EVOA WATEPAR The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Unaudited Consolidated Financial Statements, including the notes, included in Part I, Item 1 of this Quarterly Report on Form 10-Q (this "Report"), and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , as filed with theSEC onNovember 17, 2021 (the "2021 Annual Report"). You should review the disclosures in Part I, Item 1A, "Risk Factors" in the 2021 Annual Report, as well as any cautionary language in this Report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless otherwise indicated or the context otherwise requires, all references to "the Company," "Evoqua," "Evoqua Water Technologies Corp. ," "we," "us," "our" and similar terms refer toEvoqua Water Technologies Corp. , together with its consolidated subsidiaries. Unless otherwise specified, all dollar amounts in this section are referred to in millions.
Overview
We are a leading provider of mission-critical water and wastewater treatment solutions, offering a broad portfolio of products, services, and expertise to support customers across various end markets. We are headquartered inPittsburgh, Pennsylvania , with locations across nine countries. We have a comprehensive portfolio of differentiated, proprietary technologies offered under marketleading and wellestablished brands. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals. Our solutions are designed to provide our customers with the quantity and quality of water necessary to meet their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations while supporting their regulatory compliance and environmental requirements. We deliver and maintain these mission critical solutions through our extensive North American service network, and we sell our products and technologies internationally through direct and indirect sales channels. We have worked to protect water, the environment, and our employees for more than 100 years. As a result, we have earned a reputation for quality, safety, and reliability around the world. Our employees are united by a common purpose: Transforming water. Enriching life.® Our vision "to be the world's first choice for water solutions" and our values of "integrity, customers, sustainable, and performance" foster a culture that is focused on establishing a workforce that is enabled, empowered and accountable, creating a highly dynamic work environment.
We serve our customers through the following two segments:
•Integrated Solutions and Services segment, which provides application-specific solutions and full lifecycle services for critical water and wastewater applications across numerous end markets, including outsourced water service contracts, capital systems, and related recurring aftermarket services, parts and consumables, and emergency services to enable recycle and reuse, improve operational reliability and performance, and promote environmental compliance; and •Applied Product Technologies segment, which provides highly differentiated and scalable water and wastewater products and technologies as stand-alone offerings or components in integrated solutions to a diverse set of system integrators and end-users globally.
Our segments draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes, and corporate philosophies. The key factors used to identify these reportable operating segments are the organization and alignment of our internal operations, the nature of the products and services and customer type.
Recent Developments, Key Factors and Trends Affecting Our Business and Financial Statements
Our 2021 Annual Report includes a discussion of various key factors and trends
that we believe have affected or may affect our operating results. The following
discussion highlights recent developments, as well as significant changes in
these key factors and trends.
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Inflation, material availability and labor shortages. Material, freight, and
labor inflation resulted in increased costs in the first three quarters of
fiscal 2022, and we expect this trend will continue throughout fiscal 2022 and
into fiscal 2023. Although we have offset a portion of these increased costs
through price increases and operational efficiencies to date, our margin
percentage has been negatively impacted. There can be no assurance that we will
be able to continue to offset all or any portion of these increased costs. If we
are unable to manage commodity fluctuations through pricing actions, cost
savings projects, and sourcing decisions as well as through consistent
productivity improvements, it may adversely impact our gross profit and gross
margin in future periods. Additionally, supply chain disruptions and labor
shortages have restricted and could further restrict availability of certain
commodities and materials, which may result in delays in our execution of
projects in fiscal 2022 and negatively impact revenues. Tight labor markets have
resulted in longer times to fill open positions and labor inflation. Continued
delays in filling open positions, particularly among our service technician
population, could impact our ability to provide timely service to our customers.
Although these factors did not have a material adverse effect on our results of
operations for the three and nine months ended June 30, 2022 , if sustained, they
could have a material adverse effect on our results of operations going forward.
Impact of the COVID-19 pandemic. We continue to monitor the ongoing effects of
the COVID-19 pandemic, particularly as shutdowns and restrictions in parts of
China have continued in response to the spread of COVID-19 variants. These
shutdowns and restrictions did not have a material adverse effect on our
operations or financial results for the three and nine months ended June 30,
2022 . However, if the duration of these shutdowns and restrictions extends, or
if similar shutdowns and restrictions are imposed in other regions, it could
impact our sales into those regions and our ability to source materials from
those regions.
Although the pandemic negatively impacted sales volume across our business in
earlier periods, due primarily to customer site access restrictions, temporary
customer site closures, and temporary delays in annual maintenance activities by
customers in certain end markets, these factors did not have a material adverse
effect on our results of operations for the three and nine months ended June 30,
2022 . Vaccination requirements imposed by certain of our customers to allow our
employees to enter their sites may increase our costs or delay our performance
of services for our customers, however this has not materially impacted our
results to date.
For more information regarding factors and events that may impact our business,
results of operations and financial condition as a result of the COVID-19
pandemic, see "Risk Factors-The COVID-19 pandemic has adversely affected, and
may continue to adversely affect, our business, financial condition, results of
operations, and prospects" included in Part I, Item 1A, "Risk Factors" in the
2021 Annual Report.
Russia -Ukraine war. We have no operations in Russia or Ukraine , and our sales
into these regions are minimal. However, the conflict in Ukraine has exacerbated
the material inflation and availability challenges described above, particularly
with respect to the impact it has had on energy and fuel prices and the price of
steel and other precious metals that we procure in our supply chain. Although
these factors did not have a material adverse effect on our results of
operations for the three and nine months ended June 30, 2022 , we expect the
inflationary impact on energy, fuel and steel prices to continue throughout
fiscal 2022. If these factors are sustained, or if the duration of the conflict
is extended or the conflict spreads into a larger geographic portion of Europe ,
our results of operations in future periods could be materially and adversely
impacted.
Acquisitions and divestitures. On December 20, 2021 , the Company and its
indirect wholly-owned subsidiaries Evoqua Water Technologies LLC ("EWT LLC ") and
Evoqua Water Technologies Ltd. (together with EWT LLC , the "Buyer"), entered
into an Asset Purchase Agreement (the "Agreement") with Cantel Medical LLC , Mar
Cor Purification, Inc. , and certain of their affiliates (collectively, the
"Sellers"), each wholly-owned subsidiaries of Steris plc, pursuant to which the
Buyer agreed to acquire certain assets of the Sellers and assume certain
liabilities of the Sellers that are owned or used or arise in connection with
the global operation of the Sellers' renal business (the "Mar Cor Business") for
an aggregate purchase price of $196.3 million in cash at closing (the "Purchase
Price"), subject to customary adjustments, including for working capital (the
"Transaction"). On January 3, 2022 , we completed the Transaction to acquire the
Mar Cor Business for approximately $195.0 million paid in cash at closing,
following adjustments. We utilized cash on hand and borrowed an additional
$160.0 million under our 2021 Revolving Credit Facility (as defined below) to
fund the Transaction. The Purchase Price includes a $12.3 million earn out,
which is being held in escrow and will be paid, pro rata, to the Sellers if the
Mar Cor Business meets certain sales performance goals (the "Earn Out"). Any
portion of the Earn Out not paid to the Sellers during the first year following
closing of the Transaction will be returned to us. The Mar
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Cor Business is a leading manufacturer and servicer of medical water, commercial
and industrial solutions in North America . Headquartered in Plymouth, Minnesota ,
the Mar Cor Business has 27 service and regeneration facilities in the U.S. and
Canada . The Mar Cor Business offers significant technical expertise in
designing, building, and servicing high-purity water treatment systems. The
addition of this business expands our service footprint in North America ,
furthering our reach into the healthcare vertical market. During the nine months
ended June 30, 2022 , we incurred approximately $3.2 million in acquisition
costs, which are included in General and administrative expense on the Unaudited
Consolidated Statements of Operations. Additionally, we expect to incur between
$18.0 million to $20.0 million in one-time integration costs within the
following 18 to 24 months. The Mar Cor Business is included within the
Integrated Solutions and Services segment.
During the nine months ended June 30, 2022 , we completed the divestiture of
certain resin regeneration assets in Germany (the "Germany Regen Business") for
approximately $0.4 million in cash at closing, resulting in a gain of $0.2
million recognized on the sale. The Germany Regen Business was a part of the
Applied Product Technologies segment.
On April 1, 2022 , we acquired the remaining 32% equity interest in Frontier
Water Systems, LLC ("Frontier") for an aggregate purchase price of approximately
$10.4 million , making Frontier a wholly-owned subsidiary of the Company. This
followed our initial acquisition of a 60% equity interest in Frontier in October
2019 and our acquisition of an additional 8% equity interest in Frontier in
April 2021 . San Diego -based Frontier is a leading supplier of engineered
equipment packages for high-rate treatment of selenium, nitrate, and metals in
water and wastewater. The business adds to Evoqua's portfolio of advanced
wastewater treatment technologies and is part of our Integrated Solutions and
Services segment.
Also on April 1, 2022 , we acquired the remaining 50% partnership interest in
Treated Water Outsourcing, a joint venture between the Company and Nalco Water,
an Ecolab company ("Nalco"), from Nalco for an aggregate purchase price of
approximately $1.1 million .
On July 1, 2022 , we completed the acquisition of Smith Engineering, Inc. ("Smith
Engineering") for approximately $18.9 million cash paid at closing. Smith
Engineering is a leader in the design, manufacturing, and service of custom high
purity water treatment equipment serving the biotech/pharmaceutical, data
center, food and beverage, healthcare, medical device, and microelectronics
markets. With over 1,200 customers in North America , Smith Engineering offers a
variety of water treatment products and services, including filtration, UV,
reverse osmosis, and deionization.
On July 15, 2022 , we completed the acquisition of Epicor, Inc. ("Epicor") for
$4.3 million cash paid at closing. Epicor has supplied specialty resins for
power steam system treatment for fifty years. The resins provide a
cost-effective and efficient method for creating and maintaining a continual
supply of ultra-pure water for power plants.
We continue to actively evaluate acquisition opportunities that are consistent
with our business strategy. We maintain a robust pipeline of potential
acquisition targets, developed by our management team as well as various outside
industry experts and consultants.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our consolidated business are revenue, gross profit, gross margin, and net income (loss). Management utilizes these financial measures prepared in accordance with accounting principles generally accepted 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 and
aftermarket) and revenue from service. Revenue is used by management
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to evaluate the performance of our business. Organic revenue, which is a
non-GAAP financial measure, is defined as revenue excluding the impact of
foreign currency translation and inorganic revenue. Inorganic revenue represents
the impact from acquisitions and divestitures during the first 12 months
following the closing of the acquisition or divestiture. Divestitures include
sales of insignificant portions of our business that did not meet the criteria
for classification as a discontinued operation. We exclude the effect of foreign
currency translation from organic sales because foreign currency translation is
not under management's control, is subject to volatility and can obscure
underlying business trends. We exclude the effect of acquisitions and
divestitures during the first 12 months following the closing of the acquisition
or divestiture because they can obscure underlying business trends and make
comparisons of long-term performance difficult between the Company and its peers
due to the varying nature, size, and number of transactions from period to
period. Management believes that reporting organic revenue provides useful
information to investors by helping identify underlying growth trends in our
core business and facilitating easier comparisons of our revenue performance
with prior and future periods and to our peers. See "Non-GAAP Reconciliations"
in this Item 2 for a reconciliation of organic revenue to revenue.
EBITDA and Adjusted EBITDA
EBITDA, which is a non-GAAP financial measure, is defined as net income (loss) before interest expense, income tax benefit (expense), and depreciation and amortization. Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary metrics used by management to evaluate the strength and financial performance of our core business. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense), and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, share-based compensation, transaction costs, and other gains, losses, and expenses that we believe do not directly reflect our underlying business operations. We present adjusted EBITDA because we believe it is frequently used by analysts, investors, and other interested parties to evaluate and compare operating performance and value companies within our industry. Further, we believe it is helpful in highlighting trends in our operating results and provides greater clarity and comparability period over period to management and our investors regarding the operational impact of long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate, and capital investments. In addition, adjusted EBITDA highlights true business performance by removing the impact of certain items that management believes do not directly reflect our underlying operations and provides investors with greater visibility into the ongoing drivers of our business performance.
Management uses adjusted EBITDA to supplement GAAP measures of performance as follows:
•to assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance;
•in our management incentive compensation, which is based in part on components of adjusted EBITDA;
•in certain calculations under our senior secured credit facilities, which use components of adjusted EBITDA;
•to evaluate the effectiveness of our business strategies;
•to make budgeting decisions; and
•to compare our performance against that of other peer companies using similar measures.
In addition to the above, our chief operating decision maker uses adjusted
EBITDA of each reportable operating segment as a supplement to segment income
from operations and segment revenue to evaluate the operating performance of
such segments. Adjusted EBITDA on a segment basis is defined as earnings before
depreciation and amortization, adjusted for the impact of certain other items
that have been reflected at the segment level. Adjusted EBITDA of the reportable
operating segments do not include certain charges that are presented within
corporate activities. These charges include certain restructuring and other
business transformation charges that have been incurred to align and reposition
the Company to the current reporting structure, acquisition related costs
(including transaction costs and integration costs) and share-based compensation
charges.
EBITDA and adjusted EBITDA should not be considered substitutes for, or superior
to, financial measures prepared in accordance with GAAP. The financial results
prepared in accordance with GAAP and the reconciliations from these
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results should be carefully evaluated. See "Non-GAAP Reconciliations" in this
Item 2 for a reconciliation of EBITDA and adjusted EBITDA to net income. You are
encouraged to evaluate each adjustment and the reasons we consider it
appropriate for supplemental analysis. In addition, in evaluating adjusted
EBITDA, you should be aware that in the future, we may incur expenses similar to
the adjustments in the presentation of adjusted EBITDA. Our presentation of
adjusted EBITDA should not be construed as an inference that our future results
will be unaffected by unusual or non-recurring items. In addition, other
companies in our industry or across different industries may calculate adjusted
EBITDA differently.
41
--------------------------------------------------------------------------------Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
Three Months Ended June 30,
2022 2021
(In millions, except per share amounts) % of Revenue % of Revenue % Variance
Revenue from product sales and services $ 439.3 100.0 % $ 369.7 100.0 % 18.8 %
Gross profit $ 136.1 31.0 % $ 117.0 31.6 % 16.3 %
Total operating expenses $ (105.9) (24.1) % $ (90.1) (24.4) % 17.5 %
Other operating income, net $ 0.8 0.2 % $ 1.4 0.4 % (42.9) %
Interest expense $ (8.4) (1.9) % $ (11.2) (3.0) % (25.0) %
Income before income taxes $ 22.6 5.1 % $ 17.1 4.6 % 32.2 %
Income tax expense $ (5.0) (1.1) % $ (3.9) (1.1) % 28.2 %
Net income $ 17.6 4.0 % $ 13.2 3.6 % 33.3 %
Net income attributable to noncontrolling interest $ - - % $ - - % n/a
Net income attributable to Evoqua Water
Technologies Corp. $ 17.6 4.0 % $ 13.2 3.6 % 33.3 %
Weighted average shares outstanding Basic 121.3 119.0 Diluted 124.9 122.3 Earnings per share Basic$ 0.14 $ 0.11 Diluted$ 0.14 $ 0.11 Other financial data: Adjusted EBITDA(1)$ 77.0 17.5 %$ 66.2 17.9 % 16.3 % Nine Months Ended June 30, 2022 2021 (In millions, except per share amounts) % of Revenue % of Revenue % Variance Revenue from product sales and services$ 1,232.3 100.0 %$ 1,038.4 100.0 % 18.7 % Gross profit$ 375.5 30.5 %$ 318.3 30.7 % 18.0 % Total operating expenses$ (314.2) (25.5) %$ (259.6) (25.0) % 21.0 % Other operating income, net $ 3.6 0.3 %$ 2.0 0.2 % 80.0 % Interest expense$ (25.0) (2.0) %$ (28.3) (2.7) % (11.7) % Income before income taxes$ 39.9 3.2 %$ 32.4 3.1 % 23.1 % Income tax expense$ (8.9) (0.7) %$ (7.7) (0.7) % 15.6 % Net income$ 31.0 2.5 %$ 24.7 2.4 % 25.5 % Net income attributable to noncontrolling interest $ 0.1 - %$ 0.1 - % - % Net income attributable to Evoqua Water Technologies Corp.$ 30.9 2.5 %$ 24.6 2.4 %
25.6 %
Weighted average shares outstanding Basic 121.0 119.0 Diluted 124.9 122.3 Earnings per share Basic$ 0.26 $ 0.21 Diluted$ 0.25 $ 0.20 Other financial data: Adjusted EBITDA(1)$ 204.5 16.6 %$ 169.0 16.3 % 21.0 % 42
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(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report.
Consolidated Results for the Three Months Ended
Revenue-Revenue increased$69.6 million , or 18.8%, to$439.3 million in the three months endedJune 30, 2022 , from$369.7 million in the three months endedJune 30, 2021 . Revenue from product sales increased$49.6 million , or 22.7%, to$268.0 million in the three months endedJune 30, 2022 , from$218.4 million in the three months endedJune 30, 2021 . Revenue from services increased$20.0 million , or 13.2%, to$171.3 million in the three months endedJune 30, 2022 , from$151.3 million in the three months endedJune 30, 2021 .
The following tables provide the change in revenue by offering and the change in
revenue by driver during the three months ended
Three Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 268.0 61.0 % $ 218.4 59.1 % $ 49.6 22.7 %
Capital 171.4 39.0 % 156.0 42.2 % 15.4 9.9 %
Aftermarket 96.6 22.0 % 62.4 16.9 % 34.2 54.8 %
Revenue from services 171.3 39.0 % 151.3 40.9 % 20.0 13.2 %
$ 439.3 100.0 % $ 369.7 100.0 % $ 69.6 18.8 %
Three Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Organic(1) $ 403.8 91.9 % $ 369.7 100.0 % $ 34.1 9.2 %
Inorganic 40.8 9.3 % - - % 40.8 11.0 %
Foreign currency translation (5.3) (1.2) % n/a n/a (5.3) (1.4) %
$ 439.3 100.0 % $ 369.7 100.0 % $ 69.6 18.8 %
(1)Organic revenue is a non-GAAP financial measure. For a reconciliation to total revenue, its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report.
The increase in organic revenue was driven by favorable price realization and higher volume for products and services across most product lines and all regions.
Revenue in future periods could be negatively impacted by commodity and material availability constraints caused by global supply chain disruptions, skilled labor shortages, and the timing of projects.
Cost of sales and gross margin-Total gross margin decreased slightly to 31.0% in
the three months ended
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--------------------------------------------------------------------------------The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
Three Months Ended June 30,
2022 2021
Gross Gross
(In millions) Margin Margin
Cost of product sales $ (185.7) 30.7 % $
(152.6) 30.1 %
Cost of services (117.5) 31.4 % (100.1) 33.8 %
$ (303.2) 31.0 % $ (252.7) 31.6 %
Gross margin from product sales increased by 60 basis points ("bps") to 30.7% in
the three months ended June 30, 2022 , from 30.1% in the three months ended
June 30, 2021 . This increase was driven by favorable volume, mix, and positive
price realization, which was partially offset by labor, material, and freight
inflation.
Gross margin from services decreased by 240 bps to 31.4% in the three months
ended June 30, 2022 , from 33.8% in the three months ended June 30, 2021 . This
decrease was driven by increased labor costs and resource constraints.
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 $15.8 million , or 17.5%, to
$105.9 million in the three months ended June 30, 2022 , from $90.1 million in
the three months ended June 30, 2021 . Operating expenses are comprised of the
following:
Three Months Ended June 30,
2022 2021
(In millions) % of Revenue % of Revenue % Variance
General and administrative expense $ (61.4) (14.0) % $ (50.8) (13.7) % 20.9 %
Sales and marketing expense (40.6) (9.2) % (35.9) (9.7) % 13.1 %
Research and development expense (3.9) (0.9) % (3.4) (0.9) % 14.7 %
Total operating expenses $ (105.9) (24.1) % $ (90.1) (24.4) % 17.5 %
The increase period over period in operating expenses was primarily due to
foreign currency translation losses in the current period, compared to foreign
currency translation gains in the prior period, most of which is related to
intercompany loans. The increase was also due to increased employee related
expenses as well as increased operating and amortization expense due to the
acquisition of the Mar Cor Business in the current year. In addition, there were
increased consulting, information technology, and travel expenses compared to
the prior period. The above increases were partially offset by a decrease in
external legal fees compared to the prior period, as well as certain benefits in
the current period related to the acquisition of the Mar Cor Business, which we
expect to be non-recurring in nature.
Fluctuations in foreign currency translation and inflation could impact operating expenses in future periods.
Other operating income, net-Other operating income, net, decreased$0.6 million to$0.8 million in the three months endedJune 30, 2022 , from$1.4 million in the three months endedJune 30, 2021 . This decrease was driven by COVID-19 pandemic subsidies received from the Canadian government in the prior period, which did not reoccur in the current period. This was partially offset by an increase in income from the disposal of fixed assets compared to the prior period. Interest expense-Interest expense decreased$2.8 million , or 25.0%, to$8.4 million in the three months endedJune 30, 2022 , from$11.2 million in the three months endedJune 30, 2021 . The decrease in interest expense was primarily driven by$3.1 million of fees incurred in the prior period as a result of theApril 2021 refinancing of our senior credit facility, which also resulted in the write off of$1.3 million of deferred financing fees in the prior period, which did not reoccur in 44 --------------------------------------------------------------------------------
the current period. This decrease was partially offset by an increase in interest expense associated with higher outstanding debt.
Income tax expense-Income tax expense increased to$5.0 million in the three months endedJune 30, 2022 , as compared to income tax expense of$3.9 million in the three months endedJune 30, 2021 . The increase in tax expense was primarily due to higher earnings in non-U.S. tax jurisdictions, which generally increases tax expense. Net income-Net income increased$4.4 million , or 33.3%, to$17.6 million in the three months endedJune 30, 2022 , from$13.2 million in the three months endedJune 30, 2021 , as a result of the variances noted above. Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the three months endedJune 30, 2022 increased by$10.8 million , or 16.3%, to$77.0 million , as compared to$66.2 million for the three months endedJune 30, 2021 , primarily driven by sales volume, favorable price realization, and mix, which was partially offset by inflationary costs. See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of adjusted EBITDA. Segment Results Three Months Ended June 30, 2022 2021 (In millions) % of Total % of Total % Variance Revenue Integrated Solutions and Services$ 297.4 67.7 %$ 239.7 64.8 % 24.1 % Applied Product Technologies 141.9 32.3 % 130.0 35.2 % 9.2 % Total Consolidated$ 439.3 100.0 %$ 369.7 100.0 % 18.8 % Operating profit (loss) Integrated Solutions and Services$ 39.9 128.7 %$ 37.8 133.6 % 5.6 % Applied Product Technologies 28.6 92.3 % 22.7 80.2 % 26.0 % Corporate (37.5) (121.0) % (32.2) (113.8) % 16.5 % Total Consolidated$ 31.0 100.0 %$ 28.3 100.0 % 9.5 % Adjusted EBITDA(1) Integrated Solutions and Services$ 64.1 83.2 %$ 56.3 85.0 % 13.9 % Applied Product Technologies 32.8 42.6 % 28.4 42.9 % 15.5 % Corporate (19.9) (25.8) % (18.5) (27.9) % 7.6 % Total Consolidated$ 77.0 100.0 %$ 66.2 100.0 % 16.3 % (1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to segment operating profit (loss), its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report.
Integrated Solutions and Services
Revenue in the Integrated Solutions and Services segment increased
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The following tables provide the change in revenue by offering and the change in
revenue by driver during the three months ended June 30, 2022 and 2021 for the
Integrated Solutions and Services segment:
Three Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 131.5 44.2 % $ 95.2 39.7 % $ 36.3 38.1 %
Capital $ 72.5 24.4 % $ 63.3 26.4 % $ 9.2 14.5 %
Aftermarket 59.0 19.8 % 31.9 13.3 % 27.1 85.0 %
Revenue from services 165.9 55.8 % 144.5 60.3 % 21.4 14.8 %
$ 297.4 100.0 % $ 239.7 100.0 % $ 57.7 24.1 %
Three Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Organic(1) $ 257.2 86.5 % $ 239.7 100.0 % $ 17.5 7.3 %
Inorganic 40.8 13.7 % - - % 40.8 17.0 %
Foreign currency translation (0.6) (0.2) % n/a n/a (0.6) (0.2) %
$ 297.4 100.0 % $ 239.7 100.0 % $ 57.7 24.1 %
(1)Segment organic revenue is a non-GAAP financial measure. For a reconciliation
to total segment revenue, its most directly comparable financial measure
presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of
this Report.
The increase in organic revenue was driven by favorable price realization and
higher sales volume, primarily related to service and aftermarket revenue across
most end markets which offset a slight decline in capital revenue. The decline
in capital revenue was related to the timing of projects in the chemical
processing end market, which was partially offset by increases in
microelectronics and life sciences end markets.
Operating profit in the Integrated Solutions and Services segment increased $2.1
million , or 5.6%, to $39.9 million in the three months ended June 30, 2022 , from
$37.8 million in the three months ended June 30, 2021 .
[[Image Removed: aqua-20220630_g1.jpg]]
Operating profit was favorably impacted by the acquisition of the Mar Cor
Business, as well as higher organic sales volume and favorable price
realization. These increases were partially offset by operational variances,
including labor, material, and freight inflation and availability, as well as
COVID-19 pandemic subsidies received from the Canadian government in the prior
period, which did not reoccur in the current period.
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Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the
Integrated Solutions and Services segment increased $7.8 million , or 13.9%, to
$64.1 million in the three months ended June 30, 2022 , compared to $56.3 million
in the three months ended June 30, 2021 . The increase was driven by the same
factors that impacted operating profit, other than the change in depreciation
and amortization, and also excludes restructuring and other non-recurring
activity. See "Non-GAAP Reconciliations" in Item 2 of this Report for a
reconciliation of adjusted EBITDA.
Applied Product Technologies
Revenue in the Applied Product Technologies segment increased$11.9 million , or 9.2%, to$141.9 million in the three months endedJune 30, 2022 , from$130.0 million in the three months endedJune 30, 2021 . The following tables provide the change in revenue by offering and the change in revenue by driver during the three months endedJune 30, 2022 and 2021 for the Applied Product Technologies segment: Three Months Ended June 30, 2022 2021 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 136.5 96.2 %$ 123.2 94.8 %$ 13.3 10.8 % Capital 98.9 69.7 % 92.7 71.3 % 6.2 6.7 % Aftermarket 37.6 26.5 % 30.5 23.5 % 7.1 23.3 % Revenue from services 5.4 3.8 % 6.8 5.2 % (1.4) (20.6) %$ 141.9 100.0 %$ 130.0 100.0 %$ 11.9 9.2 % Three Months Ended June 30, 2022 2021 % of % of (In millions) Revenue Revenue $ Variance % Variance Organic(1)$ 146.6 103.3 %$ 130.0 100.0 %$ 16.6 12.8 % Inorganic - - % - - % - - % Foreign currency translation (4.7) (3.3) % n/a n/a (4.7) (3.6) %$ 141.9 100.0 %$ 130.0 100.0 %$ 11.9 9.2 % (1)Segment organic revenue is a non-GAAP financial measure. For a reconciliation to total segment revenue, its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report.
The increase in organic revenue was driven by strong sales volume and price realization across all regions and most end markets.
47
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Operating profit in the Applied Product Technologies segment increased
[[Image Removed: aqua-20220630_g2.jpg]]
The increase in operating profit was primarily due to favorable sales volume,
mix, and price realization across multiple product lines and regions, which were
partially offset by unfavorable operational variances, including labor,
material, and freight inflation and availability.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied
Product Technologies segment increased $4.4 million , or 15.5%, to $32.8 million
in the three months ended June 30, 2022 , compared to $28.4 million in the three
months ended June 30, 2021 . The increase was driven by the same factors that
impacted operating profit, other than the change in depreciation and
amortization, and also excludes restructuring and other non-recurring activity.
See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of
adjusted EBITDA.
Corporate
Operating loss in Corporate increased $5.3 million , or 16.5%, to $37.5 million
in the three months ended June 30, 2022 , from $32.2 million in the three months
ended June 30, 2021 . The increase was primarily due to foreign currency
translation losses in the current period, compared to foreign currency
translation gains in the prior period, most of which is related to intercompany
loans. Additionally, there were increased employment expenses, including
share-based compensation. These were partially offset by lower costs associated
with legal matters in the current period.
Consolidated Results for the Nine Months Ended
Revenue-Revenue increased$193.9 million , or 18.7%, to$1,232.3 million in the nine months endedJune 30, 2022 , from$1,038.4 million in the nine months endedJune 30, 2021 . Revenue from product sales increased$139.4 million , or 23.2%, to$740.3 million in the nine months endedJune 30, 2022 , from$600.9 million in the nine months endedJune 30, 2021 . Revenue from services increased$54.5 million , or 12.5%, to$492.0 million in the nine months endedJune 30, 2022 , from$437.5 million in the nine months endedJune 30, 2021 . 48 --------------------------------------------------------------------------------
The following tables provide the change in revenue by offering and the change in
revenue by driver during the nine months ended
Nine Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Revenue from product sales: $ 740.3 60.1 % $ 600.9 57.9 % $ 139.4 23.2 %
Capital $ 484.8 39.3 % $ 425.9 41.0 % $ 58.9 13.8 %
Aftermarket 255.5 20.7 % 175.0 16.9 % 80.5 46.0 %
Revenue from services 492.0 39.9 % 437.5 42.1 % 54.5 12.5 %
$ 1,232.3 100.0 % $ 1,038.4 100.0 % $ 193.9 18.7 %
Nine Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Organic(1) $ 1,150.0 93.3 % $ 1,037.6 99.9 % $ 112.4 10.8 %
Inorganic 88.7 7.2 % 0.8 0.1 % 87.9 8.5 %
Foreign currency translation (6.4) (0.5) % n/a n/a (6.4) (0.6) %
$ 1,232.3 100.0 % $ 1,038.4 100.0 % $ 193.9 18.7 %
(1)Organic revenue is a non-GAAP financial measure. For a reconciliation to total revenue, its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report.
The increase in organic revenue was driven by higher sales volume across most product lines and regions, as well as favorable price realization.
Cost of sales and gross margin-Total gross margin decreased to 30.5% in the nine
months ended
The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
Nine Months Ended June 30,
2022 2021
Gross Gross
(In millions) Margin Margin
Cost of product sales $(524.9) 29.1 %$ (428.2) 28.7 % Cost of services (331.9) 32.5 % (291.9) 33.3 %$ (856.8) 30.5 %$ (720.1) 30.7 % Gross margin from product sales increased by 40 bps to 29.1% in the nine months endedJune 30, 2022 , from 28.7% in the nine months endedJune 30, 2021 . The increase in gross margin was primarily driven by favorable price realization and product mix. These factors were partially offset by labor, material and freight inflation. Gross margin from services decreased by 80 bps to 32.5% in the nine months endedJune 30, 2022 , from 33.3% in the nine months endedJune 30, 2021 . This decrease was driven by increased labor costs and resource constraints. 49 -------------------------------------------------------------------------------- Operating expenses-Operating expenses increased$54.6 million , or 21.0%, to$314.2 million in the nine months endedJune 30, 2022 , from$259.6 million in the nine months endedJune 30, 2021 . Operating expenses are comprised of the following: Nine Months Ended June 30, 2022 2021 (In millions) % of Revenue % of Revenue % Variance General and administrative expense$ (186.2) (15.1) %$ (146.1) (14.1) % 27.4 % Sales and marketing expense (116.9) (9.5) % (103.6) (10.0) % 12.8 % Research and development expense (11.1) (0.9) % (9.9) (1.0) % 12.1 % Total operating expenses$ (314.2) (25.5) %$ (259.6) (25.0) % 21.0 % The increase period over period in operating expenses was primarily due to higher employee related expenses associated with labor inflation. Foreign currency translation losses in the current period, compared to foreign currency translation gains in the prior period, most of which is related to intercompany loans, also contributed to this increase. In addition, there were increased consulting and travel expenses, and increased amortization and operating expense due to acquisitions in the current period compared to the prior period. The above increases were partially offset by a decrease in external legal fees compared to the prior period, as well as a benefit in the current period related to changes in the estimate of the Mar Cor Business achieving the earn-out target.
Fluctuations in foreign currency translation and inflation could impact operating expenses in future periods.
Other operating income, net-Other operating income, net, increased$1.6 million to$3.6 million in the nine months endedJune 30, 2022 , from$2.0 million in the nine months endedJune 30, 2021 . This increase was driven by income from precious metal sales, mainly from scrapped anodes inChina , as well as gains on the disposal of fixed assets compared to the prior period. Additionally, we received a refund of certain taxes paid from the Chinese government in the current period, which partially offset COVID-19 pandemic subsidies received from the Canadian government in the prior period, which did not reoccur in the current period. Interest expense-Interest expense decreased$3.3 million , or 11.7%, to$25.0 million in the nine months endedJune 30, 2022 , from$28.3 million in the nine months endedJune 30, 2021 . The decrease in interest expense was primarily driven by a$100.0 million debt prepayment in conjunction with theApril 2021 refinancing of our senior credit facility, as well as a reduction in the interest rate spread and LIBOR year over year. As a result of theApril 2021 refinancing, an additional$3.1 million of fees and a write off of$1.3 million of deferred financing fees were incurred in the prior period. This decrease was partially offset by a fair value increase of$2.1 million in the purchase right liability to acquire the remaining equity interest of Frontier in the current period, as well as an increase in interest expense associated with higher outstanding debt. Income tax expense-Income tax expense increased$1.2 million to$8.9 million in the nine months endedJune 30, 2022 , from$7.7 million in the nine months endedJune 30, 2021 . The increase in tax expense was primarily due to higher earnings in non-U.S. tax jurisdictions, which generally increases tax expense, partially offset by discrete tax expense in the prior year that did not reoccur in the current year. Net income-Net income increased$6.3 million , or 25.5%, to$31.0 million in the nine months endedJune 30, 2022 , from$24.7 million in the nine months endedJune 30, 2021 , as a result of the variances noted above. Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the nine months endedJune 30, 2022 increased by$35.5 million , or 21.0%, to$204.5 million , as compared to$169.0 million for the nine months endedJune 30, 2021 , primarily driven by sales volume and related gross profit. See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of adjusted EBITDA. 50 --------------------------------------------------------------------------------
Segment Results
Nine Months Ended June 30,
2022 2021
(In millions) % of Total % of Total % Variance
Revenue
Integrated Solutions and Services $ 837.3 67.9 % $ 678.5 65.3 % 23.4 %
Applied Product Technologies 395.0 32.1 % 359.9 34.7 % 9.8 %
Total Consolidated $ 1,232.3 100.0 % $ 1,038.4 100.0 % 18.7 %
Operating profit (loss)
Integrated Solutions and Services $ 113.3 174.6 % $ 94.9 156.3 % 19.4 %
Applied Product Technologies 69.4 106.9 % 54.2 89.3 % 28.0 %
Corporate (117.8) (181.5) % (88.4) (145.6) % 33.3 %
Total Consolidated $ 64.9 100.0 % $ 60.7 100.0 % 6.9 %
Adjusted EBITDA(1)
Integrated Solutions and Services $ 181.4 88.7 % $ 148.8 88.0 % 21.9 %
Applied Product Technologies 82.0 40.1 % 72.6 43.0 % 12.9 %
Corporate (58.9) (28.8) % (52.4) (31.0) % 12.4 %
Total Consolidated $ 204.5 100.0 % $ 169.0 100.0 % 21.0 %
(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to
segment operating profit (loss), its most directly comparable financial measure
presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of
this Report.
Integrated Solutions and Services
Revenue in the Integrated Solutions and Services segment increased
The following tables provide the change in revenue by offering and the change in revenue by driver during the nine months endedJune 30, 2022 and 2021 for the Integrated Solutions and Services segment: Nine Months Ended June 30, 2022 2021 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 360.9 43.1 %$ 257.5 38.0 %$ 103.4 40.2 % Capital 210.3 25.1 % 166.0 24.5 % 44.3 26.7 % Aftermarket 150.6 18.0 % 91.5 13.5 % 59.1 64.6 % Revenue from services 476.4 56.9 % 421.0 62.0 % 55.4 13.2 %$ 837.3 100.0 %$ 678.5 100.0 %$ 158.8 23.4 % Nine Months Ended June 30, 2022 2021 % of % of (In millions) Revenue Revenue $ Variance % Variance Organic$ 749.0 89.5 %$ 677.7 99.9 %$ 71.3 10.5 % Inorganic 88.7 10.6 % 0.8 0.1 % 87.9 13.0 % Foreign currency translation (0.4) - % n/a n/a (0.4) (0.1) %$ 837.3 100.0 %$ 678.5 100.0 %$ 158.8 23.4 % (1)Segment organic revenue is a non-GAAP financial measure. For a reconciliation to total segment revenue, its most directly comparable financial measure presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of this Report. 51
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The increase in organic revenue was driven by higher sales volume across capital, aftermarket, and service, as well as favorable price realization.
Operating profit in the Integrated Solutions and Services segment increased
[[Image Removed: aqua-20220630_g3.jpg]]
Operating profit growth was driven by higher organic sales volume and mix as
well as favorable price realization. These increases were partially offset by
operational variances, including labor and material inflation and availability,
as well as COVID-19 pandemic subsidies received from the Canadian government in
the prior period, which did not reoccur in the current period. Acquisitions also
contributed to the increase in operating profit, primarily associated with the
impact of the Mar Cor Business.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the
Integrated Solutions and Services segment increased $32.6 million , or 21.9%, to
$181.4 million in the nine months ended June 30, 2022 , compared to $148.8
million in the nine months ended June 30, 2021 . The increase was driven by the
same factors that impacted operating profit, other than the change in
depreciation and amortization, and also excludes restructuring and other
non-recurring activity. See "Non-GAAP Reconciliations" in Item 2 of this Report
for a reconciliation of adjusted EBITDA.
Applied Product Technologies
Revenue in the Applied Product Technologies segment increased
The following tables provide the change in revenue by offering and the change in revenue by driver during the nine months endedJune 30, 2022 and 2021 for the Applied Product Technologies segment: Nine Months Ended June 30, 2022 2021 % of % of (In millions) Revenue Revenue $ Variance % Variance Revenue from product sales:$ 379.4 96.1 %$ 343.4 95.4 %$ 36.0 10.5 % Capital$ 274.5 69.5 %$ 259.9 72.2 %$ 14.6 5.6 % Aftermarket 104.9 26.6 % 83.5 23.2 % 21.4 25.6 % Revenue from services 15.6 3.9 % 16.5 4.6 % (0.9) (5.5) %$ 395.0 100.0 %$ 359.9 100.0 %$ 35.1 9.8 % 52
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Nine Months Ended June 30,
2022 2021
% of % of
(In millions) Revenue Revenue $ Variance % Variance
Organic $ 401.0 101.5 % $ 359.9 100.0 % $ 41.1 11.4 %
Inorganic - - % - - % - - %
Foreign currency
translation (6.0) (1.5) % n/a n/a (6.0) (1.6) %
$ 395.0 100.0 % $ 359.9 100.0 % $ 35.1 9.8 %
(1)Segment organic revenue is a non-GAAP financial measure. For a reconciliation
to total segment revenue, its most directly comparable financial measure
presented in accordance with GAAP, see "Non-GAAP Reconciliations" in Item 2 of
this Report.
The increase in organic revenue was driven by sales mix, volume growth, and price across all regions and multiple product lines.
Operating profit in the Applied Product Technologies segment increased$15.2 million , or 28.0%, to$69.4 million in the nine months endedJune 30, 2022 , from$54.2 million in the nine months endedJune 30, 2021 . [[Image Removed: aqua-20220630_g4.jpg]] The increase in operating profit was primarily due to favorable sales volumes and mix across multiple product lines and regions, partially offset by unfavorable operational variances, including project variances and labor and material inflation and availability. Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment increased$9.4 million , or 12.9%, to$82.0 million in the nine months endedJune 30, 2022 , compared to$72.6 million in the nine months endedJune 30, 2021 . The increase was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization, and also excludes restructuring and other non-recurring activity. See "Non-GAAP Reconciliations" in Item 2 of this Report for a reconciliation of adjusted EBITDA. Corporate Operating loss in Corporate increased$29.4 million , or 33.3%, to$117.8 million in the nine months endedJune 30, 2022 , from$88.4 million in the nine months endedJune 30, 2021 . The increase was primarily due to foreign currency translation losses in the current period, compared to foreign currency translation gains in the prior period, most of which is related to intercompany loans. Additionally, there were increased employment expenses, including share-based compensation. These were partially offset by lower costs associated with legal matters in the current year. 53 --------------------------------------------------------------------------------
Non-GAAP Reconciliations
The following is a reconciliation of total revenue to organic revenue for the
three months ended
Total Revenue Foreign Currency Inorganic Revenue(1) Organic Revenue
Three Months Ended Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, June 30, June 30,
(In millions) 2022 2021 % Variance 2022 2021 % Variance 2022 2021 % Variance 2022 2021 % Variance
Evoqua Water Technologies $439.3 $369.7 18.8 % $(5.3) n/a (1.4) % $40.8 $- 11.0 % $403.8 $369.7 9.2 %
Integrated Solutions &
Services $297.4 $239.7 24.1 % $(0.6) n/a (0.2) % $40.8 $- 17.0 % $257.2 $239.7 7.3 %
Applied Product
Technologies $141.9 $130.0 9.2 % $(4.7) n/a (3.6) % $- $- - % $146.6 $130.0 12.8 %
(1)Includes the acquisition of the Mar Cor Business on
The following is a reconciliation of total revenue to organic revenue for the
nine months ended
Total Revenue Foreign Currency Inorganic Revenue(1) Organic Revenue
Nine Months Ended June
Nine Months Ended June 30 , 30, Nine Months Ended June 30 , Nine Months Ended June 30 ,
(In millions) 2022 2021 % Variance 2022 2021 % Variance 2022 2021 % Variance 2022 2021 % Variance
Evoqua Water Technologies $1,232.3 $1,038.4 18.7 % $(6.4) n/a (0.6) % $88.7 $0.8 8.5 % $1,150.0 $1,037.6 10.8 %
Integrated Solutions &
Services $837.3 $678.5 23.4 % $(0.4) n/a (0.1) % $88.7 $0.8 13.0 % $749.0 $677.7 10.5 %
Applied Product
Technologies $395.0 $359.9 9.8 % $(6.0) n/a (1.6) % $- $- - % $401.0 $359.9 11.4 %
(1)Includes divestiture of the Lange product line on March 1, 2021 , acquisition
of Ultrapure & Industrial Services on December 17, 2020 , acquisition of WCSI on
April 1, 2021 , and the acquisition of the Mar Cor Business on January 3, 2022 .
The following is a reconciliation of our Net income to adjusted EBITDA. Amounts
excluded relate to items that management believes do not reflect the underlying,
ongoing operational performance of the business as a result of their nature or
size and/or are non-recurring and would not be expected to occur as part of our
normal business on a regular basis:
54
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Three Months Ended Nine Months Ended
June 30, June 30,
(In millions) 2022 2021 % Variance 2022 2021 % Variance
Net income $ 17.6 $ 13.2 33.3 % $ 31.0 $ 24.7 25.0 %
Income tax expense 5.0 3.9 28.2 % 8.9 7.7 15.6 %
Interest expense 8.4 11.2 (25.0) % 25.0 28.3 (11.7) %
Operating profit $ 31.0 $ 28.3 9.5 % $ 64.9 $ 60.7 6.9 %
Depreciation and amortization 32.7 29.1 12.4 % 93.9 83.7 12.2 %
EBITDA $ 63.7 $ 57.4 11.0 % $ 158.8 $ 144.4 10.0 %
Restructuring and related business
transformation costs(a) 1.9 1.8 5.6 % 5.1 9.0 (43.3) %
Purchase accounting adjustment
costs(b) 1.6 - n/a 4.2 - n/a
Share-based compensation(c) 5.8 5.5 5.5 % 17.2 11.8 45.8 % Transaction costs(d) 0.1 0.3 (66.7) % 5.0 1.6 212.5 % Other losses (gains) and expenses(e) 3.9 1.2 225.0 % 14.2 2.2 545.5 % Adjusted EBITDA$ 77.0 $ 66.2 16.3 %$ 204.5 $ 169.0 21.0 %
(a)Restructuring and related business transformation costs
Adjusted EBITDA is calculated prior to considering certain restructuring or business transformation events. These events may occur over extended periods of time, and in some cases it is reasonably possible that they could reoccur in future periods based on reorganizations of the business, cost reduction or productivity improvement needs, or in response to economic conditions. For the periods presented such events include the following: (i)Certain costs and expenses in connection with various restructuring initiatives, including severance and other employee-related costs, relocation and facility consolidation costs, and third-party consultant costs to assist with these initiatives. This includes: (A)amounts related to the Company's restructuring initiatives to reduce the cost structure and rationalize location footprint following the sale of the Memcor product line; (B)amounts related to the Company's transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide; and
(C)amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure.
(ii)Legal settlement costs and intellectual property related fees including fees and settlement costs associated with legacy matters, related to product warranty litigation on MEMCOR® products and certain discontinued products. Memcor ® is a trademark ofRohm & Haas Electronic Materials Singapore Pte. Ltd.
(iii)Expenses associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes.
55
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(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.
(b)Purchase accounting adjustment costs
Adjusted EBITDA is calculated prior to considering adjustments for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the acquisition of the Mar Cor Business. See Note 4, "Acquisitions," in Part I, Item 1 of this Report for further detail.
(c)Share-based compensation
Adjusted EBITDA is calculated prior to considering sharebased compensation expenses related to equity awards. See Note 17, "Share-Based Compensation," in Part I, Item 1 of this Report for further detail.
(d)Transaction costs
Adjusted EBITDA is calculated prior to considering transaction, integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred as a result of the transaction decision. Integration and restructuring costs associated with a business combination may occur over several years and include, but are not limited to, consulting fees, legal fees, certain employee-related costs, facility consolidation and product rationalization costs, and fair value changes associated with contingent consideration.
(e)Other losses (gains) and expenses
Adjusted EBITDA is calculated prior to considering certain other significant losses (gains) and expenses. For the periods presented such events include the following:
(i)impact of foreign exchange gains and losses;
(ii)charges incurred by the Company related to product rationalization in its electro-chlorination business;
(iii)amounts related to the sale of the Memcor product line;
(iv)expenses incurred by the Company as a result of the COVID-19 pandemic, including additional charges for personal protective equipment, increased costs for facility sanitization and one-time payments to certain employees;
(v)legal fees incurred in excess of amounts covered by the Company's insurance
related to securities litigation and an
(vi)loss on divestiture of the Lange product line.
56
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We do not present net income on a segment basis because we do not allocate
interest expense or income tax benefit (expense) to our segments, making
operating profit the most comparable GAAP metric. The following is a
reconciliation of our segment EBITDA and segment adjusted EBITDA to operating
profit, their most directly comparable financial measure presented in accordance
with GAAP:
Three Months Ended June 30,
2022 2021 $ Variance % Variance
Integrated Integrated Integrated Integrated
Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product
(In millions) Services Technologies Services Technologies Services Technologies Services Technologies
Operating profit $ 39.9 $ 28.6 $ 37.8 $ 22.7 $ 2.1 $ 5.9 6 % 26 %
Depreciation and amortization 21.9 3.4 18.2 3.5 3.7 (0.1) 20 % (3) %
EBITDA $ 61.8 $ 32.0 $ 56.0 $ 26.2 $ 5.8 $ 5.8 10 % 22 %
Restructuring and related
business transformation costs
(a) 1.0 0.8 0.3 0.7 0.7 0.1 233 % 14 %
Purchase accounting adjustment
costs (b) 1.5 - - - 1.5 - n/a n/a
Transaction costs (c) (0.2) - - - (0.2) - n/a n/a
Other losses (gains) and
expenses (d) - - - 1.5 - (1.5) n/a (100) %
Adjusted EBITDA $ 64.1 $ 32.8 $ 56.3 $ 28.4 $ 7.8 $ 4.4 14 % 15 %
Nine Months Ended June 30,
2022 2021 $ Variance % Variance
Integrated Integrated Integrated Integrated
Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product Solutions and Applied Product
(In millions) Services Technologies Services Technologies Services Technologies Services Technologies
Operating profit $ 113.3 $ 69.4 $ 94.9 $ 54.2 $ 18.4 $ 15.2 19 % 28 %
Depreciation and amortization 61.1 10.3 52.3 10.6 8.8 (0.3) 17 % (3) %
EBITDA $ 174.4 $ 79.7 $ 147.2 $ 64.8 $ 27.2 $ 14.9 18 % 23 %
Restructuring and related
business transformation costs
(a) 1.7 2.3 1.4 5.2 0.3 (2.9) 21 % (56) %
Purchase accounting adjustment
costs (b) 4.1 - - - 4.1 - n/a n/a
Transaction costs (c) 1.2 - - - 1.2 - n/a n/a
Other losses (gains) and
expenses (d) - - 0.2 2.6 (0.2) (2.6) (100) % (100) %
Adjusted EBITDA $ 181.4 $ 82.0 $ 148.8 $ 72.6 $ 32.6 $ 9.4 22 % 13 %
(a)Represents costs and expenses in connection with restructuring initiatives in
the three and nine months ended
(b)Represents adjustments for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the acquisition of the Mar Cor Business.
(c)Represents primarily costs associated with a change in the current estimate
of certain acquisitions achieving their earn-out targets, as well as certain
costs associated with the integration of the Mar Cor Business.
57
--------------------------------------------------------------------------------(d)Other losses (gains) and expenses as discussed above, distinct to our Integrated Solutions and Services ("ISS") and Applied Product Technologies ("APT") segments include the following:
(i)amounts related to the sale of the Memcor product line;
(ii)charges incurred by the Company related to product rationalization in its electro-chlorination business; and
(iii)loss on divestiture of the Lange product line.
Immaterial rounding differences may be present in the tables above.
Liquidity and Capital Resources
Liquidity describes the ability of a company to borrow or generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. Our principal sources of liquidity are cash generated by our operating activities, borrowings under the 2021 Revolving Credit Facility, and financing arrangements related to capital expenditures for equipment used to provide services to our customers. Historically, we have financed our operations primarily from these sources. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness, to fund working capital requirements, and to make capital expenditures. Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. In support of international operations, portions of our cash balances are held in various currencies and may be subject to foreign currency translation and other costs associated with repatriation, if necessary. Although neither moderate increases in net working capital nor the COVID-19 pandemic have materially impacted our liquidity to date, we plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary spending, and strategic investments. We believe we are currently well-positioned to manage our business and have the ability and sufficient capacity to meet our cash requirements by using available cash, internally generated funds, and borrowing under the 2021 Revolving Credit Facility. As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including occasionally extending payment terms. We also facilitate a voluntary supply chain finance program (the "program") to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payments on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. The amounts settled through the program and paid to participating financial institutions were$29.5 million and$27.4 million in the nine months endedJune 30, 2022 and 2021, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions' willingness to commit to participation in the program. We expect to continue to finance our liquidity requirements through internally generated funds, borrowings under the 2021 Revolving Credit Facility and equipment financing arrangements. We believe that our projected cash flows generated from operations, together with borrowings under the 2021 Revolving Credit Facility, and other financing arrangements are sufficient to fund our principal debt payments, interest expense, our working capital needs, and our expected capital expenditures for the next twelve months. Our capital expenditures for the nine months endedJune 30, 2022 and 2021 were$58.7 million and$54.1 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 nine months endedJune 30, 2022 and 2021, we entered into equipment financing arrangements totaling$30.3 million and$25.4 million , respectively. In addition, we may draw on the 2021 Revolving Credit Facility from time to time to fund or partially fund an acquisition. 58 -------------------------------------------------------------------------------- As ofJune 30, 2022 , we had total indebtedness of$936.2 million , including$470.3 million of term loan borrowings under the 2021 Credit Agreement,$211.1 million outstanding under the 2021 Revolving Credit Facility,$138.0 million outstanding under the Securitization Facility, which includes$0.1 million of accrued interest, and$116.8 million in borrowings related to equipment financing. We also had$9.5 million of letters of credit issued under our 2021 Revolving Credit Facility as ofJune 30, 2022 .
As of
2021 Credit Agreement 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. The 2021 Credit Agreement provides for a multi-currency senior secured revolving credit facility in an aggregate principal amount not to exceed theU.S. dollar equivalent of$350.0 million (the "2021 Revolving Credit Facility") and a discounted senior secured term (the "2021 Term Loan") in the amount of$475.0 million (together with the 2021 Revolving Credit Facility, the "Senior Facilities"). The 2021 Credit Agreement also provides for a letter of credit sub-facility not to exceed$60.0 million . The 2021 Credit Agreement contains customary representations, warranties, affirmative covenants, and negative covenants, including, among other things, a springing maximum first lien leverage ratio of 5.55 to 1.00. The Company did not exceed this ratio during the nine months endedJune 30, 2022 , does not anticipate exceeding this ratio during the year endingSeptember 30, 2022 , and therefore does not anticipate any additional repayments during the year endingSeptember 30, 2022 .
Receivables Securitization Program
OnApril 1, 2021 ,Evoqua Finance LLC ("Evoqua Finance"), an indirect wholly-owned subsidiary of the Company, entered into an accounts receivable securitization program (the "Receivables Securitization Program") consisting of, among other agreements, (i) a Receivables Financing Agreement (the "Receivables Financing Agreement") among Evoqua Finance, as the borrower, the lenders from time to time party thereto (the "Receivables Financing Lenders"),PNC Bank, National Association ("PNC Bank "), as administrative agent,EWT LLC , as initial servicer, andPNC Capital Markets LLC ("PNC Markets"), as structuring agent, pursuant to which the lenders have made available to Evoqua Finance a receivables finance facility (the "Securitization Facility") in an amount up to$150.0 million and (ii) a Sale and Contribution Agreement (the "Sale Agreement") among Evoqua Finance, as purchaser,EWT LLC , as initial servicer and as an originator, andNeptune Benson, Inc. , an indirectly wholly-owned subsidiary of the Company, as an originator (together withEWT LLC , the "Originators"). The Receivables Securitization Program contains certain customary representations, warranties, affirmative covenants, and negative covenants, subject to certain cure periods in some cases, including the eligibility of the Receivables being sold by the Originators and securing the loans made by the Receivables Financing Lenders, as well as customary reserve requirements, events of default, termination events, and servicer defaults. The Company was in compliance with all covenants during the nine months endedJune 30, 2022 , does not anticipate becoming noncompliant during the year endingSeptember 30, 2022 , and therefore, subject to collateral availability, does not anticipate any additional repayments during the year endingSeptember 30, 2022 .Evoqua Water Technologies Corp. is a holding company and does not conduct any business operations of its own. As a result, our ability to pay cash dividends on our common stock, if any, is dependent upon cash dividends and distributions and other transfers from our operating subsidiaries. Under the terms of the 2021 Credit Agreement, our operating subsidiaries are currently limited in their ability to pay cash dividends to us, and we expect these limitations to continue in the future under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk, and prevent us from meeting our obligations. 59 --------------------------------------------------------------------------------
Contractual Obligations
We presented our contractual obligations in Part II, Item 7, "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , as filed with theSEC onNovember 17, 2021 . There were no significant changes in our contractual obligations during the nine months endedJune 30, 2022 . OnJanuary 3, 2022 , we borrowed an additional$160 million under the 2021 Revolving Credit Facility. We are required to pay a commitment fee based on the daily unused portion of the 2021 Revolving Credit Facility, as well as certain other fees to agents and the arrangers under the Senior Facilities. Subject to the terms of the 2021 Credit Agreement, to the extent not previously paid, any amount owed under the 2021 Revolving Credit Facility will become due and payable in full onApril 1, 2026 .
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