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, 2019 , as filed with theSEC onNovember 25, 2019 and as amended onDecember 4, 2019 (the "2019 Annual Report"). You should review the disclosures in Part I, Item 1A. "Risk Factors" in the 2019 Annual Report, in Part II, Item 1A. "Risk Factors" of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2020 , as filed with theSEC onMay 6, 2020 , 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. ," "EWT Holdings I 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 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 industrial, municipal and recreational customers who value water. With over 200,000 installations worldwide, we hold leading positions in the industrial, commercial and municipal water treatment markets inNorth America . We offer a comprehensive portfolio of differentiated, proprietary technology solutions sold under a number of marketleading and wellestablished brands to our global customer base. We have worked to protect water, the environment and our employees for over 100 years. As a result, we have earned a reputation for quality, safety and reliability and are sought out by our customers to solve the full range of their water treatment needs, and maintaining our reputation is critical to the success of our business. Our solutions are designed to ensure that our customers have the quantity and quality of water that meets their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations and support their regulatory compliance and environmental sustainability. We deliver and maintain these mission critical solutions through the largest service network inNorth America , assuring our customers continuous uptime with 92 branches as ofJune 30, 2020 . We have an extensive service and support network, and as a result, a certified Evoqua Service Technician is generally no more than a twohour drive from more than 90% of our North American customers' sites. Our vision "to be the world's first choice for water solutions" and our values of "integrity, customers, performance and sustainable" foster a corporate culture that is focused on establishing a workforce that is enabled, empowered and accountable, which creates a highly entrepreneurial and dynamic work environment. Our purpose is "Transforming water. Enriching life." We draw from a long legacy of water treatment innovations and industry firsts, supported by more than 1,100 granted or pending patents, which in aggregate are imperative to our business. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals, and we are able to achieve purification levels which are 1,000 times greater than typical drinking water. Business Segments Our business is organized by customer base and offerings into two reportable operating segments that each draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes and corporate philosophies. Our reportable operating segments consist of: (i) our Integrated Solutions and Services segment and (ii) our Applied Product Technologies segment. The key factors used to identify these reportable operating segments are the organization and alignment of our internal operations, the nature of the products and services and customer type. • Within the Integrated Solutions and Services segment, we primarily provide tailored solutions in collaboration with our customers backed by lifecycle services including ondemand water, outsourced water, recycle and reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance. 45
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• Within the Applied Product Technologies segment, we provide a highly
differentiated and scalable range of products and technologies
specified by global water treatment designers, OEMs, engineering firms
and integrators.
We evaluate our business segments' operating results based on income from
operations and EBITDA or Adjusted EBITDA on a segment basis. EBITDA and Adjusted
EBITDA are non-GAAP financial measures. For more information regarding EBITDA
and Adjusted EBITDA, including a reconciliation to the most directly comparable
GAAP financial measure, please see the section titled "How We Assess the
Performance of Our Business". Corporate activities include general corporate
expenses, elimination of intersegment transactions, interest income and expense
and certain other charges, which have not been allocated to business segments.
As such, the segment results provided herein may not be comparable to other
companies.
Organic Growth Drivers
Market Growth
We maintain a leading position among customers in growing industries that
utilize water as a critical part of their operations or production processes,
including pharmaceuticals and health sciences, microelectronics, food and
beverage, hydrocarbon and chemical processing, power, general manufacturing,
municipal drinking and wastewater, marine and aquatics. Water treatment is an
essential, nondiscretionary market that is growing in importance as access to
clean water has become an international priority. Underpinning this growth are a
number of global, longterm trends that have resulted in increasingly stringent
effluent regulations, along with a growing demand for cleaner and sustainable
waste streams for reuse. These trends include the growing global population,
increasing levels of urbanization and continued global economic growth, and we
have seen these trends manifest themselves within our various end markets
creating multiple avenues of growth. For example, within the industrial market,
water is an integral and meaningful component in the production of a widerange
of goods spanning from consumer electronics to automobiles. We anticipate that
the COVID-19 pandemic and the resulting economic downturn may cause some
near-term contraction in certain end markets that we serve, and we continue to
monitor macroeconomic trends closely. However, we do not expect that the
pandemic will significantly alter these long-term trends.
Our Existing Customer Base
We believe our strong brands, leading position in highly fragmented markets,
scalable and global offerings, leading installed base and unique ability to
provide complete treatment solutions will enable us to capture a larger share of
our existing customers' water treatment spend while expanding with existing and
new customers into adjacent endmarkets and underpenetrated regions, including
by investing in our sales force and crossselling to existing customers. We
believe that we are uniquely positioned to further penetrate our core markets,
with over 200,000 installations across over 38,000 global customers. We maintain
a customerintimate business model with strong brand value and provide
solutionsfocused offerings capable of serving a customer's full lifecycle water
treatment needs, both in current and new geographic regions.
Our Service Model
We selectively target high value projects with opportunities for recurring
business through service, parts and other aftermarket opportunities over the
lifecycle of the process or capital equipment. In particular, we have developed
internetconnected monitoring technologies through the deployment of our
WaterOne® service platform, which enables customers to outsource their water
treatment systems and focus on their core business, offering customers system
optimization, predictive and proactive service, and simplified billing and
pricing. Our WaterOne® platform also enables us to transition our customers to
pricing models based on usage, which otherwise would not have been possible
without technological advancement. Our technology solutions provide customers
with increased stability and predictability in waterrelated costs, while
enabling us to optimize our service route network and on demand offerings
through predictive analytics, which we believe will result in market share
gains, improved service levels, increased barriers to entry and reduced costs.
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Product and Technology Development
We develop our technologies through inhouse research, development and
engineering and targeted tuckin, vertical market and geographyexpanding,
technology-enhancing acquisitions. We have a reservoir of recently launched
technologies and a strong pipeline of new offerings designed to provide
customers with innovative, valueenhancing solutions. Furthermore, since April
2016 , we have successfully completed thirteen acquisitions and the acquisition
of a 60% interest in Frontier Water Systems LLC ("Frontier"), each of which
expands our vertical markets and geographic reach and enhance our technologies,
strengthening our existing capabilities and adding new capabilities and cross
selling opportunities in areas such as mobile wastewater treatment, soil and air
treatment, regenerative media filtration, anodes, UV and ozone disinfection,
aerobic and anaerobic biological treatment technologies and electrochemical and
electrochlorination cells. We are able to rapidly scale new technologies using
our leading direct and thirdparty sales channels and our relationships with key
influencers, including municipal representatives, engineering firms, designers
and other system specifiers. We believe our continued investment in driving
penetration of our recently launched technologies, robust pipeline of new
capabilities and bestinclass channels to market will allow us to continue to
address our customer needs across the water lifecycle.
Operational Excellence
We believe that continuous improvement of our operations, processes and
organizational structure is a key driver of our earnings growth. We have
separately identified and are pursuing a number of discrete initiatives which,
if successful, we expect could result in additional cost savings over the next
two years. These initiatives include our supply chain improvement program to
consolidate and manage global spending, our improved logistics and
transportation management program, capturing benefits of our WaterOne® platform
and further optimizing our engineering cost structure, our global shared
services organization and our sales, inventory and operations planning. These
improvements focus on creating value for customers through reduced lead times,
improved quality and superior customer support, while also creating value for
shareholders through enhanced earnings growth. Furthermore, as a result of
significant investments we have made and plan to continue to make in our
footprint and facilities, we believe we have capacity to support our planned
growth without commensurate increase in fixed costs.
Acquisitions and Divestitures
We believe that capex-like, tuckin acquisitions present a key opportunity
within our overall growth strategy, which we will continue to evaluate
strategically. These strategic acquisitions are expected to enable us to
accelerate our growth by extending our critical mass in existing markets, as
well as expand in new geographies and new end market verticals. Our existing
customer relationships, bestinclass channels to market and ability to rapidly
commercialize technologies provide a strong platform to drive rapid growth in
the businesses we acquire. To capitalize on these opportunities, we have built
an experienced team dedicated to mergers and acquisitions that has, since April
2016 , successfully completed thirteen acquisitions and the acquisition of a 60%
interest in Frontier, each of which expands our vertical markets and geographic
reach and enhance our technologies, with purchase prices ranging from
approximately $2.6 million to approximately $283.7 million , and preacquisition
revenues ranging from approximately $3.1 million to approximately $55.7 million .
On December 31, 2019 we completed the sale of the Memcor product line to DuPont
de Nemours, Inc. (DuPont). The aggregate purchase price paid by DuPont was
$110.0 million in cash, subject to certain adjustments. Following adjustments
for cash and net working capital, gross proceeds paid by DuPont were $131.0
million . The Company recognized a $49.0 million net pre-tax benefit on the sale
of the Memcor product line, net of $8.3 million of discretionary compensation
payments to employees in connection with the transaction and $1.0 million in
transaction costs incurred in the three months ended December 31, 2019 . As a
result of net working capital adjustments, the Company recognized an additional
$9.0 million net pre-tax benefit in the three months ended March 31, 2020 . The
Company and DuPont have a history of collaboration, and following the sale,
DuPont will continue to supply the Company with Memcor® products.
Key Factors and Trends Affecting Our Business and Financial Statements
Various trends and other factors affect or have affected our operating results,
including:
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Impact of the COVID-19 pandemic. In response to the challenges created by the
COVID-19 pandemic, we have continued to prioritize protecting the safety of our
employees and stakeholders, taking actions to ensure the resiliency of our
business and managing the business for liquidity. Our business has been
considered essential under federal and local standards, and we have maintained
business continuity at our critical service branches and manufacturing
facilities. We have taken measures to protect our employees, including
implementation of remote working practices where possible and managing our
supply chain to ensure that necessary personal protective equipment is available
to our personnel. We have also taken certain cost reduction actions such as
reduction of marketing and travel activity as well as deferment of headcount
additions to preserve liquidity and reallocated existing resources to maintain
productivity levels where feasible.
In general, we have seen increased demand for services from customers in
pharmaceutical and laboratory industries through the period ended June 30, 2020 ,
as the impact of the pandemic broadened. However, we also continue to see uneven
demand for our products and services from customers in certain other industries,
such as oil and gas, refining and aquatics. Customer site shut-downs and project
delays created by the pandemic contributed to a decline in revenue from services
in the quarter. We continue to evaluate the impact of the pandemic on our
business, particularly how social distancing guidelines and government-imposed
restrictions might continue to affect our access to our customers' sites and how
the economic downturn resulting from the pandemic might affect our customers'
willingness to make capital expenditures and our ability to collect from our
customers. Given the evolving nature of the unprecedented pandemic, the overall
impact on our operations over the remainder of the fiscal year cannot be
reasonably estimated at this time.
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 II, Item 1A. "Risk Factors" of our Quarterly Report on Form
10-Q for the quarter ended March 31, 2020 , as filed with the SEC on May 6, 2020 .
Overall economic trends. The overall economic environment and related changes in
industrial, commercial and municipal spending impact our business. In general,
positive conditions in the broader economy promote industrial, commercial and
municipal customer spending, while economic weakness results in a reduction of
new industrial, commercial and municipal project activity. Macroeconomic factors
that can affect customer spending patterns, and thereby our results of
operations, include population growth, total water consumption, municipal
budgets, employment rates, business conditions, the availability of credit or
capital, interest rates, tax rates, imposition of tariffs and regulatory
changes. Since the businesses of our customers vary in cyclicality, periodic
downturns in any specific sector typically have modest impacts on our overall
business. For example, the current weakness in global oil markets has created,
and we expect will continue to create, some weakness in demand from customers
that we serve in the oil and gas industry. Additionally, the COVID-19 pandemic
has increased economic uncertainty and has caused an economic slowdown that is
likely to continue and may result in a sustained global recession.
Changes in costs and availability. We have significant exposures to certain
commodities, including steel, caustic, carbon, calcium nitrate and iridium, and
volatility in the market price and availability of these commodity input
materials has a direct impact on our costs and our business. For example,
restrictions on international trade, including tariffs imposed by the U.S.
government and other governments, as well as supply chain disruptions caused by
the COVID-19 pandemic, have increased and could further increase the cost of
certain materials and have restricted and could further restrict availability of
certain commodities, which may result in delays in our execution of projects.
Although we have offset a portion of these cost increases through price
increases, there can be no assurance that we will be able to continue to
recuperate additional cost increases from our customers through product price
increases. If we are unable to manage commodity fluctuations through pricing
actions, cost savings projects and sourcing decisions as well as through
consistent productivity improvements, it may adversely impact our gross profit
and gross margin. Further, additional potential acquisitions and international
expansion will place increased demands on our operational, managerial,
administrative and other resources. Managing our growth effectively will require
us to continue to enhance our management systems, financial and management
controls and information systems. We will also be required to hire, train and
retain operational and sales personnel, which affects our operating margins.
Inflation and deflation trends. Our financial results can be expected to be
directly impacted by substantial increases in costs due to commodity cost
increases or general inflation which could lead to a reduction in our revenues
as well as greater margin pressure as increased costs may not be able to be
passed on to customers. We actively monitor changes in cost and respond as we
deem appropriate to attempt to mitigate the impact to our results.
Fluctuation in quarterly results. Our quarterly results have historically varied
depending upon a variety of factors, including funding, readiness of projects,
regulatory approvals and significant weather events. In addition, our contracts
for
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large capital water treatment projects, systems and solutions for industrial,
commercial and municipal applications are generally fixedprice contracts with
milestone billings. As a result of these factors, our working capital
requirements and demands on our distribution and delivery network may fluctuate
during the year.
New products and technologies. Our ability to maintain our appeal to existing
customers and attract new customers depends on our ability to originate, develop
and offer a compelling array of products, services and solutions responsive to
evolving customer innovations, preferences and specifications. We expect that
increased use of water in industrial and commercial processes will drive
increased customer demand in the future, and our ability to grow will depend in
part on effectively responding to innovation in our customers' processes and
systems. Further, our ability to provide products that comply with evolving
government regulations will also be a driver of the appeal of our products,
services and solutions to industrial and commercial customers.
Government policies. Decaying water systems in the United States ("U.S.") will
require critical drinking water and wastewater repairs, often led by municipal
governments. Further, as U.S. states increase regulation on existing and
emerging contaminants, we expect that our customers will increasingly require
sustainable solutions to their waterrelated needs. In general, increased
infrastructure investment and more stringent municipal, state and federal
regulations promote increased spending on our products, services and solutions,
while a slowdown in investment in public infrastructure or the elimination of
key environmental regulations could result in lower industrial and municipal
spending on water systems and products.
Availability of water. In general, we expect demand for our products and
services to increase as the availability of clean water from public sources
decreases. Secular trends that will drive demand for water across a multitude of
industrial, commercial and municipal applications include global population
growth, urbanization, industrialization and overall economic growth. In
addition, the supply of clean water could be adversely impacted by factors
including an aging water infrastructure within North America and increased
levels of water stress from seasonal rainfall, inadequate water storage options
or treatment technologies. Because water is a critical component and byproduct
of many processes, including in manufacturing and product development, we expect
that, as global consumption patterns evolve and water shortages persist, demand
for our equipment and services will continue to increase.
Operational investment. Our historical operating results reflect the impact of
our ongoing investments to support our growth. We have made significant
investments in our business that we believe have laid the foundation for
continued profitable growth. Activities related to operational investments
include employee training and development, integrating acquired businesses,
implementing enhanced information systems, research, development and engineering
investments and other activities to enable us to support our operating model.
Our ability to source and distribute products effectively. Our revenues are
affected by our ability to purchase our inputs in sufficient quantities at
competitive prices. While we believe our suppliers have adequate capacity to
meet our current and anticipated demand, our level of revenues could be
adversely affected in the event of constraints in our supply chain, including
the inability of our suppliers to produce sufficient quantities of raw materials
in a manner that is able to match demand from our customers.
Contractual relationships with customers. Due to our large installed base and
the nature of our contractual relationships with our customers, we have high
visibility into a large portion of our revenue. The one to twentyyear terms of
many of our service contracts and the regular delivery and replacement of many
of our products help to insulate us from the negative impact of any typical
economic decline.
Exchange rates. The reporting currency for our Unaudited Consolidated Financial
Statements is the U.S. dollar. We operate in numerous countries around the world
and therefore, certain of our assets, liabilities, revenues and expenses are
denominated in functional currencies other than the U.S. dollar, primarily in
the euro, U.K. sterling, Chinese renminbi, Canadian dollar, Australian dollar
and Singapore dollar. To prepare our Unaudited Consolidated Financial Statements
we must translate those assets, liabilities, revenues and expenses into U.S.
dollars at the applicable exchange rate. As a result, increases or decreases in
the value of the U.S. dollar against these other currencies will affect the
amount of these items recorded in our Unaudited Consolidated Financial
Statements, even if their value has not changed in the functional currency.
While we believe that we are not susceptible to any material impact on our
results of operations caused by fluctuations in exchange rates because our
operations are primarily conducted in the U.S. , if we expand our foreign
operations in the future, substantial increases or decreases in the value of the
U.S. dollar relative to these other currencies could have a significant impact
on our results of operations.
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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 business are revenue, gross profit,
gross margin, operating expenses, net income (loss) and Adjusted EBITDA (which
is a non-GAAP financial measure).
Revenue
Our sales are a function of sales volumes and selling prices, each of which is a
function of the mix of product and service sales, and consist primarily of:
• sales of tailored light industry technologies, heavy industry
technologies and environmental products, services and solutions in
collaboration with our industrial customers, backed by lifecycle
services including emergency response services and outsourced water
alternatives, to a broad group of industrial customers in our U.S. ,
Canada and Singapore markets;
• sales of products, services and solutions to engineering firms andmunicipalities to purify drinking water and treat wastewater globally;
and
• sales of a wide variety of differentiated products and technologies, to
an array of OEM, distributor, enduser, engineering firm and integrator
customers in all of our geographic markets and aftermarket channels.
Cost of Sales, Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of product sales and cost of
services from our product and services revenue. Gross margin measures gross
profit as a percentage of our combined product and services revenue.
Cost of product sales consists of all manufacturing costs required to bring a
product to a ready for sale condition, including direct and indirect materials,
direct and indirect labor costs including benefits, freight, depreciation,
information technology, rental and insurance, repair and maintenance, utilities,
other manufacturing costs, warranties and third party commissions.
Cost of services primarily consists of the cost of personnel and travel for our
field service, supply chain and technicians, depreciation of equipment and field
service vehicles and freight costs.
Operating Expenses
Operating expenses consist primarily of general and administrative, sales and
marketing and research and development expenses.
General and Administrative. General and administrative expenses ("G&A expense")
consist of fixed overhead personnel expenses associated with our corporate
functions and our service organization (including district and branch managers,
customer service, contract renewals and regeneration plant management). We
expect our general and administrative expenses to increase due to the
anticipated growth of our business and related infrastructure as well as due to
the legal, accounting, insurance, investor relations and other costs associated
with being a public company.
Sales and Marketing. Sales and marketing expenses ("S&M expense") consist
primarily of advertising and marketing promotions of our products, services and
solutions and related personnel expenses (including all Evoqua sales and
application employees' base compensation and incentives), as well as sponsorship
costs, consulting and contractor expenses, travel, display expenses and related
amortization. We expect our sales and marketing expenses to increase as we
continue to actively promote our products, services and solutions.
Research and Development. Research and development expenses ("R&D expense")
consist primarily of personnel expenses related to research and development,
patents, sustaining engineering, consulting and contractor expenses, tooling and
prototype materials and overhead costs allocated to such expenses. Substantially
all of our research and development expenses are related to developing new
products and services and improving our existing products and services. To date,
research and development expenses have been expensed as incurred, because the
period between achieving technological
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feasibility and the release of products and services for sale has been short and
development costs qualifying for capitalization have been insignificant.
R&D expense can fluctuate depending on our determination to invest in developing
new products, services and solutions and enhancing our existing products,
services and solutions versus adding these capabilities through a mergers and
acquisitions strategy.
Net Income (Loss)
Net income (loss) is determined by subtracting operating expenses and interest
expense from, and adding other operating income (expense), equity income from
our partnership interest in Treated Water Outsourcing and income tax benefit
(expense) to, gross profit. For more information on how we determine gross
profit, see "Gross Profit."
Adjusted EBITDA
Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary
metrics used by management to evaluate the financial performance of our
business. Adjusted EBITDA is defined as net income (loss) before interest
expense, income tax benefit (expense) and depreciation and amortization,
adjusted for the impact of certain other items, including restructuring and
related business transformation costs, purchase accounting adjustment costs,
non-cash share-based compensation, transaction costs and other gains, losses and
expenses. We present Adjusted EBITDA because we believe it is frequently used by
analysts, investors and other interested parties to evaluate companies in our
industry. Further, we believe it is helpful in highlighting trends in our
operating results and provides greater clarity 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. 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 EBITDA and
Adjusted EBITDA of each reportable operating segment to evaluate the operating
performance of such segments. EBITDA and 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, integration costs and recognition of backlog
intangible assets recorded in purchase accounting) and share-based compensation
charges.
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 nonrecurring items. In addition, Adjusted
EBITDA may not be comparable to similarly titled measures used by other
companies in our industry or across different industries.
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--------------------------------------------------------------------------------The following is a reconciliation of our Net income (loss) to Adjusted EBITDA (unaudited, amounts in millions):
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
Net income (loss) $ 21.8 $ 4.3 $ 83.3 $ (10.4 )
Income tax expense (benefit) 0.8 7.9 3.3 (1.2 )
Interest expense 10.5 14.9 37.3 43.8
Operating profit 33.1 27.1 123.9 32.2
Depreciation and amortization 27.6 24.1 80.1 71.4
EBITDA 60.7 51.2 204.0 103.6
Restructuring and related business
transformation costs (a) 3.1 4.5 11.0 18.5
Share-based compensation (b) 2.6 5.0 8.6 14.3
Transaction costs (c) 0.3 1.0 1.0 5.5
Other (gains) losses and expenses (d) (2.9 ) (1.1 ) (60.5 ) 13.8
Adjusted EBITDA $ 63.8 $ 60.6 $ 164.1 $ 155.7
(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 they could reoccur in
future periods based on reorganizations of the business, cost reduction or
productivity improvement needs, or in response to economic conditions. For the
periods presented such events include the following:
(i) Certain costs and expenses in connection with various restructuring
initiatives, including severance costs, relocation costs, recruiting
expenses, and third-party consultant costs to assist with these
initiatives. This includes:
(A) amounts related to the Company's restructuring initiatives to
reduce the cost structure and rationalize location footprint
following the sale of the Memcor product line;
(B) amounts related to the Company's transition from a
three-segment structure to a two-segment operating model
designed to better serve the needs of customers worldwide; and
(C) amounts related to various other initiatives implemented to
restructure and reorganize our business with the appropriate
management team and cost structure.
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Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
Post Memcor divestiture
restructuring(1) $ 1.2 $ - $ 4.9 $ -
Cost of product sales and services
("Cost of sales") 0.8 - 3.7 -
S&M expense (0.1 ) - - -
G&A expense 0.5 - 1.2 -
Two-segment restructuring(2) $ 0.6 $ 2.9 $ 1.9 $ 9.9
Cost of sales 0.4 1.4 1.0 4.1
R&D expense - - - 0.1
S&M expense - 0.3 - 0.9
G&A expense 0.2 1.2 0.9 4.8
Various other initiatives(3) $ 0.5 $ 0.6 $ 1.0 $ 1.3
Cost of sales 0.3 0.2 0.7 0.7
S&M expense 0.1 - 0.1 -
G&A expense 0.1 0.4 0.2 0.6
Total $ 2.3 $ 3.5 $ 7.8 $ 11.2
(1) of which $4.8 million is reflected in restructuring charges in
Note 13, "Restructuring and Related Charges" in Part I, Item 1
of this Quarterly Report on Form 10-Q (the "Restructuring
Footnote") in the nine months ended June 30, 2020.
(2) of which $1.9 million and $9.3 million is reflected in the
Restructuring Footnote in the nine months ended June 30, 2020
and 2019, respectively.
(3) all of which is reflected in the Restructuring Footnote in the
nine months ended June 30, 2020 and 2019, respectively.
(ii) legal settlement costs and intellectual property related fees
associated with legacy matters prior to the AEA Acquisition,
including fees and settlement costs related to product warranty
litigation on Memcor products and certain discontinued products.
This includes:
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019Cost of sales$ 0.3 $ 0.1 $ 0.5 $ 0.2 G&A expense 0.1 0.2 0.3 0.7 Total$ 0.4 $ 0.3 $ 0.8 $ 0.9
(iii) expenses associated with our information technology and functional
infrastructure transformation subsequent to the AEA Acquisition,
including activities to optimize information technologysystems and
functional infrastructure processes. This includes:
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
Cost of sales $ - $ 0.3 $ 0.1 $ 0.4
G&A expense (0.1 ) 0.9 0.6 5.9
Total $ (0.1 ) $ 1.2 $ 0.7 $ 6.3
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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, includingconsultant
costs. This includes:
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
G&A expense $ 0.5 $ (0.5 ) $ 1.7 $ 0.1
Total $ 0.5 $ (0.5 ) $ 1.7 $ 0.1 (b) Share-based compensation
Adjusted EBITDA is calculated prior to considering noncash sharebased compensation expenses related to equity awards. See Note 16, "Share-Based Compensation" in Part I, Item 1 of this Quarterly Report on Form 10-Q 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. Such costs may include, without limitation,
consulting and legal costs associated with due diligence and closing a
transaction, restructuring and integration costs such as severance, facility
consolidation costs, product rationalization or inventory obsolescence charges,
system integration or conversion costs, fair value changes associated with
contingent consideration, and costs associated with any litigation matters that
arise subsequent to our acquisition of a business for which the matter in
question preceded the transaction, but was not known, not probable or unresolved
at the date of acquisition. We believe that viewing earnings prior to
considering these charges provides investors with useful additional perspective
because the significant costs incurred in connection with business combinations
result primarily from the need to eliminate duplicate assets, activities or
employees - a natural result of acquiring or disposing a fully integrated set of
activities. Integration and restructuring costs associated with a business
combination may occur over several years. This includes:
Three Months Ended Nine Months Ended
June 30, June 30,
2020 2019 2020 2019
Cost of sales $ 0.1 $ 0.1 $ (0.1 ) $ 1.4
G&A expense 0.2 0.9 1.1 4.1
Total $ 0.3 $ 1.0 $ 1.0 $ 5.5 (d) Other (gains), losses and expenses
Adjusted EBITDA is calculated prior to considering certain other significant (gains), losses and expenses. Such significant items represent substantive and/or unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and qualitative aspects of their nature and they may be highly variable and difficult to predict. Unusual items may represent items that are not part of our ongoing business, items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis, items that would be non-recurring, or items related to products we no longer sell. While not all-inclusive, examples of items that could be included as other (gains), losses and expenses would be amounts related to non-cash foreign currency exchange gains and losses on intercompany loans, significant warranty events, and certain disposals of businesses, products or facilities that do not qualify as discontinued operations under GAAP. For the periods presented such events include the following: (i) impact of foreign exchange gains and losses;
(ii) foreign exchange impact related to headquarter allocations;
54
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(iii) expenses on disposal related to maintaining nonoperational business
locations, net of gain on sale;
(iv) expenses incurred by the Company related to the remediation of
manufacturing defects caused by a third- party vendor;
(v) charges incurred by the Company related to product rationalization
in its electro-chlorination business;
(vi) net pre-tax benefit on the sale of the Memcor product line, which is
net of $8.3 million of discretionary compensation payments to
employees in connection with the transaction and $1.0 million in
transaction costs incurred in the nine months ended June 30, 2020
and gain on the sale of property in the three and nine months ended
June 30, 2019 ;
(vii) expenses incurred by the Company related to the write-off of
inventory associated with product rationalization and facility
consolidation; and
(viii) 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.
Other (gains), losses and expenses include the following for the periods
presented below:
Three Months Ended
Other Adjustments
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Total
Cost of sales $ - $ - $ - $ - $ 0.1 $ - $ - $ 0.7 $ 0.8
G&A expense (4.0 ) (0.1 ) - - - - - 0.4 (3.7 )
Total $ (4.0 ) $ (0.1 ) $ - $ - $ 0.1 $ - $ - $ 1.1 $ (2.9 ) Three Months Ended
Other Adjustments
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Total
Cost of sales $ 0.2 $ - $ - $ 0.4 $ 0.2 $ - $ (0.1 ) $ - $ 0.7
G&A expense (1.4 ) - - - - - - - (1.4 )
Other
operating
(income)
expense - - - - - (0.4 ) - - (0.4 )
Total $ (1.2 ) $ - $ - $ 0.4 $ 0.2 $ (0.4 ) $ (0.1 ) $ - $ (1.1 ) Nine Months Ended
Other Adjustments
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Total
Cost of
sales $ (0.1 ) $ - $ - $ 0.1 $ 0.4 $ 0.2 $ - $ 0.7 $ 1.3
G&A
expense (2.4 ) - - - - 0.1 - 0.4 (1.9 )
Other
operating
(income)
expense - - - (1.6 ) - (58.3 ) - - (59.9 )
Total $ (2.5 ) $ - $ - $ (1.5 ) $ 0.4 $ (58.0 ) $ - $ 1.1 $ (60.5 )
55--------------------------------------------------------------------------------
Nine Months Ended
Other Adjustments
(i) (ii) (iii) (iv) (v) (vi) (vii) (viii) Total
Cost of
sales $ 0.2 $ - $ 0.5 $ 1.7 $ 3.2 $ - $ 5.0 $ - $ 10.6
G&A
expense 3.6 - - - - - - - 3.6
Other
operating
(income)
expense - - - - - (0.4 ) - - (0.4 )
Total $ 3.8 $ - $ 0.5 $ 1.7 $ 3.2 $ (0.4 ) $ 5.0 $ - $ 13.8 Immaterial rounding differences may be present in the tables above.
56
--------------------------------------------------------------------------------
Results of Operations
The following tables summarize key components of our results of operations for
the periods indicated:
Three Months Ended June 30, Nine Months Ended June 30,
2020 2019 2020 2019
(In millions,
except per
share amounts) % of Revenue % of Revenue % Variance % of Revenue % of Revenue % Variance
Revenue $ 347.8 100.0 % $ 360.3 100.0 % (3.5 )% $ 1,045.6 100.0 % $ 1,032.0 100.0 % 1.3 %
Cost of product
sales and
services (237.6 ) (68.3 )% (249.0 ) (69.1 )% (4.6 )% (718.4 ) (68.7 )% (736.4 ) (71.4 )% (2.4 )%
Gross profit 110.2 31.7 % 111.3 30.9 % (1.0 )% 327.2 31.3 % 295.6 28.6 % 10.7 %
General and
administrative
expense (44.9 ) (12.9 )% (49.6 ) (13.8 )% (9.5 )% (152.8 ) (14.6 )% (152.6 ) (14.8 )% 0.1 %
Sales and
marketing
expense (29.8 ) (8.6 )% (31.9 ) (8.9 )% (6.6 )% (101.8 ) (9.7 )% (103.5 ) (10.0 )% (1.6 )%
Research and
development
expense (2.8 ) (0.8 )% (3.3 ) (0.9 )% (15.2 )% (9.7 ) (0.9 )% (11.4 ) (1.1 )% (14.9 )%
Other operating
income
(expense), net 0.4 0.1 % 0.6 0.2 % (33.3 )% 61.0 5.8 % 4.1 0.4 % 1,387.8 %
Interest
expense (10.5 ) (3.0 )% (14.9 ) (4.1 )% (29.5 )% (37.3 ) (3.6 )% (43.8 ) (4.2 )% (14.8 )%
Income (loss)
before income
taxes 22.6 6.5 % 12.2 3.4 % (85.2 )% 86.6 8.3 % (11.6 ) (1.1 )% 846.6 %
Income tax
(expense)
benefit (0.8 ) (0.2 )% (7.9 ) (2.2 )% 89.9 % (3.3 ) (0.3 )% 1.2 0.1 % (375.0 )%
Net income
(loss) 21.8 6.3 % 4.3 1.2 % 407.0 % 83.3 8.0 % (10.4 ) (1.0 )% 901.0 %
Net income
attributable to
noncontrolling
interest 0.4 0.1 % 0.2 0.1 % 100.0 % 1.0 0.1 % 0.8 0.1 % 25.0 %
Net income
(loss)
attributable to
Evoqua Water
Technologies
Corp. $ 21.4 6.2 % $ 4.1 1.1 % 422.0 % $ 82.3 7.9 % $ (11.2 ) (1.1 )% 834.8 %
Weighted
average shares
outstanding
Basic 116.6 114.7 116.6 114.7
Diluted 120.2 119.4 121.1 114.7
Earnings (loss)
per share
Basic $ 0.18 $ 0.04 $ 0.71 $ (0.10 )
Diluted $ 0.18 $ 0.03 $ 0.68 $ (0.10 )
Other financial
data:
Adjusted
EBITDA(1) $ 63.8 18.3 % $ 60.6 16.8 % 5.3 % $ 164.1 15.7 % $ 155.7 15.1 % 5.4 %
(1) For the definition of Adjusted EBITDA (a non-GAAP financial measure) and a
reconciliation to net income (loss), its most directly comparable
financial measure presented in accordance with GAAP, see "How We Assess
the Performance of Our Business-Adjusted EBITDA."
57-------------------------------------------------------------------------------- Consolidated Results Revenues-Revenues decreased$12.5 million , or 3.5%, to$347.8 million in the three months endedJune 30, 2020 from$360.3 million in the three months endedJune 30, 2019 . Revenues increased$13.6 million , or 1.3%, to$1,045.6 million in the nine months endedJune 30, 2020 from$1,032.0 million in the nine months endedJune 30, 2019 . The following table provides the change in revenues from product sales and revenues from services, respectively: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 % Variance 2020 2019 % Variance % of % of % of % of Revenue Revenue Revenue Revenue
Revenue
from
product
sales$ 207.6 59.7 %$ 210.3 58.4 % (1.3 )%$ 610.1 58.3 %$ 597.3 57.9 % 2.1 % Revenue from services 140.2 40.3 % 150.0 41.6 % (6.5 )% 435.5 41.7 % 434.7 42.1 % 0.2 %
Revenues from product sales decreased$2.7 million , or 1.3%, to$207.6 million in the three months endedJune 30, 2020 from$210.3 million in the three months endedJune 30, 2019 . The decrease was related to a decline in aftermarket revenues of$17.5 million , of which$15.2 million was driven by the divestiture of the Memcor product line as well as site closures and delays due to COVID-19. This decline was partially offset by increased capital revenues of$14.8 million derived primarily from activity in the microelectronics end market. Revenues from product sales increased$12.8 million , or 2.1%, to$610.1 million in the nine months endedJune 30, 2020 from$597.3 million in the nine months endedJune 30, 2019 . The increase was driven by additional capital revenues of$37.5 million , primarily related to projects in the microelectronics end market as well as$1.0 million related to the acquisitions of ATG UV and Frontier, partially offset by a decrease in aftermarket revenues of$24.8 million , related to the divestiture of the Memcor product line as well as site closures and delays due to COVID-19. Revenues from services decreased$9.8 million , or 6.5%, to$140.2 million in the three months endedJune 30, 2020 from$150.0 million in the three months endedJune 30, 2019 . This decrease was evenly driven by the timing of completion of certain large projects in the prior year as well as the impact of COVID-19 shut-downs and delays, primarily in refining and oil and gas end markets, offset somewhat by price realization related to established service contracts. Revenues from services increased$0.8 million , or 0.2%, to$435.5 million in the nine months endedJune 30, 2020 from$434.7 million in the nine months endedJune 30, 2019 . This increase was driven by strong organic service growth, which was augmented by price realization, offset by the decline in the three months endedJune 30, 2020 due to the factors mentioned above. Cost of Sales and Gross Margin-Total gross margin increased to 31.7% in the three months endedJune 30, 2020 from 30.9% in the three months endedJune 30, 2019 . Total gross margin increased to 31.3% in the nine months endedJune 30, 2020 from 28.6% in the nine months endedJune 30, 2019 . 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, Nine Months Ended June 30, 2020 2019 2020 2019 Gross Gross Gross Gross Margin % Margin % Margin % Margin %
Cost of product sales
$ (237.6 ) 31.7 %$ (249.0 ) 30.9 %$ (718.4 ) 31.3 %$ (736.4 ) 28.6 % 58 -------------------------------------------------------------------------------- Gross margin from product sales increased by 1.5% to 30.9% in the three months endedJune 30, 2020 from 29.4% in the three months endedJune 30, 2019 . The increase in gross margin was driven by improved plant productivity and operational execution as the Company continues to realize the benefits of restructuring efforts along with some impact from product mix and price realization. Gross margin from product sales increased by 3.3% to 29.8% in the nine months endedJune 30, 2020 from 26.5% in the nine months endedJune 30, 2019 . The increase in gross margin was primarily driven by costs incurred in the prior year of$10.6 million related to restructuring and product rationalization, that did not reoccur in the current year. Gross margin from services remained flat at 32.9% in the three months endedJune 30, 2020 as compared to 2019. The operational impacts of declining revenue volume and productivity challenges were neutralized by improved pricing. Gross margin from services also increased approximately 1.7% to 33.3% in the nine months endedJune 30, 2020 from 31.6% in the nine months endedJune 30, 2019 . This increase is mainly driven by price realization recognized in revenue as well as continued focus on labor productivity even as previous increases in revenue volumes were offset in the current period. Operating Expenses-Operating expenses decreased$7.3 million , or 8.6%, to$77.5 million in the three months endedJune 30, 2020 from$84.8 million in the three months endedJune 30, 2019 . The change in foreign currency translation, most of which is related to intercompany loans, resulted in a net decrease in operating expenses of$3.0 million period over period. The remaining decrease is due to various efforts taken by the Company to reduce costs across various areas in response to COVID-19 uncertainties, such as reduced travel and other employee costs. Operating expenses decreased$3.2 million , or (1.2)%, to$264.3 million in the nine months endedJune 30, 2020 from$267.5 million in the nine months endedJune 30, 2019 . This decrease is mainly due to favorable change in foreign currency translation on the intercompany loans of$6.7 million , partially offset by increased costs of$3.8 million related to the addition of operating expenses as a result of the ATG UV and Frontier acquisitions, mainly due to amortization expense on purchased intangibles. The remaining decrease is due to various efforts taken by the Company to reduce costs across various areas in response to COVID-19 uncertainties, such as reduced travel and other employee costs. A discussion of operating expenses by category is as follows: Research and Development Expense - Research and development expenses decreased$0.5 million during the three months endedJune 30, 2020 as compared toJune 30, 2019 , and decreased$1.7 million during the nine months ended of the same periods due to the Company's continued efforts to reduce spending, offset partially by increased expenses by the addition of the Frontier acquisition. Sales and Marketing Expense - Sales and marketing expenses had a decrease of$2.1 million during the three months endedJune 30, 2020 and a decrease of$1.7 million during the nine months endedJune 30, 2020 , respectively, mainly due to a reduction in certain marketing initiatives and travel related expenses, offset by increased costs by the addition of the Frontier acquisition. General and Administrative Expense - General and administrative expenses decreased$4.7 million , or 9.5%, to$44.9 million in the three months endedJune 30, 2020 from$49.6 million in the three months endedJune 30, 2019 . This decrease in general and administrative expenses was primarily due to the favorable change in foreign currency translation on the intercompany loans, as described above, of$2.9 million , in addition to a reduction in travel related expenses of$1.8 million . General and administrative expenses increased$0.2 million , or 0.1%, to$152.8 million in the nine months endedJune 30, 2020 from$152.6 million in the nine months endedJune 30, 2019 . The increase is due to: • increased employee related expenses of$3.1 million ; • increased costs of$3.3 million related to the addition of the Frontier acquisition; • costs incurred related to the secondary public offering of shares of common stock held by certain shareholders of the Company of$1.6 million ; and • transaction costs related to the sale of the Memcor product line of$1.0 million . 59
-------------------------------------------------------------------------------- The above increases were partially offset by: • favorable change in foreign currency translation on the
intercompany
loans of $6.3 million ;
• reduction in travel expenses of
Other operating income (expense)-Other operating income (expense) decreased slightly by$0.2 million , to income of$0.4 million in the three months endedJune 30, 2020 from income of$0.6 million in the three months endedJune 30, 2019 . Other operating income (expense) increased$56.9 million to income of$61.0 million in the nine months endedJune 30, 2020 from income of$4.1 million in the nine months endedJune 30, 2019 . The increase is mainly due to the net pre-tax benefit on sale of the Memcor product line of$58.0 million , which is net of$8.3 million of discretionary compensation payments to employees in connection with the transaction and$1.0 million in transaction costs incurred in the first quarter of 2020. Interest Expense-Interest expense decreased$4.4 million , or 29.5%, to$10.5 million in the three months endedJune 30, 2020 from$14.9 million in the three months endedJune 30, 2019 . Interest expense decreased$6.5 million , or 14.8%, to$37.3 million in the nine months endedJune 30, 2020 from$43.8 million in the nine months endedJune 30, 2019 . The decrease in interest expense was primarily driven by a reduction in LIBOR year over year in addition to a$100 million debt repayment in the three months endedJune 30, 2019 , partially offset by a write-off of deferred financing fees related to the debt paydown and interest expense associated with additional equipment financings. Income tax (expense) benefit-Income tax expense of$0.8 million and income tax expense of$7.9 million were recorded for the three months endedJune 30, 2020 and 2019, respectively. The decrease in tax expense from the prior year was principally due to the favorable impact to the projected annual effective tax rate of the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of theU.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles, as compared to the prior year in which the quarter reflected the year-to-date cumulative tax impact of a profitable quarter while remaining in a year-to-date loss. Income tax expense of$3.3 million and an income tax benefit of$1.2 million was recorded for the nine months endedJune 30, 2020 and 2019, respectively. The increase in tax expense from the prior year was principally due to the significant income earned in the current year, primarily from the sale of the Memcor product line, as compared to a loss in the prior year. Net Income-Net income increased by$17.5 million , or 407.0%, to$21.8 million for the three months endedJune 30, 2020 , from net income of$4.3 million in the three months endedJune 30, 2019 . The main driver of this increase was a net decrease in income tax expense in the current year period based on the projected effective tax rate for the fiscal year of$7.1 million . Additionally, there was a reduction in interest of expense of$4.4 million and a favorable change in foreign currency translation resulting in a net gain of$3.1 million . The remaining increase in net income is due to overall contributions of revenue volume and mix, operational efficiency and cost savings. Net income increased by$93.7 million , or 901.0%, to net income of$83.3 million for the nine months endedJune 30, 2020 from a net loss of$10.4 million in the nine months endedJune 30, 2019 . The main driver of this increase was the sale of the Memcor product line, which resulted in a gain on sale of$67.3 million , less amounts paid for discretionary bonuses of$8.3 million and transaction costs of$1.0 million incurred in the nine months endedJune 30, 2020 . The resulting net pre-tax benefit was$58.0 million . In addition to the net benefit of the sale, we saw overall contributions of revenue volume and mix as well as operational efficiencies of$26.4 million and a favorable change in foreign currency translation resulting in a net gain of$7.3 million . Finally, interest expense decreased by$6.5 million . These increases were offset by an increase in income tax expense of$4.5 million . Adjusted EBITDA-Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the three months endedJune 30, 2020 was$63.8 million , as compared to$60.6 million for the three months endedJune 30, 2019 . Adjusted EBITDA for the quarter as compared to the prior year period was driven primarily by operational efficiencies and cost savings, offset by the changes as compared to the prior year period in non-recurring expenses and benefits. 60 -------------------------------------------------------------------------------- Adjusted EBITDA increased$8.4 million , or 5.4%, to$164.1 million for the nine months endedJune 30, 2020 from$155.7 million for the nine months endedJune 30, 2019 . The increase in Adjusted EBITDA as compared to the prior year period was primarily driven by increased revenue volume and favorable change in mix as well as operational efficiencies. Segment Results Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 % Variance 2020 2019 % Variance % of Revenue % of Revenue % of Revenue % of Revenue Revenues Integrated Solutions and Services$ 228.7 65.8 %$ 225.4 62.6 % 1.5 %$ 694.7 66.4 %$ 662.8 64.2 % 4.8 % Applied Product Technologies 119.1 34.2 % 134.9 37.4 % (11.7 )% 350.9 33.6 % 369.2 35.8 % (5.0 )% Total Consolidated 347.8 100.0 % 360.3 100.0 % (3.5 )% 1,045.6 100.0 % 1,032.0 100.0 % 1.3 % Operating profit (loss) Integrated Solutions and Services 32.6 9.4 % 37.4 10.4 % (12.8 )% 102.5 9.8 % 102.3 9.9 % 0.2 % Applied Product Technologies 23.6 6.8 % 22.5 6.2 %
4.9 % 110.5 10.6 % 38.4 3.7 % 187.8 % Corporate (23.1 ) (6.6 )% (32.8 ) (9.1 )% (29.6 )% (89.1 ) (8.5 )% (108.5 ) (10.5 )% (17.9 )% Total Consolidated 33.1 9.5 % 27.1 7.5 % 22.1 % 123.9 11.8 % 32.2 3.1 % 284.8 % EBITDA Integrated Solutions and Services 50.4 14.5 % 51.4 14.3 % (1.9 )% 153.2 14.7 % 144.6 14.0 % 5.9 % Applied Product Technologies 27.1 7.8 % 26.9 7.5 % 0.7 % 121.2 11.6 % 51.5 5.0 % 135.3 % Corporate and unallocated costs (16.8 ) (4.8 )% (27.1 ) (7.5 )% (38.0 )% (70.4 ) (6.7 )% (92.5 ) (9.0 )% (23.9 )% Total Consolidated$ 60.7 17.5 %$ 51.2 14.2 % 18.6 %$ 204.0 19.5 %$ 103.6 10.0 % 96.9 % 61
--------------------------------------------------------------------------------
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA on a segment
basis is defined as earnings before interest expense, income tax expense
(benefit) and depreciation and amortization, adjusted for the impact of certain
other items that have been reflected at the segment level. The following is a
reconciliation of our segment Adjusted EBITDA to operating profit, its most
directly comparable financial measure presented in accordance with GAAP:
Three Months Ended June 30, Nine Months Ended June 30,
2020 2019 2020 2019
Integrated Integrated Integrated Integrated
Solutions and Applied Product Solutionsand Applied Product Solutions and Applied Product Solutions and Applied Product
Services Technologies Services Technologies Services Technologies Services Technologies
Operating Profit $ 32.6 $ 23.6 $ 37.4 $ 22.5 $ 102.5 $ 110.5 $ 102.3 $ 38.4
Depreciation and
amortization 17.8 3.5 14.0 4.4 50.7 10.7 42.3 13.1
EBITDA $ 50.4 $ 27.1 $ 51.4 $ 26.9 $ 153.2 $ 121.2 $ 144.6 $ 51.5
Restructuring and
related business
transformation
costs (a) 0.2 1.6 - 0.2 0.3 5.6 0.4 0.7
Transaction costs
(b) - 0.1 - - - (1.2 ) 0.5 0.7
Other losses
(gains) and
expenses (c) - 0.1 - 0.2 - (59.1 ) 0.1 9.6
Adjusted EBITDA (d) $ 50.6 $ 28.9 $ 51.4 $ 27.3 $ 153.5 $ 66.5 $ 145.6 $ 62.5
(a) Represents costs and expenses in connection with restructuring initiatives
distinct to our Integrated Solutions and Services and Applied Product
Technologies segments in the three and nine months ended
2019, respectively. Such expenses are primarily composed of severance and
relocation costs.
(b) Represents costs associated with a change in the current estimate ofcertain acquisitions achieving their earn-out targets, which resulted in a
(decrease) increase to the fair valued amount of the earn-out recorded
upon acquisition, in the three and nine months ended
2019, respectively, distinct to our Integrated Solutions and Services and
Applied Product Technologies segments.
(c) Other losses, (gains) and expenses as discussed above in "How We Assess
the Performance of Our Business-Adjusted EBITDA" distinct to our
Integrated Solutions and Services ("ISS") and Applied Product Technologies
("APT") segments include the following:
62
--------------------------------------------------------------------------------
Three Months Ended June 30 ,
Nine Months Ended
2020 2019 2020 2019
(In millions) ISS APT ISS APT ISS APT ISS APT
Net pre-tax benefit on
sale of the Memcor
product line $ - $ - $ - $ - $ - $ (58.0 ) $ - $ -
Gain on sale of
property - - - (0.4 ) - - - (0.4 )
Remediation of
manufacturing defects - - - 0.4 - (1.5 ) - 1.7
Product rationalization
in electro-chlorination
business - 0.1 - 0.3 - 0.4 - 3.2
Expenses related to
maintaining
non-operational
business locations - - - - - - 0.1 -
Write-off of inventory - - - (0.1 ) - - - 5.0
Foreign exchange impact
related to headquarter
allocations - - - - - - - 0.1
Total $ - $ 0.1 $ - $ 0.2 $ - $ (59.1 ) $ 0.1 $ 9.6 (d) For the definition of Adjusted EBITDA (a non-GAAP financial measure) and a
reconciliation to net income (loss), its most directly comparable
financial measure presented in accordance with GAAP, see "How We Assess
the Performance of Our Business-Adjusted EBITDA." Immaterial rounding
differences may be present in the tables above.
Integrated Solutions and Services Revenues in the Integrated Solutions and Services segment increased$3.3 million , or 1.5%, to$228.7 million in the three months endedJune 30, 2020 from$225.4 million in the three months endedJune 30, 2019 . The increase in revenue was mainly driven by growth in capital revenue of$11.7 million , exclusive of the Frontier acquisition. These increases were primarily driven by continued strong demand for water solutions and systems in the microelectronics end market. The Frontier acquisition resulted in another increase of$1.4 million of revenue. These increases were offset by a decline in service revenue of$8.8 million . The decline was evenly driven by the timing of completion of certain large projects in the prior year, as well as the impact of COVID-19 shut down and delays, primarily in the refining and oil and gas end markets, offset somewhat by price realization related to established service contracts. Finally, aftermarket revenue saw a decline of$1.0 million . [[Image Removed: chart-ca3b2a47275a53048b6.jpg]] Revenues in the Integrated Solutions and Services segment increased$31.9 million , or 4.8%, to$694.7 million in the nine months endedJune 30, 2020 from$662.8 million in the nine months endedJune 30, 2019 . The increase in revenue was driven by stronger capital growth of$30.0 million , exclusive of acquisitions, primarily related to projects in the microelectronics end market. In addition, service growth of$1.0 million was a combination of price realization offset by 63 -------------------------------------------------------------------------------- timing of large projects completed in the prior year as well as the impact of COVID-19 shut-downs and delays, primarily in the refining and oil and gas end markets. Our recent investment in Frontier resulted in an additional increase of$3.7 million of revenue. These increases were offset by a reduction in aftermarket revenue of$2.8 million . [[Image Removed: chart-9859da609897511c96d.jpg]] Operating profit in the Integrated Solutions and Services segment decreased$4.8 million , or 12.8%, to$32.6 million in the three months endedJune 30, 2020 from$37.4 million in the three months endedJune 30, 2019 . Segment profitability was impacted by$2.8 million of operational variances related to lower service volumes and productivity due to customer shutdowns and enhanced safety protocols as well as$2.9 million related to increased employee related expenses, offset by$2.1 million of cost containment measures implemented in response to the uncertainties of COVID-19. Additionally, higher depreciation and amortization expense resulted in another reduction of profit of$3.8 million . These decreases were partially offset by$2.6 million profit in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing. [[Image Removed: chart-4f908b1209a25efca06.jpg]] Operating profit in the Integrated Solutions and Services segment increased$0.2 million , or 0.2%, to$102.5 million in the nine months endedJune 30, 2020 from$102.3 million in the nine months endedJune 30, 2019 . Segment profitability improved$16.7 million in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing, offset by$2.8 million of operational variances in the current quarter related to lower service volumes and productivity due to customer shutdowns and enhanced safety protocols. The current period negative impacts were somewhat mitigated by$2.1 million of cost containment measures implemented in response to the uncertainties of COVID-19. Profitability in the current year was also favorably impacted by the non-recurrence of$0.5 million of charges related to the achievement of earn-out targets associated with the Pure Water acquisition, in addition to the non-recurrence of other charges noted in the prior year of approximately$0.2 million related to restructuring and inactive sites. Negative drivers to profitability were increased employee related expenses of$8.1 million and higher depreciation and amortization expense of$8.4 million . 64 -------------------------------------------------------------------------------- [[Image Removed: chart-94409ba5a4b5590f9f4.jpg]] EBITDA in the Integrated Solutions and Services segment decreased$1.0 million , or 1.9%, to$50.4 million in the three months endedJune 30, 2020 , compared to$51.4 million in the three months endedJune 30, 2019 and increased$8.6 million , or 5.9%, to$153.2 million in the nine months endedJune 30, 2020 , compared to$144.6 million in the nine months endedJune 30, 2019 . Applied Product Technologies Revenues in the Applied Product Technologies segment decreased$15.8 million , or 11.7%, to$119.1 million in the three months endedJune 30, 2020 from$134.9 million in the three months endedJune 30, 2019 . The impact from the divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction in revenue of$11.1 million . The segment also saw an unfavorable foreign currency translation impact of$1.4 million . Additionally, revenue declined across multiple product lines in both theAmericas and EMEA regions by$3.6 million and$1.7 million , respectively, mainly due to COVID-19 related site closures and delays. These decreases were partially offset by organic revenue growth by an increase inAsia Pacific of$2.0 million , driven by volume in the Anodes and Aquatics product lines, as demand improved in the region as it recovers from COVID-19. [[Image Removed: chart-ecbe36eb8d765a21a84.jpg]] Revenues in the Applied Product Technologies segment decreased$18.3 million to$350.9 million in the nine months endedJune 30, 2020 from$369.2 million in the nine months endedJune 30, 2019 . The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction in revenue of$15.2 million . Additionally, organic revenues were down$3.3 million and$1.2 million in theAmericas andAsia Pacific regions, respectfully, predominantly due to COVID-19 slow down and delays. The segment also saw an unfavorable foreign currency translation impact of$3.5 million . These declines were partially offset by organic revenue growth in EMEA of$4.9 million . 65 -------------------------------------------------------------------------------- [[Image Removed: chart-ea474e245934526a9be.jpg]] Operating profit in the Applied Product Technologies segment increased$1.1 million , or 4.9%, to$23.6 million in the three months endedJune 30, 2020 from$22.5 million in the three months endedJune 30, 2019 . The increase is mainly driven by mix performance and price of$3.2 million , operational performance improvements of$1.0 million , employee & other cost variances of$0.7 million , in addition to lower depreciation of$0.9 million . These increases were offset by a volume impact of$2.3 million . The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction of$0.8 million , and$0.2 million in unfavorable foreign currency.
Further operating profit decreases were due to one-time costs of
• An increase in restructuring charges of
costs incurred following the sale of the Memcor product line;
• A gain on sale recorded in the prior year of
not reoccur in the current year; and
• An increase of $0.1 million related to charges related to the
achievement of earn-out targets on a prior acquisition.
These decreases were partially offset by:
• A reduction in costs incurred by the Company in the prior year from a
settlement with a third-party vendor associated with remediation of
manufacturing defects caused by the vendor of $0.4 million .
• Other non-recurring charges related to product rationalization that
declined by $0.1 million as compared to the prior year period.
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Operating profit in the Applied Product Technologies segment increased $72.1
million , or 187.8%, to $110.5 million in the nine months ended June 30, 2020
from $38.4 million in the nine months ended June 30, 2019 . The increase is
mainly due to the net pre-tax benefit on sale of the Memcor product line of
$58.0 million , which is net of $8.3 million of discretionary compensation
payments to employees in connection with the transaction and $1.0 million in
transaction costs incurred. Increased profit was also driven by volume and mix
performance, augmented by improved pricing, of $9.0 million , in addition to a
$0.3 million net benefit from the divestiture of the Memcor product line and the
acquisition of ATG UV and lower depreciation of $2.4 million . Further increases
were due to net reductions in nonrecurring costs of $5.3 million related to:
• Reduction in costs incurred by the Company related to the write-off of
inventory in the prior year of
rationalization and facility consolidation;
• A reduction in costs incurred by the Company from a settlement with a
third-party vendor associated with remediation of manufacturing defects
caused by the vendor of
• Reductions in costs related to the achievement of earn-out targets
associated with certain acquisitions of
• Reductions in product rationalization costs related to charges incurred
by the Company in its electro-chlorination business of $2.8 million ;
• A gain on sale recorded in the prior year of $0.4 million which did notreoccur in the current year;
• Increases in restructuring charges of
costs incurred following the sale of the Memcor product line; and
• Release of an acquisition related contingency due to the passage of
time in the prior year for
Operating profit was reduced by inflation and employee related costs increased$0.6 million , foreign currency of$0.5 million , and operational variances of$1.6 million . 67
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EBITDA in the Applied Product Technologies segment increased $0.2 million , or
0.7%, to $27.1 million in the three months ended June 30, 2020 , compared to
$26.9 million in the three months ended June 30, 2019 . EBITDA in the Applied
Product Technologies segment increased $69.7 million , or 135.3%, to $121.2
million in the nine months ended June 30, 2020 , compared to $51.5 million in the
nine months ended June 30, 2019 .
Liquidity and Capital Resources
Liquidity describes the ability of a company to 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. We consider liquidity in terms of cash flows from operations and
their sufficiency to fund our operating and investing activities.
Our principal sources of liquidity are our cash generated by operating
activities and borrowings under our Revolving Credit Facility. Historically, we
have financed our operations primarily from cash generated from operations and
periodic borrowings under our $125.0 million Revolving Credit Facility. 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.
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 June 30 year to date amounts settled
through the program and paid to participating financial institutions were $24.1
million , and $0.2 million in 2020 and 2019, 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 our Revolving Credit Facility and equipment
financing arrangements. We believe that our projected cash flows generated from
operations, together with borrowings under our 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 ended June 30, 2020 and 2019 were $65.9 million and $63.9 million ,
respectively. However, our budgeted capital expenditures can vary from period to
period based on the nature of capital intensive project awards. From time to
time, we may enter into financing arrangements related
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to capital expenditures for equipment used to provide services to our customers.
In addition, we may draw on our Revolving Credit Facility from time to time to
fund or partially fund an acquisition.
As of June 30, 2020 , we had total indebtedness of $879.9 million , including
$821.6 million of borrowings under the First Lien Term Loan Facility, no
borrowings under our Revolving Credit Facility, $56.0 million in borrowings
related to equipment financing, $0.7 million of notes payable related to certain
equipment related contracts and $1.6 million related to a mortgage. We also had
$11.9 million of letters of credit issued under our $125.0 million Revolving
Credit Facility and an additional $51 thousand of letters of credit issued under
a separate uncommitted facility as of June 30, 2020 .
Our senior secured credit facilities contain a number of covenants imposing
certain restrictions on our business. These restrictions may affect our ability
to operate our business and may limit our ability to take advantage of potential
business opportunities as they arise. The restrictions these covenants place on
our business operations, include limitations on our or our subsidiaries' ability
to:
• incur or guarantee additional indebtedness;
• make certain investments;
• pay dividends or make distributions on our capital stock;
• sell assets, including capital stock of restricted subsidiaries;
• agree to payment restrictions affecting our restricted subsidiaries;
• consolidate, merge, sell or otherwise dispose of all or substantially
all of our assets;
• enter into transactions with our affiliates;
• incur liens; or
• designate any of our subsidiaries as unrestricted subsidiaries.
We are a holding company and do not conduct any business operations of our 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 our senior secured credit facilities, 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. In addition, our Revolving Credit Facility, but not the First Lien Term Loan Facility, contains a financial covenant which requires us to comply with the maximum first lien net leverage ratio of 5.55 to 1.00 as of the last day of any quarter on which the aggregate amount of revolving loans and letters of credit outstanding under the Revolving Credit Facility (net of cash collateralized letters of credit and undrawn outstanding letters of credit in an amount of up to 50% of the Revolving Credit Facility) exceeds 25% of the total commitments thereunder. As ofJune 30, 2020 andSeptember 30, 2019 , we were in compliance with the covenants contained in the senior secured credit facilities. 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. Cash Flows The following table summarizes the changes to our cash flows for the periods presented: 69
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