EVOA WATEPAR The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled "Cautionary Note Regarding Forward-Looking Statements" and in Part I, Item 1A, "Risk Factors" in this Annual Report. 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. Our fiscal year ends onSeptember 30 of each year and references in this section to a year refer to our fiscal year. As such, references to: 2021 relates to the fiscal year endedSeptember 30, 2021 , 2020 relates to the fiscal year endedSeptember 30, 2020 , and 2019 relates to the fiscal year endedSeptember 30, 2019 . Overview and Background We are a leading provider of mission-critical water and wastewater treatment solutions, offering a broad portfolio of products, services, and expertise to support customers across various end markets. We are headquartered inPittsburgh, Pennsylvania , with locations across ten 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 sustainability requirements. We deliver and maintain these mission critical solutions through our extensive North American service network, assuring our customers continuous uptime with 91 service branches as ofSeptember 30, 2021 . We have certified Evoqua Service Technicians within approximately a two-hour drive from more than 90% of our industrial North American customers' sites. In addition, 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. 32 --------------------------------------------------------------------------------
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.
For the years ended
2021 2020
Integrated Solutions and Services segment 65.5 % 66.1 % Applied Product Technologies segment 34.5 % 33.9 %
Recent Developments, Key Factors, and Trends Affecting Our Business and Financial Statements The following recent developments have affected our business and operating results during the year endedSeptember 30, 2021 : Impact of the COVID-19 pandemic. Our business has been considered essential under federal and local standards, and we have maintained business continuity at our critical service branches and manufacturing facilities to date. We have taken measures throughout the duration of the pandemic to protect our employees, including implementation of remote working practices where possible and enhanced safety procedures for employees on site at our facilities and our customers' facilities. These measures have resulted in additional incremental costs and reductions in service productivity over the course of the pandemic, although neither had a material adverse effect on our results of operations for fiscal 2021. To date, the pandemic has negatively impacted sales volume across our business, due primarily to customer site access restrictions, temporary customer site closures, and temporary delays in annual maintenance activities by customers in certain end markets, although we started to see sales volume rebound in certain end markets during the second half of fiscal 2021, as further discussed below in the discussion of our results of operations. The implementation of vaccine mandates in fiscal 2022 may further increase costs and delay our performance of services for our customers or our internal business operations due to customer site access restrictions and labor shortages. Additionally, in the second half of fiscal 2021 we experienced increases in certain discretionary costs that were the subject of cost reduction actions earlier in the pandemic, particularly employee travel expenses. We have continued to focus on collecting outstanding customer account balances, and, throughSeptember 30, 2021 , we have not experienced any deterioration in collections from our customers. We continue to evaluate the impact of the pandemic on our business and the potential effects of recent spikes in COVID-19 cases in certain regions, as well as challenges created by the macroeconomic conditions associated with the reopening of global economies, including inflation and availability constraints, which are discussed in more detail below. For more information regarding factors and events that may impact our business, results of operations and financial condition from the effects of the COVID-19 pandemic, see Part I, Item 1A. "Risk Factors-The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations and prospects." Inflation and material availability. Material, freight, and labor inflation resulted in increased costs in fiscal 2021, and we expect this trend will continue in 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. We have taken and continue to take strategic actions focused on mitigating the impact of these challenges. Although these factors did not have a material adverse effect on our results of operations for fiscal 2021, if sustained, they could have a material adverse effect on our results of operations going forward. Acquisitions and divestitures. OnApril 1, 2021 , we acquired the assets ofWater Consulting Specialists, Inc. ("WCSI") for$12.0 million cash paid at closing. In addition, we recorded a liability of$0.8 million at closing associated with an earn-out related to the WCSI acquisition, which was subsequently revalued to$0.2 million and is included in Accrued 33 -------------------------------------------------------------------------------- expenses and other liabilities on the Consolidated Balance Sheets. During the year endedSeptember 30, 2021 , we received cash of$21 thousand from the seller as a result of net working capital adjustments. WCSI is a leader in the design, manufacturing, and service of industrial high-purity water treatment systems. The acquisition strengthens the Company's portfolio of high-purity water treatment systems and provides the opportunity to further expand its digitally enabled solutions and services in key industrial markets. WCSI is a part of the Integrated Solutions and Services segment. During the year endedSeptember 30, 2021 , the Company incurred approximately$0.1 million in acquisition costs, which are included in General and administrative expense on the Consolidated Statements of Operations. OnMarch 1, 2021 , we completed the divestiture of the Lange containment system, geomembrane, and geosynthetic liner product line (the "Lange Product Line") for$0.9 million in cash at closing. The Lange Product Line was a part of the Integrated Solutions and Services segment. During the year endedSeptember 30, 2021 , the Company recognized a loss of$0.2 million on the divestiture. OnDecember 17, 2020 , we acquired the industrial water business ofUltrapure & Industrial Services, LLC ("Ultrapure") for$8.7 million cash paid at closing. OnApril 1, 2021 , we paid an additional$0.3 million as a result of net working capital adjustments. Ultrapure, based out ofTexas , provides customers across multiple end markets with a variety of water treatment products and services, including service deionization, reverse osmosis, UV, and ozonation. Ultrapure will strengthen the Company's service capabilities in theHouston andDallas markets and is a part of the Integrated Solutions and Services segment. During the year endedSeptember 30, 2021 , the Company incurred approximately$0.2 million in acquisition costs, which are included in General and administrative expense on the Consolidated Statements of Operations. OnSeptember 3, 2020 , the Company acquired the assets of privately held Aquapure Technologies ofCincinnati ("Aquapure"), aHamilton, Ohio based water service and equipment company. Aquapure serves the commercial and light industrial markets and provides customers with a variety of water treatment products and services, including deionization, reverse osmosis, softeners, and filtration systems. Aquapure is part of the Integrated Solutions and Services segment. OnDecember 31, 2019 , we completed the sale of the Memcor ® product line to DuPont de Nemours, Inc. (Memcor ® is a trademark ofRohm & Haas Electronic Materials Singapore Pte. Ltd. ). The Company recognized a$57.7 million net pre-tax benefit on the sale of the Memcor product line, net of$8.3 million of discretionary compensation payments to employees in connection with the transaction and$2.1 million in transaction costs incurred in the year endedSeptember 30, 2020 . OnOctober 1, 2019 , we acquired a 60% investment position inSan Diego -basedFrontier Water Systems, LLC ("Frontier"), which included an agreement to acquire the remaining 40% interest in Frontier on or prior toMarch 30, 2024 . This agreement gave holders of the remaining 40% interest in Frontier (the "Minority Owners") the right to sell to Evoqua up to approximately 10% of the outstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners betweenJanuary 1, 2021 andFebruary 28, 2021 (the "Option"). The Minority Owners exercised the Option, and onApril 8, 2021 , the Company completed the purchase of an additional 8% of the outstanding equity in Frontier for approximately$1.5 million . As a result, the Company's ownership position in Frontier increased to 68%. During the year endedSeptember 30, 2021 , the Company recorded an increase in the fair value of the Purchase Right liability for$2.1 million , which was recorded to Interest expense on the Consolidated Statements of Operations. As ofSeptember 30, 2021 ,$8.3 million is included in Other noncurrent liabilities related to the Purchase Right on the Consolidated Balance Sheets. Debt refinancing. OnApril 1, 2021 , we completed the refinancing of the term loan (the "2014 Term Loan") outstanding under our First Lien Credit Agreement datedJanuary 15, 2014 (as modified, amended or supplemented from time to time, the "2014 Credit Agreement"), amongEWT Holdings III Corp. ("EWT III"),EWT Holdings II Corp. ("EWT II"), the lenders party thereto and Credit Suisse AG as administrative agent and collateral agent. OnApril 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, andING Capital, LLC , as sustainability coordinator, which provides for (i) a senior secured term loan facility relating to a term loan (the "2021 Term Loan") in the amount of$475.0 million maturing onApril 1, 2028 , and 34 -------------------------------------------------------------------------------- (ii) 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") maturing onApril 1, 2026 . OnApril 1, 2021 ,Evoqua Finance LLC ("Evoqua Finance") entered into an accounts receivable securitization program (the "Receivables Securitization Program") consisting of, among other agreements, (i) a Receivables Financing Agreement (the "Receivables Financing Agreement") among Evoqua Finance, as the borrower, the lenders from time to time party thereto (the "Receivables Financing Lenders"),PNC Bank, National Association ("PNC Bank "), as administrative agent,Evoqua Water Technologies LLC ("EWT LLC "), an indirect wholly-owned subsidiary of the Company, as initial servicer, 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 maturing onApril 1, 2024 , and (ii) a Sale and Contribution Agreement (the "Sale Agreement") among Evoqua Finance, as purchaser,EWT LLC , as initial servicer and as an originator, andNeptune Benson, Inc. , an indirectly wholly-owned subsidiary of the Company, as an originator (together withEWT LLC , the "Originators"). OnApril 1, 2021 , we borrowed$475.0 million under the 2021 Term Loan,$105.0 million under the 2021 Revolving Credit Facility and$142.2 million under the Securitization Facility. The net proceeds of these facilities, together with cash on hand, were used to repay all outstanding indebtedness under our 2014 Credit Agreement, in an aggregate principal amount of approximately$814.5 million . The reduction in the outstanding principal amount of our term loan of approximately$340.0 million was funded by draws on the 2021 Revolving Credit Facility, the Securitization Facility and$100.0 million of cash on hand. In addition to extending the maturities of our term loan and previous revolving credit facility, the refinancing reduced our weighted average cash borrowing cost and improved liquidity. See "Liquidity and Capital Resources" below for additional information. OnSeptember 30, 2021 , the Company had$473.8 million outstanding under the 2021 Term Loan,$37.3 million outstanding on the 2021 Revolving Credit Facility, and$150.1 million outstanding under the Securitization Facility, which includes$0.1 million of accrued interest. 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 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 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 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 7 for a reconciliation of organic revenue to revenue. 35 -------------------------------------------------------------------------------- Adjusted EBITDA Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary metrics used by management to evaluate the strength and financial performance of our core business. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, 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 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. Adjusted EBITDA should not be considered a substitute for, or superior to, financial measures prepared in accordance with GAAP. The financial results prepared in accordance with GAAP and the reconciliations from these results should be carefully evaluated. See "Non-GAAP Reconciliations" in this Item 7 for a reconciliation of 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.
Basis of Presentation
The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the fiscal years endedSeptember 30, 2021 and 2020. For a discussion of changes from the fiscal year endedSeptember 30, 2020 to the fiscal year endedSeptember 30, 2019 , refer to Management's Discussion and Analysis of Financial Condition and Results of Operation in Part II, Item 7 of our Annual Report on Form 10-K for the year ended September 30, 2020 (filedNovember 20, 2020 ). 36 -------------------------------------------------------------------------------- Results of Operations The following tables summarize key components of our results of operations for the periods indicated: Year Ended September 30, 2021 2020 (In millions, except per share % amounts) % of Revenue % of Revenue
Variance
Revenue from product sales and services$ 1,464.4 100.0 %$ 1,429.5 100.0 % 2.4 % Gross profit$ 457.4 31.2 %$ 449.8 31.5 % 1.7 % Total operating expenses$ (363.0) (24.8) %$ (342.0) (23.9) % 6.1 % Other operating income, net$ 4.9 0.3 %$ 60.6 4.2 % (91.9) % Interest expense$ (37.5) (2.6) %$ (46.6) (3.3) % (19.5) % Income before income taxes$ 61.8 4.2 %$ 121.8 8.5 % (49.3) % Income tax expense$ (10.1) (0.7) %$ (7.4) (0.5) % 36.5 % Net income$ 51.7 3.5 %$ 114.4 8.0 % (54.8) % Net income attributable to noncontrolling interest$ 0.2 - %$ 0.8 0.1 % (75.0) % Net income attributable to Evoqua Water Technologies Corp.$ 51.5 3.5 %$ 113.6 7.9 %
(54.7) %
Weighted average shares outstanding Basic 119.6 116.7 Diluted 122.9 121.1 Earnings per share Basic$ 0.43 $ 0.97 Diluted$ 0.42 $ 0.94 Other financial data: Adjusted EBITDA(1)$ 250.9 17.1%$ 239.6 16.8 % 4.7 %
(1)For the definition of Adjusted EBITDA and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in this Item 7.
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Years Ended September 30, 2021 and September 30, 2020
Consolidated Results
Revenue-Revenue increased $34.9 million , or 2.4%, to $1,464.4 million in the
year ended September 30, 2021 , from $1,429.5 million in the prior year. Revenue
from product sales increased $21.1 million , or 2.5%, to $861.0 million in the
year ended September 30, 2021 , from $839.9 million in the prior year. Revenue
from services increased $13.8 million , or 2.3%, to $603.4 million in the year
ended September 30, 2021 , from $589.6 million in the prior year.
The following table provides the change in revenue by offering and the change in
revenue by driver during the years ended September 30, 2021 and 2020:
Year Ended September 30,
2021 2020
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 861.0 58.8 % $ 839.9 58.8 % $ 21.1 2.5 %
Capital 616.0 42.1 % 592.7 41.5 % 23.3 3.9 %
Aftermarket 245.0 16.7 % 247.2 17.3 % (2.2) (0.9) %
Revenue from services 603.4 41.2 % 589.6 41.2 % 13.8 2.3 %
$ 1,464.4 100.0 % $ 1,429.5 100.0 % $ 34.9 2.4 %
Year Ended September 30,
2021 2020
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Organic $ 1,436.4 98.1 % $ 1,413.3 98.9 % $ 23.1 1.6 %
Inorganic 9.9 0.7 % 16.2 1.1 % (6.3) (0.4) %
Foreign currency
translation 18.1 1.2 % n/a n/a 18.1 1.3 %
$ 1,464.4 100.0 % $ 1,429.5 100.0 % $ 34.9 2.4 %
The increase in organic revenue was driven by higher sales volume, primarily in
product sales in the Asia Pacific region across multiple product lines and the
EMEA region primarily in the electrochlorination product line, as demand
improved following prior year economic closures, and to a lesser extent, capital
revenue in the chemical processing industry in the second half of the fiscal
year. In addition, organic revenue was favorably impacted by higher sales volume
in service and favorable price realization. These increases were partially
offset by lower sales volume in capital revenue related to the timing of
completion of prior year projects in the microelectronics end market and lower
product sales volume in the Americas region, due to customer site access
challenges and delays, primarily in the first half of fiscal 2021, as a result
of the COVID-19 pandemic. Favorable foreign currency translation more than
offset the reduction in revenue due to the prior year divestiture of the Memcor
product line.
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 to 31.2% in the year
ended September 30, 2021 , from 31.5% in the prior year. The following table
provides the change in cost of product sales and cost of services, respectively,
along with related gross margins:
38
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Year Ended September 30,
2021 2020
Gross Gross
Margin % Margin %
Cost of product sales $ (607.6) 29.4 % $ (588.3) 30.0 %
Cost of services (399.4) 33.8 % (391.4) 33.6 %
$ (1,007.0) 31.2 % $ (979.7) 31.5 %
Gross margin from product sales decreased by 60 bps to 29.4% in the year ended
September 30, 2021 , from 30.0% in the prior year. The decrease in gross margin
was primarily driven by product mix, which was influenced by delays and economic
closures related to the COVID-19 pandemic, coupled with higher material,
freight, and employment costs driven by inflation, as well as capital project
variances. This was partially offset by positive price realization.
Gross margin from services increased by 20 bps to 33.8% in the year ended
September 30, 2021 , from 33.6% in the prior year. This increase is mainly driven
by favorable price/cost as well as continued focus on labor productivity.
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
Year Ended September 30,
2021 2020
(In millions) % of Revenue % of Revenue % Variance
General and administrative expense $ (206.5) (14.1) % $ (192.6) (13.5) % 7.2 %
Sales and marketing expense (143.1) (9.8) % (136.2) (9.5) % 5.1 %
Research and development expense (13.4) (0.9) % (13.2) (0.9) % 1.5 %
Total operating expenses $ (363.0) (24.8) % $ (342.0) (23.9) % 6.1 %
The increase period over period in operating expenses was primarily due to
increased employee related expenses, a decrease in foreign currency translation
gains of $7.7 million from the prior period which is mostly related to
intercompany loans, increased amortization expense due to acquisitions in the
current period, and an increase in external legal fees. These increases were
partially offset by efforts taken by the Company to reduce spending across
various areas in response to uncertainties related to the COVID-19 pandemic,
such as reduced travel, particularly in the first half of fiscal 2021.
Fluctuations in foreign currency translation and labor inflation could impact
operating expenses in future periods.
Other Operating Income, Net-Other operating income, net, decreased $55.6
million , to $5.0 million in the year ended September 30, 2021 , from $60.6
million in the prior year. The decrease is primarily due to the prior year net
pre-tax benefit on the sale of the Memcor product line of $57.7 million , which
is net of $8.3 million of discretionary compensation payments to employees in
connection with the transaction and $2.1 million in transaction costs incurred.
In the year ended September 30, 2021 , other operating income, net, includes
COVID-19 pandemic subsidies received from the Canadian government, which are not
expected to reoccur in future periods.
Interest Expense-Interest expense decreased $9.1 million , or 19.5%, to $37.5
million in the year ended September 30, 2021 , from $46.6 million in the prior
year. 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. In addition, there was a $100.0 million debt prepayment that
occurred in January 2020 . This decrease was partially offset by an additional
$3.1 million of fees incurred as a result of the April
39
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2021 refinancing, which also resulted in the write off of $1.3 million of
deferred financing fees, and a fair value increase of $2.1 million in the
Purchase Right liability to acquire the remaining share of Frontier.
Income Tax Expense-Income tax expense was $10.1 million for the year ended
September 30, 2021 , compared to expense of $7.4 million in the prior year. The
increase in tax expense was primarily attributable to an increase in foreign tax
expense due to improved profitability in certain countries and the impact of a
one-time state tax adjustment for prior periods. The increase in expense was
partially offset by a one-time tax benefit for the reversal of the valuation
allowance with respect to the Company's German operating company.
Net Income-Net income decreased by $62.7 million , or 54.8%, to net income of
$51.7 million for the year ended September 30, 2021 , from $114.4 million in the
prior year, as a result of the variances noted above.
Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA
increased $11.3 million , or 4.7%, to $250.9 million for the year ended
September 30, 2021 , from $239.6 million for the prior year, primarily driven by
sales volume and related gross profit. See "Non-GAAP Reconciliations" in this
Item 7 for a reconciliation of adjusted EBITDA to net income.
Segment Results
Year Ended September 30,
2021 2020
(In millions) % of Total % of Total % Variance
Revenue
Integrated Solutions and Services $ 959.9 65.5 % $ 944.2 66.1 % 1.7 %
Applied Product Technologies 504.5 34.5 % 485.3 33.9 % 4.0 %
Total Consolidated $ 1,464.4 100.0 % $ 1,429.5 100.0 % 2.4 %
Operating profit (loss)
Integrated Solutions and Services $ 147.3 148.3 % $ 145.7 86.5 % 1.1 %
Applied Product Technologies 82.9 83.5 % 134.3 79.8 % (38.3) %
Corporate (130.9) (131.8) % (111.6) (66.3) % 17.3 %
Total Consolidated $ 99.3 100.0 % $ 168.4 100.0 % (41.0) %
Adjusted EBITDA(1)
Integrated Solutions and Services $ 219.3 87.4 % $ 213.7 89.2 % 2.6 %
Applied Product Technologies 105.7 42.1 % 99.2 41.4 % 6.6 %
Corporate (74.1) (29.5) % (73.3) (30.6) % 1.1 %
Total Consolidated $ 250.9 100.0 % $ 239.6 100.0 % 4.7 %
(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation of
segment adjusted EBITDA to segment operating profit (loss), its most directly
comparable financial measure presented in accordance with GAAP, see "Non-GAAP
Reconciliations" in this, Item 7.
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Integrated Solutions and Services
Revenue in the Integrated Solutions and Services segment increased $15.7
million , or 1.7%, to $959.9 million in the year ended September 30, 2021 , from
$944.2 million in the year ended September 30, 2020 . The following tables
provide the change in revenue by offering and the change in revenue by driver
during the years ended September 30, 2021 and 2020 for the Integrated Solutions
and Services segment:
Year Ended September 30,
2021 2020
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 378.8 39.5 % $ 376.6 39.9 %$ 2.2 0.6 % Capital 250.2 26.1 % 257.5 27.3 % (7.3) (2.8) % Aftermarket 128.6 13.4 % 119.1 12.6 % 9.5 8.0 % Revenue from services 581.1 60.5 % 567.6 60.1 % 13.5 2.4 %$ 959.9 100.0 %$ 944.2 100.0 %$ 15.7 1.7 % Year Ended September 30, 2021 2020 % of % of (In millions) Revenue Revenue $ Variance % Variance Organic$ 947.2 98.7 %$ 942.4 99.8 %$ 4.8 0.5 % Inorganic 9.9 1.0 % 1.8 0.2 % 8.1 0.9 % Foreign currency translation 2.8 0.3 % n/a n/a 2.8 0.3 %$ 959.9 100.0 %$ 944.2 100.0 %$ 15.7 1.7 % The increase in organic revenue was driven by higher sales volume, primarily due to growth in service and aftermarket revenue across a variety of end markets as well as favorable price realization. This was partially offset by a net decline in capital revenue, related to the timing of completion of projects in the microelectronics end market. Capital revenue saw volume growth in the second half of the fiscal year, primarily in the chemical processing industry. Operating profit in the Integrated Solutions and Services segment increased$1.6 million , or 1.1%, to$147.3 million in the year endedSeptember 30, 2021 , from$145.7 million in the year endedSeptember 30, 2020 . [[Image Removed: aqua-20210930_g5.jpg]] 41 -------------------------------------------------------------------------------- Operating profit was favorably impacted by sales volume and mix, favorable price/cost, reductions in travel and other discretionary spending as well as COVID-19 pandemic subsidies received from the Canadian government in the current year. These items were partially offset by lower productivity due to customer shutdowns and enhanced safety protocols as a result of the COVID-19 pandemic in the first half of fiscal 2021, some challenges filling open positions and increased operating costs based on changes in allocation methodologies for corporate expenses in the current year. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Integrated Solutions and Services segment increased$5.6 million , or 2.6%, to$219.3 million in the year endedSeptember 30, 2021 , compared to$213.7 million in the year endedSeptember 30, 2020 . 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 this Item 7 for a reconciliation of segment adjusted EBITDA to segment operating profit. Applied Product Technologies Revenue in the Applied Product Technologies segment increased$19.2 million , or 4.0%, to$504.5 million in the year endedSeptember 30, 2021 , from$485.3 million in the year endedSeptember 30, 2020 . The following tables provide the change in revenue by offering and the change in revenue by driver during the years endedSeptember 30, 2021 and 2020 for the Applied Product Technologies segment: Year Ended September 30, 2021 2020 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 482.2 95.6 %$ 463.3 95.5 %$ 18.9 4.1 % Capital 365.8 72.5 % 335.2 69.1 % 30.6 9.1 % Aftermarket 116.4 23.1 % 128.1 26.4 % (11.7) (9.1) % Revenue from services 22.3 4.4 % 22.0 4.5 % 0.3 1.4 %$ 504.5 100.0 %$ 485.3 100.0 %$ 19.2 4.0 % Year Ended September 30, 2021 2020 % of % of (In millions) Revenue Revenue $ Variance % Variance Organic$ 489.2 97.0 %$ 470.9 97.0 %$ 18.3 3.8 % Inorganic - - % 14.4 3.0 % (14.4) (3.0) % Foreign currency translation 15.3 3.0 % n/a n/a 15.3 3.2 %$ 504.5 100.0 %$ 485.3 100.0 %$ 19.2 4.0 % The increase in organic revenue was driven by sales volume growth from product sales in theAsia Pacific region across multiple product lines and the EMEA region primarily in our electrochlorination product line, as demand improved following economic closures that occurred in the prior year due to the COVID-19 pandemic, and to a lesser extent, favorable pricing. This growth was partially offset by declines across multiple product lines in theAmericas region as a result of continued customer site access challenges and delays. In addition, the divestiture of the Memcor product line reduced revenue by$14.4 million as compared to the prior year period while foreign currency was favorable by$15.3 million . 42 -------------------------------------------------------------------------------- Operating profit in the Applied Product Technologies segment decreased$51.4 million , or 38.3%, to$82.9 million in the year endedSeptember 30, 2021 , from$134.3 million in the year endedSeptember 30, 2020 . [[Image Removed: aqua-20210930_g6.jpg]] The decline in operating profit was primarily related to the net pre-tax benefit on the sale of the Memcor product line of$57.7 million recognized in the prior year, which was net of$8.3 million of discretionary compensation payments to employees in connection with the transaction and$2.1 million in transaction costs incurred. Operating profit was also impacted by the reduction in sales volume as a result of the sale of the Memcor product line. These declines were partially offset by favorable revenue and operational variances including organic sales volume, product mix and favorable price/cost, as well as the benefits of plant consolidation benefits and higher productivity. However, capital project variances and supply chain challenges unfavorably impacted operating profit. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment increased$6.5 million , or 6.6%, to$105.7 million in the year endedSeptember 30, 2021 , compared to$99.2 million in the year endedSeptember 30, 2020 . 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, including the$57.7 million gain recognized in the prior year related to the divestiture of the Memcor product line. See "Non-GAAP Reconciliations" in this Item 7 for a reconciliation of segment adjusted EBITDA to segment operating profit. Corporate Operating loss in Corporate increased$19.3 million , or 17.3%, to$130.9 million in the year endedSeptember 30, 2021 , from$111.6 million in the year endedSeptember 30, 2020 . The increase period over period was primarily due to increased expenses associated with share-based compensation and legal matters in the current year as well as a decrease in foreign currency translation gains from the prior period, most of which was related to intercompany loans. Reductions in discretionary spending compared to the prior year partially offset these increases. 43 -------------------------------------------------------------------------------- Non-GAAP Reconciliations The following is a reconciliation of organic revenue to total revenue for the years endedSeptember 30, 2021 and 2020: Total Revenue Foreign Currency Inorganic Revenue(1) Organic Revenue Year Ended September 30, Year Ended September 30, Year Ended
September 30, Year Ended September 30, (In millions) 2020 2021 % Variance 2020 2021 % Variance 2020 2021 % Variance 2020 2021 % Variance Evoqua Water Technologies$1,429.5 $1,464.4 2.4 % n/a$18.1 1.3 %$16.2
$9.9 (0.4) %$1,413.3 $1,436.4 1.6 % Integrated Solutions & Services$944.2 $959.9 1.7 % n/a$2.8 0.3 %$1.8 $9.9 0.9 %$942.4 $947.2 0.5 % Applied Product Technologies$485.3 $504.5 4.0 % n/a$15.3 3.2 %$14.4 $- (3.0) %$470.9 $489.2 3.8 % (1)Includes acquisition of our interest in Frontier onOctober 1, 2019 , divestiture of the Memcor product line onDecember 31, 2019 , divestiture of the Lange Product Line onMarch 1, 2021 , acquisition of Aquapure onSeptember 3, 2020 , acquisition of Ultrapure onDecember 17, 2020 and acquisition of WCSI onApril 1, 2021 . The following is a reconciliation of our Net income to adjusted EBITDA. Amounts excluded relate to items that management believes do not reflect the underlying, ongoing operational performance of the business as a result of their nature or size and/or are non-recurring and would not be expected to occur as part of our normal business on a regular basis. Year Ended September 30, (In millions) 2021 2020 % Variance Net income$ 51.7 $ 114.4 (54.8) % Income tax expense 10.1 7.4 36.5 % Interest expense 37.5 46.6 (19.5) % Operating profit$ 99.3 $ 168.4 (41.0) % Depreciation and amortization 113.7 107.3 6.0 % EBITDA$ 213.0 $ 275.7 (22.7) % Restructuring and related business transformation costs(a) 11.3 17.4 (35.1) % Share-based compensation(b) 17.7 10.5 68.6 % Transaction costs(c) 1.6 1.9 (15.8) % Other losses (gains) and expenses(d) 7.3 (65.9) (111.1) % Adjusted EBITDA$ 250.9 $ 239.6 4.7 % (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 events of a similar nature 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: 44 -------------------------------------------------------------------------------- (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. Year Ended September 30, 2021 2020 Post Memcor divestiture restructuring$ 5.6 $ 9.1 Cost of product sales and services ("Cost of sales") 3.5 6.6 S&M expense 0.3 0.2 G&A expense 1.5 1.9 Other operating (income) expense 0.3 0.4 Two-segment restructuring$ 1.0 $ 2.1 Cost of sales 0.3 1.0 G&A expense 0.7 1.1 Various other initiatives$ 2.8 $ 1.0 Cost of sales 1.0 0.7 S&M expense 0.1 0.1 G&A expense 0.9 0.2 Other operating (income) expense 0.8 - Total(1)$ 9.4 $ 12.2 (1)Of which$9.1 million and$12.1 million for the year endedSeptember 30, 2021 and 2020, respectively, is reflected in restructuring charges in Note 15, "Restructuring and Related Charges," in Part II, Item 8 of this Annual 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: Year Ended September 30, 2021 2020 Cost of sales $ 0.4$ 1.5 G&A expense 0.6 0.7 Total $ 1.0$ 2.2
(iii)Expenses associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes. This includes:
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Year Ended September 30,
2021 2020
Cost of sales $ 0.1 $ 0.1
G&A expense 0.2 0.9
Total $ 0.3 $ 1.0
(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:
Year Ended September 30,
2021 2020
G&A expense $ 0.6 $ 2.0
Total $ 0.6 $ 2.0
(b)Share-based compensation
Adjusted EBITDA is calculated prior to considering sharebased compensation
expenses related to equity awards. See Note 18, "Share-Based Compensation" in
Part II, Item 8 of this Annual Report for further detail.
(c)Transaction related costs
Adjusted EBITDA is calculated prior to considering transaction, integration and
restructuring costs associated with business combinations because these costs
are unique to each transaction and represent costs that were incurred as a
result of the transaction decision. 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:
Year Ended September 30,
2021 2020
Cost of sales $ 0.7 $ 0.1
G&A expense 0.9 1.8
Total $ 1.6 $ 1.9
(d)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)net expense reduction related to the remediation of manufacturing defects
caused by a third-party vendor for which partial restitution was received;
(iii)charges incurred by the Company related to product rationalization in its
electrochlorination business;
(iv)amounts related to the prior year sale of the Memcor product line;
(v)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;
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(vi)legal fees incurred in excess of amounts covered by the Company's insurance
related to the Securities Litigation and SEC investigation; and
(vii)loss on divestiture of the Lange Product Line.
Other (gains), losses and expenses include the following for the periods
presented below:
Year Ended September 30, 2021
Other Adjustments
(In millions) (i) (ii) (iii) (iv) (v) (vi) (vii) Total
Cost of sales $ 0.1 $ - $ 2.4 $ 0.2 $ 0.3 $ - $ - $ 3.0
G&A expense (1.8) - - - 0.2 5.7 - 4.1
Other operating expense - - - - - - 0.2 0.2
Total $ (1.7) $ - $ 2.4 $ 0.2 $ 0.5 $ 5.7 $ 0.2 $ 7.3
Year Ended September 30, 2020
Other Adjustments
(In millions) (i) (ii) (iii) (iv) (v) (vi) (vii) Total
Cost of sales $ (0.2) $ - $ 0.7 $ 0.1 $ 0.8 $ - $ - $ 1.4
G&A expense (8.5) - - 0.3 0.5 - - (7.7)
Other operating
(income) expense - (1.5) - (58.1) - - - (59.6)
Total $ (8.7) $ (1.5) $ 0.7 $ (57.7) $ 1.3 $ - $ - $ (65.9) 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 adjusted EBITDA to segment operating profit, its most directly comparable financial measure presented in accordance with GAAP:
Year Ended September 30,
2021 2020 $ Variance % Variance
Integrated Integrated Integrated
Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product Integrated Solutions Applied Product
Services Technologies Services Technologies Services Technologies and Services Technologies
Operating profit $ 147.3 $ 82.9 $ 145.7 $ 134.3 $ 1.6 $ (51.4) 1.1 % (38.3) %
Depreciation and
amortization 70.6 14.4 67.4 14.2 3.2 0.2 4.7 % 1.4 %
EBITDA 217.9 97.3 213.1 148.5 $ 4.8 $ (51.2) 2.3 % (34.5) %
Restructuring and
related business
transformation costs
(a) 1.8 5.9 0.6 9.7 1.2 (3.8) 200.0 % (39.2) %
Transaction costs (b) (0.6) (0.1) - (0.5) (0.6) 0.4 n/a (80.0) %
Other (gains) losses
and expenses (c) 0.2 2.6 - (58.5) 0.2 61.1 n/a (104.4) %
Segment adjusted EBITDA $ 219.3 $ 105.7 $ 213.7 $ 99.2 $ 5.6 $ 6.5 2.6 % 6.6 %
(a)Represents costs and expenses in connection with restructuring initiatives.
Such expenses are primarily composed of severance, relocation, and facility
consolidation costs.
(b)Represents costs associated with a change in the current estimate of certain
acquisitions achieving their earn-out targets.
47
--------------------------------------------------------------------------------(c)Other losses, (gains) and expenses as discussed above, distinct to our Integrated Solutions and Services and Applied Product Technologies segments include the following:
Year Ended September 30,
2021 2020
Integrated Integrated
Solutions and Applied Product Solutions and Applied Product
(In millions) Services Technologies Services TechnologiesTrailing costs from the sale of the Memcor product line
$ - $ 0.2 $ - $ -
Net pre-tax benefit on sale of the Memcor product
line - - - (57.7)
Remediation of manufacturing defects - - - (1.5)
Product rationalization in electro-chlorination
business - 2.4 - 0.7
Loss on divestiture of Lange Product Line 0.2 - - -
Total $ 0.2 $ 2.6 $ - $ (58.5)
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 the COVID-19 pandemic has not materially impacted our liquidity to
date, we plan to continue to evaluate aspects of our spending, including capital
expenditures, discretionary spending, and strategic investments in fiscal 2022.
We have considered the impacts of the COVID-19 pandemic on our liquidity and
capital resources to date, and we do not currently expect it to impact our
ability to meet future liquidity needs or affect our ability to continue to
comply with our applicable debt covenants. 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 payment on the terms originally negotiated with our supplier,
regardless of whether the supplier sells its receivable to a financial
institution. We do not enter into agreements with any of the participating
financial institutions in connection with the program. The range of payment
terms we negotiate with our suppliers is consistent, irrespective of whether a
supplier participates in the program. The amounts settled through the program
and paid to participating financial institutions were $42.0 million and
$39.7 million in the year ended September 30, 2021 and 2020, respectively. A
downgrade in our credit rating or changes in the financial markets could limit
the financial institutions' willingness to commit to participating in the
program.
We expect to continue to finance our liquidity requirements through internally
generated funds, borrowings under our 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 year
ended September 30, 2021 and 2020 were
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$75.3 million and $88.5 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 year ended September 30, 2021
and 2020, we entered into equipment financing arrangements totaling $37.5
million and $23.3 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 of September 30, 2021 , we had total indebtedness of $754.9 million , including
$473.8 million of term loan borrowings under the 2021 Credit Agreement, $37.3
million outstanding under the 2021 Revolving Credit Facility, $150.1 million
outstanding under the Securitization Facility which includes $0.1 million of
accrued interest, $93.4 million in borrowings related to equipment financing and
$0.4 million of notes payable related to certain equipment related contracts. We
also had $10.1 million of letters of credit issued under our 2021 Revolving
Credit Facility as of September 30, 2021 .
As of September 30, 2021 and September 30, 2020 , 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 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 and a discounted senior secured term loan facility relating to a
term loan in the amount of $475.0 million (together, the "Senior Facilities").
The 2021 Credit Agreement also provides for a letter of credit sub-facility not
to exceed $60.0 million . On April 1, 2021 , EWT III borrowed the full amount of
$475.0 million under the 2021 Term Loan and $105.0 under the 2021 Revolving
Credit Facility. On September 30, 2021 , the Company had $473.8 million
outstanding under the 2021 Term Loan and $37.3 million outstanding on the 2021
Revolving Credit Facility.
The Senior Facilities are guaranteed by EWT II and certain existing and future
direct or indirect wholly-owned domestic subsidiaries of EWT III (together with
EWT III, collectively, the "Loan Parties"), and collateralized by a first lien
on substantially all of the assets of the Loan Parties, with certain exceptions,
including: (i) any equity interest in, and any assets sold to or held by, Evoqua
Finance in connection with the Receivables Securitization Program, (ii) any
equity interest in, and any assets sold to or held by, any other special purpose
entity that is an indirect subsidiary of the Company in connection with any
other securitization facility permitted under the 2021 Credit Agreement, and
(iii) any real property with a fair market value of $5.0 million or less, when
considered individually, or $30.0 million or less when taken together with all
other real property owned by the Loan Parties.
With respect to the 2021 Revolving Credit Facility, EWT III is required to pay a
commitment fee based on the daily unused portion of the 2021 Revolving Credit
Facility, as well as certain other fees to the agents and the arrangers under
the Senior Facilities. 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 .
With respect to the 2021 Term Loan, EWT III pays quarterly installments of
principal of approximately $1.2 million . Subject to the terms of the 2021 Credit
Agreement, to the extent not previously paid, any amount owed under the 2021
Term Loan become due and payable in full on April 1, 2028 .
Amounts outstanding under the Senior Facilities, at EWT III's option, bear
interest at either (i) a Base Rate determined in accordance with the terms of
the 2021 Credit Agreement, (ii) with respect to any amounts denominated in U.S.
dollars or Sterling, a LIBO rate, or replacement thereof, as determined in
accordance with the terms of the 2021 Credit Agreement, or (iii) with respect to
amounts denominated in Euros, the EURIBOR rate, or replacement thereof, as
determined in accordance with the terms of the 2021 Credit Agreement. In the
case of the 2021 Revolving Credit Facility, an applicable margin based on the
consolidated total leverage of EWT III and its restricted subsidiaries, as
calculated in accordance
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with the terms of the 2021 Credit Agreement, is added to the interest rate
elected by EWT III; provided that the interest rate may be adjusted if EWT III
meets certain metrics for a sustainability price adjustment prior to December
31, 2021 . In the case of the 2021 Term Loan, a fixed applicable margin,
calculated in accordance with the terms of the 2021 Credit Agreement, is added
to the interest rate elected by EWT III.
The net proceeds of the Senior Facilities, together with the net proceeds of the
Receivables Securitization Program and cash on hand, were used to repay all
outstanding indebtedness, in an aggregate principal amount of approximately
$814.5 million , under the 2014 Credit Agreement. The proceeds of the 2021
Revolving Credit Facility may also be used to finance or refinance the working
capital and capital expenditures needs of EWT III and certain of its
subsidiaries and for general corporate purposes.
The 2021 Credit Agreement is subject to acceleration upon various events of
default and contains customary representations, warranties, affirmative
covenants, and negative covenants, each substantially similar to those included
in the Credit Agreement, including, among other things, a springing maximum
first lien leverage ratio of 5.55 to 1.00.
As a result of the refinancing, the Company wrote off approximately $1.3 million
of deferred financing fees related to the 2014 Term Loan. In addition, the
Company incurred approximately $5.0 million of fees as a result of the
refinancing, of which $1.9 million were recorded as deferred financing fees on
the Consolidated Balance Sheets and $3.1 million were expensed.
Receivables Securitization Program
On April 1, 2021 , Evoqua Finance entered into the Receivables Securitization
Program consisting of, among other agreements, (i) the Receivables Financing
Agreement among Evoqua Finance, as the borrower, the Receivables Financing
Lenders, PNC Bank, as administrative agent, EWT LLC , as initial servicer, and
PNC Markets, as structuring agent, pursuant to which the lenders have made
available to Evoqua Finance the Securitization Facility in an amount up to
$150.0 million and (ii) 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. Under the
Receivables Securitization Program, the Originators, pursuant to the Sale
Agreement, are required to sell substantially all of their trade receivables and
certain related rights to payment and obligations of the Originators with
respect to such receivables (the "Receivables") to Evoqua Finance, which, in
turn, will obtain loans secured by the Receivables from the Receivables
Financing Lenders pursuant to the Receivables Financing Agreement. On April 1,
2021 , Evoqua Finance borrowed $142.2 million under the Securitization Facility.
During the second half of 2021, Evoqua Finance borrowed additional amounts under
the Securitization Facility and had $150.1 million outstanding at September 30,
2021 , which includes $0.1 million of accrued interest.
Pursuant to the Receivables Securitization Program, the aggregate principal
amount of the loans made by the Receivables Financing Lenders will not exceed
$150.0 million outstanding, subject to the borrowing base restrictions, unless
so increased under the Receivables Financing Agreement. The Receivables
Financing Lenders under the Receivables Securitization Program receive interest
at LIBOR or LMIR as selected by Evoqua Finance. The Receivables Financing
Agreement contains customary LIBOR benchmark replacement language. Additionally,
PNC Bank and PNC Markets will receive certain fees as agents, and EWT LLC will
receive a fee as servicer of the Receivables.
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 Receivables
Securitization Program matures on April 1, 2024 . As of September 30, 2021 , we
were in compliance with the covenants contained in the Receivables
Securitization Program.
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Contractual Obligations
We enter into longterm obligations and commitments in the normal course of
business, primarily debt obligations and noncancelable operating leases. As of
September 30, 2021 , our contractual cash obligations over the next several
periods were as follows:
Less than 1 to 3 to More than
(In millions) Total 1 year 3 years 5 years 5 years
Longterm debt obligations(a)
$ 179.7 $ 34.5 $ 526.1 Interest payments on longterm debt obligations 124.7 22.2 39.7 36.1 26.7 Operating lease commitments(b) 56.3 15.1 22.5 13.6 5.1 Finance lease commitments(c) 40.9 13.4 19.2 7.9 0.4 Total$ 976.8 $ 65.3 $ 261.1 $ 92.1 $ 558.3 (a)The amounts shown in this table do not include any net reductions for deferred financing fees. The amounts for current and long-term debt shown on the Consolidated Balance Sheets are net of deferred financing fees. (b)We occupy certain facilities and operate certain equipment and vehicles under noncancelable lease arrangements. Lease agreements may contain lease escalation clauses and purchase and renewal options. We recognize scheduled lease escalation clauses over the course of the applicable lease term on a straightline basis. (c)We lease certain equipment classified as finance leases. The leased equipment is depreciated on a straight line basis over the life of the lease and is included in depreciation expense.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. See Part I, Item 1A, "Risk Factors-Our substantial indebtedness could adversely affect our financial condition and limit our ability to raise additional capital to fund our operations." Cash Flows The following table summarizes the changes to our cash flows for the periods presented: Year Ended September 30, (In millions) 2021 2020 2019 Statement of Cash Flows Data Net cash provided by operating activities$ 178.7 $ 177.0 $ 125.2 Net cash (used in) provided by investing activities (97.2) 12.0 (94.5) Net cash (used in) provided by financing activities (130.3) (108.1) 5.7 Effect of exchange rate changes on cash 2.0 2.2 (1.6) Cash and cash equivalents classified as held for sale - - (7.3) Change in cash and cash equivalents$ (46.8) $
83.1
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Operating Activities
Cash flows from operating activities can fluctuate significantly from
periodtoperiod as working capital needs and the timing of payments for
restructuring activities and other items impact reported cash flows.
Net cash provided by operating activities increased to $178.7 million in the
year ended September 30, 2021 from $177.0 million in the year ended
September 30, 2020 .
[[Image Removed: aqua-20210930_g7.jpg]]
•Operating cash flows in the year ended September 30, 2021 reflect a decrease in
net income of $62.7 million from the year ended September 30, 2020 , primarily
driven by the sale of the Memcor product line.
•The add back of noncash charges increased operating cash flows by $130.5
million for the year ended September 30, 2021 as compared to an increase to
operating cash flows of $45.3 million for the year ended September 30, 2020 ,
resulting in an increase of $85.2 million . This increase was primarily related
to the gain on sale of the Memcor product line, which was reflected as a
reduction of operating cash flows in the prior year, a decrease in the amount of
foreign currency translation gains compared to the prior year, as well as
increased share-based compensation and depreciation and amortization compared to
the prior period. Non-cash changes also include amortization of deferred
financing fees, deferred income taxes and loss on sale of property, plant, and
equipment.
•The aggregate of receivables, inventories, contract assets, accounts payable
and contract billings used $17.5 million in operating cash flows in the year
ended September 30, 2021 compared to the providing of $23.1 million in the prior
year. 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 $18.8 million in
operating cash flows in the year ended September 30, 2021 compared to the
providing of $39.9 million in operating cash flows in the prior year, resulting
in a decrease to cash flows of $58.7 million . This decrease was primarily due to
an increase in customer long term receivables and timing of payments associated
with large outsourced water contracts.
•Income taxes used $2.1 million for the year end September 30, 2021 , as compared
to the providing of $0.6 million during the prior year.
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Investing Activities
Net cash used in investing activities decreased $109.2 million to $97.2 million
in the year ended September 30, 2021 from net cash provided by investing
activities of $12.0 million in the year ended September 30, 2020 . This decrease
was largely driven by proceeds from the sale of the Memcor product line during
the year ended September 30, 2020 , in addition to higher cash outflow associated
with the Ultrapure and WCSI acquisitions in the current year period as compared
to the Frontier acquisition that occurred in the prior period. This decrease was
partially offset by lower cash outflow associated with purchase of capital
assets and intangibles compared to the prior period. Other activity related to
proceeds from the sale of property, plant and equipment remained relatively
consistent with the prior period.
Financing Activities
Net cash used in financing activities increased $22.2 million to $130.3 million
in the year ended September 30, 2021 from net cash provided by financing
activities of $108.1 million in the year ended September 30, 2020 . The increase
in cash used in financing activities for the year ended September 30, 2021 was
primarily due to the debt refinancing activities that occurred in the current
year. This increase was partially offset by an increase in cash received from
the exercise of stock options in the current period and a decrease in taxes paid
related to net share settlements of share-based compensation awards and
distribution of dividends to non-controlling interest declined compared to the
prior period.
Seasonality
For more information regarding how seasonality may impact our business, results
of operations and financial condition, see Part I, Item 1A. "Risk
Factors-Seasonality of sales and weather conditions may adversely affect, or
cause volatility in, our financial results."
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.
OffBalance Sheet Arrangements
We had the following outstanding under our credit arrangements at September 30,
2021 and September 30, 2020 :
September 30, September 30,
(In millions) 2021 2020
Letters of credit $ 10.1 $ 13.0
Surety bonds $ 147.8 $ 153.0
The longest maturity date of the letters of credit and surety bonds in effect as
of September 30, 2021 was March 20, 2030 .
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions about future events that affect
amounts reported in our Consolidated Financial Statements and related notes, as
well as the related disclosure of contingent assets and liabilities at the date
of the financial statements. Management evaluates its accounting policies,
estimates and judgments on an ongoing basis. Management bases its estimates and
judgments on historical experience, current trends and various other factors
that are believed to be relevant at the time Consolidated Financial Statements
are prepared. Actual results may differ from these estimates under different
assumptions and conditions.
Management evaluated the development and selection of its critical accounting
policies and estimates and believes that the following involve a higher degree
of judgment, complexity or uncertainty and are most significant to reporting our
results of operations and financial position, and are therefore discussed as
critical. The following critical accounting
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policies reflect the significant estimates and judgments used in the preparation
of our Consolidated Financial Statements. More information on all of our
significant accounting policies can be found in Note 2, "Summary of Significant
Accounting Policies" in Part II, Item 8 of this Annual Report.
Acquisitions and Purchase Price Allocation
We record acquisitions using the purchase method of accounting in accordance
with Accounting Standards Codification ("ASC") 805, Business Combinations, which
requires that the assets acquired and liabilities assumed, including contingent
consideration, be recorded at their respective fair values at the acquisition
date. The excess of the purchase price over the estimated fair values of the net
tangible and intangible assets acquired is recorded as goodwill. The application
of the purchase method of accounting requires management to make significant
estimates and assumptions in the determination of the fair value of assets
acquired and liabilities assumed, in order to properly allocate purchase price
consideration. These assumptions and estimates include a market participant's
use of the asset and the appropriate discount rates for a market participant.
Our estimates are based on historical experience, information obtained from
members of management of the acquired companies and with the assistance of
independent third-party appraisal firms. Significant assumptions and estimates
include quoted market prices, carrying values, and expected future cash flows,
which includes consideration of future growth rates and margins, attrition
rates, future changes in technology and brand awareness, loyalty, and the
appropriate weighted-average cost of capital and the cost savings expected to be
derived from acquiring an asset. These estimates are inherently uncertain and
unanticipated events and circumstances may occur which could affect the accuracy
or validity of estimates used in purchase accounting. The purchase price
allocation recorded in a business combination may change during the measurement
period, which is a period not to exceed one year from the date of acquisition,
as additional information about conditions existing at the acquisition date
becomes available.
We record contingent consideration arrangements at fair value on a recurring
basis as earn-outs related to acquisitions. The fair value of earn-outs related
to acquisitions is based on significant unobservable inputs including the
achievement of certain performance metrics. Significant changes in these inputs
would result in corresponding increases or decreases in the fair value of the
earn-out each period until the related contingency has been resolved. Changes in
the fair value of the contingent consideration obligations can result from
adjustments in the probability of achieving future development steps, sales
targets and profitability and are recorded in General and administrative
expenses in the Consolidated Statements of Operations.
Goodwill Impairment Review
We review goodwill to determine potential impairment annually during the fourth
quarter of our fiscal year, or more frequently if events and circumstances
indicate that the asset might be impaired. Impairment testing for goodwill is
performed at a reporting unit level. A reporting unit is defined as an operating
segment or one level below the operating segment. We have determined that we
have three reporting units.
The fair values of reporting units are determined using a combination of two
methods, one utilizing market revenue and earnings multiples derived from stocks
of companies that are engaged in the same or similar lines of business and that
are actively traded on a free and open market applied to the corresponding
measure of our reporting unit's financial performance (the market approach -
guideline public company ("GPC") method), and the other derived from discounted
cash flow models with estimated cash flows based on internal forecasts of
revenue and expenses over a specified period plus a terminal value (the income
approach discounted cash flows ("DCF") method). In estimating the fair value of
the reporting unit utilizing a DCF valuation technique, we incorporate our
judgment and estimates of future cash flows, future revenue and gross profit
growth rates, terminal value amount, capital expenditures and applicable
weightedaverage cost of capital used to discount these estimated cash flows.
The estimates and projections used in the estimate of fair value are consistent
with our current budget and longrange plans, including anticipated change in
market conditions, industry trends, growth rates and planned capital
expenditures, among other considerations.
We believe these two approaches are appropriate valuation techniques and we
generally weight the two resulting values equally as an estimate of a reporting
unit's fair value for the purposes of our impairment testing. However, we may
weigh one value more heavily than the other when conditions merit doing so. If
market conditions change compared to those used in our market approach, or if
actual future results of operations fall below the projections used in the DCF
method,
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our goodwill could become impaired in the future. As a result of our goodwill
impairment assessment, we have concluded that none of our goodwill was impaired
as of September 30, 2021 , and we do not believe the risk of impairment is
significant at this time.
Impairment of LongLived Assets
Longlived assets, such as property, plant, and equipment, and purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of an asset or
asset group may not be recoverable. Conditions that may indicate impairment
include, but are not limited to, a significant adverse change in customer demand
or business climate that could affect the value of an asset based on indicators
of reduced profits or losses generated by the asset or asset group, a product
recall, or an adverse action by a regulator, such as a successful challenge of
patent rights.
When necessary, we record charges for impairments of long-lived assets for the
amount by which the fair value is less than the carrying value of the asset or
asset group. Fair value of long-lived assets is determined using an appraised
value (obtained with the assistance of independent third-party appraisal firms)
or using an income approach, specifically the discounted cash flow method.
Starting with a forecast of the expected future net cash flows associated with
an asset or group of assets, we then apply an asset-specific discount rate to
arrive at a net present value amount. There were no material impairments of
long-lived assets recorded in the current year.
We amortize long-lived assets with finite lives over their estimated useful
lives on a straightline basis. This amortization methodology best matches the
pattern of economic benefit that is expected from definitelived assets.
Revenue Recognition
For sales of aftermarket parts or products with a low level of customization and
engineering time, the Company recognizes revenue at the time risks and rewards
of ownership pass, which is generally when products are shipped or delivered to
the customer as the Company has no obligation for installation. The Company
considers shipping and handling services to be fulfillment activities and as
such they do not represent separate performance obligations for revenue
recognition. Sales of shortterm service arrangements are recognized as the
services are performed, and sales of longterm service arrangements are
typically recognized on a straightline basis over the life of the agreement.
For certain arrangements where there is significant customization to the product
and for long-term construction-type sales contracts, revenue may be recognized
over time as performance is completed. In these instances, revenue is recognized
using a measure of progress that applies an input method based on costs incurred
in relation to total estimated costs at completion (the percentage-of-completion
method). These arrangements include large water treatment projects, systems, and
solutions for municipal and industrial applications. The nature of the contracts
is generally fixed price with milestone billings. In order for revenue to be
recognized over a period of time, the product must have no alternative use and
the Company must have an enforceable right to payment for the performance
completed to date, including a normal profit margin, in the event of termination
for convenience. If these two criteria are not met, revenue from these contracts
will not be recognized until construction is complete. Contract costs include
all direct materials, labor, subcontractors costs and indirect costs related to
contract performance. We believe this is the most accurate measure of contract
performance because it directly measures the value of the goods and services
transferred to the customer.
The percentage-of-completion method of revenue recognition requires us to
prepare estimates of cost to complete for contracts in progress. Due to the
nature of the work performed on many of our performance obligations, the
estimates of total revenue and cost at completion is complex, subject to many
variables and may require significant judgment. In making such estimates,
judgments are required to evaluate contingencies such as weather, potential
variances in schedule and the cost of materials, labor cost and productivity,
the impact of change orders, liability claims, contract disputes and achievement
of contractual performance standards. As a significant change in one or more of
these estimates could affect the profitability of our contracts, we routinely
review and update our significant contract estimates through a disciplined
project review process in which management reviews the progress and execution of
our performance obligations and estimates at completion. Contract revenue and
cost estimates are reviewed and revised monthly and the cumulative effect of
such adjustments are recognized in current operations. Such changes in contract
estimates can result in the
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recognition of revenue in a current period for performance obligations which
were satisfied or partially satisfied in a prior period. Changes in contract
estimates may also result in the reversal of previously recognized revenue if
the current estimate differs from the previous estimate. The amount of such
adjustments has not been material.
For contracts with multiple performance obligations, we allocate the transaction
price to each performance obligation using our best estimate of the standalone
selling price of each distinct good or service in the contract. In cases where
we do not provide the distinct good or service on a standalone basis, the
primary method used to estimate standalone selling price is the expected cost
plus a margin approach, under which we forecast our expected costs of satisfying
a performance obligation and then add an appropriate margin for that distinct
good or service. Our contracts are sometimes modified for changes in contract
specifications and requirements. Judgment is required to determine if such
modifications result in goods or services that are distinct from the existing
contract. For customized products and long-term construction type contracts,
most contract modifications are for goods and services that are not distinct due
to the significant integration provided in the context of the contract and are
accounted for as if they were part of the original contract on a cumulative
catch-up basis. We account for contract modifications prospectively when it
results in the promise to deliver additional goods and services that are
distinct and the increase in price of the contract is for the same amount as the
stand-alone selling price of the additional goods or services included in the
modification.
Our contracts sometimes contain variable consideration in the form of incentive
fees, performance bonuses, award fees, liquidated damages, or penalties. Other
contract provisions also give rise to variable consideration such as claims and
unpriced change orders that may either increase or decrease the transaction
price. We estimate the amount of variable consideration at the most likely
amount we expect to be entitled. Variable consideration is included in the
transaction price when it is probable that a significant reversal of cumulative
revenue recognized will not occur or when the uncertainty associated with the
variable consideration is resolved. Our estimates of variable consideration and
determination of whether to include such amounts in the transaction price are
based largely on our assessment of legal enforceability, anticipated
performance, and any other information (historical, current, or forecasted) that
is reasonably available to us. Variable consideration associated with claims and
unapproved change orders is included in the transaction price only to the extent
of costs incurred.
Product Warranties
Accruals for estimated expenses related to warranties are made at the time
products are sold and are recorded as a component of cost of product sales in
the Consolidated Statements of Operations in our Consolidated Financial
Statements included elsewhere in this Annual Report. The estimated warranty
obligation is based on product warranty terms offered to customers, ongoing
product failure rates, material usage and service delivery costs expected to be
incurred in correcting a product failure, as well as specific obligations for
known failures and other currently available evidence. We assess the adequacy of
the recorded warranty liabilities on a regular basis and adjust amounts as
necessary.
Deferred Taxes, Valuation Allowances, and Tax Contingencies
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of events that have been recognized in our Consolidated Financial
Statements or tax returns. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. We record a
valuation allowance to reduce certain deferred tax assets to amounts that are
more-likely-than-not to be realized within a reasonable period of time. The
factors used to assess the likelihood of realization include our forecast of
future taxable income exclusive of reversing temporary differences and
carryforwards, future reversals of existing taxable temporary differences and
available tax planning strategies that could be implemented to realize the net
deferred tax assets.
We consider both positive and negative evidence when evaluating the need for a
valuation allowance on our deferred tax assets in accordance with ASC 740,
Income Taxes. Available evidence includes historical financial information
supplemented by currently available information about future years. Generally,
historical financial information is more objectively verifiable than projections
of future income and is therefore given more weight in our assessment. We
consider cumulative losses in the most recent twelve quarters to be significant
negative evidence that is difficult to
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overcome in considering whether a valuation allowance is required. Conversely,
we consider a cumulative income position over the most recent twelve quarters,
to be significant positive evidence that a valuation allowance may not be
required.
Income tax positions must meet a more-likely-than-not recognition threshold to
be recognized. Income tax positions that previously failed to meet the
more-likely-than-not threshold are recognized in the first subsequent financial
reporting period in which that threshold is met. Previously recognized tax
positions that no longer meet the more-likely-than-not threshold are
derecognized in the first subsequent financial reporting period in which that
threshold is no longer met. Uncertain tax positions are reviewed each balance
sheet date. We recognize potential interest and penalties related to
unrecognized tax benefits in income tax expense.
Recent Accounting Pronouncements
See Note 2, "Summary of Significant Accounting Policies" in Item 8, included in
this Annual Report for a complete discussion of recently adopted accounting
pronouncements and recently issued accounting pronouncements not yet adopted.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our
senior secured credit facilities, which bear interest at rates that are
benchmarked against LIBOR. Based on our overall interest rate exposure to
variable rate debt outstanding as of September 30, 2021 , a 1% increase or
decrease in interest rates would decrease or increase income (loss) before
income taxes by approximately $6.8 million . By comparison, a 1% increase or
decrease in interest rates would have decreased or increased income (loss)
before income taxes by approximately $8.2 million as of September 30, 2020 based
on our overall interest rate exposure to variable rate debt outstanding as of
that date.
In June 2021 , the Company entered into an interest rate swap with an effective
date of August 1, 2022 to mitigate risk associated with a variable rate
equipment financing. The interest rate swap provides for a fixed rate of 5.25%,
has a notional amount of $31 million and a term of seven years.
In May 2020 , the Company entered into an interest rate swap to mitigate risks
associated with variable rate debt. The interest rate swap has a five year term
to hedge the variability of interest payments on the first $500 million of the
Company's senior secured debt and fixes the LIBOR rate on this portion of the
senior secured debt at 0.61%.
Impact of Inflation and Tariffs
Our results of operations and financial condition are presented based on
historical cost. Our financial results can be expected to be directly impacted
by substantial increases in costs due to commodity cost increases, general
inflation, and tariffs, which could lead to a reduction in our revenue as well
as decreased margins, as increased costs may not be able to be passed on to
customers. We cannot provide any assurance that our results of operations and
financial condition will not be materially impacted by inflation in the future.
The Company engages in activities to adjust pricing practices with customers to
attempt to mitigate the inflationary cost impact incurred. Additionally, while
we have experienced supply chain disruptions, to date we have managed
restrictions in material availability, delays in shipments or disruptions
associated with finding and qualifying alternate suppliers in order to maintain
our ability to fulfill customer requirements.
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Foreign Currency Risk
We have global operations and therefore enter into transactions denominated in
various foreign currencies. While we believe we are not susceptible to any
material cash impact on our results of operations caused by fluctuations in
exchange rates because our operations are primarily conducted in the United
States ("U.S."), if we expand our foreign operations in the future, substantial
increases or decreases in the value of the U.S. dollar relative to these other
currencies could have a significant impact on our results of operations.
To mitigate cross-currency transaction risk, we analyze significant exposures
where we have receipts or payments in a currency other than the functional
currency of our operations, and from time to time we may strategically enter
into short-term foreign currency forward contracts to lock in some or all of the
cash flows associated with these transactions. We also are subject to currency
translation risk associated with converting our foreign operations' financial
statements into U.S. dollars. We use short-term foreign currency forward
contracts and swaps to mitigate the impact of foreign exchange fluctuations on
consolidated earnings. We use foreign currency derivative contracts in order to
manage the effect of exchange fluctuations on forecasted sales, purchases,
acquisitions, inventory, capital expenditures and certain intercompany
transactions that are denominated in foreign currencies. We do not use
derivative financial instruments for trading or speculative purposes.
Additionally, we are subject to foreign exchange translation risk due to changes
in the value of foreign currencies in relation to our reporting currency, the
U.S. Dollar. At this time the Company's translation risk is primarily
concentrated in the exchange rate between the U.S. Dollar and the Euro due to
intercompany loans denominated in Euro used to facilitate the capital
requirements of our non-U.S. subsidiaries. As the U.S. Dollar strengthens
against the Euro, income will generally be negatively impacted, and as the U.S.
Dollar weakens, income will generally be positively impacted. At this time these
are non-cash impacts. We manage our worldwide cash requirements in accordance
with availability in multiple jurisdictions and effectiveness with which those
funds can be accessed. As a result, we may access cash from among international
subsidiaries and the U.S. when it is cost effective to do so. We continually
review our domestic and foreign cash profile, expected future cash generation
and investment opportunities and reassess whether there is a need to repatriate
funds held internationally to support our U.S. operations. Accordingly, we do
not expect translation risk to have a material economic impact on our financial
positions or results of operations. Based on our overall foreign currency
translation risk exposure related to intercompany loans denominated in Euro as
of September 30, 2021 and 2020, a 1% increase or decrease in the Euro to U.S.
Dollar exchange rate would decrease or increase income (loss) before income
taxes by approximately $1.0 million in both periods.
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