMarch 31, 2023 . 58
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