Washington, D.C. 20549
EVOQUA WATER TECHNOLOGIES CORP.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
The aggregate market value of the outstanding common stock, par value $0.01 per share, of the registrant other than shares held by persons who may be deemed affiliates of the registrant, as of March 31, 2019,2021, the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $665 million.$3.1 billion.
EVOQUA WATER TECHNOLOGIES CORP.
Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward‑looking statements. The forward‑looking statements contained in this Annual Report on Form 10-K are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward‑looking statements contained in this Annual Report on Form 10-K.Report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward‑looking statements contained in this Annual Report, on Form 10-K, they may not be predictive of results or developments in future periods.
Item 1. Business
We provide solutions across the entire water cycle. The water cycle begins with “influent”influent water, which is sourced from rivers, lakes, as well asand other sources. We treat influent water for use in a wide variety of industrial, commercial, and municipal applications. In industrial applications, treated influent water, after it is treated, is usedincluding use as process water forin manufacturing, power generation and other industrial applications, including microelectronic production,use as ingredient water in the production of food, beverage, and other goods,
The table below provides an overview of our two segments, including their sales channels and a summary of their key offerings as of September 30, 2019.2021.
our routine service calls through predictive analytics and provide customers a more predictable, cost‑efficientcost-efficient water solution. We offer services which include water on‑demand, mobile solutions and smart water systems that leverage our extensive branch network, technical personnel and technology portfolio.
We provide products, services, and solutions to federal, state and local government customers both directly and indirectly as a supplier to general contractors. Many of our government contracts contain a termination for convenience clause, regardless of whether we are the prime contractor or a subcontractor. Upon a termination for convenience, we are generally able to recover the purchase price for delivered items and reimbursement of allowable work in process costs. See also Item 1A, “Risk Factors.”
Our business may exhibit seasonality resulting from our customers’ increasing demand for our products and services during the spring and summer months as compared to the fall and winter months. For example, we experience increased demand for our odor control product lines and services in the warmer months which, together with other factors, typically results in improved performance in the second half of our fiscal year. Inclement weather and extreme weather events, such as hurricanes, winter storms, droughts, and floods, can also have varying impacts on our business. Certain events may cause customer shutdowns that prevent or defer our performance of services or sale of equipment, while other events may drive increased demand for our products and services, particularly emergency response services. As a result, our results from operations may vary from period to period.
Applied Product Technologies segment
Our Applied Product TechnologiesAPT segment delivers a full suite of product technologies,markets its offerings primarily through indirect channels to serve the global market or through our Industrial Solutions and Services organization. The Applied Product Technologies segment includes:
Advanced filtration and separation products, suchISS segment’s sales organization as Memcor® membranes, Ionpure® technologies and Vortisand® systems;
Wastewater treatment technologies, including the BioMag® system, clarification, odor control and sludge management solutions;
Disinfection, covering a wide rangepart of solutions from chlorine to ultraviolet (UV) light and ozone technologies;
Electrocatalytic and materials, which combines our electro chlorination, cathodic protection and anodes product lines; and
Aquatics, which will combine our highly-valued products, such as the Defender® regenerative media filter, with a complete set of solutions for our partners.
We maintainbroader solutions. APT maintains relationships with OEMs, system integrators, sales representatives, regional distributors, engineering firms, operators and various other key influencersend users through our direct technical sales force to drive adoption of our offerings. We also maintainAPT maintains a comprehensive municipal representative network in the United States,U.S., providing us with a unique abilityan opportunity to influence specifications and the basis of design for new treatment facilities. As of September 30, 2019,2021, we had active relationships with more than 200 OEM partnerships240 distributors and managedsales representatives.
Growth Opportunities
We believe the global water market is well positioned to grow, supported by a variety of anticipated secular trends that will drive demand for clean water across a multitude of industrial, commercial, and municipal applications. These secular trends include water and climate risk, health and safety, connectivity and overall economic growth. Less predictable water availability and increased water scarcity are among the anticipated effects of climate change. Accessing water from current sources is becoming increasingly challenging, so the development of non-traditional sources of water and recycle and reuse technologies will be required.
The supply of clean water could be further impacted by factors including aging water infrastructure within North America and increased levels of water stress from seasonal rainfall, inadequate water storage options or treatment technologies. As global consumption patterns evolve and water shortages persist, we expect demand for solutions and services will continue to increase. Additionally, a decrease in the supply of clean water, as well as a heightened focus on environmental sustainability across various end markets, may increase the demand for closed-loop solutions that allow recycling and reuse of effluent water for certain applications. In order to position the company to meet this demand, key elements of our growth strategy include:
Provide a higher value-add service-based business model to our customers.Many of our customers require water that meets a particular specification to facilitate the operation of their own businesses. Our goal is to provide reliable water treatment solutions by combining our products and technologies with our extensive service and distribution capabilities, enabling our customers to outsource their water treatment needs to us and focus on their core businesses. Our outsourced water offerings are high value add solutions utilizing our owned assets to generate service revenue. An example is our Water One® service platform, which uses digitally connected remote monitoring technology to provide customers with predictive and proactive service, usage-based pricing, and simplified billing.
Drive margin expansion and cash flow improvements through continued focus on strategic pricing, operational excellence, execution and cost savings initiatives.During the year ended September 30, 2021, we deployed a more robust strategic pricing program to focus on efficient and effective price increase implementation with the objective of ensuring more immediate recovery of increased supply chain costs and capturing appropriate value for our innovations. Dedicated resources and systems have been put in place to institutionalize these practices. In parallel, we are pursuing several discrete initiatives that, if successful, we expect could result in additional cost savings over 250 channel partners.the next two years. These initiatives include our continuing supply chain improvement program to consolidate and manage global spending, our improved logistics and transportation management program, capturing benefits of our Water One® service platform and further optimizing our engineering cost structure, our global shared services organization and our sales, inventory and operations planning, including footprint rationalization. Furthermore, as a result of significant investments we have made in our footprint and facilities, we believe we have the capacity to support our planned growth without commensurate increases in fixed costs.
Continue to expand our capabilities for the treatment of increasingly complex emerging contaminants. Emerging contaminants such as PFAS, PFOA, selenium, micro-plastics and many others, may present global health risks if not properly removed from drinking water, process water and wastewater. We believe we have one of the leading portfolios of water treatment products and solutions to remove emerging contaminants from water including granular activated carbon, ion exchange resin, reverse osmosis, and advanced oxidation processes. In addition, we have an extensive service branch network, located predominantly in the United States, as well as a large fleet of mobile assets to respond quickly to customers’ water treatment needs.
Continue to evaluate and pursue accretive acquisitions to add new technologies, attractive geographic regions and end markets.As a complement to our organic growth initiatives, we view acquisitions as a key element of our overall growth strategy. We target acquisitions that we believe will enable us to accelerate our growth in our current addressable market, new geographies, and new end market verticals. Our existing customer relationships, channels to market and ability to rapidly commercialize technologies provide a strong platform to drive growth in the businesses we acquire. To capitalize on these opportunities, we have built an experienced team dedicated to mergers and acquisitions that has helped us expand our vertical markets and geographic reach and enhance our portfolio of technologies.
During the year ended September 30, 2021, we completed the following acquisitions:
•On December 17, 2020, we acquired the industrial water business of Ultrapure & Industrial Services, LLC (“Ultrapure”) for $8.7 million cash paid at closing. On April 1, 2021, we paid an additional $0.3 million as a result of net working capital adjustments. Ultrapure, based out of Texas, provides customers across multiple end markets with a variety of water treatment products and services, including service deionization, reverse osmosis, UV, and ozonation. Ultrapure will strengthen our service capabilities in the Houston and Dallas markets and is a part of our ISS segment.
•On April 1, 2021, we acquired the assets of Water Consulting Specialists, Inc (“WCSI”) for $12.0 million cash paid at closing. WCSI is a leader in the design, manufacturing, and service of industrial high-purity water treatment systems. The acquisition strengthens our portfolio of high-purity water treatment systems and provides the opportunity to further expand its digitally enabled solutions and services in key industrial markets. WCSI is a part of our ISS segment.
Research, Development and Engineering
We utilize a disciplined, stage‑gate process-consistingstage-gate process consisting of development, field test, commercialization, supply chain and sourcing decisions-todecisions to identify and develop new technologies for commercialization.We also partner with leading universities, research centers and other outside agencies to commercialize, focus our efforts on and engage early with supply‑chain management to promote profitability. We focus on tuck‑in acquisitions as additional resources for new product innovation and development.explore potential developments.
As of September 30, 2019,2021, our global research, development, and engineering footprint includesincluded seven facilities located in the United States,U.S., the United Kingdom, the Netherlands, Germany Singapore and Australia (which will be transferred to DuPont upon the closing of the Memcor Disposition),India, staffed with managers, scientists, researchers, engineers, and technicians, along with partnerships spanning leading universities research centerstechnicians. In October 2021, we opened a new Sustainability and other outside agencies.
Information Technology
Our information technology systems consist of enterprise management, e‑commerce, customer relationshipInnovation Hub in Pittsburgh, Pennsylvania.This 18,000 square-foot facility houses a hands-on demonstration and field service management, customer quotingtraining area, a pilot testing environment, and billing, environmental compliance, businessa laboratory to grow our analytical and operational support, and procurement and sales force management systems. feasibility study capacity.We continue to integrate our acquisitions onto our enterprise platform, focusing on standardizing global processes. In 2019, we enhanced our customer relationship and field service management platform with the objective of enabling our field sales team to better service our customers. The shift from our initial WaterOne® service platform to the next generation platform is complete, and we expect this will provide enhanced monitoringfacility to advance our research and visibilitydevelopment capabilities and enable further development of customer installations. We have nearly completed our infrastructure standards deployment globally, and we continue to update our information technology infrastructure through investments focused on cost efficiencies, reliability, functionality and scalability.sustainable water treatment technologies.Our total expected investment in this facility is approximately $5.6 million, of which $3.5 million has been recognized as of September 30, 2021.
.
Intellectual Property
Our intellectual property and proprietary rights are important to our business.business, but we do not believe our business as a whole to be materially dependent on any single patent, trade secret or trademark. As of September 30, 2019,2021, we have approximately 1,4001,600 granted or pending patents (of which, approximately 300 will be(after giving effect to patents transferred as a result of acquisitions and dispositions to DuPont upon the closing of the Memcor Disposition)date). We undertake to strategically and proactively develop our intellectual property portfolio by
pursuing patent protection, obtaining copyrights and registering our trademarks in the United StatesU.S. and in foreign countries. We currently rely primarily on patent, trademark, copyright and trade secret laws, and control access to our intellectual property through license agreements, confidentiality procedures, non‑disclosurenondisclosure agreements with third parties, employment agreements and other contractual rights, to protect our intellectual property rights.
Competition
Our industry is highly fragmented and includes a number of regional and niche‑niche offering focused competitors. Competition is largely based on product performance and reliability, and innovativenesspricing of products and services, ability to provide service and solutions,support, application expertise and process knowledge, brand reputation, energy and water efficiency, product compliance with regulatory and environmental requirements, product lifecycle cost, scalability, timeliness of delivery, the proximity of service centers to our customers and the effectiveness of our distribution channels and price.channels. Within each of our segments and the various businesses that comprise them, we compete with a fragmented rangevariety of companies, but we do not haveconsider any individuallysingle company to be a key competitors.competitor to our business as a whole.
Backlog
Backlog represents the expected future revenue for unfulfilled and remaining performance obligations for capital projects where neither Evoqua nor the customer can terminate the contract without penalty. As of September 30, 2019,2021, our backlog was approximately $179.3$275.6 million.
Employees
Human Capital Resources
We believe our talent within the organization is key to our long-term success. Our human capital management philosophy and objectives focus on creating a high-performance culture in which employees are highly enabled, empowered, and accountable to deliver results. As of September 30, 2019,2021, we had approximately 4,1504,000 employees. Of these employees, approximately 59% were full‑timefull-time salaried level staff and the remaining employees consisted of a mix of full‑timefull-time and part‑timepart-time hourly workers. Approximately 78%75% of our employees work in our U.S. operations and approximately 22%25% work in foreign operations. None of our facilities in the United StatesU.S. or Canada are covered by collective bargaining agreements. As is common in Germany and the Netherlands, our employee populations there are represented by works councils. We are not involved in any material disputes with
The health, safety and well-being of our employees and believe that relations withis our employees and, to the extent applicable, with our works councils, are good.
Insurance
We maintain insurance policies to cover directors’ and officers’ liability, fiduciary, crime, special accident, cyber, property, business interruption, cargo, workers’ compensation, automobile, general liability, environmental, umbrella and excess liability insurance.
All of our insurance policies are with third‑party carriers and syndicates with financial ratings of an A or better. We and our global insurance broker regularly review our insurance policies and believe the premiums, deductibles, coverage limits and scope of coverage under such policies are reasonable and appropriate for our business. The continued availability of appropriate insurance policies on commercially reasonable termstop priority.Fostering a safe working environment is importantcritical to our ability to operate our businessattract and retain talent and to maintainearn and keep the trust of our reputation. See Item 1A, “Risk Factors.”customers.In order to do so, our Environmental, Health and Safety team conducts monthly safety reviews at the executive level, reviews each recordable accident with our CEO and leadership team, conducts quarterly reviews with our Board of Directors, routinely reviews key performance indicators, and conducts regular facility audits.Every employee is empowered to stop work when they have a concern or see the potential for injury.Throughout the COVID-19 pandemic, we have remained focused on protecting the health, safety and well-being of our employees and managing the business to preserve our workforce.We have implemented safety plans and protocols following guidance from the Centers for Disease Control, World Health Organization, and other federal, state, local and international regulations, and we continue to evolve our corporate and site-specific crisis management teams to actively manage and ensure compliance with these plans and protocols.
We are currently operating in an extremely challenging talent market. Market hiring surges, increased attrition and shifting work expectations have significantly impacted the attraction and retention of talent, creating a hyper-competitive global marketplace. We understand that our long-term success will require a differentiated, targeted approach to talent attraction and retention. In response to these challenges, we took a number of actions in 2021 in an effort to enhance our ability to attract and retain diverse talent.
•We learned through employee surveys, stay interviews, and exit survey data that career development and recognition were two key factors that might influence our employees to consider leaving the organization. In response, we developed six enterprise-wide career paths designed to help employees in certain roles establish career development plans.We also put in place processes to advance our internal talent placements, ensuring cross-segment and cross-functional internal talent moves are occurring across the organization, to help employees achieve the objectives of their development plans. We plan to launch a global recognition program in 2022 to ensure the accomplishments of our employees are better acknowledged.
•We recently launched workstreams in two key focus areas: total compensation, with a deeper focus on sign-on and referral bonuses, and branding and advertising within the talent market, with a heightened focus on Inclusion and Diversity and Sustainability.
•We launched our flexible work approach that balances the benefits of working remotely with the experience of working on-site.
Our Inclusion & Diversity (ID) strategy is also critical to our long-term success, and we continuously strive to improve the diversity of our workforce through inclusive practices and actions. Through our ID action plan, we launched a Business Resource Group called the Evoqua Inclusion Network (EIN) in September 2021, which is tasked with identifying action opportunities that promote inclusion and minimize unconscious bias. Specific actions taken to date include the dissemination to all global employees of an unconscious bias learning program, enhancement of our benefits offerings with our flexible work approach, updating our internal and external branding materials focusing on ID, and implementing recruiting strategies to better attract diversity, such as blind resumes and diverse interview panels.
We are working to improve gender diversity at all levels of the business through our ID strategy and action plan. As of September 30, 2021, women make up approximately 20% of our global employee population and approximately 15% of our leadership roles, defined as director level and above. In 2021, we saw an increase of approximately 23% in gender diversity in leadership roles within the organization, and we have seen an increase of approximately 95% in gender diversity in leadership roles from September 30, 2018 to September 30, 2021.
We embrace inclusion and diversity not only in our employment practices but also in our director selection. Since October 2018, our Corporate Governance Guidelines have provided that diverse candidates, including women and minorities, must be included in each pool of candidates from which we select new directors, otherwise known as the “Rooney Rule.” Forty percent of our current Board members self-identify as diverse, in terms of race, ethnicity or gender, including three of the four directors that have joined our Board since our initial public offering.
Government Regulation and Environmental Matters
We are subject to extensive and varied laws and regulations in the jurisdictions in which we operate, including those relating to anti‑corruption and trade, anti-money laundering, import and export compliance, antitrust, data security and privacy, employment, workplace safety, product safety, public health and safety, product safety,environmental compliance, intellectual property, transportation, zoning, and fire codes. WeOur policies mandate compliance with all applicable laws and regulations, and we operate our business in accordance with standards and procedures designed to comply with applicablethese laws and regulations.
In particular, our international operations subject us to laws and regulations related to anti-corruption and trade, including those related to export and import compliance, anti-trust, anti-bribery and money laundering. Our policies mandate compliance with these laws and regulations, and we have established policies and procedures designed to assist us and our personnel in compliance with applicable United States and international laws and regulations. However, any violation of
such laws, regulations or policies could result in substantial fines, sanctions, civil and/or criminal penalties, imprisonment, disgorgement of profits, debarment from government contracts and curtailment of operations in certain jurisdictions, and might materially adversely affect our business, financial condition, results of operations or prospects. See Item 1A, “Risk Factors-Failure to comply with applicable anti-corruption and trade laws, regulations and policies, including the U.S. Foreign Corrupt Practices Act, could result in fines and criminal penalties, causing a material adverse effect on our business, financial condition, results of operations or prospects.”
In certain countries where we operate, our employees are represented by a works council, as required by local law. In such countries, we are required to consult and seek the consent or advice of these works councils in connection with certain corporate decisions, such as a major restructuring, a change of control or changes to local management. Certain other decisions that directly involve employment matters applicable either to all employees or certain groups of employees may also require works council approval. Further, certain of our international operations offer employees defined benefit plans in compliance with applicable local legal provisions requiring payments of, among other things, mandatory pension payments or allocations for severance pay. None of our U.S. or Canadian employees are represented by unions or works councils, and our U.S. and Canadian operations do not maintain defined-benefit plans.
In addition, there are numerous U.S. federal, state and local laws and regulations and foreign laws and regulations regarding data security, privacy and the collection, sharing, use, processing, disclosure and protection of personal information and other user data, the scope of which is changing, subject to differing interpretations, and may be inconsistent among different jurisdictions. If our efforts to protect the security of information about our customers, suppliers and employees are unsuccessful, a significant data security breach may result in costly government enforcement actions, private litigation and negative publicity resulting in reputation or brand damage with customers, and our business, financial condition, results of operations or prospects could suffer. See Item 1A, “Risk Factors-If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, our business and reputation could suffer.” Further, governments are continuing to focus on privacy and data security and it is possible that new privacy or data security laws will be passed or existing laws will be amended in a way that is material to our business.
Environmental Matters
The geographic breadth of our facilities and the nature of our operations subject usour operations and products to extensive environmental, health and safety laws, regulations, and regulations in jurisdictionspermits, domestically and internationally, at national, state, and local levels throughout the world. Such laws, regulations and regulationspermits relate to, among other things, air emissions, to air, the treatmentpotable and discharge of drinkingnon-potable water and wastewater treatment, wastewater discharge, the discharge of hazardous materials into the environment, thegeneration, handling, storage, use, transport, treatment and disposal of non-hazardous and hazardous materials and solid, hazardous and other wastes, product safety and workplace health and safety. These laws and regulations impose a variety of requirements and restrictions on our operations and the products we distribute.distribute, and they could increase our cost of producing certain products or make certain products obsolete or less attractive in the marketplace. The failure by us to comply with these laws and regulations could result in fines, penalties, enforcement actions, third‑third party claims, damage to property or natural resources, and personal injury claims, requirements to investigate or cleanup property or to pay for the costs of investigation or cleanup or regulatory or judicial orders
requiring corrective measures, including the installation of pollution control equipment, remedial actions or the pulling of products from the market, and could negatively impact our reputation with customers. We
Many of the customers that we serve are not aware of any pending environmental compliancesubject to the same or remediation matters that, in the opinion of management, are reasonably likely to have a material effect on our business, financial condition, results of operations or prospects. However,similar environmental, health and safety laws and regulations applicable to our business, the products we distribute, the services we provide and the business ofregulations. Compliance with these laws by our customers and the interpretationcould result in increased or enforcement of these laws and regulations, are constantly evolving and it is impossible to predict accurately the effect that changes in these laws and regulations, or their interpretation or enforcement, may have upon our business, financial condition, results of operations or prospects. Should environmental, health and safety laws and regulations, or their interpretation or enforcement, become more stringent, our costs could increase and significant capital expenditures or operational restrictions could be required, which may have an adverse effect on our business, financial condition, results of operations or prospects. However, such increased stringency could also increasedecreased demand for our products and services.
Specific laws and regulations that may affect our operations or demand for our products and services include, among others, the following.
•The federal Clean Water Act (the “CWA”) and solutions, which assist various industriescomparable state, local and municipalities in meeting environmental and safety requirements forforeign laws that regulate the treatment and discharge of pollutants into streams and other waters.These laws may limit the quantity of pollutants in water discharges and require persons to apply for and obtain permits and conduct sampling and monitoring, and in some cases, treat the water.Changes in limits on the quantity of pollutants and the types of pollutants under the CWA and comparable state, local or foreign laws could affect demand for our products or services or create liability for us as the result of contamination in water we treat.
•The federal Safe Drinking Water Act (the “SDWA”) and comparable state, local and foreign laws that set standards for drinking water quality and wastewater. Inprotect sources of public drinking water. The U.S. Environmental Protection Agency (the “EPA”) has issued standards for microorganisms, disinfectants, disinfection byproducts, inorganic chemicals, organic chemicals, and radionuclides.Changes in the SDWA or comparable state, local or foreign standards, including the addition of newly-regulated contaminants, could affect demand for our products and services and/or result in the obsolescence of our products or lead to an interruption or suspension of our operations. Additionally, increased public awareness of the presence and human health impacts of man‑mademanmade chemicals and naturally occurring contaminants in drinking water may increase demand for our municipal service offerings. Correspondingly, if stringent laws or regulations are delayed or are not enacted, or repealed or amended to be less stringent, or enacted with prolonged phase‑in periods, or not enforced, then demand for our products and services may also be reduced.
•The nature of ourResource Conservation and Recovery Act (“RCRA”) and comparable state, local and foreign laws that regulate substances designated as hazardous waste.Our operations which involve the generation, handling, storage, use, transport, treatment and disposal of non-hazardous and hazardous materials and solid, hazardouswastes.Changes in materials covered or treatment, storage, and other wastes, exposes us to the risk of liabilitydisposal requirements under RCRA and claims associated with contamination atcomparable state, local or foreign standards could result in increased operating costs or require additional investment in our current and former facilities or sites where we have disposed of or arranged for the disposal of waste, or with the impact of our products and services on human health and safety and the environment. Laws and regulations with respect to the investigation and remediation of contaminated sites can impose joint and several liability for releases or threatened releases of hazardous materials upon statutorily defined parties, including us, regardless of fault or the lawfulness of the original activity or disposal. We have been subject to claims and remediation obligations, including having been named as a potentially responsible party, in certain proceedings initiated pursuant to thecovered facilities.
•The Comprehensive, Environmental Response, Compensation, and Liability Act (“CERCLA”) and comparable state, local and foreign laws.The Company has been subject to claims under CERCLA, which can impose joint and several liability on “potentially responsible parties” for costs of investigation and remediation and for natural resource damages, without regard to fault or the legality of the original conduct, on certain classes of persons with respect to the release into the environment of specified substances, including, under CERCLA, those designated as “hazardous substances.”
•The Toxic Substances Control Act (the “TSCA”), the Federal Insecticide, Fungicide and similarRodenticide Act (the “FIFRA”), and comparable state, local and foreign laws regulationsthat regulate the manufacture and/or distribution of certain chemical substances and/or disinfection equipment.These laws may require ongoing submissions to the EPA or state environmental agencies, including, but not limited to, information on the chemistry and statutes,toxicology of the chemical substance or products, registrations, notification, and mayother requirements before such products can be named a potentially responsible partymanufactured, distributed, or sold. Changes in other similar proceedingsthese laws could affect demand for our products and services, increase our cost of operations, result in the future. Unforeseen expendituresobsolescence of our products or liabilities may ariselead to an interruption or suspension of our operations.
We are not aware of any pending environmental compliance or remediation matters that, in connection with such matters.the opinion of management, are reasonably likely to have a material effect on our business, financial condition, results of operations or prospects.
Available Information
Our internet address is www.evoqua.com. We are subject to the informational requirements of the Exchange Act, and in accordance therewith, we file reports, proxy and information statements and other information with the U.S. Securities and Exchange Commission (the “SEC”). Our Annual ReportReports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as well as our sustainability reports, are available free of charge through the “Investors” section of our website at www.evoqua.com. Reportswebsite. These materials are generally made available free of chargeon our website as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The information contained on our website is not incorporated by reference into this Annual Report on Form 10-K.
Report.In addition to our website, you may read our reports, proxy and information statements, and other information that we file electronically with the SEC at www.sec.gov/edgar.www.sec.gov.
We intend to make future announcements regarding Company developments and financial performance on the “Investors” section of our website, www.evoqua.com, as well as through press releases, filings with the SEC, conference calls, and webcasts.
Item 1A. Risk Factors
The following risks and uncertainties could materially adversely affect our business, financial condition, results of operations or prospects. Although the risks are organized by headings and each risk is described separately, many of the risks are interrelated. While we believe we have identified and discussed below the key risk factors affecting our business, there may be important in understanding any statement in this Annual Report on Form 10-Kadditional risks and uncertainties that are not presently known or elsewhere. Ourthat are not currently believed to be significant that may adversely affect our business, financial condition, results of operations or prospects could be materially and adversely affected by a number of factors, whether currently known or unknown, including but not limited to those described below.in the future. Any one or more of such factors could directly or indirectly cause our actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these factors, in whole or in part, could materially
Business and Operational Risks
The COVID-19 pandemic has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations orand prospects.
Risks Relating to Our Business
GeneralThe COVID-19 pandemic, the resulting global economic and business conditions may materially adversely affect demand for our products, services and solutions.
We compete in various end markets and geographic regions around the world. Among these, the most significant are global industrial markets and municipal markets. In fiscal 2019, 85% and 15% of our revenue was generated in North Americaslowdown, and the restreopening of world, respectively. Weglobal economies that has followed have experienced,created a number of macroeconomic challenges that have impacted our business, including volatility and expectuncertainty in business planning, disruptions in global supply chains, material, freight and labor inflation, shortages of and delays in obtaining certain materials and component parts, and labor shortages.To date, the pandemic has negatively impacted sales volume across our business, due primarily to continue to experience, fluctuationscustomer site access restrictions, temporary customer site closures, and temporary delays in revenues and operating results due to economic and business cycles. Important factors for our businesses and the businessesannual maintenance activities by customers in certain end markets. Further, certain of our customers bothhave restricted access to their sites such that only our vaccinated employees may enter such sites, which may delay our timely provision of services to them.
The COVID-19 pandemic has also heightened risks associated with our operations. Our service technicians enter high-risk areas such as hospitals and testing laboratories, putting them at greater risk of exposure to the virus. An outbreak among our service technician population or an outbreak among employees at any of our manufacturing facilities, which may require us to suspend or reduce operations at that facility, could have a material adverse effect on our business, financial condition, results of operations and prospects. Additionally, a large number of our employees continue to work remotely, resulting in increased cyber-security risk.
Further, the U.S.Occupational Safety and abroad, include local and global macroeconomic conditions, commodity prices, energy prices,Health Administration, acting at the timing of projects, the overall strength of and our customers’ confidence in the economy, industrial and governmental capital spending, governmental fiscal and trading policies, global environmental and regulatory policies, the strengthdirection of the residential and commercial real estate markets, unemployment rates, consumer spending, availability of financing, interest rates, tax rates, changes in tax laws and political conditions. The businesses of many of our industrial customers are, to varying degrees, cyclical, and have experienced periodic downturns. While we attempt to minimize our exposure to economic or market fluctuations by serving a balanced mix of end markets and geographic regions, anyPresident of the above factors, individuallyUnited States, published a Temporary Emergency Standard requiring certain companies to vaccinate their employees or intest those who are not vaccinated at least once per week. This could impact employee retention or increase our costs of operation. If we
are unable to respond to and manage the aggregate,impact of these events, our business and results of operations may be adversely affected. Additionally, if we are unable to comply with these requirements, we could face enforcement actions or a significantfinancial penalties.
The duration and severity of the pandemic remain uncertain and cannot be predicted. If COVID-19 and its variants continue to spread, or sustained downturn in a specific end market or geographic region, could materially reduce demand for our products, services and solutions.
Levelsif the duration of municipal spending may particularly impactthe disruptions caused by the pandemic is further prolonged, our business, financial condition, results of operations or prospects. Reduced tax revenue in certain regions, or inability to access traditional sources of credit, may limit spending and new development by municipalities or local governmental agencies, which in turn mayprospects could be materially adversely affected. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business and our financial results in subsequent periods due to the pandemic’s impact on the global economy and on certain markets that we serve. COVID-19 and future public health crises and pandemics may also affect our operating and financial results in a manner that is not presently known to us or not presently considered to be a significant risk to our operations. The impact of the demand forCOVID-19 pandemic may also have the effect of heightening many of the other risks and uncertainties described in this “Risk Factors” section.
Our financial results depend on successful project execution and may be adversely affected by cost overruns, failure to meet customer schedules or other execution issues.
A significant portion of our solutionsrevenue is derived from large projects that are technically complex and reducemay occur over multiple years. These projects are subject to a number of significant risks, including project delays, cost overruns, changes in scope, unanticipated site conditions, design and engineering issues, incorrect cost assumptions, increases in the cost of materials and labor, health and safety hazards, third party performance issues, weather issues and changes in laws or permitting requirements. If we are unable to manage these risks, we may incur higher costs, liquidated damages, and other liabilities to our revenue.customers, which may decrease our profitability and harm our reputation. Many of these projects require us to contract with engineering, procurement, and construction firms (“EPCs”). If an EPC that we have commissioned to build a new project defaults or fails to fulfill its contractual obligations, we could face significant delays, cost overruns and liabilities.Our continued growth will depend in part on executing a higher volume of large projects, which will require us to expand and retain our project management and execution personnel and resources.
Failure to compete successfully
Our business could be adversely affected by material, freight, and labor inflation and other manufacturing and operating cost increases and commodity availability constraints.
Certain commodities and materials used in our marketsoperations, including, but not limited to, steel, caustic, carbon, calcium nitrate, and iridium, are subject to significant price fluctuations. Volatility in the market price and availability of these materials has a direct impact on the cost of operating our business. Our operating costs are also impacted by fluctuations in the cost of energy and related utilities, freight, and labor. We have experienced material, freight, and labor cost increases, and we have taken actions to mitigate the impact of these cost increases through price increases, cost savings projects, and sourcing decisions, as well as through strategic productivity improvements. If we are unable to offset these cost increases, it will adversely impact our gross profit, gross margin and operating profit. In addition, many of our contracts are long‑term in nature, and our failure to accurately project operating costs or negotiate or enforce price escalation provisions in our long‑term contracts could materially adversely affecthave a material adverse effect on our business, financial condition, results of operations or prospects.
Reliance on third party shipping companies may impact our ability to execute projects on time and within budget.
We rely upon various means of transportation through third parties, including shipments by air, sea, rail, and truck, to deliver products to our facilities from vendors and from our facilities to our customers, as well as for direct shipments from vendors to customers. Factors beyond our control, many of which have been caused or exacerbated by the COVID-19 pandemic, including labor shortages and capacity constraints in the transportation industry, container shortages, port congestion, disruptions to the national and international transportation infrastructure, fuel shortages, and transportation cost increases (such as increases in fuel costs or port fees), have impacted and could further impact our ability to execute projects or ship products to our customers on time and within budget, which could harm our reputation and have a material adverse effect on our business, financial condition, results of operations and prospects. Generally, we have been ableto pass on the majority of shipping and related charges to our customers, but there can be no assurance that we will be able to do so into the future. Failure to do so may adversely impact our gross profit and gross margin.
We may incur liabilities to customers as a result of warranty claims or failure to meet performance guarantees, which could reduce our profitability.
Our customers typically require product warranties as to the proper operation and conformance to specifications of the products we manufacture or install, and performance guarantees as to any effluent water produced by our equipment and services. Failure of our products to operate properly or to meet specifications of our customers or our failure to meet our performance guarantees may increase costs by requiring additional engineering resources and services, replacement of parts and equipment and frequent replacement of consumables or monetary reimbursement to a customer or could otherwise result in liability to our customers. We have in the past received warranty claims, and we expect to continue to receive them in the future. There are significant uncertainties and judgments involved in estimating warranty and performance guarantee obligations, including changing product designs, differences in customer installation processes and failure to identify or disclaim certain variables in a customer’s influent. To the extent that we incur substantial warranty or performance guarantee claims in any period, our reputation, earnings, and ability to obtain future business could be materially adversely affected.
Our inability to meet our own and our customers’ safety standards could have a material adverse effect on our sales and profitability.
Maintaining a strong and reliable reputation for safety is critical to our business. Many of our customers actively monitor and review our company‑wide safety record. Risks arising from unsafe products or unsafe performance by our employees include, among other things, personal injury or death caused by our products or occurring in our facilities, the destruction of customer or third‑party property during the execution of a service arrangement or due to the malfunction of our products, delays in or suspension of service or the failure to timely deliver our products. Workplace accidents or near-accidents, product-related accidents, or the failure to follow our own or our customers’ safety policies could damage our reputation or our customers’ perception of our safety record, which could have a material adverse impact on demand for our products and services, result in additional costs to our business or the loss of customers, result in litigation against us or increase government or regulatory oversight over us.
Failure to effectively treat emerging contaminants could result in material liabilities.
A number of emerging contaminants might be found in water that we treat, including PFAS, PFOA, selenium, micro-plastics, hazardous chemicals, or pathogens that may cause a number of illnesses, including cholera, typhoid fever, cancer, giardiasis, cryptosporidiosis, amoebiasis and free-living amoebic infections. Such contaminants or pathogens may be found in the environment, and, as a result, there is a risk that they could be present in water treated using our systems or products. In applications where treated water enters the human body, illness and death may result if contaminants or pathogens are not eliminated during the treatment process. In particular, contamination could result from failing to properly treat reusable products before they are distributed to our customers, or from actions taken by our customers or other third parties using our products, which could result in material liability. The potential impact of a contamination of water treated using our products, services or solutions is difficult to predict and could lead to an increased risk of exposure to product liability claims, increased scrutiny by federal and state regulatory agencies and negative publicity. Further, an outbreak of disease in any one of the municipal markets we serve could result in a widespread loss of customers across other such markets.
Our future growth is dependent upon our ability to continue to develop or acquire new products, services and solutions that allow us to compete successfully in our markets.
We offer our products, services, and solutions in highly competitive markets. We believe the principal points of competition in our markets are product performance, reliability and innovation of our solutions, application expertise and process knowledge, brand reputation, energy and water efficiency, product compliance with environmental and regulatory requirements, product lifecycle cost, scalability, timeliness of delivery, proximity of service centers to our customers, effectiveness of our distribution channels and price. Maintaining and improving our competitive position will require successful management of these factors, including continued investment by us in research and development (including acquisition of technology through transactions), engineering, marketing, customer service and support and our distribution networks. Our future growth rate depends upon our ability to compete successfully, which is impacted by a number of factors, including our ability to (i) identify emerging technological trends in our target end markets, (ii) develop and maintain a wide range of competitive and appropriately priced products, services and solutions, (iii) enhance and differentiate our products from those of our competitors, (iv) develop and drive commercial acceptance of compelling new products quickly and cost‑effectively, (v) ensure that our products, services and solutions remain cost‑competitive, even when faced with rising commodity costs, (vi) attract, develop and retain individuals with the requisite technical expertise and understanding of customers’ needs to develop and sell new technologies and products, and (vii) execute projects in a cost-effective manner according to the schedules required by our customers.
Our growth strategy includes growth through acquisitions, and we may not be able to identify suitable acquisition targets or otherwise successfully implement our growth strategy.
Acquisitions have historically been a significant part of our growth strategy, and we expect to continue to grow through acquisitions in the future. We may not be able to identify suitable candidates, negotiate appropriate or favorable acquisition terms, obtain financing that may be needed to consummate such transactions or complete proposed acquisitions. There is significant competition for acquisition and expansion opportunities in our businesses.
Acquisitions require significant time and attention from management and other key personnel, which may result in attention being diverted from the operation of our existing business.Other risks associated with our acquisition strategy include ineffective integration of an acquisition, as further described below, inaccurately estimating a target’s financial condition or risk profile, failure to achieve planned synergies, litigation relating to an acquisition, failure to receive required regulatory approvals or such approvals being delayed or restrictively conditional, potentially insufficient internal controls over financial activities or financial reporting at an acquired entity that could impact our existing business on a combined basis, and an adverse impact on our existing business resulting from an acquired business that historically had a higher risk tolerance or whose personnel fail to comply with our existing policies.
We may have difficulty operating or integrating any acquired businesses, assets, or product lines profitably, or in successfully implementing our growth strategy.
The anticipated benefits from any potential acquisitions may not be achieved unless the operations of the acquired business assets or product lines are successfully integrated in an efficient, effective, and timely manner. The integration of our acquisitions will require substantial attention from management and operating personnel to ensure that the acquisition does not disrupt any existing operations or affect our customers’ opinions and perceptions of our services, products, or customer support. Risks associated with integration of an acquisition include failure of an acquired business to perform to our expectations, our failure to integrate it appropriately and on a timely basis, our failure to realize anticipated synergies and cost savings, our failure to preserve the customer relationships and retain key employees of an acquired business and difficulties, inefficiencies or cost overruns in integrating and assimilating the organizational cultures, operations, technologies, data, services and products of the acquired business with ours.
The process of integrating acquired businesses, assets and product lines could cause the interruption of, or delays in, the operation of our existing business, which could have a material adverse effect on our business, financial condition, results of operations or prospects. Acquisitions also place a burden on our information, financial and operating systems and our employees and management. If we are unable to manage our growth effectively, we may spend time and resources on such acquisitions that do not ultimately increase our profitability or that cause loss of, or harm to, relationships with employees and customers.
We may not achieve some or all of the expected benefits of our restructuring actions, which may materially adversely affect us.
We have taken a number of restructuring actions in recent years in an effort to better serve the needs of our customers worldwide, achieve cost savings and operational efficiencies, and position ourselves for improved long-term growth and profitability. Achieving the expected cost savings and efficiencies will be subject to significant economic, competitive, and other uncertainties, some of which are beyond our control, and we may not be able to obtain the cost savings and benefits that we currently anticipate in connection with these restructuring actions. Our assumptions may not be accurate, and we may not be able to operate in accordance with our plans, which may cause us to incur additional restructuring charges. These types of initiatives could yield unintended consequences such as distraction of our management and employees, business disruption and unforeseen costs, attrition beyond any planned reduction in workforce, inability to attract or retain key personnel and reduced employee productivity, which could materially adversely affect our business, financial condition, and results of operations. The successful implementation and execution of our restructuring actions are critical to achieving our expected cost savings as well as effectively competing in the marketplace and positioning us for future growth. If our restructuring actions are not executed successfully, it could have a material adverse effect on our business, financial condition, results of operations, and prospects.
Delays in enactment or repeals of environmental laws and regulations may make our products, services, and solutions unnecessary or less economically beneficial to our customers, adversely affecting demand for our products, services, and solutions.
Certain of our products, services and solutions assist various industries and municipalities in meeting stringent environmental and safety requirements enacted for the purpose of making water cleaner and safer. Our future growth is dependent in part on the impact and timing of potential new water laws and regulations, as well as potential changes to existing laws and regulations. If stricter laws or regulations are delayed or are not enacted, or repealed or amended to be less strict, or enacted with prolonged phase‑in periods, or not enforced, demand for our products and services may be reduced. We are currently unable to predict whether changes to statutes and rules will affect demand for our products and services. To the extent that such changes have a negative impact on us, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations or prospects.
If we become subject to claims relating to handling, storage, release, or disposal of hazardous materials, we could incur significant costs and experience delays in our business due to our efforts to comply.
Our business activities, including our manufacturing processes and waste recycling and treatment processes, currently involve the use, treatment, storage, transfer, handling and/or disposal of hazardous materials, chemicals, and wastes. These activities create a risk of significant environmental liabilities and reputational damage. Under applicable environmental laws and regulations, including RCRA and CERCLA, we could be strictly, jointly, and severally liable for releases of regulated substances by us at our current or former properties or the properties of others or by other businesses that previously owned or used our current or former properties. We could also be liable or incur reputational damage if we merely generate hazardous materials or wastes, or arrange for their transportation, disposal, or treatment, or we transport such materials, and they are subsequently released or cause harm. Our business activities also create a risk of contamination or injury to our employees, customers or third parties, from the use, treatment, storage, transfer, handling and/or disposal of these materials, and these activities could result in accidental contamination or injury to the general public, as end‑users of our industrial and municipal customers’ products and services.
In the event that our business activities result in environmental liabilities, such as those described above, we could incur significant costs or reputational damage in connection with the investigation and remediation of environmental contamination, and we could be liable for any resulting damages including natural resource damages. Such liabilities could exceed our available liquidity or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, federal, state, and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverse effect on our business, financial condition, results of operations or prospects.
Failure to retain our existing senior management, skilled technical, engineering, sales and other key personnel or the inability to attract and retain new qualified personnel could materially and adversely impact our ability to operate or grow our business.
Our success depends to a significant extent on our ability to attract and retain talent, specifically in senior management and skilled technical, engineering, sales, project management and other key roles. Macroeconomic conditions, specifically labor shortages, increased competition for employees and wage inflation, could have a material impact on our ability to attract and retain talent, our turnover rate, and the cost of operating our business. If we are unable to attract and retain sufficient talent, minimize employee turnover, or manage wage inflation, it could have a material adverse effect on our business, financial condition, results of operations or prospects.
Wastewater operations may result in contamination or pose other significant risks that could cause us to incur significant costs.
Wastewater treatment involves various unique risks. If our treatment systems fail or do not operate properly, or if there is a spill, untreated or partially treated wastewater could discharge onto property or into nearby streams and rivers, causing various damages and injuries, including environmental damage. These risks are most acute during periods of substantial
rainfall or flooding, which are the main causes of sewer overflow and system failure. Liabilities resulting from such damages and injuries could materially adversely affect our business, financial condition, results of operations or prospects.
Weather conditions, climate change, and legislation or regulations addressing climate change may adversely impact our business, financial condition, results of operations and prospects.
The physical impacts of climate change are highly uncertain and vary depending on geographical location, but could include changing temperatures, droughts, water shortages, wildfires, changes in weather and rainfall patterns, changes in sea levels, and changing storm patterns and intensities. These impacts present several potential challenges to water and wastewater service providers, such as potential degradation of water quality and changes in demand for water services, particularly during periods of increased precipitation, flooding, or water shortages. Inclement weather and extreme weather events may have varying impacts on our business.Certain events may disrupt the operations of our customers, creating customer shutdowns that prevent or defer our performance of services or sale of equipment, while other events may drive increased demand for our products and services, particularly emergency response services, which may create volatility in our financial results. Additionally, these events may disrupt our own operations and the operations of our suppliers, including the operation of manufacturing plants, the transportation of raw materials from our suppliers, and the transportation of products to our customers, any of which may increase our costs, reduce our productivity and adversely affect our business, financial condition, results of operations and prospects.
Additionally, concern over climate change may result in new or increased legal and regulatory requirements to reduce or mitigate the effects of climate change, including limitations on greenhouse gas emissions, which could increase our costs or require additional investments in our facilities and equipment. New legislation and regulatory requirements may also impact our customers and suppliers, which could affect demand for our products or our ability to source key materials. In addition, our customers and suppliers may impose their own requirements with respect to climate change and greenhouse gas emissions. Any failure to comply with those requirements may also affect demand for our products or our ability to source key materials. Any failure to achieve our own goals with respect to reducing our impact on the environment, or any perception of a failure to act responsibly with respect to the environment or to effectively respond to regulatory requirements concerning climate change, can lead to adverse publicity, resulting in an adverse effect on our business or damage to our reputation.
Our business may be materially adversely affected by risks associated with international sales and operations.
Our international sales and operations are subject, in varying degrees, to risks inherent to doing business outside the U.S. These risks include tariffs and other trade restrictions, import and export requirements, foreign taxation policies, limitations on our ability to repatriate funds, unanticipated regulatory changes, geopolitical risks, political instability, currency fluctuations, varying levels of protection of intellectual property, difficulty enforcing agreements, disruptions in global supply chains, labor disruptions, and potential violations of anti-corruption laws.
In addition to the general risks that we face outside the U.S., our operations in emerging markets could involve additional uncertainties for us, including risks that an outbreak or escalation of any insurrection or armed conflict may occur; governments may seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions affecting our business.
We currently have operations and source and manufacture certain of our materials and products for global distribution from third‑party suppliers and manufacturers in the People’s Republic of China. Operating in China exposes us to political, legal, and economic risks. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese relations, laws and regulations, such as those related to, among other things, taxation, import and export tariffs, environmental regulations, energy use, land use rights, intellectual property, currency controls, network security, employee benefits and other matters, and we may not obtain or retain the requisite legal permits to continue to operate in China, or we may become subject to costs or operational limitations imposed in connection with obtaining and complying with such permits. We may also experience difficulty in managing relations with our employees, distributors, suppliers, or customers, with whom disagreements or conflicts of interest could materially adversely affect our operations or our ability to source and manufacture certain of our materials and products in China.
If we do not adequately protect our intellectual property, or if third parties infringe our intellectual property rights or claim that we are infringing their intellectual property rights, we may suffer competitive injury, expend significant resources enforcing our rights or defending against such claims, or be prevented from selling products or services.
We own numerous patents, trademarks, service marks, copyrights, trade secrets and other intellectual property and hold licenses to intellectual property owned by others, which in aggregate are important to our business. The intellectual property rights that we have and may obtain, however, may not provide our products and services with a significant competitive advantage because our rights may not be sufficiently broad or may be challenged or invalidated. Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property, or detect or prevent circumvention or unauthorized use of such property and the cost of enforcing our intellectual property rights could materially adversely impact our business, financial condition, results of operations or prospects. Any dispute or litigation regarding intellectual property could be costly and time consuming due to the complexity and the uncertainty of intellectual property litigation. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. We may incur significant costs and diversion of management attention and resources as a result of such claims of infringement or misappropriation, and we or our suppliers or subcontractors could lose rights to critical technology, be unable to license critical technology, provide or sell critical products or services, or be required to pay substantial damages or license fees with respect to the infringed rights or be required to redesign, rework, reprogram, or replace our or our customers’ products, subcomponents, software, or systems, or recast our valuable brands at substantial cost, any of which could materially adversely impact our competitive position, financial condition and results of operations even if we successfully defend against such claims of infringement or misappropriation.
Our industry is highly fragmented and localized.
We operate in markets that are characterized by customer demand that is often broad in scope but localized in delivery. We compete with companies that may be better positioned to capitalize on highly localized relationships and knowledge that are difficult for us to replicate. Our potential customers may prefer local suppliers, in some cases because of existing relationships and in other cases because of local legal restrictions or incentives that favor local businesses. Smaller regional suppliers may also have lower cost structures. As a result, efforts to expand or support our service network may not improve our ability to penetrate new local markets or expand our footprint in existing markets.
Further, many of our customers actively monitorOur contracts with federal, state, and review our company‑wide safety record, and apply rigorous safety standards to us and our competitors. Although we take precautions to prevent workplace accidents and mechanical failures, such incidents are difficult to predictlocal governments involve unique risks and may be outside of our control. If we are unableterminated or adversely modified prior to meet our customers’ stringent workplace safety standards, or if our customers perceive us to have a poor safety record, itcompletion, which could materially impact our ability to retain their business or attract new business.
We may not be successful in maintaining our competitive position for a number of reasons. We may fail to identify optimal vertical or geographic markets, focus our attention in suboptimal vertical or geographic markets or fail to execute an appropriate business model in certain vertical or geographic markets. Our competitors may develop disruptive technologies or products that are superior to our products, develop more efficient or effective methods of providing products and services, operate with lower cost structures allowing them to price products and services more competitively or adapt more quickly than we do to new technologies or evolving customer requirements. The failure of our technologies or products to gain market acceptance due to more attractive offerings by our competitors could significantly reduce our revenues and materially adversely affect our business.
We derive, and expect to continue to derive in the future, a portion of our revenue from government customers, including municipalities. Sales to governments and related entities present unique risks, including potential disruption due to appropriation and spending patterns, delays in the adoption of new technologies due to political, fiscal or bureaucratic processes, delays in approving budgets, long purchase and payment cycles, competitive standingbidding requirements, qualification requirements, extensive specification development and price negotiations, milestone requirements and the potential unenforceability of limitations on liability or prospects. Pricing pressures alsoother contractual provisions. Government contracts may contain provisions not typically found in commercial contracts, including provisions permitting the government to terminate for convenience, reduce scope and potential future revenue, modify certain terms and conditions of existing contracts, suspend performance, impose fines or penalties, subject us to criminal prosecution or debarment, subject awarded contracts to protests or challenges by competitors, or claim rights in technologies developed by us.Exercise of any of these rights could cause us to adjust the prices of certain products to stay competitive, which could materially adversely affectrecognize lower revenue or margin than anticipated under our margins and overall financial performance. Failure to continue competing successfully or to win business withgovernment contracts.Additionally, because our existing customers could materially adversely affect our business, financial condition, results of operations or prospects.
Our future growth is dependent upon our ability to continue to develop or acquire new products, serviceswater treatment projects and solutions for municipal customers often include fixed‑price contracts with milestone billings and adaptliquidated damages for our businesses to meet the demands ofdelay, our customers, comply with changes to government regulations and achieve market acceptance with acceptable margins.
Our future success depends upon a number of factors, including our ability to adapt our products, services and solutions to fit localities throughout our end markets, particularly in high growth emerging markets,performance under such contracts involves risks such as China; identify emerging technological and other trends in our target end markets; and develop or acquire competitive products and services and bring them to market quickly and cost‑effectively. If we are unable to continue to differentiate our products, services and solutions, or if we are forced to cut prices or hold prices in an otherwise inflationary market in order to remain competitive, our business, financial condition, results of operations or prospects could be materially and adversely affected.
We are also impacted by changing technology, competitively imposed process and safety standards and regulatory requirements, particularly under environmental regulations, each of which influences the demand for our products, services and solutions. Advances in technology and changes in industrial specifications or in legislative, regulatory and environmental requirements, including the availability of intellectual property protections in various jurisdictions, may render certain of our products, services and solutions obsolete.
In addition, our industrial and municipal customers have made considerable fixed‑cost investments in the installation of their water and wastewater treatment products and systems, and our municipal customers are often subject to stringent appropriation requirements and extensive procurement processes. The replacement of our customers’ installed products and systems with the new technologies that we develop could entail significant costs to such customers. Further, many of our potential customers engage and rely on engineering firms to recommend and select products and systems for their facilities, and many of our products are sold to OEMs as components of larger systems. Our inability to persuade our customers or other parties to adopt the technologies we develop could have an adverse effect on our business, financial condition, results of operations or prospects.
Our growth strategy includes growth through acquisitions, and we may not be able to identify suitable acquisition targets or otherwise successfully implement our growth strategy.
Acquisitions have historically been a significant part of our growth strategy, and we expect to continue to grow through acquisitions in the future. We expect to continue evaluating potential strategic acquisitions of businesses, assets and product lines. We may not be able to identify suitable candidates, negotiate appropriate or favorable acquisition terms, obtain financing that may be needed to consummate such transactions or complete proposed acquisitions. There is significant competition for acquisition and expansion opportunities in our businesses.
In addition, acquisitions involve numerous risks, including (i) incurring the time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business; (ii) using inaccurate estimates and judgments to evaluate credit, operations, funding, liquidity, business, management and market risks with respect to the target institution or assets; (iii) litigation relating to an acquisition, particularly in the context of a publicly held acquisition target, that could require us to incur significant expenses, result in management’s attention being diverted from the operation of our existing business or delay or enjoin the transaction; (iv) failing to properly identify an acquisition candidate’s liabilities, potential liabilities or risks; (v) not receiving required regulatory approvals or such approvals being delayed or restrictively conditional; (vi) potentially insufficient internal controls over financial activities or financial reporting at an acquired entity that could impact our existing business on a combined basis; and (vii) an adverse impact on our existing business resulting from an acquired business that historically had a higher risk tolerance or whose personnel fail to comply with our existing policies. In connection with any acquisitions, we must comply with various antitrust requirements. It is possible that perceived or actual violations of these requirements could give rise to regulatory enforcement action or result in uspayments, not receiving the necessary approvals to completepayments in a desired acquisition.
We routinely evaluate potential acquisition candidates and engage in discussions and negotiations regarding potential acquisitions; however, eventimely manner or incurring significant damages if certain milestones are not met or not met on schedule. As a result, we execute a definitive agreement for an acquisition, there can be no assurance that we will consummate the transaction within the anticipated closing timeframe, or at all. Further, acquisitions typically involve
the payment of a premium over book‑ and market‑values and, therefore, some dilution of our tangible book value and earnings per common share may occur in connection with any future transaction.
We may have difficulty in operating or integrating any acquired businesses, assets or product lines profitably, or in successfully implementing our growth strategy.
The anticipated benefits from any potential acquisitions may not be achieved unless the operations of the acquired business assets or product lines are successfully integrated in an efficient, effective and timely manner. The integration of our acquisitions will require substantial attention from management and operating personnel to ensure that the acquisition does not disrupt any existing operations, or affect our customers’ opinions and perceptions of our services, products or customer support.
In addition, the integration of any acquisition includes numerous risks, including an acquired business not performing to our expectations, our failure to integrate it appropriately, our failure to realize anticipated synergies and cost savings, our failure to preserve the customer relationships and retain key employees of an acquired business and difficulties, inefficiencies or cost overruns in integrating and assimilating the organizational cultures, operations, technologies, data, services and products of the acquired business with ours.
The process of integrating acquired businesses, assets and product lines could cause the interruption of, or delays in, the operation of our existing business, which could haveexperience a material adverse effect on our business, financial condition, results of operations or prospects. Acquisitions also place a burden on our information, financial and operating systems and our employees and management. Our ability to manage our growth effectively and integrate the operations of acquired businesses, assets or product lines, will require us to continue to attract, train, motivate, manage and retain key employees and to expand our information technology, operational and financial systems. If we are unable to manage our growth effectively, we may spend time and resources on such acquisitions that do not ultimately increase our profitability or that cause loss of, or harm to, relationships with employees and customers.
We may not achieve some or all of the expected benefits of our restructuring actions and restructuring our business into two segments may materially adversely affect us.
Effective October 1, 2018, we restructured our business into two reportable operating segments, the Integrated Solutions and Services segment and the Applied Product Technologies segment, in an effort to better serve the needs of our customers worldwide and position ourselves for improved long-term growth and profitability. We currently expect cost savings in the range of $15 million to $20 million on an annualized basis once fully implemented. However, achieving these cost savings are subject to significant economic, competitive and other uncertainties, some of which are beyond our control, and we may not be able to obtain the cost savings and benefits that we currently anticipate in connection with these restructuring actions. In order to achieve these cost savings, we currently expect to incur cash costs associated with the implementation of our two-segment structure in the range of $17 million to $22 million through fiscal 2020. However, this assumption may not be accurate and we may not be able to operate in accordance with our plans. In that case, we may determine that we must incur additional restructuring charges. These types of initiatives could yield unintended consequences such as distraction of our management and employees, business disruption, attrition beyond any planned reduction in workforce, inability to attract or retain key personnel and reduced employee productivity, which could materially adversely affect our business, financial condition and results of operations.
The successful implementation and execution of our restructuring actions are critical to achieving our expected cost savings as well as effectively competing in the marketplace and positioning us for future growth. If our restructuring actions are not executed successfully, it could have a material adverse effect on our business, financial condition and results of operations.
Our financial results depend on successful project execution and may be adversely affected by cost overruns, failure to meet customer schedules or other execution issues.
A significant portion of our revenue is derived from large projects that are technically complex and may occur over multiple years. These projects are subject to a number of significant risks, including project delays, cost overruns,
changes in scope, unanticipated site conditions, design and engineering issues, incorrect cost assumptions, increases in the cost of materials and labor, safety hazards, third party performance issues, weather issues and changes in laws or permitting requirements. If we are unable to manage these risks, we may incur higher costs, liquidated damages and other liabilities to our customers, which may decrease our profitability and harm our reputation. Our continued growth will dependrely, in part, on executing a higher volume of large projects, which will require usthird‑party sales representatives to expand and retain our project management and execution personnel and resources.
Our business could be adversely affected by inflation and other manufacturing and operating cost increases and commodity availability constraints.
Our operating costs are subject to fluctuations, particularly due to changesassist in commodity prices, raw materials, energy and related utilities, freight and cost of labor. In order to remain competitive, we may not be able to recover all or a portion of these higher costs from our customers through product price increases. In addition, many of our contracts are long‑term in nature, and our failure to accurately project operating costs or negotiate or enforce price escalation provisions in our long‑term contracts could, in the event of an inflationary or otherwise cost‑increasing environment, have a material adverse effect on our business, financial condition, results of operations or prospects. Further, in a declining price environment, our operating margins may contract because we account for inventory costs on the basis of an average or first‑in, first‑out method. Actions we take to mitigate volatility in manufacturing and operating costs may not be successful and, as a result, our business, financial condition, results of operations or prospects could be materially and adversely affected.
We have significant exposures to certain commodities, including, but not limited to, 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, the U.S. government has recently imposed greater restrictions on international trade, including tariffs and other trade restraints on certain imports. These restrictions have increased and could further increase the cost of our products and have restricted and could further restrict availability of certain commodities, which may result in delays in our execution of projects. 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.
Our financial results may fluctuate from period to period and can be difficult to predict.
Our financial results may be impacted by large projects, which often have lower margins and greater risk from both a timing and execution standpoint than standard product sales. The timing of these project awards is often unpredictable and outside of our control. If we fail to accurately estimate our operating costs to complete these projects or if we fail to execute these projects efficiently and timely, our margins on these projects will be further eroded. The timing of these project awards is often unpredictable and can change based upon customer requirements due to a number of factors affecting the project that are outside of our control, such as funding, readiness of the project and regulatory approvals. If any of these large projects get delayed or canceled, our results during the periods in which these projects were scheduled to occur could be adversely affected and the delay or failure could have a material adverse effect on our business, financial condition and results of operations or prospects. In addition, our contracts for large capital water treatment projects, systems and solutions for municipal and industrial applications are generally fixed‑price contracts with milestone billings. Additionally, competitive‑bid processes impose significant uncertainty with respect to our prospects for success, and our failure to properly predict our win rate could reduce our margins. Accordingly, our financial results for any given period may fluctuate and can be difficult to predict.
Further, our capital expenditures for any given fiscal year may exceed our initial forecasts and may vary substantially if we are required to undertake certain actions to comply with new regulatory requirements or compete with new technologies. We may not have the capital to undertake the capital investments. If we are unable to do so, we may not be able to effectively compete.
Delays in enactment or repeals of environmental laws and regulations may makeselling our products, services and solutions, less economically beneficialand the failure of these representatives to perform as expected could reduce our customers, thereby affecting demand for our products, services and solutions.future sales.
Certain
Sales of our products, services, and solutions assist various industriesto some of our customers are accomplished, in part, through the efforts of third‑party sales representatives. We are unable to predict the extent to which these third‑party sales representatives will be successful in marketing and municipalities in meeting stringent environmentalselling our products. Moreover, many of these third‑party sales representatives also market and safety requirements enacted for the purposesell competing products and may more aggressively pursue sales of making water cleaner and safer.our competitors’ products. Our third‑party sales representatives may terminate their relationships with us at any time on short or no notice. Our future growth is dependentperformance may also depend, in part, on the impactour ability to attract, incentivize and timing of potential new water lawsretain additional third‑party sales representatives that will be able to market and regulations, as well as potential changes to existing laws and regulations.support our products effectively, especially in markets in which we have not previously sold our products. If stricter lawswe cannot retain our current third‑party sales representatives or regulations are delayedrecruit additional or replacement third‑party sales representatives or if these sales representatives are not enacted, or repealed or amended to be less strict, or enacted with prolonged phase‑in periods, or not enforced, demand for our products and services may be reduced. For example, in response to Presidential Executive Order 13777, calling on each federal agency to establish a regulatory reform task force and evaluate existing rules and recommend repeal, replacement or modification to reduce regulatory burdens, the U.S. Environmental Protection Agency (the “U.S. EPA”) established a task force and initiated reviews in several program areas. The U.S. EPA’s Office of Water conducted such a review, soliciting public comments in the spring of 2017, including hosting a public listening session, seeking proposals for Office of Water rules that could be repealed, replaced or modified to make them less burdensome. In turn, in September 2017, the U.S. EPA issued a final rule stating thateffective, it intended to revise a 2015 rule limiting toxic metal levels in wastewater discharged by steam electric power plants and delayed associated compliance deadlines for two years. We are currently unable to predict whether changes to statutes and rules which occur will affect demand for our products and services. To the extent that such changes have a negative impact on us, including as a result of related uncertainty, these changes may materially and adversely impact our business, financial condition, results of operations or prospects.
If we become subject to claims relating to handling, storage, release or disposal of hazardous materials, we could incur significant cost and time to comply.
Our business activities, including our manufacturing processes and waste recycling and treatment processes, currently involve the use, treatment, storage, transfer, handling and/or disposal of hazardous materials, chemicals and wastes. These activities create a risk of significant environmental liabilities and reputational damage. Under applicable environmental laws and regulations, we could be strictly, jointly and severally liable for releases of regulated substances by us at our current or former properties or the properties of others or by other businesses that previously owned or used our current or former properties, including if such releases result in contamination of air, water or soil, or cause harm to individuals. We could also be liable or incur reputational damage if we merely generate hazardous materials or wastes, or arrange for their transportation, disposal or treatment, or we transport such materials, and they are subsequently released or cause harm, or if some other entity conducted such activities and by virtue of an acquisition, under applicable law we are a successor to that entity.
Our business activities also create a risk of contamination or injury to our employees, customers or third parties, from the use, treatment, storage, transfer, handling and/or disposal of these materials, and these activities could result in accidental contamination or injury to the general public, as end‑users of our industrial and municipal customers’ products and services.
In the event that our business activities result in environmental liabilities, such as those described above, we could incur significant costs or reputational damage in connection with the investigation and remediation of environmental contamination, and we could be liable for any resulting damages including natural resource damages. Such liabilities could exceed our available cash or any applicable insurance coverage we may have. Additionally, we are subject to, on an ongoing basis, federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specified waste products. The cost of compliance with these laws and regulations may become significant and could have a material adverse effect on our business, financial condition, results of operations or prospects.
Further, we may incur costs to defend our position even if we are not liable for consequences arising out of a release of or exposure to a hazardous substance or waste, or other environmental damage. Our insurance policies may not be sufficient to cover the costs of such claims.
Failure to retain our existing senior management, skilled technical, engineering, sales and other key personnel or the inability to attract and retain new qualified personnel could materially adversely impact our ability to operate or grow our business.
Our success depends to a significant extent on our ability to retain or attract a significant number of employees in senior management, skilled technical, engineering, sales, project management and other key personnel. We have focused on creating a high performance culture, in which our employees are highly enabled, empowered and accountable. Our inability to continue to develop and maintain our culture by empowering our senior management, other leaders and employees and promoting an entrepreneurial spirit, could result in our loss of key leaders and employees and have a material adverse effect on our business, financial condition, results of operations or prospects. Additionally, our decision to restructure our business into two reportable operating segments could yield unintended consequences such as attrition beyond any planned reduction in workforce, inability to attract or retain key personnel, and reduced employee productivity which could negatively affect our business sales, financial condition and results of operations.
Our experienced sales team has also developed a number of meaningful customer relationships that would be difficult to replace. Therefore, competition for qualified technical personnel and for sales personnel with established customer relationships is intense, both in retaining our existing employees and in replacing or finding additional suitable employees. This is especially true when unemployment rates in the United States are low, as they currently are. There can be no assurance that the labor pool from which we hire our personnel will increase or remain stable, and any failure to retain our existing technical and sales personnel and other employees or to attract additional skilled personnel could have a material adverse effect our business, financial condition, results of operations or prospects.
In addition, the lockup agreement prohibiting our employees from selling shares of our stock that were acquired prior to our initial public offering expired on November 2, 2019, and a significant number of restricted stock units granted to certain senior employees at the time of our initial public offering vested on November 2, 2019. The liquidity available to employees who hold shares of our stock as a result of these two occurrences could create further challenges with respect to retention.
Product defects and unanticipated or improper use of our products could adversely affect our business, reputation, and financial statements.
Manufacturing or design defects in (including inour products or components that we source from third parties), unanticipated or improper use of or inadequate disclosure of risks relating to the use of our products services and solutions by our customers or third parties could create product safety, regulatory or other risks, including personal injury, death, or property damage. These events could lead to recalls or safety alerts relating to our products, result in the removal of a product from the market andor result in product liability claims being brought against us. Recalls, removals, and product liability claims can result in significant costs, as well as negative publicity and damage to our reputation that could reduce demand for our products and have a material adverse effect on our business, financial condition, results of operations or prospects.
Further, it is generally our responsibility to service the equipment we provide our customers throughout the duration of our contract with such customers, and our customers may be required to maintain insurance covering loss, damage or injury caused by our equipment. However, we are not able to monitor our customers’ use or maintenance of their water systems or their compliance with our contracts or usage instructions. Customers’ failure to properly use, maintain or safeguard their equipment or customers’ noncompliance with insurance requirements may reflect poorly on us as the provider of such equipment and, as a result, damage our reputation.
Our operations are subject to various hazards that may cause personal injury or property damage and increase our operating costs, and which may exceed the coverage of our insurance or for which we are not insured.
There are inherent risks to our operations. We are exposed to risks posed by severe weather and other natural disasters, such as hurricanes and earthquakes. In addition to natural risks, hazards (such as fire, explosion, collapse, or machinery failure) are inherent risks in our operations which may incur liabilities to customersoccur as a result of warrantyinadequate internal processes, technological flaws, human error, or certain events beyond our control. We also utilize approximately 840 vehicles in connection with our offsite services and distribution operations and, from time to time, these drivers are involved in accidents which may cause injuries, spills, or uncontrolled discharges and in which goods carried by these drivers may be lost or damaged. The hazards described above can cause significant personal injury or loss of life, severe damage to or destruction of property, plants, and equipment, including customer or third‑party property, contamination of, or damage to, the environment and suspension of operations. The occurrence of any of these events may subject us to investigations, require us to perform remediation, or result in us being named as a defendant in lawsuits asserting claims for substantial damages, environmental cleanup costs, personal injury, natural resource damages and fines or penalties. As a result, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. We may also become exposed to certain claims that are excluded from our insurance coverage, such as claims of fraud or for punitive damages. Although we have liability insurance, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be adequate to cover any product liability claims. In addition, such events may affect the availability of personnel, proper functioning of our information technology infrastructure and availability of third parties on whom we rely, any of which consequences could have a material adverse effect on our business, financial condition, results of operations or prospects.
Financial and Credit-Related Risks
Our financial results may fluctuate from period to period and can be difficult to predict.
Our financial results may be impacted by large projects, which often have lower margins and greater risk from both a timing and execution standpoint than standard product sales. The timing of these project awards is often unpredictable and outside of our control. If we fail to accurately estimate our operating costs to complete these projects or if we fail to execute these projects efficiently and timely, our margins on these projects could be further eroded. The timing of these project awards is often unpredictable and can change based upon customer requirements due to a number of factors affecting the project that are outside of our control, such as funding, readiness of the project and regulatory approvals. If any of these large projects get delayed or canceled, our results during the periods in which these projects were scheduled to occur could be adversely affected and the delay or failure could have a material adverse effect on our business, financial condition, results of operations or prospects. In addition, our contracts for large capital water treatment projects, systems and solutions for municipal and industrial applications are generally fixed‑price contracts with milestone billings. Additionally, competitive‑bid processes impose significant uncertainty with respect to meet performance guarantees, whichour prospects for success, and our failure to properly predict our win rate could reduce our profitability.margins. Accordingly, our financial results for any given period may fluctuate and can be difficult to predict.
Our customers typically require product warrantiessubstantial indebtedness could adversely affect our financial condition and limit our ability to raise additional capital to fund our operations.
We have a significant amount of indebtedness. As of September 30, 2021, we had total indebtedness of $754.9 million, including $473.8 million of borrowings under our term loan facility, $37.3 million borrowings under our revolving credit facility, $150.1 million of borrowings related to our Securitization facility which includes $0.1 million of accrued interest, $93.4 million in borrowings related to equipment financings, and $0.4 million of notes payable related to certain equipment related contracts. We also had $10.1 million of letters of credit issued under our $350.0 million revolving credit facility. We cannot provide any assurance that our business will generate sufficient cash flow from operations in amounts sufficient to enable us to fund our debt service obligations and other liquidity needs.Our inability to generate sufficient cash flow to satisfy our debt obligations could materially adversely affect our business, financial condition, results of operations, or prospects.
Our high level of indebtedness could, among other things, limit our ability to obtain additional financing in the future, reduce the amount of cash available for working capital, capital expenditures and other business needs, increase our vulnerability to adverse changes in the economy, expose us to greater interest rate risk, restrict us from making strategic acquisitions, force us to make non-strategic divestitures, place us at a disadvantage compared to less leveraged competitors, and increase our costs of borrowing. Any one of these impacts could have a material effect on our business, financial condition, results of operations, prospects, and our ability to satisfy our obligations in respect of our outstanding debt.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our senior secured credit facilities are at variable rates of interest and expose us to interest rate risk. Interest rates are still near historically low levels and are projected to rise in the future. If interest rates rise, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed may remain the same, and our net income and cash flows will correspondingly decrease. Assuming no prepayments of the term loan facility (which had $473.8 million outstanding as of September 30, 2021) and that our revolving credit facility was fully drawn, each 0.125% change in interest rates would result in an approximate change of $1.0 million in annual interest expense on the indebtedness under our senior secured credit facilities. We entered into an interest rate swap during the third quarter of fiscal 2020 to mitigate risks associated with variable rate debt. The interest rate swap became effective June 30, 2020, has a term of five years to hedge the variability of interest payments on the first $500.0 million of the Company’s senior secured debt and provides for a fixed rate of 0.61%.
The covenants in our senior secured credit facilities impose restrictions that may limit our operating and financial flexibility.
Our senior secured credit facilities contain a number of significant restrictions and covenants that limit our ability, among other things, to incur additional indebtedness, pay dividends on or repurchase our outstanding capital stock, prepay certain indebtedness, create certain liens, divest certain assets, make certain investments, and enter into new lines of business.
In addition, our senior secured credit facilities contain a financial covenant requiring us to comply with a 5.55 to 1.00 first lien net leverage ratio test. This financial covenant is solely for the benefit of the lenders under our revolving credit facility and is tested as of the last day of a 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 12.5% of the total commitments thereunder.
These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot provide any assurance that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
A breach of any covenant in our senior secured credit facilities or the agreements and indentures governing any other indebtedness that we may have outstanding from time to time would result in a default under that agreement or indenture after any applicable grace periods. A default, if not waived, could result in acceleration of the debt outstanding under the agreement and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at that time, it may not be on terms that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, results of operations and financial condition could be materially and adversely affected.
Seasonality of sales and weather conditions may adversely affect, or cause volatility in, our financial results.
We experience seasonal demand in a number of our end markets, as demand for infrastructure and municipal products and projects generally follows warm weather trends. Seasonal effects may vary from year to year and are impacted by weather patterns, particularly by temperatures, heavy flooding, and droughts. Our operating results and financial condition could be materially and adversely affected by severe weather, natural disasters, or other environmental factors. Repercussions of these catastrophic events may include shutting down operations, a need to obtain additional equipment or supplies on an emergency basis, evacuation of or injury to personnel, damage to equipment or property, loss of productivity and harm to our reputation, any of which may result in a decrease in our revenue or decreased profitability.
We may incur impairment charges for our goodwill and other indefinite‑lived intangible assets which would negatively impact our operating results.
We have a significant amount of goodwill and purchased intangible assets on our balance sheet. As of September 30, 2021, the net carrying value of our goodwill and other indefinite‑lived intangible assets totaled approximately $441.6 million. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of indefinite‑lived intangible assets represents the federal hazardous waste treatment management permits obtained for locations operated by the Company. We do not amortize goodwill and indefinite‑lived intangible assets that we expect to contribute indefinitely to our cash flows, but instead we evaluate these assets for impairment at least annually, or more frequently if changes in circumstances indicate that a potential impairment could exist. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes, or planned changes in use of the assets,
divestitures and market capitalization declines may impair our goodwill and other indefinite‑lived intangible assets. Any charges relating to such impairments could materially adversely affect our financial condition and results of operations.
Our ability to use our net operating loss carryforwards may be limited.
As of September 30, 2021, we had approximately $297.1 million of U.S. federal and state net operating loss carryforwards (“NOLs”). Our federal NOLs begin to expire in 2035, while certain state NOLs began to expire in 2019. Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. We maintain a full valuation allowance against these NOLs.
We may be unable to bid on or enter into significant long‑term agreements if we are not able to obtain letters of credit, bank guarantees or surety bonds, and our liquidity may be adversely affected by bonding requirements.
A portion of our business, including our water treatment projects and solutions, requires us to provide letters of credit, bank guarantees or surety bonds in support of our commitments and as part of the terms and conditions on water treatment projects. In addition, we are required to provide letters of credit or surety bonds to the proper operation and conformancedepartment of environmental protection or equivalent in some states in order to specifications of the products we manufacture or install and performance guarantees asmaintain our licenses to any effluent produced by our equipment and services. Failurehandle hazardous waste at certain of our products to operate properly or to meet specifications of our customers or our failure to meet our performance guarantees may increase costs by requiring additional engineering resources and services, replacement of parts and equipment and frequent replacement of consumables or monetary reimbursement to a customer or could otherwise
result in liability to our customers.regeneration facilities. We have in the past received warranty claims,been, and we expect to continue to receive themmay in the future. There are significant uncertainties and judgments involved in estimating warranty and performance guarantee obligations, including changing product designs, differences in customer installation processes and failurefuture be, required to identify or disclaim certain variables in a customer’s influent. To the extent that we incur substantial warrantyprovide bid bonds or performance guarantee claimsbonds to secure our performance on certain projects or, in any period, our reputation, earnings and abilitysome cases, as a pre‑requisite to submit a bid on a potential project. Our inability to obtain futureadequate bonding or letters of credit to meet bid requirements or enter into significant long‑term agreements could have a material adverse effect on our business, could be materially adversely affected.financial condition, results of operations or prospects.
Information Technology and Cybersecurity Risks
We are increasingly dependent on the continuous and reliable operation of our information technology systems, and a disruption of these systems could materially and adversely affect our business.
We rely on our information technology systems in connection with various aspects of the operation of our business, including with respect tocustomer relationship management, customer service, purchasing, inventory management, project management, human resource management, billing, and billing, accounting and, in some cases, theaccounting. We also rely on digitally connected systems for monitoring and operation of certain of our water treatment installations. Many of our products, services and solutions depend on the integrity of our information technology systems, including our remote monitoring and data analytics features and our automated control solutions.
Our WaterOne® services These systems are provided using remote monitoring technology that is connected to the “Internet of Things,” which is inherently susceptible a number of threats, including, but not limited to, cyber-attacks. A successful attack may result in inappropriate access to our or our customers’ information or systems or cause our products to function improperly. Additionally, the systems through which we provide our WaterOne® services use electronic software embedded into a control board and water meter. This software or the control board could malfunction for a variety of reasons including, without limitation, exposure to software bugs, extreme heat or cold, corrosive water or simple wear and tear. A malfunction could result in our inability to operate the system effectively or to collect revenue for the services in a timely fashion.
In addition, we rely on our systems to manage maintenance and construction projects, materials and supplies and our human resource functions. A loss of these systems, major problems with the operation of these systems, the failure to properly implement these systems, including in customer installations, or the failure to identify market trends and continuously update our information technology systems could materially adversely affect our operations, sales and reputation and have a material adverse effect on our business, financial condition, results of operations or prospects.
Specifically, our information technology systems may be vulnerable to damage or interruption from, among other things:
power loss, computer systems failures and internet, telecommunications or data network failures;
operator negligence or improper operation by, or supervision of, employees;
physical and electronic loss of data;
computer viruses;
intentional security breaches,viruses, ransomware, malware, malicious codes, hacking, phishing, denial of service actions, misappropriationhuman error, network failures, electronic loss of data, and similar events;other electronic security breaches. Although we have experienced attempts by external parties to access our networks and
hurricanes, fires, floods, earthquakes and other natural disasters.
Such incidents systems, these attempts have not resulted in any material breaches, disruptions, or loss of information to date. A successful cyber-attack may result in the loss or compromise of customer, financial or operational data, theft of intellectual property, disruption of billing, collections or normal field service activities, disruption of data analytics and electronic monitoring and control of operational systems, and delays in financial reporting and other normal management functions. Possible impacts associated with a cybersecurity incident may include loss of revenue, ransomware payments, remediation costs related to lost, stolen, or compromised data, repairs to infrastructure, physical systems or data processing systems, increased cybersecurity protection costs, or violation of U.S. and international privacy laws, which may result in litigation. Any of these occurrences could harm our reputation or have a material adverse effectseffect on our compliance with regulatorybusiness, financial condition, results of operation and environmental laws and regulations, including standards for drinking water, litigation and reputational damage.prospects.
We, and some of our third party vendors, have experienced cybersecurity attacks in the past and may experience them in the future, potentially with more frequency. To date, most of these attacks have been unsuccessful, and none have
resulted in any material adverse impact to our business or operations. We have adopted measures to mitigate potential risks associated with information technology disruptions and cybersecurity threats; however, given the unpredictability of the timing, nature and scope of such disruptions and the evolving nature of cybersecurity threats, which vary in technique and sources, we could potentially be subject to production downtimes, operational delays, other detrimental impacts on our operationsthere is no assurance that these measures will prevent cyber-attacks or ability to provide products and services to our customers, the compromising of confidential or otherwise protected information, destruction or corruption of data, security breaches, other manipulation or improper use of our systems or networks, financial losses from remedial actions, loss of business or potential liability, regulatory enforcement actions and/or damage to our reputation, any of which could have a material adverse effect on our competitive position, results of operations, cash flows or financial condition.breaches. We also have a concentration of operations on certain sites, such as production and shared services centers, where business interruptions could cause material damage and costs. Transport of goods from suppliers, and to customers, could also be hampered for the reasons stated above. Although we continue to assess these risks, implement controls and perform business continuity and disaster recovery planning, we cannot be sure that interruptions with material adverse effects will not occur.
Our Water One® services are provided using remote monitoring technology that is connected to the “Internet of Things” (IoT), which is inherently susceptible to cyber-attacks and outages. A successful attack may result in inappropriate access to our or our customers’ information or systems or cause our products to function improperly. We have experienced outages due to disruptions in service by cellular providers. Although these outages have not had a
material impact on our business to date, if outages occur with greater frequency or for extended durations, it could adversely affect our ability to monitor our assets, which could harm our reputation or result in a loss of revenue, failure to fulfill contractual obligations and additional costs to repair damages.
If we experience a significant data security breach or fail to detect and appropriately respond to a significant data security breach, our business and reputation could suffer.
The nature of our business involves the receipt and storage of information about our customers, suppliers, employees, operations and employees.financial performance. Further, we rely on various information technology systems to capture, process, store, and report data in connection with the products, services, and solutions that we provide to our customers, such as our WaterOne®Water One® services. We have procedures in place to detect and respond to data security incidents. However, because the techniques used to obtain unauthorized access, disable, or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures. In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security. We outsource administration of certain functions to vendors that could be targets of cyber attacks. Any theft, loss and/or fraudulent use of customer, employee, or proprietary data as a result of a cyber attack targeting us or one of our third-party service providers could subject us to significant litigation, liability, and costs, as well as adversely impact our reputation with customers and regulators, among others. Unauthorized parties may also attempt to gain access to our systems or facilities and to our proprietary business information. If our efforts to protect the security of information about our customers, suppliers and employees are unsuccessful, a significant data security breach may result in costly government enforcement actions, private litigation and negative publicity resulting in reputation or brand damage with customers, and our business, financial condition, results of operations or prospects could suffer. While we maintain insurance coverage that is designed to address certain aspects of cyber risks, such insurance coverage may be insufficient to cover all losses or all types of claims that may arise in the event we experience a cybersecurity incident, data breach or disruption, unauthorized access, or failure of systems.
We are subject to laws, rules, and regulations in the United States (such as the California Consumer Protection Act (“CCPA”), which will become effective on January 1, 2020)), and other countries relating to the collection, use and security of employee and other data. Our ability to execute transactions and to possess and use personal information and data in conducting our business subjects us to legislative and regulatory burdens that may require us to notify regulators and customers, employees, and other individuals of a data security breach, including in the European Union under the EU General Data Protection Regulation, or the GDPR. Evolving compliance and operational requirements under the GDPR, the CCPA, and the privacy laws of other jurisdictions in which we operate impose significant costs that are likely to increase over time.
We may be unable to bid on or enter into significant long‑term agreements if we are not able to obtain letters of credit, bank guarantees or surety bonds,Legal and our liquidity may be adversely affected by bonding requirements.
A portion of our business, including our water treatment projects and solutions, requires us to provide letters of credit, bank guarantees or surety bonds in support of our commitments and as part of the terms and conditions on water treatment projects. In addition, we are required to provide letters of credit or surety bonds to the department of environmental protection or equivalent in some states in order to maintain our licenses to handle hazardous waste at certain of our regeneration facilities. We have in the past been, and may in the future be, required to provide bid bonds or performance bonds to secure our performance under these construction‑type customer arrangements or, in some cases, as a pre‑requisite to submit a bid on a potential project.
Current or future market conditions, as well as changes in surety companies’ assessment of our operating and financial risk, could cause our surety providers and lenders to decline to issue or renew, or substantially reduce the amount of, bid or performance bonds for our work, and could increase our costs associated with collateral. These actions could be taken on short notice. Our inability to obtain adequate bonding or letters of credit to meet bid requirements or enter into significant long‑term agreements could have a material adverse effect on our business, financial condition, results of operations or prospects.
Further, surety companies may require that we collateralize a percentage of the bond with cash or another form of credit enhancement. Some of our customers also require collateral guarantees in the form of letters of credit to secure performance or to fund possible damages as the result of an event of default under our contracts with them. If we enter into significant long‑term agreements that require the issuance of letters of credit, our liquidity could be negatively impacted.
Our inability to meet our customers’ safety standards or adverse publicity affecting our reputation as a result of incidents such as workplace accidents, mechanical failures, spills, uncontrolled discharges, damage to customer or third‑party property or the transmission of contaminants or diseases could have a material adverse effect on our sales and profitability.
Maintaining a strong and reliable reputation for safety is critical to our business. Many of our customers actively monitor and review our company‑wide safety record. Further, reports and media coverage of incidents, such as those involving workplace accidents, mechanical failures, spills, uncontrolled discharges, damage to customer or third‑party property, the transmission of contaminants or diseases and other adverse events can result in negative publicity, and considerable expansion in the use of social media over recent years has increased the ways in which our reputation can be impacted, and the speed with which such an impact can occur. Such incidents, or reports thereof, could lead to a negative perception among our customers, prospective customers and the general public regarding the safety or quality of our products, services and solutions, and anything that damages our reputation or our customers’ perception of our safety record, whether or not justified, could have a materially adverse impact on demand for our products and services, result in additional costs to our business or the loss of customers, result in litigation against us or increase government or regulatory oversight over us.
Our products and facilities are subject to risks involving workplace accidents, mechanical failures spills, uncontrolled discharges and damage to customer or third‑party property, including, among other things, personal injury or death caused by our products or occurring in our facilities, the destruction of customer or third‑party property during the execution of a service arrangement or due to the malfunction of our products, delays in or suspension of service or the failure to timely deliver our products. A workplace accident, mechanical failure, spill, uncontrolled discharge or any problem involving any one or more of our products or facilities, or any perceived insufficiency in our response to any such deficiency or problem, could materially adversely affect our reputation. Although we take precautions to prevent workplace accidents and mechanical failures, such incidents are difficult to predict and may be outside of our control. If we are unable to meet our customers’ stringent workplace safety standards or, if our customers perceive us to have a poor safety record, it could materially impact our ability to retain their business or attract new business.
Water may be subject to contaminants, including hazardous chemicals, or pathogens that cause a number of illnesses, including cholera, typhoid fever, giardiasis, cryptosporidiosis, amoebiasis and free living amoebic infections. Such contaminants or pathogens may be found in the environment, and, as a result, there is a risk that they could become present in water treated using our systems or products. In applications where treated water enters the human body, illness and death may result if such contaminants or pathogens are not eliminated during the treatment process. In particular, such contamination could result from failing to properly treat reusable products before they are distributed to our customers, or from actions taken by our customers or other third parties using our products, which could result in material liability. Further, any pandemic or other public health crisis, including those involving non‑waterborne illnesses, might adversely impact our business by diminishing the public trust in water and wastewater treatment facilities or by causing customers to seek sources of water other than those processed using our systems or products. The potential impact of a contamination of water treated using our products, services or solutions is difficult to predict and could lead to an increased risk of exposure to product liability claims, increased scrutiny by federal and state regulatory agencies and negative publicity. Further, an outbreak of disease in any one of the municipal markets we serve could result in a widespread loss of customers across other such markets.
Our operations are subject to various hazards that may cause personal injury or property damage and increase our operating costs, and which may exceed the coverage of our insurance or for which we are not insured.
There are inherent risks to our operations. We are exposed to risks posed by severe weather and other natural disasters, such as hurricanes and earthquakes. In addition to natural risks, hazards (such as fire, explosion, collapse or machinery failure) are inherent risks in our operations which may occur as a result of inadequate internal processes, technological flaws, human error or certain events beyond our control. We further utilize approximately 740 vehicles in connection with our offsite services and distribution operations and, from time to time, these drivers are involved in accidents which may cause injuries, spills or uncontrolled discharges and in which goods carried by these drivers may be lost or damaged. The hazards described above can cause significant personal injury or loss of life, severe damage to or destruction of property, plants and equipment, including customer or third‑party property, contamination of, or damage to, the environment and suspension of operations. The occurrence of any of these events may result in our being subject to investigation, required to perform remediation or named as a defendant in lawsuits asserting claims for substantial damages, environmental cleanup costs, personal injury, natural resource damages and fines or penalties. As a result, we may from time to time become exposed to significant liabilities for which we may not have adequate insurance coverage. We may also become exposed to certain claims that are excluded from our insurance coverage, such as claims of fraud or for punitive damages. Although we have liability insurance, we cannot be certain that this insurance coverage will continue to be available to us at a reasonable cost or will be adequate to cover any product liability claims. In addition, such events may affect the availability of personnel, proper functioning of our information technology infrastructure and availability of third parties on whom we rely, any of which consequences could have a material adverse effect on our business, financial condition, results of operations or prospects.
Significant or prolonged disruptions in the supply of goods or services from third parties could materially adversely affect our business, financial condition, results of operations or prospects.
We are dependent on a continuing flow of goods and services from suppliers to provide our products, services and solutions to our customers. A disruption or prolonged delays in obtaining supplies or services, including, for example, chemicals, electricity or other materials, could materially adversely affect our ability to provide our products, services and solutions to our customers, and our ability to operate in compliance with all regulatory requirements, which could have a material adverse effect on our business, financial condition, results of operations or prospects. In certain circumstances, we rely on third parties to provide certain important services and a disruption in these services could materially adversely affect our business, financial condition, results of operations or prospects. Some possible reasons for a delay or disruption in the supply of important goods and services include:
our suppliers may not provide materials that meet our specifications in sufficient quantities;
our suppliers may face production delays due to natural disasters, strikes, lock‑outs or other such events;
one or more suppliers could make strategic changes in the lines of products and services they offer; and
some of our suppliers, such as small companies, may be more likely to experience financial and operational difficulties than larger, well‑established companies, because of their limited financial and other resources.
As a result of any of these, or other, factors, we may be required to find alternative suppliers for the materials and services on which we rely. Accordingly, we may experience delays in obtaining appropriate materials and services on a timely basis and in sufficient quantities from such alternative suppliers at a reasonable price, which could interrupt services to our customers and materially adversely affect our business, financial condition, results of operations or prospects.
The loss of, or disruption in, our ability to efficiently operate our distribution network could have a material adverse impact on our business.
We rely on the orderly operation of our receiving and distribution process, which depends on our distribution system, adherence to shipping schedules and effective management of our distribution network. If complications arise with our distribution system or if our shipping or storage facilities (or a significant portion of inventory located there) is severely
damaged or destroyed, our ability to receive and deliver our products on a timely basis will be significantly impaired. There can be no assurance that disruptions in operations due to natural or man‑made disasters, fire, flooding, terrorism or other catastrophic events, system failure, labor disagreements or shipping problems will not result in delays in the delivery of our products to our customers. Such delays could materially adversely impact our business, financial condition, results of operations or prospects. In addition, we could incur significantly higher costs and longer lead times associated with distributing our products to our customers during the time it takes for us to reopen or replace our facilities. Moreover, our business interruption insurance may not be adequate to cover or compensate us for any losses that may occur.
We rely upon various means of transportation through third parties, including shipments by air, sea, rail and truck, to deliver products to our facilities from vendors and from our facilities to our customers, as well as for direct shipments from vendors to customers. Labor shortages or capacity constraints in the transportation industry, disruptions to the national and international transportation infrastructure, fuel shortages or transportation cost increases (such as increases in fuel costs or port fees) could materially adversely affect our business and operating results.
We rely, in part, on third‑party sales representatives to assist in selling our products, services and solutions and the failure of these representatives to perform as expected could reduce our future sales.
Sales of our products, services and solutions to some of our customers are accomplished, in part, through the efforts of third‑party sales representatives. We are unable to predict the extent to which these third‑party sales representatives will be successful in marketing and selling our products. Moreover, many of these third‑party sales representatives also market and sell competing products and may more aggressively pursue sales of our competitors’ products. Our third‑party sales representatives may terminate their relationships with us at any time on short or no notice. Our future performance may also depend, in part, on our ability to attract, incentivize and retain additional third‑party sales representatives that will be able to market and support our products effectively, especially in markets in which we have not previously sold our products. If we cannot retain our current third‑party sales representatives or recruit additional or replacement third‑party sales representatives or if these sales representatives are not effective, it could have a material adverse effect on our business, financial condition, results of operations or prospects.
Our products, services and solutions, or our participation in large‑scale projects, could expose us to litigation, regulatory or enforcement actions and reputational risk.
We are subject to various laws, ordinances, regulations and other requirements of government authorities in foreign countries and in the U.S., any violation of which could potentially create substantial liability for us. Changes in laws, ordinances, regulations or other government policies, the nature, timing and effect of which are uncertain, may significantly increase our expenses and liabilities.
From time to time, we are involved in lawsuits that arise from our business. Litigation may, for example, relate to product liability claims, personal injury, property damage, accidents, regulatory issues, contract disputes or employment matters. We may face claims that are broader than the scope of our involvement on a project, including claims that seek to impose liability on us for an entire solution or system for which we provided only limited components.
The occurrence of any of these matters could also create possible damage to our reputation. The defense and ultimate outcome of lawsuits against us may result in higher operating expenses. Higher operating expenses or reputational damage could have a material adverse effect on our business, financial condition, results of operations or prospects.
It is not possible to predict with certainty the outcome of claims, investigations and lawsuits, and we could in the future incur judgments, fines or penalties or enter into settlements of lawsuits and claims that could have a material adverse effect on our business, financial condition, results of operations or prospects in any particular period. Additionally, we may be required to change or cease operations at one or more facilities if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our business.
A number of factors may prevent or delay us in building new plants, expanding our existing plants or installing equipment at our customers’ facilities, including our dependence on third‑party suppliers and construction companies.
A number of factors may prevent or delay construction, expansion or use of our facilities or installation of our equipment at our customers’ facilities, including our dependence on third‑party suppliers of equipment and materials, our dependence on third‑party construction companies and the timing of equipment purchases.
Further, we enter into contracts with customers regarding long‑term engineering, procurement and construction projects. If a construction company we have commissioned to build a new project defaults or fails to fulfill its contractual obligations, we could face significant delays and cost overruns. Any construction delays could have a material adverse impact on us.
The timing of equipment purchases can pose financial risks to us. We attempt to make purchases of equipment and/or material as needed. However, from time to time, there may be excess demand for certain types of equipment with substantial delays between the time we place orders and receive delivery. In those instances, to avoid construction delays, service disruptions or liquidated damages associated with the inability to own and place such equipment or materials into service when needed, we may place orders well in advance of deployment or when actual damage to the equipment or materials occurs. Thus, there is a risk that at the time of delivery of such equipment or materials, there may not yet be a need to use them; however, we are still required to accept delivery and make payment. In addition, due to the customization of some of our equipment or materials, there may be a limited market for resale of such equipment or material. This can result in our incurrence of material equipment and/or material costs, with no use for or ability to resell such equipment.
Seasonality of sales and weather conditions may adversely affect, or cause volatility in, our financial results.
We experience seasonal demand in a number of our markets, as demand for infrastructure and municipal products and projects follows warm weather trends. Seasonal effects may vary from year to year and are impacted by weather patterns, particularly by temperatures, heavy flooding and droughts.
Additionally, our operating results and financial condition could be materially and adversely affected by severe weather, natural disasters, environmental factors, terrorist or other deliberate attacks or hazards (such as fire, explosion or mechanical failure) resulting from inadequate internal processes, technical flaws, human error or other circumstances. Repercussions of these catastrophic events may include shutting down operations, a need to obtain additional equipment or supplies on an emergency basis, evacuation of or injury to personnel, damage to equipment or property, loss of productivity and harm to our reputation, any of which may result in a decrease in our revenue or decreased profitability.
Government customers involve unique policy‑, contract‑ and performance‑related risks, and we may face challenges to our government contracts or our eligibility to serve government customers, any of which could materially adversely impact our business, financial condition, results of operations or prospects.
We derive, and expect to continue to derive in the future, a substantial portion of our revenues from government customers, including municipalities. Sales to governments and related entities present risks in addition to those involved in sales to industrial and other customers, including policy‑related risks such as potential disruption due to appropriation and spending patterns, delays in the adoption of new technologies due to political, fiscal or bureaucratic processes, delays in approving budgets and the government’s right to cancel contracts and purchase orders for its convenience. General political and economic conditions, which we cannot accurately predict, also directly and indirectly affect policies relating to the quantity and allocation of expenditures by government customers. In addition, government contracts may involve long purchase and payment cycles, competitive bidding requirements, qualification requirements, delays or changes in agreed‑to funding, budgetary constraints, political agendas, extensive specification development and price negotiations, milestone requirements and the potential unenforceability of limitations on liability or other contractual provisions, any of which may create price pressure and reduce our margins. Because our water treatment projects and solutions for municipal customers often include fixed‑price contracts with milestone billings and liquidated damages for our delay, our performance under such contracts involves risks such as not receiving payments, not receiving payments in a timely manner or incurring significant damages if certain milestones are not met or not met on schedule. As a result, we could experience a material adverse effect on our business, financial condition, results of operations or prospects.
Each government entity also maintains its own rules and regulations with which we must comply and which can vary significantly among customers. We face risks associated with the failure to comply with such rules and regulations. These risks include bid protests, in which our competitors could challenge the contracts we have obtained, or suspension, debarment or similar ineligibility from serving government customers. Challenges to our current or future government contracts or to our eligibility to serve government customers could result in a loss of government sales and have a material adverse effect on our business, financial condition, results of operations or prospects.
Our contracts with federal, state and local governments may be terminated or adversely modified prior to completion, which could adversely affect our business.
Government contracts generally contain provisions, and are subject to laws and regulations, that give the government rights and remedies not typically found in commercial contracts, including provisions permitting the government to terminate our existing contracts, reduce scope and potential future revenues, modify certain terms and conditions of existing contracts, suspend performance or our ability to do business with the government, impose fines or penalties, subject us to criminal prosecution or debarment, subject awarded contracts to protests or challenges by competitors or claim rights in technologies developed by us.
The government may terminate a contract with us either for convenience (for instance, due to a change in its perceived needs or its desire to consolidate work under another contract) or if we default by failing to perform under the contract. Upon a termination for convenience, we are generally able to recover the purchase price for delivered items and reimbursement of allowable work‑in‑process costs. If the government terminates a contract with us based upon our default, we generally would be denied any recovery for undelivered work, and instead may be liable for excess costs incurred by the government in procuring undelivered items from an alternative source and other damages as authorized by law. We may in the future receive show‑cause or cure notices under contracts that, if not addressed to the government’s satisfaction, could give the government the right to terminate those contracts for default or to cease procuring our services under those contracts.Regulatory Risks
The cost of complying with complex governmental regulations applicable to our business, sanctions resulting from non‑compliance or reduced demand resulting from certain changes in regulations could increase our operating costs and reduce our profit.
Our operations are subject to various licensing, permitting, approval and reporting requirements imposed by federal, state, local and foreign laws. Our operations are subject to inspection and regulation by various governmental agencies, including the U.S. EPA, the Occupational Safety and Health Administration and equivalent state and local agencies, as well as their counterparts in various states and foreign countries. A major risk inherent in our operations is the need to obtain and renew permits from federal, state, and local authorities. Delays in obtaining permits, the failure to obtain a permit or a renewal permit for a project, challenges to our permits by local communities, citizen groups, landowners or others opposed to their issuance or the issuance of a permit with unreasonable conditions or costs could limit our ability to effectively provide our services. We are also required to secure and maintain licenses required by several states which can take a significant amount of time and result in our inability or delays in our ability to bid on and execute certain projects. If we fail to secure or maintain any such licenses or if states place burdensome restrictions or limitations on our ability to obtain or maintain such licenses, we may not be able to operate in such states and our business, financial condition, results of operations or prospects may be materially adversely affected as a result.
Our business may be further impacted by changes in federal, state, and local requirements that set forth air and wastewater discharge parameters, constrain water availability and set quality and treatment standards. Our failure or inability to comply with the stringent standards set forth by regulating entities or to provide cost‑effective and compliant design and construction solutions could result in fines or other penalties, and could have a material adverse effect on our business, financial condition, results of operations or prospects.
Foreign, federal, state, and local environmental, health and safety laws and regulations impose substantial compliance requirements on our operations. Our operating costs could be significantly increased in order to comply with new or stricter regulatory standards imposed by foreign, federal, and state environmental agencies.
Our operations, products and services are governed by various foreign, federal, state and local environmental protection and health and safety laws and regulations, including, without limitation, the federal Safe Drinking Water Act, the Clean Water Act, the Clean Air Act, the Resource Conservation and Recovery Act, the Occupational Safety and Health Act, the Toxic Substances Control Act and the Federal Insecticide, Fungicide, and Rodenticide Act in the U.S., the Registration, Evaluation and Authorization of Chemicals, or REACH, directive in Europe, and similar foreign, federal, state and local laws and regulations and permits issued under these laws by the foreign, federal, state and local environmental and health and safety regulatory agencies. These laws and regulations establish, among other things, criteria and standards for drinking water and for discharges into the waters of the U.S. and its states, for the proper management of hazardous and non‑hazardous solid waste and for protection of public and worker health and safety. Pursuant to these laws, we are required to obtain various environmental permits from environmental regulatory agencies for our operations. We cannot provide any assurance that our operations, products, or services will be at all times in total compliance with these laws, regulations and permits or that we will be able to obtain or renew all required permits. If we violate or fail to comply with these laws, regulations or permits, we could be fined or otherwise sanctioned by regulators and be subject to lawsuits, civil or criminal, seeking enforcement and/or injunctive relief. We may also be subject to civil claims by citizens groups seeking to enforce environmental laws. In the event of an accident or if we otherwise fail to comply with applicable regulations, we could lose our permits or approvals and/or be held liable for damages and monetary penalties.
Environmental laws and regulations are complex and change frequently. These laws, and the enforcement thereof, have tended to become more stringent over time. It is possible that new standards could be imposed, either stricter or more lenient, that could result in the obsolescence of our products or lead to an interruption or suspension of our operations and have a material adverse effect on the productivity and profitability of a particular manufacturing facility, service, or product or on us as a whole.
Wastewater operations entail significant risks that may impose significant costs.
Wastewater treatment involves various unique risks. If our treatment systems fail or do not operate properly, or if there is a spill, untreated or partially treated wastewater could discharge onto property or into nearby streams and rivers, causing various damages and injuries, including environmental damage. These risks are most acute during periods of substantial rainfall or flooding, which are the main causes of sewer overflow and system failure. Liabilities resulting from such damages and injuries could materially adversely affect our business, financial condition, results of operations or prospects.
These risks could be increased by the potential physical impacts of climate change on our operations. The physical impacts of climate change are highly uncertain and would vary depending on geographical location, but could include changing temperatures, water shortages, changes in weather and rainfall patterns and changing storm patterns and intensities. Many climate change predictions, if true, present several potential challenges to water and wastewater service providers, such as increased precipitation and flooding, potential degradation of water quality and changes in demand for water services.
Failure to comply with applicable anti‑corruption and trade laws, regulations, and policies, including the U.S. Foreign Corrupt Practices Act, could result in fines and criminal penalties, causing a material adverse effect on our business, financial condition, results of operations or prospects.
Due to our global operations, we are subject to regulation under a wide variety of U.S. federal and state and non‑U.S. laws, regulations and policies related to anti‑corruption and trade, including those related to export and import compliance, anti‑trust and money laundering. The U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and similar anti‑bribery laws in other jurisdictions generally prohibit companies and their intermediaries from making improper payments to government officials or other persons for the purpose of obtaining or retaining business. We operate in parts of the world that are recognized as high-risk regions for corruption. Our operations in these regions include sales to government and non-government customers and may include the use of third-party intermediaries. In certain circumstances,
strict compliance with anti-bribery and trade laws, regulations and policies may conflict with local customs and practices in these regions.
The International Traffic in Arms Regulations generally require export licenses from the U.S. Department of State for goods, technical data and services sent outside the U.S. that have military or strategic applications. The Export Administration Regulations regulate the export of certain “dual use” goods, software, and technologies, and in some cases requiresrequire export licenses from the U.S. Department of Commerce. Office of Foreign Asset Control regulations implement various sanctions programs that include prohibitions of restrictions on dealings with certain sanctioned countries, governments, entities, and individuals. Our policies mandate compliance with these trade laws, regulations, and policies, and we have established procedures designed to assist us and our personnel in compliance with applicable
U.S. and international laws and regulations. However, we cannot provide any assurance that our internal control policies and procedures will always protect us from improper conduct of our employees or business partners.
In the event that we believe or have reason to believe that our employees or agents have or may have violated applicable laws, including anti‑corruption and trade laws, regulations, and policies, we may be required to investigate or engage outside counsel to investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. Any such violation could result in substantial fines, sanctions, civil and/or criminal penalties, imprisonment, disgorgement of profits, debarment from government contracts and curtailment of operations in certain jurisdictions, and might materially adversely affect our business, financial condition, results of operations or prospects. In addition, actual or alleged violations could damage our reputation and diminish our ability to do business. Furthermore, detecting, investigating, and resolving actual or alleged violations is expensive and can consume significant time and attention of our senior management.
Our business, results of operations and financial condition may be materially adversely affected by risks associated with international sales and operations.
Our international sales and operations are subject, in varying degrees, to risks inherent to doing business outside the U.S. These risks include the following:
changes in trade protection measures, including tariff and trade barriers and import and export licensing requirements;
potential negative consequences from changes to taxation policies;
unanticipated changes in other laws, governmental policies and regulations, or in how such provisions are interpreted or administered;
risks associated with the withdrawal of the United Kingdom from the European Union, commonly known as “Brexit,” including volatility in worldwide and European financial markets, potential restrictions on the free movement of goods and labor between the United Kingdom and the European Union and other impediments to our ability to transact within and between each of the United Kingdom and the European Union;
potential disruptions in our global supply chain;
possibility of unfavorable circumstances arising from host country laws or regulations;
restrictions on, or taxation of, dividends on repatriation of earnings under applicable local law, monetary transfer restrictions and foreign currency exchange regulations in the jurisdictions in which our subsidiaries operate;
currency exchange rate fluctuations and restrictions on currency repatriation;
labor disturbances;
safety and security considerations;
increased costs and risks of developing and managing global operations, including our potential failure to implement global best practices, experiences of employee dissatisfaction and the improper allocation of resources, as a result of distance as well as language and cultural differences; and
political instability insurrection, armed conflict, terrorism or war.
In addition to the general risks that we face outside the U.S., our operations in emerging markets could involve additional uncertainties for us, including risks that governments may impose limitations on our ability to repatriate funds; governments may impose withholding or other taxes on remittances and other payments to us, or the amount of any such taxes may increase; an outbreak or escalation of any insurrection or armed conflict may occur; governments may seek to nationalize our assets; or governments may impose or increase investment barriers or other restrictions affecting our business. The emerging markets in which we are active, including China, pose other uncertainties, including the difficulty of enforcing agreements, collecting receivables, protecting of our intellectual property and other assets and pricing of our products appropriately, as well as higher business conduct risks, less qualified talent and risks of political instability. We cannot predict the impact such events might have on our business, financial condition, results of operations or prospects.
Our operations in China expose us to risks inherent in doing business there.
We currently have operations and source and manufacture certain of our materials and products for global distribution from third‑party suppliers and manufacturers in China. The political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable, and operating in China exposes us to political, legal and economic risks. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, network security, employee benefits and other matters, and we may not obtain or retain the requisite legal permits to continue to operate in China or we may become subject to costs or operational limitations imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. We may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. and international standards. We may also experience difficulty in managing relations with our employees, distributors, suppliers or customers, with whom disagreements or conflicts of interest could materially adversely affect our operations or our ability to source and manufacture certain of our materials and products in China. Further, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. Any of these factors could have a material adverse effect on our business, financial condition, results of operations or prospects.
Additionally, the rapid development of the Chinese economy has led to increased labor costs, and the cost of labor in China may continue to increase in the future. Our results of operations will be materially and adversely affected if our labor costs, or the labor costs of our suppliers and manufacturers, increase significantly. We and our manufacturers and suppliers may be unable to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. These labor laws and related regulations impose liabilities on employers and may significantly increase the costs of workforce reductions. If we decide to change or reduce our workforce, these labor laws could limit or restrict our ability to make such changes in a timely, favorable and effective manner. Any of these events could have a material adverse effect our business, financial condition, results of operations or prospects.
If we do not or cannot adequately protect our intellectual property, if third parties infringe our intellectual property rights, or if third parties claim that we are infringing or misappropriating their intellectual property rights, we may suffer competitive injury, expend significant resources enforcing our rights or defending against such claims, or be prevented from selling products or services.
We own numerous patents, trademarks, service marks, copyrights, trade secrets and other intellectual property and hold licenses to intellectual property owned by others, which in aggregate are important to our business. The intellectual property rights that we have and may obtain, however, may not provide our products and services with a significant competitive advantage because our rights may not be sufficiently broad or may be challenged, invalidated, or subject to government march‑in or sovereign rights or compulsory licensing, sunshine laws, or be subject to freedom of information requests, or court‑ordered public disclosure, or be subject to open‑source software licensing, or be circumvented, independently developed or designed‑around, misappropriated, disparaged, diluted, or stolen, particularly in countries where intellectual property rights laws are not highly developed, protected or enforced. Our failure to obtain or maintain intellectual property rights that convey competitive advantage, adequately protect our intellectual property or detect or prevent circumvention or unauthorized use of such property and the cost of enforcing our intellectual property rights could materially adversely impact our business, financial condition, results of operations or prospects.
From time to time, we, or on occasion our suppliers, contractors or indemnified parties in our supply chain including end‑users, receive notices from third parties alleging or warning of potential intellectual property infringement or misappropriation. Any dispute or litigation regarding intellectual property could be costly and time‑consuming due to the complexity and the uncertainty of intellectual property litigation. Our intellectual property portfolio may not be useful in asserting a counterclaim, or negotiating a license, in response to a claim of infringement or misappropriation. We may incur significant costs and diversion of management attention and resources as a result of such claims of infringement or misappropriation, and we or our suppliers or sub‑contractors could lose rights to critical technology, be unable to license critical technology, provide or sell critical products or services, or be required to pay substantial damages or license fees with respect to the infringed rights or be required to redesign, rework, re‑program, or replace our or our customers’ products, sub‑components, software, or systems, or re‑cast our valuable brands at substantial cost, any of which could materially adversely impact our competitive position, financial condition and results of operations even if we successfully defend against such claims of infringement or misappropriation.
Changes to U.S. tax laws may have a material adverse impact on our business.
On December 22, 2017, President Trump signed into law new legislation that significantly revises the Internal Revenue Code of 1986, as amended (the “IRC”). The newly enacted federal income tax law, among other things, contains significant changes to corporate taxation, including the reduction of the corporate income tax rate from 35% to 21%, a one-time transition tax on foreign earnings at a reduced tax rate regardless of whether the earnings are repatriated, the elimination of the U.S. tax on future foreign earnings (subject to certain existing exceptions for inclusions under Subpart F of the IRC and newly enacted provisions under Subpart F regarding global intangible low-taxed income, or “GILTI”), limits on the deduction of interest, a new minimum tax related to certain payments to foreign subsidiaries and affiliates, immediate deductions for certain new investments and the modification of many business deductions and credits. In particular, the legislation limits the deduction for interest expense available to U.S. corporations as compared to the total debt burden on the international group, and limits interest deductions to 30% of EBITDA determined by applying U.S. tax principles. Tax reform also introduced “GILTI” which, in general, will subject U.S. corporations to tax on the earnings of certain foreign subsidiaries that are in excess of 10% of the foreign subsidiaries U.S. tax basis in tangible assets. Finally, it is uncertain whether, and to what extent, various states will conform to the new tax law and foreign countries will react by enacting tax legislation or take other actions. Notwithstanding the reduction in the corporate income tax rate, the overall impact of the new federal tax law is uncertain and could have a material adverse impact on our business, financial condition, cash flows and results of operations.
Our ability to use our net operating loss carryforwards may be limited.
As of September 30, 2019, we had approximately $291.2 million of U.S. federal and state net operating loss carryforwards (“NOLs”). Our federal NOLs begin to expire in 2034 while certain state NOLs begin to expire in 2019. Utilization of these NOLs depends on many factors, including our future income, which cannot be assured. We have a full
valuation allowance against the NOLs. In addition, U.S. tax reform imposes certain limitations on a corporation’s ability to offset its future income with its NOLs. The legislation reduces the U.S. corporate tax rate, which would result in a reduction of the expected cash tax benefit that would arise from any future utilization of our NOLs. Finally, Section 382 of the IRC (“Section 382”), generally imposes an annual limitation on the amount of taxable income that may be offset by NOLs when a corporation has undergone an “ownership change” (as determined under Section 382). Generally, a corporation experiences such an ownership change if the percentage of its stock owned by its “5‑percent stockholders,” as defined in Section 382, increases by more than 50 percentage points (by value) over a three‑year period. Any unused annual limitation may, subject to certain limitations, be carried over to later years. We may undergo an ownership change in the future, including an ownership change as a result of the combined effect of our initial public offering and future equity offerings, which could result in an annual limitation under Section 382 determined by multiplying the value of our stock at the time of the ownership change by the applicable long‑term tax‑exempt rate as defined in Section 382, increased under certain circumstances as a result of recognizing built‑in gains in our assets existing at the time of the ownership change. The limitations arising from any ownership change may prevent utilization of our NOLs prior to their expiration. Future ownership changes or regulatory changes could further limit our ability to utilize our NOLs. To the extent we are not able to offset our future income with our NOLs, this could adversely affect our operating results and cash flows if we attain profitability.
Changes in our effective tax rates may adversely affect our financial results.
We offer our products, services and solutions in more than 100 countries and 20.5% of our revenue was generated outside the U.S. in fiscal 2019. Given the global nature of our business, a number of factors may increase our future effective tax rates, including:
the jurisdictions in which profits are determined to be earned and taxed;
sustainability of historical income tax rates in the jurisdictions in which we conduct business;
the resolution of issues arising from tax audits with various tax authorities; and
changes in the valuation of our deferred tax assets and liabilities, and changes in deferred tax valuation allowances.
Any significant increase in our future effective tax rates could reduce net income for future periods.
We are a holding company with no operations of our own, and we depend on our subsidiaries for cash.
We are a holding company and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends, if any, is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. The ability of our subsidiaries to generate sufficient cash flow from operations to allow us and them to make scheduled payments on our debt obligations will depend on their future financial performance, which will be affected by a range of economic, competitive and business factors, many of which are outside of our control. We cannot provide any assurance that the cash flow and earnings of our operating subsidiaries will be adequate for our subsidiaries to service their debt obligations. Additionally, under the terms of the agreement governing 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. If our subsidiaries do not generate sufficient cash flow from operations to satisfy corporate obligations, we may have to undertake alternative financing plans (such as refinancing), restructure debt, sell assets, reduce or delay capital investments or seek to raise additional capital. We cannot provide any assurance that any such alternative refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds realized from those sales, that additional financing could be obtained on acceptable terms, if at all, or that additional financing would be permitted under the terms of our various debt instruments then in effect. Our inability to generate sufficient cash flow to satisfy our obligations, or to refinance our obligations on commercially reasonable terms, could have a material adverse effect on our business, financial condition, results of operations or prospects.
Furthermore, we and our subsidiaries may incur substantial additional indebtedness in the future that may severely restrict or prohibit our subsidiaries from making distributions, paying dividends, if any, or making loans to us.
We may incur impairment charges for our goodwill and other indefinite‑lived intangible assets which would negatively impact our operating results.
We have a significant amount of goodwill and purchased intangible assets on our balance sheet as a result of the Acquisition in 2014 and subsequent acquisitions we have completed. As of September 30, 2019, the net carrying value of our goodwill and other indefinite‑lived intangible assets totaled approximately $427.1 million. The carrying value of goodwill represents the fair value of an acquired business in excess of identifiable assets and liabilities as of the acquisition date. The carrying value of indefinite‑lived intangible assets represents the federal hazardous waste treatment management permits obtained for locations operated by the Company. We do not amortize goodwill and indefinite‑lived intangible assets that we expect to contribute indefinitely to our cash flows, but instead we evaluate these assets for impairment at least annually, or more frequently if changes in circumstances indicate that a potential impairment could exist. Significant negative industry or economic trends, disruptions to our business, inability to effectively integrate acquired businesses, unexpected significant changes or planned changes in use of the assets, divestitures and market capitalization declines may impair our goodwill and other indefinite‑lived intangible assets. Any charges relating to such impairments could materially adversely affect our financial condition and results of operations.
Our substantial indebtedness could adversely affect our financial condition and limit our ability to raise additional capital to fund our operations.
We have a significant amount of indebtedness. As of September 30, 2019, we had total indebtedness of $977.2 million, including $928.8 million of borrowings under our term loan facility, no borrowings under our revolving credit facility, and $46.8 million in borrowings related to equipment financing and $1.6 million in borrowings related to financing our purchase of our facility in Schiedam, Netherlands. We also had $13.0 million of letters of credit issued under our $125.0 million revolving credit facility and an additional $204 thousand of letters of credit issued under a separate uncommitted facility as of September 30, 2019.
Our high level of indebtedness could have important consequences to us, including:
making it more difficult for us to satisfy our obligations with respect to our debt;
limiting our ability to obtain additional financing to fund future working capital, capital expenditures, investments or acquisitions or other general corporate requirements;
requiring a substantial portion of our cash flows to be dedicated to debt service payments and/or debt repayment instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, investments or acquisitions or other general corporate purposes;
increasing our vulnerability to adverse changes in general economic, industry and competitive conditions;
exposing us to the risk of increased interest rates as borrowings under our senior secured credit facilities (to the extent not hedged) bear interest at variable rates, which could further adversely impact our cash flows;
limiting our flexibility in planning for and reacting to changes in our business and the industry in which we compete;
restricting us from making strategic acquisitions or causing us to make non‑strategic divestitures;
impairing our ability to obtain additional financing in the future;
placing us at a disadvantage compared to other, less leveraged competitors; and
increasing our cost of borrowing.
Any one of these limitations could have a material effect on our business, financial condition, results of operations, prospects and our ability to satisfy our obligations in respect of our outstanding debt.
Despite our current debt levels, we may incur substantially more indebtedness, which could further exacerbate the risks associated with our substantial leverage.
We and our subsidiaries may be able to incur additional indebtedness in the future, which may be secured. While the agreement governing our senior secured credit facilities limits our ability and the ability of our subsidiaries to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions and thus, notwithstanding these restrictions, we may still be able to incur substantially more debt. In addition, provided that no default or event of default (as defined in the agreement governing our senior secured credit facilities) has occurred and is continuing, we have the option to add one or more incremental term loan or revolving credit facilities or increase commitments under our revolving credit facility by an aggregate amount which does not cause our total first lien net leverage ratio, on a pro forma basis (in each case, as defined in the agreement governing our senior secured credit facilities), to exceed 4.50 to 1.00, plus up to an additional $100.0 million (excluding incremental revolving credit facilities or increases under our revolving credit facility in an aggregate principal amount not to exceed $30.0 million) (all of which remains available as of September 30, 2019). To the extent that we incur additional indebtedness, the risks that we now face related to our substantial indebtedness could increase.
To service our indebtedness, we require a significant amount of cash, which depends on many factors beyond our control.
We cannot provide any assurance that our business will generate sufficient cash flow from operations, or that future borrowings will be available to us under our senior secured credit facilities in amounts sufficient to enable us to fund our liquidity needs. If we do not generate sufficient cash flow from operations to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets or seeking to raise additional capital. We cannot provide any assurance that we would be able to enter into these alternative financing plans on commercially reasonable terms or at all. Moreover, any alternative financing plans that we may be required to undertake would still not guarantee that we would be able to meet our debt obligations. Our inability to generate sufficient cash flow to satisfy our debt obligations, or to obtain alternative financing, could materially adversely affect our business, financial condition, results of operations or prospects. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources.”
We will need to repay or refinance borrowings under our senior secured credit facilities.
Our revolving credit facility and term loan facility are scheduled to mature in December 2022 and December 2024, respectively. We will need to repay, refinance, replace or otherwise extend the maturity of our senior secured credit facilities. Our ability to repay, refinance, replace or extend these facilities by their maturity dates will be dependent on, among other things, business conditions, our financial performance and the general condition of the financial markets. If a financial disruption were to occur at the time that we are required to repay indebtedness outstanding under our senior secured credit facilities, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity of our senior secured credit facilities or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay indebtedness under our senior secured credit facilities. We cannot provide any assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all.
Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.
Borrowings under our senior secured credit facilities are at variable rates of interest and expose us to interest rate risk. Interest rates are still near historically low levels and are projected to rise in the future. If interest rates rise, our debt service obligations on the variable rate indebtedness will increase even though the amount borrowed may remain the same, and our net income and cash flows will correspondingly decrease. Assuming no prepayments of the term loan facility (which
had $928.8 million outstanding as of September 30, 2019) and that our revolving credit facility was fully drawn, each 0.125% change in interest rates would result in an approximate change of $1.2 million in annual interest expense on the indebtedness under our senior secured credit facilities. The Company entered into an interest rate cap to mitigate the risks associated with variable rate debt effective November 28, 2018. The LIBOR interest rate cap has a notional value of $600 million, is effective for a period of three years and has strike price of 3.5%.
The covenants in our senior secured credit facilities impose restrictions that may limit our operating and financial flexibility.
Our senior secured credit facilities contain a number of significant restrictions and covenants that limit our ability, among other things, to:
incur additional indebtedness;
pay dividends or distributions on our capital stock or repurchase or redeem our capital stock;
prepay, redeem or repurchase specified indebtedness;
create certain liens;
sell, transfer or otherwise convey certain assets;
make certain investments;
create dividend or other payment restrictions affecting subsidiaries;
engage in transactions with affiliates;
create unrestricted subsidiaries;
consolidate, merge or transfer all or substantially all of our assets or the assets of our subsidiaries;
enter into agreements containing certain prohibitions affecting us or our subsidiaries; and
enter into new lines of business.
In addition, our senior secured credit facilities contain a financial covenant requiring us to comply with a 5.55 to 1.00 first lien net leverage ratio test. This financial covenant is solely for the benefit of the lenders under our revolving credit facility and is tested as of the last day of a 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.
These covenants could materially adversely affect our ability to finance our future operations or capital needs. Furthermore, they may restrict our ability to expand and pursue our business strategies and otherwise conduct our business. Our ability to comply with these covenants may be affected by circumstances and events beyond our control, such as prevailing economic conditions and changes in regulations, and we cannot provide any assurance that we will be able to comply with such covenants. These restrictions also limit our ability to obtain future financings to withstand a future downturn in our business or the economy in general. In addition, complying with these covenants may also cause us to take actions that may make it more difficult for us to successfully execute our business strategy and compete against companies that are not subject to such restrictions.
A breach of any covenant in our senior secured credit facilities or the agreements and indentures governing any other indebtedness that we may have outstanding from time to time would result in a default under that agreement or indenture after any applicable grace periods. A default, if not waived, could result in acceleration of the debt outstanding
under the agreement and in a default with respect to, and an acceleration of, the debt outstanding under other debt agreements. If that occurs, we may not be able to make all of the required payments or borrow sufficient funds to refinance such debt. Even if new financing were available at that time, it may not be on terms that are acceptable to us or terms as favorable as our current agreements. If our debt is in default for any reason, our business, results of operations and financial condition could be materially and adversely affected.
Risks Relating to Ownership of our Common Stock
The market price of our common stock may be highly volatile, and our shareholders may not be able to resell their shares at or above the price they paid for them.
The trading price of our common stock could be volatile, and our shareholders could lose all or part of their investment. We cannot provide any assurance that an active public market for our common stock will be sustained. Volatility or a lack of positive performance in our stock price may adversely affect our ability to retain key employees, many of whom have been granted stock incentive awards. The following factors, in addition to other factors described in this “Risk Factors” section and elsewhere in this Annual Report on Form 10-K, may have a significant impact on the market price of our common stock:
negative trends in global economic conditions or activity levels in our industry;
changes in our relationship with our customers or in customer needs, expectations or trends;
announcements concerning our competitors or our industry in general;
our ability to implement our business strategy;
our ability to complete and integrate acquisitions;
actual or anticipated fluctuations in our quarterly or annual operating results;
trading volume of our common stock;
the failure of securities analysts to cover the Company or changes in analysts’ financial estimates;
severe weather, natural disasters, acts of war or terrorism or other external events;
economic, legal and regulatory factors unrelated to our performance;
changes in accounting principles;
the loss of any of our management or key personnel;
sales of our common stock by us, our executive officers and directors or our shareholders (including certain affiliates of AEA) in the future; and
general economic and market conditions and overall fluctuations in the U.S. equity markets.
In addition, broad market and industry factors may negatively affect the market price of our common stock, regardless of our actual operating performance, and factors beyond our control may cause our stock price to decline rapidly and unexpectedly.
Because AEA holds a significant percentage of our common stock, it may influence major corporate decisions, and the interests of AEA and its affiliates, including certain of our directors, may conflict with the interests of owners of our common stock and those of the Company.
AEA currently owns approximately 30.6% of our common stock. As a result, although we are no longer a controlled company, AEA will continue to be able to influence matters requiring approval by our shareholders and/or our board of directors, including the election of directors and the approval of business combinations or dispositions and other extraordinary transactions. See Item 13, “Certain Relationships and Related Party Transactions.”
AEA may have interests that are different from our other shareholders and may vote in a way with which our other shareholders disagree and which may be adverse to our other shareholders’ interests. Further, AEA’s concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of us, which could cause the market price of our common stock to decline or prevent our shareholders from realizing a premium over the market price for their common stock. Additionally, AEA and its affiliates are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or supply us with goods and services. Shareholders should consider that the interests of AEA may differ from their interests in material respects.
Two of our nine directors are currently affiliated with AEA. These persons have fiduciary duties to both us and AEA. As a result, they may have real or apparent conflicts of interest on matters affecting both us and AEA, which in some circumstances may have interests adverse to ours. In addition, our amended and restated certificate of incorporation provides that the doctrine of “corporate opportunity” will not apply with respect to us, to AEA or certain related parties or any of our directors who are employees of AEA or its affiliates in a manner that would prohibit them from investing in competing businesses or doing business with our customers. AEA or its affiliates may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. To the extent they invest in such other businesses, AEA and its affiliates, including affiliates of AEA who serve on our board of directors, may have interests that differ from those of our other shareholders.
Sales, or the potential for sales, of a substantial number of shares of our common stock in the public market by us or our existing shareholders could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Additionally, future exercises and the vesting of equity awards may result in dilution of the value of our common stock and could also depress the market price of our common stock. Sales of stock by these shareholders could have a material adverse effect on the trading price of our common stock.
Holders of an aggregate of approximately 56,620,498 shares of our common stock have rights, subject to certain conditions, to require us to file registration statements covering their shares or to include their shares in registration statements that we may file for ourselves or other shareholders. Registration of these shares under the Securities Act, would result in the shares becoming freely tradable without restriction under the Securities Act, except for shares held by our affiliates as defined in Rule 144 under the Securities Act. Any sales of securities by these shareholders could have a material adverse effect on the trading price of our common stock.
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes‑Oxley Act of 2002.
We are required to comply with the management certification requirement of Section 404 of the Sarbanes Oxley Act of 2002 (the “Sarbanes Oxley Act”). As we perform the system and process evaluation and testing, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board (“PCAOB”) rules and regulations that remain unremediated. As a public company, we are required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
If we fail to comply with the requirements of Section 404, regulatory authorities such as the SEC or the PCAOB might subject us to sanctions or investigation. If we do not implement improvements to our disclosure controls and procedures or to our internal controls in a timely manner, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal controls over financial reporting pursuant to an audit of our controls. This may subject us to adverse regulatory consequences or a loss of confidence in the reliability of our financial statements. We could also suffer a loss of confidence in the reliability of our financial statements if our independent registered public accounting firm reports a material weakness in our internal controls, if we do not develop and maintain effective controls and procedures or if we are otherwise unable to deliver timely and reliable financial information.
Additionally, effective internal controls are necessary for us to provide reliable financial reports and prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. Inadequate internal controls could also cause investors to lose confidence in our reported financial information. Any loss of confidence in the reliability of our financial statements or other negative reaction to our failure to develop timely or adequate disclosure controls and procedures or internal controls could result in a decline in the price of our common stock. In addition, if we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets and our stock price may be adversely affected.
If securities or industry analysts cease publishing research or reports about us, our business or our markets, or if they adversely change their recommendations or publish negative reports regarding our business or our stock, our stock price and trading volume could materially decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts may publish about us, our business, our markets or our competitors. We do not have any control over these analysts and we cannot provide any assurance that analysts will cover us or provide favorable coverage. If any of the analysts who may cover us adversely change their recommendation regarding our stock, or provide more favorable relative recommendations about our competitors, our stock price could materially decline. If any analyst who may cover us were to cease coverage of our Company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to materially decline.
Some provisions of our charter documents and Delaware law may have anti‑takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders, and may prevent attempts by our shareholders to replace or remove our current management.
Provisions in our amended and restated certificate of incorporation and our amended and restated bylaws, as well as provisions of the Delaware General Corporation Law (the “DGCL”), could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, including transactions in which shareholders might otherwise receive a premium for their shares. These provisions include:
establishing a classified board of directors such that not all members of the board of directors are elected at one time;
allowing the authorized number of our directors to be determined exclusively by resolution of our board of directors and granting to our board of directors the sole power to fill any vacancy on the board of directors;
limiting the ability of shareholders to remove directors without cause;
providing that our board of directors is expressly authorized to adopt, or to alter or repeal, our amended and restated bylaws;
authorizing the issuance of “blank check” preferred stock by our board of directors, without further shareholders approval, to thwart a takeover attempt;
prohibiting shareholders action by written consent (and, thus, requiring that all shareholder actions be taken at a meeting of our shareholders);
eliminating the ability of shareholders to call a special meeting of shareholders;
establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon at annual shareholder meetings; and
requiring the approval of the holders of at least two‑thirds of the voting power of all outstanding stock entitled to vote thereon, voting together as a single class, to amend or repeal our amended and restated certificate of incorporation or amended and restated bylaws.
In addition, while we have opted out of Section 203 of the DGCL, our amended and restated certificate of incorporation contains similar provisions providing that we may not engage in certain “business combinations” with any “interested shareholder” for a three‑year period following the time that the shareholder became an interested shareholder, unless:
prior to such time, our board of directors approved either the business combination or the transaction that resulted in the shareholder becoming an interested shareholder;
upon consummation of the transaction that resulted in the shareholder becoming an interested shareholder, the interested shareholder owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding certain shares; or
at or subsequent to that time, the business combination is approved by our board of directors and by the affirmative vote of holders of at least two‑thirds of our outstanding voting stock that is not owned by the interested shareholder.
These anti‑takeover defenses could discourage, delay or prevent a transaction involving a change in control of our Company. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors of their choosing and cause us to take corporate actions other than those that certain shareholders desire.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our shareholders, which could limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed to us or our shareholders by any of our directors, officers, employees or agents, (iii) any action asserting a claim against us arising under the DGCL or (iv) any action asserting a claim against us that is governed by the internal affairs doctrine. Shareholders in our Company will be deemed to have notice of and have consented to the provisions of our amended and restated certificate of incorporation related to choice of forum. The choice of forum provision in our amended and restated certificate of incorporation may limit our shareholders’ ability to obtain a favorable judicial forum for disputes with us.
We do not currently expect to pay any cash dividends.
We currently anticipate that we will retain future earnings for the development, operation and expansion of our business, and the continued operation and expansion of our business will require substantial funding. Accordingly, we do not currently anticipate declaring or paying any cash dividends on shares of our common stock in the foreseeable future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by our operating subsidiaries. Under our senior secured credit facilities, our operating subsidiaries are currently limited
in their ability to pay cash dividends, and we expect these limitations to continue in the future. Our ability to pay dividends may also be limited by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Accordingly, realization of a gain on any investment in shares of our common stock will depend on the appreciation of the price of our common stock, which may never occur.
The requirements of being a public company, including compliance with the reporting requirements of the Exchange Act and the requirements of the Sarbanes‑Oxley Act and the NYSE, may strain our resources, increase our costs and divert management’s attention, and we may be unable to comply with these requirements in a timely or cost‑effective manner.
As a public company, we are subject to the reporting requirements of the Exchange Act, and the corporate governance standards of the Sarbanes‑Oxley Act and the NYSE. These requirements place a strain on our management, systems and resources and we will continue to incur significant legal, accounting, insurance and other expenses. The Exchange Act, requires us to file annual, quarterly and current reports with respect to our business and financial condition within specified time periods and to prepare a proxy statement with respect to our annual meeting of shareholders. The Sarbanes‑Oxley Act requires that we maintain effective disclosure controls and procedures and internal controls over financial reporting. The NYSE requires that we comply with various corporate governance requirements. To maintain and improve the effectiveness of our disclosure controls and procedures and internal controls over financial reporting and comply with the Exchange Act and NYSE requirements, significant resources and management oversight will be required. This may divert management’s attention from other business concerns and lead to significant costs associated with compliance, which could have a material adverse effect on us and the price of our common stock. Furthermore, as we grow our business both organically and through acquisitions, our disclosure controls and procedures and internal control over financial reporting will become more complex, and we may require significantly more resources to ensure that these controls and procedures remain effective.
These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors or its committees or as our executive officers. Advocacy efforts by shareholders and third parties may also prompt even more changes in governance and reporting requirements. We cannot predict or estimate the amount of additional costs we may incur or the timing of these costs. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
We may be subject to securities litigation, which is expensive and could divert management attention.
Our share price has been volatile and, in the past, companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Litigation of this type could result in substantial costs and diversion of management’s attention and resources, which could have a material adverse effect on our business, financial condition, results of operations or prospects. Any adverse determination in litigation could also subject us to significant liabilities. See Item 3, “Legal Proceedings” for a discussion of the status of certain securities litigation related to our share price volatility.
As a result of the expiration of certain voting proxies, we are no longer a “controlled company” within the meaning of the corporate governance standards of the NYSE. However, we continue to qualify for, and may rely on, exemptions from certain corporate governance requirements that would otherwise provide protection to our shareholders during a one-year transition period.
Because AEA no longer controls the votes of a majority of our common stock, we are no longer a “controlled company” within the meaning of the corporate governance standards of the NYSE. However, we continue to qualify for, and may rely on, exemptions from certain corporate governance standards that would otherwise provide protection to our shareholders during a one-year transition period that ends November 2, 2020. The NYSE rules require that we (i) have at least one independent director on each of our compensation committee and nominating and corporate governance committee by the date we ceased to qualify as a “controlled company,” (ii) have a majority of independent directors on each of our compensation committee and nominating and corporate governance committee within 90 days of the date we ceased to
qualify as a “controlled company,” and (iii) have a fully independent compensation committee and nominating and corporate governance committee within one year of the date we ceased to qualify as a “controlled company.” We are also required to have a majority independent board of directors within one year of the date we ceased to qualify as a “controlled company” and to perform an annual performance evaluation of our compensation committee and nominating and corporate governance committee. Our board of directors has determined that two of the four members of our compensation committee, two of the four members of our nominating and corporate governance committee, all of the members of our audit committee and six of the nine members of our board of directors are independent for purposes of the NYSE corporate governance standards.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
As of September 30, 2019,2021, we operate 163operated 156 locations located in the United States, Canada, the United Kingdom, the Netherlands, Germany, Australia, China, Singapore, India, and Korea, including 1911 manufacturing facilities, seven7 research and development facilities, and 9791 service branches. Of our facilities, weWe own 2120 of these properties and lease 142the remaining 136 properties. The manufacturing and research and development facilities support both our ISS and APT segments globally. The service branches primarily support our ISS segment. Our North American presence includes 11 resin regeneration plants, three3 carbon reactivation plants, and one1 wastewater ion exchange facility. As of September 30, 2019, the covered square footage of our facilities is equal to an aggregate of approximately 3.6 million square feet.
Item 3. Legal Proceedings
From time to time, we are subject to various claims, charges and litigation matters that arise in the ordinary course of business. We believe these actions are a normal incident of the nature and kind of business in which we are engaged. While it is not feasible to predict the outcome of these matters with certainty, we do not believe that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on our business, financial condition, results of operations or prospects.
On or aroundIn November 6, 2018, a purported shareholder of the Company filed a class action lawsuit, captioned McWilliams v. Evoqua Water Technologies Corp., Case No. 1:18-CV-10320, in the U.S.United States District Court for the Southern District of New York alleging that the Company and senior management violated federal securities laws by issuing false, misleading, and/or omissive disclosures in the period leading up to the Company’s October 30, 2018 announcement of, among other things, (a) preliminary results for the full-year fiscal 2018 that were below previous expectations and (b) a transition from a three-segment structure to a two-segment operating model. The action is captioned McWilliams v. Evoqua Water Technologies Corp., et al., Case No. 1:18-CV-10320 and names as defendants the Company and the Company’s CEO and CFO. In January 2019, the court appointed lead plaintiffs and lead counsel and re-captioned the action as In re Evoqua Water Technologies Corp. Securities Litigation(the “Securities Litigation”). In March 2019, lead plaintiffs filed an amended complaint, which assertsasserted claims pursuant to the Securities Exchange Act of 1934 and the Securities Act against the Company, members of the Company’s board of directors, senior management, a former executive, AEA Investors LP (“AEA”), and the underwriters of the Company’s IPO and secondary public offering. The amended complaint allegesalleged that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s integration of acquired companies, the Company’s reduction-in-force, and the Company’s accounting practices.financial results of operations. The lawsuit seekssought compensatory damages in an unspecified amount to be proved at trial,and an award of reasonable costs and expenses to the plaintiff and class counsel, and such other relief ascounsel. In March 2020, the court may deem just and proper. In June 2019,Court granted the defendants filed motionsdefendants’ motion to dismiss a portion of the amended complaint, and briefing ofclaims, dismissing all claims predicated on supposedly intentional misstatements or omissions, which were brought under the Exchange Act. The claims that remained were those motions was completed in October 2019.brought under the Securities Act. The Company believes that this lawsuit is without meritfiled an answer denying the material allegations of the complaint, the parties engaged in discovery, and intendslead plaintiffs filed a motion for class certification in December 2020.
On June 1, 2021, following mediation, the parties filed a stipulation agreeing to vigorously defend itself againstsettle the allegations.Securities Litigation, subject to Court approval, for $16.65 million, all of which was paid by insurance. On November 1, 2021, the Court granted final approval of the settlement and entered a judgment dismissing the Securities Litigation.
In April 2019, another purported shareholder of the Company filed a derivative lawsuit in the United States District Court for the Western District of Pennsylvania, captioned Dallas Torgersen v. Ronald C. Keating, Case No. 2:19-CV-410. The complaint names as defendants the Company’s CEO & CFO,Chief Executive Officer and Chief Financial Officer, as well as members of the Company’s board of directors, and
it names the Company as a nominal defendant. The complaint alleges, among other things, that the individual defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures in the period leading up to the Company’s October 30, 2018 disclosures, and that they breached their fiduciary duties to the Company. The lawsuit seeks compensatory damages in an unspecified amount, an award of reasonable costs and expenses, restitution from the individual defendants, and an order directing the Company and the individual defendants to take all necessaryunspecified actions to reform and improve the Company’s corporate governance and internal procedures.
In June 2019, the Court entered an order staying the lawsuit pending resolutionJuly 2020, a different purported shareholder of the Company filed a second shareholder derivative lawsuit ostensibly on behalf of the Company in the same court, captioned Robert Hyams v. Ronald C. Keating, Case No. 2:20-CV-1112. The complaint is similar to the one in Torgersen but also names as defendants AEA and a number of its affiliated entities. In September 2020, the court consolidated the Torgersen and Hyams cases under the caption In re Evoqua Water Technologies Corp. Derivative Litigation (the “Derivative Litigation”). The Derivative Litigation was stayed in June 2019 pending resolution of the Securities Litigation.
In February 2020, yet another purported shareholder of the Company sent a letter to the board of directors demanding that it investigate and bring claims against various directors and officers for the same matters that were already the subject of the Securities Litigation and the Derivative Litigation. Although no lawsuit described above.was filed by this purported shareholder, the shareholder agreed to stay matters on terms similar to what was agreed in the Derivative Litigation.
On July 28, 2021, following mediation, the parties signed an agreement, subject to Court approval, to settle the Derivative Litigation and the stockholder demand for non-cash consideration, including certain enhancements to corporate governance practices and internal procedures. On November 2, 2021, the Court granted final approval of the settlement and entered a judgment dismissing the Derivative Litigation.
In October 2020, the Company learned that the SEC and the United States Attorney’s Office for the District of Massachusetts are investigating whether financial misstatements were made in the Company’s public filings and earnings announcements prior to October 2018, similar to what is alleged in the Securities Litigation. The Company is cooperating with those investigations. Although the Company is unable to predict the outcome or reasonably estimate any potential loss, we currently believe that this matter will not have a material adverse effect on our business, financial condition, results of operations or prospects.
Item 4. Mine Safety Disclosures
None.
Part II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
The Company’s common stock began tradingis traded on the NYSENew York Stock Exchange under the symbol “AQUA” on November 2, 2017. Before then, there was no public market for the Company’s common stock.“AQUA.”
After underwriting discounts and commissions and expenses, we received net proceeds from our initial public offering of approximately $137.6 million. We used a portion of the net proceeds from our initial public offering to repay approximately $104.9 million of indebtedness (including accrued and unpaid interest) under our senior secured first lien term loan facility and we used the remainder for general corporate purposes.
As of October 31, 2019,2021, there were 32540 holders of record of the Company’s common stock, which does not reflect thoseindividual holders of shares held beneficially or those shares held in “street” name. Accordingly, the number of beneficial owners of our common stock exceeds this number.
Dividend Policy
No dividends were paid to shareholders during the fiscal years ended September 30, 2019, 20182021, 2020 or 2017.2019. The Company currently intends to retain all of its future earnings, if any, to finance operations, development and growth of its business and repay indebtedness. Most of the Company’s indebtedness contains restrictions on the Company’s activities, including paying dividends on its capital stock. See Note 11,12, “Debt” in Part II, Item 8 of this Annual Report on Form 10-K. Any future determination relating to our dividend policy will be made at the discretion of the Company’s board of directors and will depend on a number of factors, including future earnings, capital requirements, financial and market conditions, future prospects, contractual restrictions and covenants and other factors that the board of directors may deem relevant.
Unregistered Sales of Equity Securities and Use of Proceeds
In the year ended September 30, 2019, we issued 352,727 shares of our common stock to certain employees upon the exercise of stock options pursuant to the Stock Option Plan, which amount gives effect to the net exercise by certain of such employees of a portion of their vested options to cover exercise price and applicable tax withholding obligations.These issuances were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and/or Rule 701 promulgated thereunder. The securities were issued directly by the registrant and did not involve a public offering or general solicitation.None.
Stock Performance Graph
The following graph shows a comparison of cumulative total return to holders of shares of Evoqua’s common stock against the cumulative total return of the S&P Mid Cap 400 Index and the S&P Mid Cap 400 / Utility Index, which the Company selected as comparator indices for fiscal 2021, as well the S&P Small Cap 600 Index and the S&P Small Cap 600 / Utilities Index, which the Company used as comparator indices for fiscal 2020, from market close on November 2, 2017 (the first day of trading of our common stock) through September 30, 2019.2021. The Company changed its comparator indices for fiscal 2021 to select indices that include companies whose equity securities are of comparable market capitalization, given the increase in the Company’s market capitalization as compared to fiscal 2020. The comparison of the cumulative total returns for each investment assumes that $100 was invested in Evoqua common stock and the respective indices on November 2, 2017 through September 30, 2019,2021, including reinvestment of any dividends (although no dividends have been declared on our common stock to date). Historical share price performance should not be relied upon as an indication of future share price performance, and we do not make or endorse any predications as to future shareholder returns.
This performance graph and related information shall not be deemed “soliciting material”or to be deemed “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities under that Section,section, and shall not be deemed to be incorporated by reference into any future filing under the Securities Act or Exchange Act, except to the extent that we specifically incorporate it by reference into such filing.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 11/2/2017 | | 9/30/2018 | | 9/30/2019 | | 9/30/2020 | | 9/30/2021 |
AQUA | $ | 100 | | | $ | 85 | | | $ | 82 | | | $ | 102 | | | $ | 180 | |
S&P Small Cap 600 | $ | 100 | | | $ | 117 | | | $ | 105 | | | $ | 94 | | | $ | 147 | |
S&P Small Cap 600 / Utilities | $ | 100 | | | $ | 100 | | | $ | 113 | | | $ | 85 | | | $ | 102 | |
S&P Mid Cap 400 | $ | 100 | | | $ | 110 | | | $ | 106 | | | $ | 102 | | | $ | 144 | |
S&P Mid Cap 400 / Utilities | $ | 100 | | | $ | 103 | | | $ | 117 | | | $ | 84 | | | $ | 99 | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 11/2/2017 | | 9/30/2018 | | 12/31/2018 | | 3/31/2019 | | 6/30/2019 | | 9/30/2019 |
AQUA | $ | 100 |
| | $ | 85 |
| | $ | 46 |
| | $ | 60 |
| | $ | 68 |
| | $ | 82 |
|
S&P Small Cap 600 | $ | 100 |
| | $ | 117 |
| | $ | 93 |
| | $ | 104 |
| | $ | 105 |
| | $ | 105 |
|
S&P Small Cap 600 / Utilities | $ | 100 |
| | $ | 100 |
| | $ | 94 |
| | $ | 102 |
| | $ | 107 |
| | $ | 113 |
|
Item 6. Selected Financial Data
Our selected historical Consolidated Balance Sheet data presented below as of September 30, 2019 and 2018 and our selected historical Consolidated Statements of Operations and cash flow data presented below for each of the years ended September 30, 2019, 2018, 2017, 2016 and 2015 has been derived from our audited Consolidated Financial Statements. Our selected historical Consolidated Balance Sheet data presented below as of September 30, 2015, 2016 and 2017 has been derived from our audited Consolidated Financial Statements not included in this Annual Report on Form 10-K.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. The selected historical consolidated financial data presented below should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements and related notes thereto contained in Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.[Reserved]
|
| | | | | | | | | | | | | | | | | | | |
(In millions, except per share amounts) | Year Ended September 30, |
| 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
Statement of Operations Data: | | | | | | | | | |
Revenue from product sales and services | $ | 1,444.4 |
| | $ | 1,339.5 |
| | $ | 1,247.4 |
| | $ | 1,137.2 |
| | $ | 1,061.0 |
|
Gross profit | 426.0 |
| | 404.7 |
| | 399.7 |
| | 333.1 |
| | 292.4 |
|
Total operating expenses | (371.3 | ) | | (345.7 | ) | | (332.0 | ) | | (302.9 | ) | | (298.0 | ) |
Net (loss) income | (8.5 | ) | | 7.9 |
| | 6.4 |
| | 13.0 |
| | (86.0 | ) |
Net (loss) income attributable to the Company | $ | (9.5 | ) | | $ | 6.1 |
| | $ | 2.2 |
| | $ | 11.6 |
| | $ | (86.0 | ) |
(Loss) income per share | | | | | | | | | |
Basic | $ | (0.08 | ) | | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.11 |
| | $ | (0.85 | ) |
Diluted | $ | (0.08 | ) | | $ | 0.05 |
| | $ | 0.02 |
| | $ | 0.11 |
| | $ | (0.85 | ) |
Cash Flow Data: | | | | | | | | | |
Net cash provided by operating activities | $ | 125.2 |
| | $ | 81.0 |
| | $ | 28.5 |
| | $ | 31.9 |
| | $ | 41.9 |
|
Net cash used in investing activities | $ | (94.5 | ) | | $ | (207.0 | ) | | $ | (134.9 | ) | | $ | (344.6 | ) | | $ | (46.9 | ) |
Net cash provided by (used in) financing activities | $ | 5.7 |
| | $ | 150.6 |
| | $ | 114.5 |
| | $ | 191.4 |
| | $ | (6.3 | ) |
Balance Sheet Data (as of end of period): |
Cash and cash equivalents | $ | 109.9 |
| | $ | 82.4 |
| | $ | 59.3 |
| | $ | 50.4 |
| | $ | 169.0 |
|
Total assets | $ | 1,737.8 |
| | $ | 1,663.6 |
| | $ | 1,473.3 |
| | $ | 1,296.2 |
| | $ | 1,039.9 |
|
Total debt (including current portion) | $ | 965.0 |
| | $ | 939.6 |
| | $ | 889.8 |
| | $ | 758.2 |
| | $ | 552.1 |
|
Item 7. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with Item 6, “Selected Financial and Operating Data” andPart II, Item 8, “Financial Statements and Supplementary Data,” of this Annual Report on Form 10-K.Report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from such forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those identified below and those discussed in the section titled “Cautionary Note Regarding Forward-Looking Statements” and in Part I, Item 1A, “Risk Factors” in this Annual Report on Form 10-K.Report. 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”“our,” and similar terms refer to Evoqua Water Technologies Corp., together with its consolidated subsidiaries. Unless otherwise specified, all dollar amounts in this section are referred to in millions. Our fiscal year ends on September 30 of each year and references in this section to a year refer to our fiscal year. As such, references to: 2021 relates to the fiscal year ended September 30, 2021, 2020 relates to the fiscal year ended September 30, 2020, and 2019 relates to the fiscal year ended September 30, 2019, 2018 relates to the fiscal year ended September 30, 2018 and 2017 relates to the fiscal year ended September 30, 2017.2019.
Overview and Background
We are a leading provider of mission criticalmission-critical water and wastewater treatment solutions, offering a broad portfolio of products, services, systems and technologiesexpertise to support our customers’ full water lifecycle needs. With over 200,000 installations worldwide, we hold leading positionscustomers across various end markets. We are headquartered in the industrial, commercial and municipal water treatment markets in North America.Pittsburgh, Pennsylvania, with locations across 10 countries. We offerhave a comprehensive portfolio of differentiated, proprietary technology solutions soldtechnologies offered under a number of market‑leading and well‑established brands to our global customer base. We have worked to protectbrands. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through 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 rangeaddition of their water treatment needs, and maintaining our reputation is critical to the success of our business.chemicals.
Our solutions are designed to ensure thatprovide our customers havewith the quantity and quality of water that meetsnecessary to meet their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations and supportwhile supporting their regulatory compliance and environmental sustainability.sustainability requirements. We deliver and maintain these mission critical solutions through the largestour extensive North American service network, in North America, assuring our customers continuous uptime with 9791 service branches as of September 30, 2019.2021. We have an extensive service and support network, and as a result, a certified Evoqua Service Technician is no more thanTechnicians within approximately a two hourtwo-hour drive from more than 90% of our industrial North American customers’ sites. In addition, we sell our products and technologies internationally through direct and indirect sales channels. We have worked to protect water, the environment, and our employees for more than 100 years. As a result, we have earned a reputation for quality, safety, and reliability around the world. Our employees are united by a common purpose: Transforming water. Enriching life.®
Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers, sustainable, and performance” foster a corporate culture that is focused on establishing a workforce that is enabled, empowered and accountable, which createscreating 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 1,400 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
For the year ended September 30, 2019, we servedserve our customers through the following two segments:
•Integrated Solutions and Services a group entirely focused on engaging directly withsegment, which provides application-specific solutions and full lifecycle services for critical water and wastewater applications across numerous end users,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 group focused on developing product platforms to be sold primarily through third party channels. 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 ourthese 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 life‑cycle services including on‑demand water, outsourced water (formerly known as build-own-operated), recycle and reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance.
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 net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization (“EBITDA”) on a segment basis. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and other unallocated charges, which have not been allocated to business segments. As such, the segment results provided herein may not be comparable to other companies. In addition, our chief operating decision maker uses Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments. Adjusted EBITDA of the reportable segments does not include certain unallocated charges that are presented within Corporate activities. These unallocated 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.
For the years ended September 30, 2019, 20182021 and 2017,2020, our segments accounted for the following percentage of our revenues:revenue:
| | | | | | | | | | | | | |
| 2021 | | 2020 | | |
Integrated Solutions and Services segment | 65.5 | % | | 66.1 | % | | |
Applied Product Technologies segment | 34.5 | % | | 33.9 | % | | |
|
| | | | | | | | |
| 2019 | | 2018 | | 2017 |
Integrated Solutions and Services segment | 63.1 | % | | 62.4 | % | | 59.7 | % |
Applied Product Technologies segment | 36.9 | % | | 37.6 | % | | 40.3 | % |
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, non‑discretionary market that is growing in importance as access to clean water has become an international priority. Underpinning this growth are a number of global, long‑term 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 wide‑range of goods spanning from consumer electronics to automobiles.
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 end‑markets and underpenetrated regions, including by investing in our sales force and cross‑selling to existing customers. We believe we are uniquely positioned to further penetrate our core markets, with over 200,000 installations across over 38,000 global customers. We maintain a customer‑intimate business model with strong brand value and provide solutions‑focused 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 internet‑connected 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 water‑related 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.
Product and Technology Development
We develop our technologies through in‑house research, development and engineering and targeted tuck‑in, vertical market and geography‑expanding, technology-enhancing acquistions. We have a reservoir of recently launched technologies and a strong pipeline of new offerings designed to provide customers with innovative, value‑enhancing solutions. Furthermore, since April 2016, we have successfully completed thirteen acquisitions that expand 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 third‑party 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 best‑in‑class 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. Effective October 1, 2018, we restructured our business into two reportable operating segments, which we expect to result in cost savings in the range of $15 million to $20 million on an annualized basis once fully implemented. 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 leadtimes, 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 in our footprint and facilities, we believe we have capacity to support our planned growth without commensurate increase in fixed costs.
Acquisitions
We believe that capex-like, tuck‑in acquisitions present a key opportunity within our overall growth strategy, which we will continue to evaluate strategically. These strategic acquisitions will enable us to accelerate our growth by extending the critical mass in existing markets as well as expand in new geographies and new end market verticals. Our existing customer relationships, best‑in‑class 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 that expand our vertical markets and geographic reach and enhance our technologies, with purchase prices ranging from approximately $2.0 million to approximately $283.7 million, and pre‑acquisition revenues ranging from approximately $3.1 million to approximately $55.7 million.
During the year ended September 30, 2019, we acquired all of the issued and outstanding equity securities of ATG UV Technology Limited (“ATG UV”). See Note 3, “Acquisitions and Divestitures,” in Item 8 in this Annual Report on Form 10-K for a complete discussion of this acquisition. During the year ended September 30, 2018, we acquired substantially all of the assets of Le Groupe IsH20Top Inc. (“Isotope”) and Pure Water Solutions, LLC (“Pure Water”) and all of the issued and outstanding equity securities of ProAct Services Corporation (“ProAct”) and Pacific Ozone Technology, Inc. (“Pacific Ozone”). During the year ended September 30, 2017, we acquired all of the issued and outstanding equity securities of Olson Irrigation Systems (“Olson”) and ADI Systems North America Inc., Geomembrane Technologies Inc. and Lange Containment Systems, Inc. (collectively, “ADI”) from ADI Group Inc., and substantially all of the assets of Noble Water Technologies, Inc. (“Noble”) and Environmental Treatment Systems Inc. (“ETS”).
We will 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.
Recent Developments, Key Factors, and Trends Affecting Our Business and Financial Statements
Various trends and other factors affect orThe following recent developments have affected our business and operating results including:during the year ended September 30, 2021:
Overall economic trends. The overall economic environmentImpact of the COVID-19 pandemic. Our business has been considered essential under federal and related changeslocal standards, and we have maintained business continuity at our critical service branches and manufacturing facilities to date. We have taken measures throughout the duration of the pandemic to protect our employees, including implementation of remote working practices where possible and enhanced safety procedures for employees on site at our facilities and our customers’ facilities. These measures have resulted in industrial, commercialadditional incremental costs and municipal spending impact our business. In general, positive conditionsreductions in service productivity over the broader economy promote industrial, commercial and municipal customer spending, while economic weakness results incourse of the pandemic, although neither had a reduction of new industrial, commercial and municipal project activity. Macroeconomic factors that can affect customer spending patterns, and therebymaterial adverse effect on our results of operations include population growth, total water consumption, municipal budgets, employment rates,for fiscal 2021.
To date, the pandemic has negatively impacted sales volume across our business, conditions,due primarily to customer site access restrictions, temporary customer site closures, and temporary delays in annual maintenance activities by customers in certain end markets, although we started to see sales volume rebound in certain end markets during the availabilitysecond half of credit or capital, interest rates, tax rates, imposition of tariffs and regulatory changes. Sincefiscal 2021, as further discussed below in the businessesdiscussion of our results of operations. The implementation of vaccine mandates in fiscal 2022 may further increase costs and delay our performance of services for our customers varyor our internal business operations due to customer site access restrictions and labor shortages. Additionally, in cyclicality, periodic downturnsthe second half of fiscal 2021 we experienced increases in certain discretionary costs that were the subject of cost reduction actions earlier in the pandemic, particularly employee travel expenses. We have continued to focus on collecting outstanding customer account balances, and, through September 30, 2021, we have not experienced any specific sector typically have modest impactsdeterioration in collections from our customers. We continue to evaluate the impact of the pandemic on our overall business.
Changesbusiness and the potential effects of recent spikes in costs and availability. We have significant exposures toCOVID-19 cases in certain commodities,regions, as well as challenges created by the macroeconomic conditions associated with the reopening of global economies, including steel, caustic, carbon, calcium nitrate and iridium, and volatility in the market priceinflation and availability constraints, which are discussed in more detail below.
For more information regarding factors and events that may impact our business, results of these commodity input materialsoperations and financial condition from the effects of the COVID-19 pandemic, see Part I, Item 1A. “Risk Factors-The COVID-19 pandemic has a direct impact onadversely affected, and may continue to adversely affect, our business, financial condition, results of operations and prospects.”
Inflation and material availability. Material, freight, and labor inflation resulted in increased costs in fiscal 2021, and our business. For example, the U.S. government and other governments have recently imposed greater restrictions on international trade, including tariffs and/or other trade restraints on certain materials. These restrictions, particularly those related to China, have increased and could further increase the cost of our products and have restricted and could further restrict availability of certain commodities, which may resultwe expect this trend will continue in delays in our execution of projects.fiscal 2022. Although we have offset a portion of these cost increasesincreased costs through price increases and operational efficiencies to date, there can be no assurance that we will be able to continue to recuperate additional cost increases from our customers through further product price increases.do so. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross profit and gross margin. Further, additional potential acquisitionsmargin in future periods. Additionally, supply chain disruptions and international expansion will place increased demands onlabor shortages have restricted and could further restrict availability of certain commodities and materials, which may result in delays in our operational, managerial, administrativeexecution of projects in fiscal 2022 and other resources. Managing our growth effectively will require us tonegatively impact revenues. We have taken and 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 passedtake strategic actions focused on to customers.
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 large capital water treatment projects, systems and solutions for industrial, commercial and municipal applications are generally fixed‑price 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 water‑related 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 reflectmitigating the impact of our ongoing investments to support our growth. Wethese challenges. Although these factors did not 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 twenty‑year 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 economic decline.
Exchange rates. The reporting currency for our 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 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 Consolidated Financial Statements, even if their value has not changed in the functional currency. While we believe we are not susceptible to any material impactadverse effect on our results of operations caused by fluctuations in exchange rates because our operations are primarily conducted in the U.S.,for fiscal 2021, 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 currenciessustained, they could have a significant impactmaterial adverse effect on our results of operations.operations going forward.
Public company costs. AsAcquisitions and divestitures. On April 1, 2021, we acquired the assets of Water Consulting Specialists, Inc. (“WCSI”) for $12.0 million cash paid at closing. In addition, we recorded a liability of $0.8 million at closing associated with an earn-out related to the WCSI acquisition, which was subsequently revalued to $0.2 million and is included in Accrued
expenses and other liabilities on the Consolidated Balance Sheets. During the year ended September 30, 2021, we received cash of $21 thousand from the seller as a result of our initial public offeringnet working capital adjustments. WCSI is a leader in the design, manufacturing, and service of industrial high-purity water treatment systems. The acquisition strengthens the Company’s portfolio of high-purity water treatment systems and provides the opportunity to further expand its digitally enabled solutions and services in key industrial markets. WCSI is a part of the Integrated Solutions and Services segment. During the year ended September 30, 2021, the Company incurred approximately $0.1 million in acquisition costs, which are included in General and administrative expense on the Consolidated Statements of Operations.
On March 1, 2021, we completed the divestiture of the Lange containment system, geomembrane, and geosynthetic liner product line (the “Lange Product Line”) for $0.9 million in cash at closing. The Lange Product Line was a part of the Integrated Solutions and Services segment. During the year ended September 30, 2021, the Company recognized a loss of $0.2 million on the divestiture.
On December 17, 2020, we acquired the industrial water business of Ultrapure & Industrial Services, LLC (“IPO”Ultrapure”) for $8.7 million cash paid at closing. On April 1, 2021, we paid an additional $0.3 million as a result of net working capital adjustments. Ultrapure, based out of Texas, provides customers across multiple end markets with a variety of water treatment products and services, including service deionization, reverse osmosis, UV, and ozonation. Ultrapure will strengthen the Company’s service capabilities in the Houston and Dallas markets and is a part of the Integrated Solutions and Services segment. During the year ended September 30, 2021, the Company incurred approximately $0.2 million in acquisition costs, which are included in General and administrative expense on the Consolidated Statements of Operations.
On September 3, 2020, the Company acquired the assets of privately held Aquapure Technologies of Cincinnati (“Aquapure”), a Hamilton, Ohio based water service and equipment company. Aquapure serves the commercial and light industrial markets and provides customers with a variety of water treatment products and services, including deionization, reverse osmosis, softeners, and filtration systems. Aquapure is part of the Integrated Solutions and Services segment.
On December 31, 2019, we now incur additional legal, accounting and other expenses that we did not previously incur, including costs associated with SEC reporting and corporate governance requirements. These requirements include compliance withcompleted the Sarbanes‑Oxley Act as well as other rules implemented bysale of the SEC andMemcor ® product line to DuPont de Nemours, Inc. (Memcor ® is a trademark of Rohm & Haas Electronic Materials Singapore Pte. Ltd.). The Company recognized a $57.7 million net pre-tax benefit on the NYSE. Our financial statements following our IPO reflectsale of the impactMemcor product line, net of these expenses. In addition, the one‑time grant$8.3 million of stock‑settled restricted stock unit awards madediscretionary compensation payments to employees in connection with the IPO to certain members of management resultedtransaction and $2.1 million in increased non‑cash share‑based compensation expense, which will be incremental to our ongoing stock‑based compensation expense. This stock‑based compensation was expensed beginningtransaction costs incurred in the first fiscal quarter of fiscal 2018 and continued overyear ended September 30, 2020.
On October 1, 2019, we acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”), which included an agreement to acquire the following eight fiscal quarters.
Debt refinancings. On December 20, 2017, certain subsidiariesremaining 40% interest in Frontier on or prior to March 30, 2024. This agreement gave holders of the remaining 40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately 10% of the outstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners between January 1, 2021 and February 28, 2021 (the “Option”). The Minority Owners exercised the Option, and on April 8, 2021, the Company entered into Amendment No. 5completed the purchase of an additional 8% of the outstanding equity in Frontier for approximately $1.5 million. As a result, the Company’s ownership position in Frontier increased to 68%. During the year ended September 30, 2021, the Company recorded an increase in the fair value of the Purchase Right liability for $2.1 million, which was recorded to Interest expense on the Consolidated Statements of Operations. As of September 30, 2021, $8.3 million is included in Other non‑current liabilities related to the Purchase Right on the Consolidated Balance Sheets.
Debt refinancing.On April 1, 2021, we completed the refinancing of the term loan (the “Fifth Amendment”“2014 Term Loan”) outstanding under our First Lien Credit Agreement dated January 15, 2014 (as modified, amended or supplemented from time to time, the “2014 Credit Agreement”), among EWT Holdings III asCorp. (“EWT III”), EWT Holdings II Corp. (“EWT II”), the borrower, certain other subsidiaries of the Company,lenders party thereto and Credit Suisse AG as administrative agent and collateral agent, relating to the First Lien Credit Agreement. Proceeds of the Fifth Amendment were used to refinance approximately $796.6 million of the then-existing term loans.
In connection with the closing of the ProAct acquisition on July 26, 2018,agent. On April 1, 2021, EWT III entered into Amendment No. 6a Credit Agreement (the “Sixth Amendment”“2021 Credit Agreement”) among EWT III, as borrower, EWT II, as parent guarantor, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and ING Capital, LLC, as sustainability coordinator, which provides for (i) a senior secured term loan facility relating to a term loan (the “2021 Term Loan”) in the First Lienamount of $475.0 million maturing on April 1, 2028, and
(ii) a multi-currency senior secured revolving credit facility in an aggregate principal amount not to exceed the U.S. dollar equivalent of $350.0 million (the “2021 Revolving Credit Agreement. Pursuant to the Sixth Amendment,Facility”) maturing on April 1, 2026.
On April 1, 2021, Evoqua Finance LLC (“Evoqua Finance”) entered into an accounts receivable securitization program (the “Receivables Securitization Program”) consisting of, among other things, agreements, (i) a Receivables Financing Agreement (the “Receivables Financing Agreement”) among Evoqua Finance, as the borrower, the lenders from time to time party thereto (the “Receivables Financing Lenders”), PNC Bank, National Association (“PNC Bank”), as administrative agent, Evoqua Water Technologies LLC (“EWT III borrowedLLC”), an additionalindirect wholly-owned subsidiary of the Company, as initial servicer, and PNC Capital Markets LLC (“PNC Markets”), as structuring agent, pursuant to which the lenders have made available to Evoqua Finance a receivables finance facility (the “Securitization Facility”) in an amount up to $150.0 million in incremental term loans,maturing on April 1, 2024, and all(ii) a Sale and Contribution Agreement (the “Sale Agreement”) among Evoqua Finance, as purchaser, EWT LLC, as initial servicer and as an originator, and Neptune Benson, Inc., an indirectly wholly-owned subsidiary of the Company, as an originator (together with EWT LLC, the “Originators”).
On April 1, 2021, we borrowed $475.0 million under the 2021 Term Loan, $105.0 million under the 2021 Revolving Credit Facility and $142.2 million under the Securitization Facility. The net proceeds of these facilities, together with cash on hand, were used to repay all outstanding indebtedness under our 2014 Credit Agreement, in an aggregate principal amount of approximately $814.5 million. The reduction in the outstanding principal amount of our term loan of approximately $340.0 million was funded by draws on the 2021 Revolving Credit Facility, the Securitization Facility and $100.0 million of cash on hand. In addition to extending the maturities of our term loan and previous revolving credit lenders whose revolving credit loans were scheduled to mature on January 15, 2019 agreed to convert 100% of their commitments into revolving credit loans that will mature on December 20, 2022. Principalfacility, the refinancing reduced our weighted average cash borrowing cost and interest under the term loans outstanding under the First Lien Credit Agreement are payable in quarterly installments, with quarterly principal repayments of $2.4 million, and the balance due at maturity on December 20, 2024. The other terms of the First Lien Credit Agreement, including rates, remain generally the same.improved liquidity. See “Liquidity and Capital Resources” below.below for additional information. On September 30, 2021, the Company had $473.8 million outstanding under the 2021 Term Loan, $37.3 million outstanding on the 2021 Revolving Credit Facility, and $150.1 million outstanding under the Securitization Facility, which includes $0.1 million of accrued interest.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our consolidated business are revenue, gross profit, gross margin, operating expenses,and net income (loss). Management utilizes these financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) when reviewing the Company’s performance and Adjusted EBITDA.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 sales arerevenue is a function of sales volumes and selling prices, eachprices. We report revenue by segment and by source which includes revenue from product sales (capital projects and aftermarket) and revenue from service. Revenue is used by management to evaluate the performance of our business. Organic revenue, which is a functionnon-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 mix of product and service sales, and consist primarily of:
acquisition or divestiture. Divestitures include 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 and municipalities 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, end‑user, engineering firm and integrator customers in allinsignificant portions 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 profitbusiness that did not meet the criteria for classification as a percentagediscontinued operation. We exclude the effect of our combined productforeign currency translation from organic sales because foreign currency translation is not under management’s control, is subject to volatility and services revenue.
Costcan obscure underlying business trends. We exclude the effect of product sales consistsacquisitions and divestitures because they can obscure underlying business trends and make comparisons of all manufacturing costs required to bring a product to a ready for sale condition, including directlong-term performance difficult between the Company 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 the following:
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 increaseits peers due to the anticipatedvarying 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 businessrevenue performance with prior and related infrastructure as well as legal, accounting, insurance, investor relationsfuture periods and other costs associated with beingto our peers. See “Non-GAAP Reconciliations” in this Item 7 for a public company.reconciliation of organic revenue to revenue.
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 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. R&D expenditures are concentrated in our products businesses.
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 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, purchase accounting adjustment costs, non-cash share-based compensation, sponsor fees, transaction costs, and other gains, losses, and expenses.expenses that we believe do not directly reflect our underlying business operations. We present Adjustedadjusted EBITDA which is not a recognized financial measure under accounting
principles generally accepted in the United States (“GAAP”), because we believe it is frequently used by analysts, investors, and other interested parties to evaluate and compare operating performance and value companies inwithin our industry. Further, we believe it is helpful in highlighting trends in our operating results because it excludesand provides greater clarity and comparability period over period to management and our investors regarding the resultsoperational impact of decisions that are outside the control of management, while other measures can differ significantly depending on long‑termlong-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 Adjustedadjusted 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 Adjustedadjusted EBITDA;
•in certain calculations under our senior secured credit facilities, which use components of Adjusted EBITDA.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 Adjustedadjusted EBITDA of each reportable operating segment to evaluate the operating performance of such segments. Adjusted EBITDA on a segment basis is defined as earnings before depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. Adjusted EBITDA of the reportable operating segments doesdo not include certain unallocated charges that are presented within Corporatecorporate activities. These unallocated 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 recognition of backlog intangible assets recorded in purchase accounting)costs) and share-based compensation charges.
Adjusted EBITDA should not be considered a substitute for, or superior to, financial measures prepared in accordance with GAAP. The financial results prepared in accordance with GAAP and the reconciliations from these results should be carefully evaluated. See “Non-GAAP Reconciliations” in this Item 7 for a reconciliation of adjusted EBITDA to net income. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjustedadjusted EBITDA, you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of Adjustedadjusted EBITDA. Our presentation of Adjustedadjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non‑recurringnon-recurring items. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
industries may calculate adjusted EBITDA differently.
Basis of Presentation
The following isdiscussion that follows includes a reconciliationcomparison of our Net (loss) income to Adjusted EBITDA:
|
| | | | | | | | | | | |
| Year Ended September 30, |
(In millions) | 2019 | | 2018 | | 2017 |
Net (loss) income | $ | (8.5 | ) | | $ | 7.9 |
| | $ | 6.4 |
|
Income tax expense | 9.6 |
| | 1.4 |
| | 7.4 |
|
Interest expense | 58.6 |
| | 57.5 |
| | 55.4 |
|
Operating profit | 59.7 |
| | 66.8 |
| | 69.2 |
|
Depreciation and amortization | 98.2 |
| | 85.9 |
| | 77.9 |
|
EBITDA | 157.9 |
| | 152.7 |
| | 147.1 |
|
Restructuring and related business transformation costs (a) | 24.2 |
| | 34.4 |
| | 51.3 |
|
Purchase accounting adjustment costs (b) | — |
| | — |
| | 0.2 |
|
Share-based compensation (c) | 20.0 |
| | 15.8 |
| | 2.3 |
|
Sponsor fees (d) | — |
| | 0.3 |
| | 4.2 |
|
Transaction costs (e) | 11.6 |
| | 7.6 |
| | 7.3 |
|
Other (gains) losses and expenses (f) | 21.3 |
| | 6.1 |
| | (4.7 | ) |
Adjusted EBITDA | $ | 235.0 |
| | $ | 216.9 |
| | $ | 207.7 |
|
| |
(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 periodsresults of timeoperations and in some cases it is reasonably possible that they could reoccur in future periods based on reorganizationsliquidity and capital resources for the fiscal years ended September 30, 2021 and 2020. For a discussion 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) | costs related to our voluntary separation plan pursuant to which approximately 220 employees accepted separation packages; |
| |
(B) | amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure; and |
| |
(C) | 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; |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Voluntary separation plan(1) | $ | — |
| | $ | 0.3 |
| | $ | 20.1 |
|
Various other initiatives(2) | $ | 1.4 |
| | $ | 9.0 |
| | $ | 13.1 |
|
Cost of product sales and services ("Cost of sales") | 0.8 |
| | 2.8 |
| | 8.2 |
|
R&D expense | — |
| | 0.6 |
| | — |
|
S&M expense | — |
| | 0.7 |
| | 1.6 |
|
G&A expense | 0.6 |
| | 4.7 |
| | 3.3 |
|
Other operating (income) expense | — |
| | 0.2 |
| | — |
|
Two-segment restructuring(3) | $ | 11.9 |
| | $ | — |
| | $ | — |
|
Cost of sales | 5.2 |
| | — |
| | — |
|
R&D expense | 0.1 |
| | — |
| | — |
|
S&M expense | 1.1 |
| | — |
| | — |
|
G&A expense | 5.5 |
| | — |
| | — |
|
Total | $ | 13.3 |
| | $ | 9.3 |
| | $ | 33.2 |
|
| |
(1)
| all of which is reflected as a component of Restructuring charges in Note 14, “Restructuring and Related Charges” in Part II, Item 8 of this Annual Report on Form 10-K (the “Restructuring Footnote”). |
| |
(2)
| all of which is reflected in the Restructuring Footnote in 2019 and 2018 and of which $12.3 million is reflected in the Restructuring Footnote in 2017. |
| |
(3)
| of which $11.1 million is reflected in the Restructuring Footnote in 2019. |
| |
(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: |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Cost of sales | $ | 0.8 |
| | $ | 3.0 |
| | $ | 0.4 |
|
G&A expense | 0.8 |
| | 1.3 |
| | 2.1 |
|
Total | $ | 1.6 |
| | $ | 4.3 |
| | $ | 2.5 |
|
| |
(iii) | expenses associated with our information technology and functional infrastructure transformation subsequent to the AEA Acquisition, including activities to optimize information technology systems and functional infrastructure processes. This includes: |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Cost of sales | $ | 0.7 |
| | $ | 4.2 |
| | $ | 3.3 |
|
S&M expense | — |
| | — |
| | 1.5 |
|
G&A expense | 8.4 |
| | 10.5 |
| | 2.5 |
|
Other operating (income) expense | — |
| | 0.3 |
| | — |
|
Total | $ | 9.1 |
| | $ | 15.0 |
| | $ | 7.3 |
|
| |
(iv) | costs associated with our IPO and secondary offering as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs. This includes: |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
G&A expense | $ | 0.2 |
| | $ | 5.8 |
| | $ | 8.3 |
|
Total | $ | 0.2 |
| | $ | 5.8 |
| | $ | 8.3 |
|
| |
(b) | Purchase accounting adjustment costs |
Adjusted EBITDA is calculated prior to considering certain significant purchase accounting impacts resulting from business combination and net asset acquisitions. These impacts primarily include the incremental charge to cost of saleschanges from the salefiscal year ended September 30, 2020 to the fiscal year ended September 30, 2019, refer to Management’s Discussion and Analysis of acquired inventory that was written up to fair value. For the periods presented, adjustments represent the effectFinancial Condition and Results of the step-up in value of inventory recognized in cost of sales as a result of the acquisition of Magneto.
| |
(c) | Share-based compensation |
Adjusted EBITDA is calculated prior to considering non‑cash share‑based compensation expenses related to equity awards. See Note 17, “Share-Based Compensation”Operation in Part II,
Item 87 of
thisour Annual Report on Form 10-K for
further detail.Adjusted EBITDA is calculated prior to considering management fees paid to AEA pursuant to a management agreement. Prior to our IPO, AEA provided advisory and consulting services to us, including investment banking, due diligence, financial advisory and valuation services. AEA also provided ongoing advisory and consulting services to us pursuant to the management agreement. In connection with our IPO, the management agreement was terminated. See Noteyear ended September 30, 2020 (filed November 20, “Related-Party Transactions” in Part II, Item 8 of this Annual Report on Form 10-K for further detail.
| |
(e) | 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:2020).
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Cost of sales | $ | 3.2 |
| | $ | 0.5 |
| | $ | — |
|
G&A expense | 8.4 |
| | 7.1 |
| | 7.3 |
|
Total | $ | 11.6 |
| | $ | 7.6 |
| | $ | 7.3 |
|
| |
(f) | 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 pact related to headquarter allocations; |
| |
(iii) | expenses on disposal related to maintaining non‑operational 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 for which the Company is seeking restitution; |
| |
(v) | charges incurred by the Company related to product rationalization in its electro-chlorination business; |
| |
(vi) | gain on the sale of property and gain on the sale of assets related to the disposition of land at our Windsor, Australia location; and |
| |
(vii) | expenses incurred by the Company related to the write-off of obsolete inventory as part of the migration of an operational business unit to a new enterprise reporting (“ERP”) system, all reflected as a component of Cost of sales). |
Other adjustments include the following (gains), losses and expenses for the periods presented below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2019 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | Total |
Cost of sales | $ | 0.4 |
| | $ | — |
| | $ | 0.3 |
| | $ | 2.1 |
| | $ | 4.1 |
| | $ | — |
| | $ | 5.0 |
| | $ | 11.9 |
|
R&D expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
S&M expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
G&A expense | 10.1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 10.1 |
|
Other operating (income) expense | — |
| | — |
| | (0.3 | ) | | — |
| | — |
| | (0.4 | ) | | — |
| | (0.7 | ) |
Total | $ | 10.5 |
| | $ | — |
| | $ | — |
| | $ | 2.1 |
| | $ | 4.1 |
| | $ | (0.4 | ) | | $ | 5.0 |
| | $ | 21.3 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2018 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | Total |
Cost of sales | $ | 0.7 |
| | $ | — |
| | $ | 1.0 |
| | $ | 3.9 |
| | $ | — |
| | $ | 0.1 |
| | $ | 2.1 |
| | $ | 7.8 |
|
R&D expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
S&M expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
G&A expense | 7.3 |
| | (0.5 | ) | | — |
| | — |
| | — |
| | — |
| | 0.5 |
| | 7.3 |
|
Other operating (income) expense | (2.1 | ) | | — |
| | — |
| | — |
| | — |
| | (6.9 | ) | | — |
| | (9.0 | ) |
Total | $ | 5.9 |
| | $ | (0.5 | ) | | $ | 1.0 |
| | $ | 3.9 |
| | $ | — |
| | $ | (6.8 | ) | | $ | 2.6 |
| | $ | 6.1 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2017 |
| Other Adjustments |
| (i) | | (ii) | | (iii) | | (iv) | | (v) | | (vi) | | (vii) | | Total |
Cost of sales | (1.8 | ) | | 4.4 |
| | (0.3 | ) | | — |
| | — |
| | — |
| | — |
| | 2.3 |
|
R&D expense | — |
| | — |
| | 0.2 |
| | — |
| | — |
| | — |
| | — |
| | 0.2 |
|
S&M expense | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
G&A expense | 5.2 |
| | (3.2 | ) | | 1.4 |
| | — |
| | — |
| | — |
| | — |
| | 3.4 |
|
Other operating (income) expense | (11.2 | ) | | — |
| | 0.6 |
| | — |
| | — |
| | — |
| | — |
| | (10.6 | ) |
Total | $ | (7.8 | ) | | $ | 1.2 |
| | $ | 1.9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (4.7 | ) |
Results of Operations
The following tables summarize key components of our results of operations for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | |
| 2021 | | 2020 | | | | % Variance | | |
(In millions, except per share amounts) | | | % of Revenue | | | | % of Revenue | | | | | |
Revenue from product sales and services | $ | 1,464.4 | | | 100.0 | % | | $ | 1,429.5 | | | 100.0 | % | | | | | | 2.4 | % | | |
| | | | | | | | | | | | | | | |
Gross profit | $ | 457.4 | | | 31.2 | % | | $ | 449.8 | | | 31.5 | % | | | | | | 1.7 | % | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Total operating expenses | $ | (363.0) | | | (24.8) | % | | $ | (342.0) | | | (23.9) | % | | | | | | 6.1 | % | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Other operating income, net | $ | 4.9 | | | 0.3 | % | | $ | 60.6 | | | 4.2 | % | | | | | | (91.9) | % | | |
Interest expense | $ | (37.5) | | | (2.6) | % | | $ | (46.6) | | | (3.3) | % | | | | | | (19.5) | % | | |
Income before income taxes | $ | 61.8 | | | 4.2 | % | | $ | 121.8 | | | 8.5 | % | | | | | | (49.3) | % | | |
Income tax expense | $ | (10.1) | | | (0.7) | % | | $ | (7.4) | | | (0.5) | % | | | | | | 36.5 | % | | |
Net income | $ | 51.7 | | | 3.5 | % | | $ | 114.4 | | | 8.0 | % | | | | | | (54.8) | % | | |
Net income attributable to non‑controlling interest | $ | 0.2 | | | — | % | | $ | 0.8 | | | 0.1 | % | | | | | | (75.0) | % | | |
Net income attributable to Evoqua Water Technologies Corp. | $ | 51.5 | | | 3.5 | % | | $ | 113.6 | | | 7.9 | % | | | | | | (54.7) | % | | |
| | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | |
Basic | 119.6 | | | | | 116.7 | | | | | | | | | | | |
Diluted | 122.9 | | | | | 121.1 | | | | | | | | | | | |
Earnings per share | | | | | | | | | | | | | | | |
Basic | $ | 0.43 | | | | | $ | 0.97 | | | | | | | | | | | |
Diluted | $ | 0.42 | | | | | $ | 0.94 | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Other financial data: | | | | | | | | | | | | | |
Adjusted EBITDA(1) | $ | 250.9 | | | 17.1% | | $ | 239.6 | | | 16.8 | % | | | | | | 4.7 | % | | |
(1)For the definition of Adjusted EBITDA and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in this Item 7.
|
| | | | | | | | | | | | | | | | |
| Year Ended September 30, | % Variance |
| 2019 | | 2018 | | 2019 vs. 2018 |
(In millions, except per share amounts) | | | % of Revenue | | | | % of Revenue | |
Revenue | $ | 1,444.4 |
| | 100.0 | % | | $ | 1,339.5 |
| | 100.0 | % | | 7.8 | % |
Cost of product sales and services | (1,018.4) |
| | (70.5 | )% | | (934.8) |
| | (69.8 | )% | | 8.9 | % |
Gross profit | 426.0 |
| | 29.5 | % | | 404.7 |
| | 30.2 | % | | 5.3 | % |
General and administrative expense | (217.1) |
| | (15.0 | )% | | (193.8) |
| | (14.5 | )% | | 12.0 | % |
Sales and marketing expense | (138.9) |
| | (9.6 | )% | | (136.0) |
| | (10.2 | )% | | 2.1 | % |
Research and development expense | (15.3) |
| | (1.1 | )% | | (15.9) |
| | (1.2 | )% | | (3.8 | )% |
Total operating expenses | (371.3) |
| | (25.7 | )% | | (345.7) |
| | (25.8 | )% | | 7.4 | % |
Other operating income (expense), net | 5.0 |
| | 0.3 | % | | 7.8 |
| | 0.6 | % | | (35.9 | )% |
Interest expense | (58.6) |
| | (4.1 | )% | | (57.5) |
| | (4.3 | )% | | 1.9 | % |
Income before income taxes | 1.1 |
| | 0.1 | % | | 9.3 |
| | 0.7 | % | | (88.2 | )% |
Income tax expense | (9.6) |
| | (0.7 | )% | | (1.4) |
| | (0.1 | )% | | 585.7 | % |
Net (loss) income | (8.5) |
| | (0.6 | )% | | 7.9 |
| | 0.6 | % | | (207.6 | )% |
Net income attributable to non‑controlling interest | 1.0 |
| | 0.1 | % | | 1.8 |
| | 0.1 | % | | (44.4 | )% |
Net (loss) income attributable to Evoqua Water Technologies Corp. | $ | (9.5 | ) | | (0.7 | )% | | $ | 6.1 |
| | 0.5 | % | | (255.7 | )% |
| | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | |
Basic | 114.7 |
| | | | 113.9 |
| | | | |
Diluted | 114.7 |
| | | | 120.2 |
| | | | |
Earnings per share | | | | | | | | | |
Basic | $ | (0.08 | ) | | | | $ | 0.05 |
| | | | |
Diluted | $ | (0.08 | ) | | | | $ | 0.05 |
| | | | |
| | | | | | | | |
Other financial data: | | | | | | | | |
Adjusted EBITDA (1) | $ | 235.0 |
| | 16.3% | | $ | 216.9 |
| | 16.2 | % | | 8.3 | % |
| |
(1) | For the definition of Adjusted EBITDA and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.” |
Years Ended September 30, 20192021 and September 30, 20182020
Consolidated Results
Revenues-RevenuesRevenue-Revenue increased $104.9$34.9 million, or 7.8%2.4%, to $1,444.4$1,464.4 million in the year ended September 30, 20192021, from $1,339.5$1,429.5 million in the prior year. Revenue from product sales increased $21.1 million, or 2.5%, to $861.0 million in the year ended September 30, 2021, from $839.9 million in the prior year. Revenue from services increased $13.8 million, or 2.3%, to $603.4 million in the year ended September 30, 2021, from $589.6 million in the prior year.
The following table provides the change in revenues fromrevenue by offering and the change in revenue by driver during the years ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | $ | 861.0 | | | 58.8 | % | | $ | 839.9 | | | 58.8 | % | | $ | 21.1 | | | 2.5 | % | | | | | | | | | | |
Capital | 616.0 | | | 42.1 | % | | 592.7 | | | 41.5 | % | | 23.3 | | | 3.9 | % | | | | | | | | | | |
Aftermarket | 245.0 | | | 16.7 | % | | 247.2 | | | 17.3 | % | | (2.2) | | | (0.9) | % | | | | | | | | | | |
Revenue from services | 603.4 | | | 41.2 | % | | 589.6 | | | 41.2 | % | | 13.8 | | | 2.3 | % | | | | | | | | | | |
| $ | 1,464.4 | | | 100.0 | % | | $ | 1,429.5 | | | 100.0 | % | | $ | 34.9 | | | 2.4 | % | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 1,436.4 | | | 98.1 | % | | $ | 1,413.3 | | | 98.9 | % | | $ | 23.1 | | | 1.6 | % | | | | | | | | | | |
Inorganic | 9.9 | | | 0.7 | % | | 16.2 | | | 1.1 | % | | (6.3) | | | (0.4) | % | | | | | | | | | | |
Foreign currency translation | 18.1 | | | 1.2 | % | | n/a | | n/a | | 18.1 | | | 1.3 | % | | | | | | | | | | |
| $ | 1,464.4 | | | 100.0 | % | | $ | 1,429.5 | | | 100.0 | % | | $ | 34.9 | | | 2.4 | % | | | | | | | | | | |
The increase in organic revenue was driven by higher sales volume, primarily in product sales in the Asia Pacific region across multiple product lines and revenues from services, respectively:
|
| | | | | | | | | | | | | | | | |
| Year Ended September 30, | | |
| 2019 | | 2018 | | % Variance |
| | | % of Revenue | | | | % of Revenue | | |
Revenue from product sales | $ | 851.1 |
| | 58.9 | % | | $ | 802.3 |
| | 59.9 | % | | 6.1 | % |
Revenue from services | 593.3 |
| | 41.1 | % | | 537.2 |
| | 40.1 | % | | 10.4 | % |
| $ | 1,444.4 |
| | 100.0 | % | | $ | 1,339.5 |
| | 100.0 | % | | 7.8 | % |
Revenues fromthe EMEA region primarily in the electrochlorination product line, as demand improved following prior year economic closures, and to a lesser extent, capital revenue in the chemical processing industry in the second half of the fiscal year. In addition, organic revenue was favorably impacted by higher sales volume in service and favorable price realization. These increases were partially offset by lower sales volume in capital revenue related to the timing of completion of prior year projects in the microelectronics end market and lower product sales increased $48.8 million, or 6.1% fromvolume in the Americas region, due to customer site access challenges and delays, primarily in the first half of fiscal 2021, as a result of the COVID-19 pandemic. Favorable foreign currency translation more than offset the reduction in revenue due to the prior year primarily drivendivestiture of the Memcor product line.
Revenue in future periods could be negatively impacted by growth in aftermarket product revenues of $50.1 million, $1.4 million of it due tocommodity and material availability constraints caused by global supply chain disruptions, skilled labor shortages, and the ATG UV acquisition. The aftermarket revenue increase was offset by a decline in capital revenues of $1.2 million. While the acquisitions of Pacific Ozone, ProAct, Isotope and ATG UV resulted in an increase to capital revenues of $7.1 million, the decline due to timing of large capital projects more than offset that increase by $8.3 million.projects.
Revenues from services increased $56.1 million, or 10.4% from the prior year, primarily driven by revenue from the acquired businesses of ProAct, Isotope and ATG UV which accounted for $39.1 million. The remaining increase was driven by stronger organic service growth of $17.0 million, which was augmented by price realization.
Cost of Sales and Gross Margin-Total gross margin decreased to 29.5%31.2% in the year ended September 30, 20192021, from 30.2%31.5% in the prior year. The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:
| | | Year Ended September 30, | | Year Ended September 30, |
| 2019 | | 2018 | | 2021 | | 2020 |
| | | Gross Margin % | | | | Gross Margin % | | | Gross Margin % | | | Gross Margin % |
Cost of product sales | $ | (615.1 | ) | | 27.7 | % | | $ | (582.6 | ) | | 27.4 | % | Cost of product sales | $ | (607.6) | | | 29.4 | % | | $ | (588.3) | | | 30.0 | % |
Cost of services | (403.3 | ) | | 32.0 | % | | (352.2 | ) | | 34.4 | % | Cost of services | (399.4) | | | 33.8 | % | | (391.4) | | | 33.6 | % |
| $ | (1,018.4 | ) | | 29.5 | % | | $ | (934.8 | ) | | 30.2 | % | | $ | (1,007.0) | | | 31.2 | % | | $ | (979.7) | | | 31.5 | % |
Gross margin from product sales decreased by 60 bps to 29.4% in the year ended September 30, 2021, from 30.0% in the prior year. The decrease in gross margin for product sales improved slightly as revenue volume and operational efficiencies offset the negative impacts ofwas primarily driven by product mix, which was influenced by delays and economic closures related to the increaseCOVID-19 pandemic, coupled with higher material, freight, and employment costs driven by inflation, as well as capital project variances. This was partially offset by positive price realization.
Gross margin from services increased by 20 bps to 33.8% in costs as comparedthe year ended September 30, 2021, from 33.6% in the prior year associated with product rationalization and facility consolidation, restructuring and the remediation of a manufacturing defect causedyear. This increase is mainly driven by a third party vendor of $3.9 million. Thefavorable price/cost as well as continued focus on labor productivity.
We expect continued pressure on gross margin for services declined as the Company continuesin future periods due to leveragematerial, 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 are more fixed in nature as revenue volumes increase.we will be able to do so.
Operating Expenses-Operating expenses increased $25.6$21.0 million, or 7.4%6.1%, to $371.3$363.0 million in year ended September 30, 20192021 from $345.7$342.0 million in the prior year. Operating expenses are comprised of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30, | | |
| | | | | | | 2021 | | 2020 | | |
(In millions) | | | | | | | | | | | | | % of Revenue | | | | % of Revenue | | % Variance |
General and administrative expense | | | | | | | | | | | $ | (206.5) | | | (14.1) | % | | $ | (192.6) | | | (13.5) | % | | 7.2 | % |
Sales and marketing expense | | | | | | | | | | | (143.1) | | | (9.8) | % | | (136.2) | | | (9.5) | % | | 5.1 | % |
Research and development expense | | | | | | | | | | | (13.4) | | | (0.9) | % | | (13.2) | | | (0.9) | % | | 1.5 | % |
Total operating expenses | | | | | | | | | | | $ | (363.0) | | | (24.8) | % | | $ | (342.0) | | | (23.9) | % | | 6.1 | % |
The increase period over period in operating expenses was primarily driven by the acquisitions of Pacific Ozone, ProAct, Isotope, and ATG UV whichdue to increased employee related expenses, by $16.6 million. Share-based compensation expense also increased by $4.2 million. The net changea decrease in foreign currency translation resultedgains of $7.7 million from the prior period which is mostly related to intercompany loans, increased amortization expense due to acquisitions in the current period, and an increase in operating expenses of $5.1 million. Included in 2019 was a loss from unfavorable foreign currency translation of $11.2 million, whereas included in 2018 was a loss from unfavorable foreign currency translation of $6.0 million.external legal fees. These increases were partially offset by
a $1.4 million reduction from efforts taken by the changeCompany to reduce spending across various areas in response to uncertainties related to the COVID-19 pandemic, such as reduced travel, particularly in the estimatefirst half of certain acquisitions achieving their earn-out targetsfiscal 2021. Fluctuations in the prior year. A discussion offoreign currency translation and labor inflation could impact operating expenses by category is as follows:in future periods.
Research and Development Expense-Research and development (“R&D”) expense decreased $0.6 million, or 3.8%, to $15.3 million in the year ended September 30, 2019 from $15.9 million in the prior year due to the Company’s continued efforts to reduce spending.
Sales and Marketing Expense-Sales and marketing expense increased $2.9 million, or 2.1%, to $138.9 million in the year ended September 30, 2019 from $136.0 million in the prior year mainly due to the ProAct acquisition made in the prior year.
General and Administrative Expense-General and administrative expense increased $23.3 million, or 12.0%, to $217.1 million in the year ended September 30, 2019 from $193.8 million in the prior year. The Pacific Ozone, ProAct, Isotope and ATG UV acquisitions contributed an additional $12.7 million of expense. Other factors contributing to the increase include unfavorable foreign currency impacts on our intercompany loans, as described above, of $4.9 million, share-based compensation expense increased $4.2 million and other increased employment expenses of $2.8 million. These increases were offset by a reduction in earn-out adjustments of $1.4 million.
Other Operating Income, (Expense), Net-Other operating income, (expense), net, decreased $2.9$55.6 million, or 35.9%, to income of $5.0 million in the year ended September 30, 20192021, from income of $7.8$60.6 million in the prior year. The current year income was mainlydecrease is primarily due to the release of an acquisition related contingency and the collection of previously written off amounts, whereas the income in 2018 was fromprior year net pre-tax benefit on the sale of landthe Memcor product line of $57.7 million, which is net of $8.3 million of discretionary compensation payments to employees in our Australian location which resulted in a gain of $6.8 million. In addition, we recorded gains related toconnection with the sale of precious metals of $0.8transaction and $2.1 million in 2018.transaction costs incurred. In the year ended September 30, 2021, other operating income, net, includes COVID-19 pandemic subsidies received from the Canadian government, which are not expected to reoccur in future periods.
Interest Expense-Interest expense increased $1.1decreased $9.1 million, or 1.9%19.5%, to $58.6$37.5 million in the year ended September 30, 20192021, from $57.5$46.6 million in the prior year. The decrease in interest expense was primarily driven by a $100.0 million debt prepayment in conjunction with the April 2021 refinancing of our senior credit facility, as well as a reduction in the interest rate spread and LIBOR year over year. In addition, there was a $100.0 million debt prepayment that occurred in January 2020. This decrease was partially offset by an additional $3.1 million of fees incurred as a result of the April
2021 refinancing, which also resulted in the write off of $1.3 million of deferred financing fees, and a fair value increase of $2.1 million in the Purchase Right liability to acquire the remaining share of Frontier.
Income Tax Expense-Income tax expense was $10.1 million for the year ended September 30, 2021, compared to expense of $7.4 million in the prior year. The increase in interesttax expense was primarily attributable to an increase in foreign tax expense due to increased debtimproved profitability in certain countries and interest rates as comparedthe impact of a one-time state tax adjustment for prior periods. The increase in expense was partially offset by a one-time tax benefit for the reversal of the valuation allowance with respect to the prior year.Company’s German operating company.
Net Income Tax Benefit (Expense)-Income tax expense was $9.6-Net income decreased by $62.7 million, or 54.8%, to net income of $51.7 million for the year ended September 30, 2019, compared to expense of $1.42021, from $114.4 million in the prior year. This increase in expense was primarily theyear, as a result of the favorable impact included in the prior fiscal year related to the reduction of the U.S. federal tax rate which required the remeasurement of U.S. deferred tax liabilities associated with indefinite lived intangible assets and the favorable impact of current year acquisitions for which the acquired deferred tax liabilities generatedvariances noted above.
Adjusted EBITDA-Adjusted EBITDA is a reduction in the amount of valuation allowance required against our existing U.S. and state deferred tax assets.
Net Income-Net income decreased by $16.4non-GAAP financial measure. Adjusted EBITDA increased $11.3 million, or 207.6%4.7%, to loss of $8.5$250.9 million for the year ended September 30, 20192021, from net income of $7.9 million in the prior year. This decrease was mainly due to the decrease in gross margin associated with product mix, along with the increase in operating expenses related to non-cash foreign currency translation and share-based compensation charges and additional tax expense as compared to the prior year.
Adjusted EBITDA-Adjusted EBITDA increased $18.1 million, or 8.3%, to $235.0 million for the year ended September 30, 2019 from $216.9$239.6 million for the prior year. Increased revenueyear, primarily driven by sales volume and the benefits derived from restructuring and operational efficiencies that were implementedrelated gross profit. See “Non-GAAP Reconciliations” in the current and prior year were partly offset by the lower margins derived from product mix.this Item 7 for a reconciliation of adjusted EBITDA to net income.
Segment Results
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30, | | |
| | | | | | | 2021 | | 2020 | | |
(In millions) | | | | | | | | | | | | | % of Total | | | | % of Total | | % Variance |
Revenue | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 959.9 | | | 65.5 | % | | $ | 944.2 | | | 66.1 | % | | 1.7 | % |
Applied Product Technologies | | | | | | | | | | | 504.5 | | | 34.5 | % | | 485.3 | | | 33.9 | % | | 4.0 | % |
Total Consolidated | | | | | | | | | | | $ | 1,464.4 | | | 100.0 | % | | $ | 1,429.5 | | | 100.0 | % | | 2.4 | % |
Operating profit (loss) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 147.3 | | | 148.3 | % | | $ | 145.7 | | | 86.5 | % | | 1.1 | % |
Applied Product Technologies | | | | | | | | | | | 82.9 | | | 83.5 | % | | 134.3 | | | 79.8 | % | | (38.3) | % |
Corporate | | | | | | | | | | | (130.9) | | | (131.8) | % | | (111.6) | | | (66.3) | % | | 17.3 | % |
Total Consolidated | | | | | | | | | | | $ | 99.3 | | | 100.0 | % | | $ | 168.4 | | | 100.0 | % | | (41.0) | % |
Adjusted EBITDA(1) | | | | | | | | | | | | | | | | | | | |
Integrated Solutions and Services | | | | | | | | | | | $ | 219.3 | | | 87.4 | % | | $ | 213.7 | | | 89.2 | % | | 2.6 | % |
Applied Product Technologies | | | | | | | | | | | 105.7 | | | 42.1 | % | | 99.2 | | | 41.4 | % | | 6.6 | % |
Corporate | | | | | | | | | | | (74.1) | | | (29.5) | % | | (73.3) | | | (30.6) | % | | 1.1 | % |
Total Consolidated | | | | | | | | | | | $ | 250.9 | | | 100.0 | % | | $ | 239.6 | | | 100.0 | % | | 4.7 | % |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| Year Ended September 30, | | |
| 2019 | | 2018 | | % Variance |
| | | % of Revenue | | | | % of Revenue | |
Revenues | | | | | | | | | |
Integrated Solutions and Services | $ | 910.8 |
| | 63.1 | % | | $ | 835.6 |
| | 62.4 | % | | 9.0 | % |
Applied Product Technologies | 533.6 |
| | 36.9 | % | | 503.9 |
| | 37.6 | % | | 5.9 | % |
Total Consolidated | 1,444.4 |
| | 100.0 | % | | $ | 1,339.5 |
| | 100.0 | % | | 7.8 | % |
Operating Profit | | | | | | | | | |
Integrated Solutions and Services | $ | 148.6 |
| | 10.3 | % | | $ | 138.0 |
| | 10.3 | % | | 7.7 | % |
Applied Product Technologies | 69.4 |
| | 4.8 | % | | 71.9 |
| | 5.4 | % | | (3.5 | )% |
Corporate | (158.3 | ) | | (11.0 | )% | | (143.1 | ) | | (10.7 | )% | | 10.6 | % |
Total Consolidated | $ | 59.7 |
| | 4.1 | % | | $ | 66.8 |
| | 5.0 | % | | (10.6 | )% |
EBITDA | | | | | | | | | |
Integrated Solutions and Services | $ | 205.8 |
| | 14.2 | % | | $ | 186.8 |
| | 13.9 | % | | 10.2 | % |
Applied Product Technologies | 87.1 |
| | 6.0 | % | | 88.6 |
| | 6.6 | % | | (1.7 | )% |
Corporate and unallocated costs | (135.0 | ) | | (9.3 | )% | | (122.7 | ) | | (9.2 | )% | | 10.0 | % |
Total Consolidated | $ | 157.9 |
| | 10.9 | % | | $ | 152.7 |
| | 11.4 | % | | 3.4 | % |
(1)Adjusted EBITDA onis a segment basis is defined as earnings before interest, taxes, depreciation and amortization adjusted for the impact of certain other items that have been reflected at the segment level. The following isnon-GAAP financial measure. For a reconciliation of oursegment adjusted EBITDA to segment operating profit to Adjusted EBITDA:(loss), its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in this, Item 7.
|
| | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 |
| Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies |
Operating Profit | $ | 148.6 |
| | $ | 69.4 |
| | $ | 138.0 |
| | $ | 71.9 |
|
Depreciation and amortization | 57.2 |
| | 17.7 |
| | 48.8 |
| | 16.7 |
|
EBITDA | 205.8 |
| | 87.1 |
| | 186.8 |
| | 88.6 |
|
Restructuring and related business transformation costs (a) | 0.5 |
| | 1.1 |
| | — |
| | 1.5 |
|
Transaction costs (b) | 0.5 |
| | 0.7 |
| | 2.6 |
| | — |
|
Legal fees (c) | — |
| | 0.6 |
| | — |
| | 1.9 |
|
Other losses and expenses (d) | 0.1 |
| | 10.4 |
| | — |
| | 0.1 |
|
Adjusted EBITDA (e) | $ | 206.9 |
| | $ | 99.9 |
| | $ | 189.4 |
| | $ | 92.1 |
|
| |
(a) | Represents costs and expenses in connection with restructuring initiatives distinct to our Integrated Solutions and Services and Applied Product Technologies segments, respectively, incurred in 2019 and 2018. Such expenses are primarily composed of severance and relocation costs. |
| |
(b) | Represents costs associated with a change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in an increase to the fair valued amount of the earn-out recorded upon acquisition in 2019 and 2018, distinct to our Integrated Solutions and Services and Applied Product Technologies segments. |
| |
(c) | Represents warranty costs associated with the settlement of a legacy warranty claim in 2019 and 2018, distinct to our Applied Product Technologies segment. |
| |
(d) | Other losses and expenses as discussed above in “How We Assess the Performance of Our Business-Adjusted EBITDA” distinct to our Integrated Solutions and Services and Applied Product Technologies segments include the following: |
|
| | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 |
(In millions) | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies |
Expenses related to maintaining non-operational business locations | $ | 0.1 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Product rationalization in electro-chlorination business | — |
| | 3.7 |
| | — |
| | — |
|
Remediation of manufacturing defects | — |
| | 2.1 |
| | — |
| | 3.9 |
|
Gain on sale of property and land | — |
| | (0.4 | ) | | — |
| | (6.8 | ) |
Write-off of inventory | — |
| | 5.0 |
| | — |
| | 2.6 |
|
Costs associated with terminated business venture | — |
| | — |
| | — |
| | 0.4 |
|
Total | $ | 0.1 |
| | $ | 10.4 |
| | $ | — |
| | $ | 0.1 |
|
| |
(e) | For the definition of Adjusted EBITDA and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.” |
Integrated Solutions and Services
RevenuesRevenue in the Integrated Solutions and Services segment increased $75.2$15.7 million, or 9.0%1.7%, to $910.8$959.9 million in the year ended September 30, 20192021, from $835.6$944.2 million in the prior year ended September 30, 2020. The following tables provide the change in revenue by offering and the change in revenue by driver during the years ended September 30, 2021 and 2020 for the Integrated Solutions and Services segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | $ | 378.8 | | | 39.5 | % | | $ | 376.6 | | | 39.9 | % | | $ | 2.2 | | | 0.6 | % | | | | | | | | | | |
Capital | 250.2 | | | 26.1 | % | | 257.5 | | | 27.3 | % | | (7.3) | | | (2.8) | % | | | | | | | | | | |
Aftermarket | 128.6 | | | 13.4 | % | | 119.1 | | | 12.6 | % | | 9.5 | | | 8.0 | % | | | | | | | | | | |
Revenue from services | 581.1 | | | 60.5 | % | | 567.6 | | | 60.1 | % | | 13.5 | | | 2.4 | % | | | | | | | | | | |
| $ | 959.9 | | | 100.0 | % | | $ | 944.2 | | | 100.0 | % | | $ | 15.7 | | | 1.7 | % | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 947.2 | | | 98.7 | % | | $ | 942.4 | | | 99.8 | % | | $ | 4.8 | | | 0.5 | % | | | | | | | | | | |
Inorganic | 9.9 | | | 1.0 | % | | 1.8 | | | 0.2 | % | | 8.1 | | | 0.9 | % | | | | | | | | | | |
Foreign currency translation | 2.8 | | | 0.3 | % | | n/a | | n/a | | 2.8 | | | 0.3 | % | | | | | | | | | | |
| $ | 959.9 | | | 100.0 | % | | $ | 944.2 | | | 100.0 | % | | $ | 15.7 | | | 1.7 | % | | | | | | | | | | |
The increase in organic revenue was driven by organichigher sales volume, primarily due to growth of $33.5 million, mainly fromin service and aftermarket revenue growth andacross a variety of end markets as well as favorable price realization. Our acquisitionsThis was partially offset by a net decline in capital revenue, related to the timing of ProAct and Isotope resultedcompletion of projects in another increasethe microelectronics end market. Capital revenue saw volume growth in the second half of $41.7 million of revenue.
the fiscal year, primarily in the chemical processing industry.Operating profit in the Integrated Solutions and Services segment increased $10.6$1.6 million, or 7.7%1.1%, to $148.6$147.3 million in the year ended September 30, 20192021, from $138.0$145.7 million in the prior year. The profitability generatedyear ended September 30, 2020.
Operating profit was favorably impacted by organic revenuesales volume and mix, favorable price/cost, reductions in addition totravel and other discretionary spending as well as COVID-19 pandemic subsidies received from the acquisitions of ProAct and Isotope resulted in a contribution to profit of $24.3 million. Another increase in profit of $2.1 million is due to lower earn–out adjustments recognizedCanadian government in the current year as compared to prior year. These improvements to profitabilityitems were partially offset by lower productivity due to customer shutdowns and enhanced safety protocols as a result of the COVID-19 pandemic in the first half of fiscal 2021, some challenges filling open positions and increased employee relatedoperating costs based on changes in allocation methodologies for corporate expenses of $7.4 million and $8.4 million from higher depreciation and amortization.in the current year.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Integrated Solutions and Services segment increased $19.0$5.6 million, or 10.2%2.6%, to $205.8$219.3 million in the year ended September 30, 2019 from $186.82021, compared to $213.7 million in the prior year.year ended September 30, 2020. The increase was driven by the same factors that impacted operating profit, other than the change in depreciation and amortization. Segment adjusted EBITDA also excludes restructuring and other non-recurring activity. See “Non-GAAP Reconciliations” in this Item 7 for a reconciliation of segment adjusted EBITDA to segment operating profit.
Applied Product Technologies
RevenuesRevenue in the Applied Product Technologies segment increased by $29.7$19.2 million, or 5.9%4.0%, to $533.6$504.5 million in the year ended September 30, 20192021, from $503.9$485.3 million in the prior year.year ended September 30, 2020. The following tables provide the change in revenue by offering and the change in revenue by driver during the years ended September 30, 2021 and 2020 for the Applied Product revenues grewTechnologies segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Revenue from product sales: | $ | 482.2 | | | 95.6 | % | | $ | 463.3 | | | 95.5 | % | | $ | 18.9 | | | 4.1 | % | | | | | | | | | | |
Capital | 365.8 | | | 72.5 | % | | 335.2 | | | 69.1 | % | | 30.6 | | | 9.1 | % | | | | | | | | | | |
Aftermarket | 116.4 | | | 23.1 | % | | 128.1 | | | 26.4 | % | | (11.7) | | | (9.1) | % | | | | | | | | | | |
Revenue from services | 22.3 | | | 4.4 | % | | 22.0 | | | 4.5 | % | | 0.3 | | | 1.4 | % | | | | | | | | | | |
| $ | 504.5 | | | 100.0 | % | | $ | 485.3 | | | 100.0 | % | | $ | 19.2 | | | 4.0 | % | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | | | | | |
| 2021 | | 2020 | | $ Variance | | % Variance | | | | | | |
(In millions) | | | % of Revenue | | | | % of Revenue | | | | | | | | | | | | |
Organic | $ | 489.2 | | | 97.0 | % | | $ | 470.9 | | | 97.0 | % | | $ | 18.3 | | | 3.8 | % | | | | | | | | | | |
Inorganic | — | | | — | % | | 14.4 | | | 3.0 | % | | (14.4) | | | (3.0) | % | | | | | | | | | | |
Foreign currency translation | 15.3 | | | 3.0 | % | | n/a | | n/a | | 15.3 | | | 3.2 | % | | | | | | | | | | |
| $ | 504.5 | | | 100.0 | % | | $ | 485.3 | | | 100.0 | % | | $ | 19.2 | | | 4.0 | % | | | | | | | | | | |
The increase in organic revenue was driven by $40.2 millionsales volume growth from product sales in the Asia Pacific region across multiple businesses,product lines and the EMEA region primarily in our electrochlorination product line, as demand improved following economic closures that occurred in the prior year due to the COVID-19 pandemic, and to a lesser extent, favorable pricing. This growth was partially offset by declines across multiple product lines in the Americas region as a result of whichcontinued customer site access challenges and delays. In addition, the acquisitionsdivestiture of Pacific Ozone and ATG UV resulted in an increasethe Memcor product line reduced revenue by $14.4 million as compared to product revenues of $7.1 million. Offsetting this increase was an unfavorablethe prior year period while foreign currency translation impact of $11.4was favorable by $15.3 million.
Operating profit in the Applied Product Technologies segment decreased $2.5$51.4 million, or 3.5%38.3%, to $69.4$82.9 million in the year ended September 30, 20192021, from $71.9$134.3 million in the prior year. Recognizedyear ended September 30, 2020.
The decline in operating profit was primarily related to the prior year was anet pre-tax benefit of $6.8 million fromon the gain on sale of land, whereas the segment only recognized a gain on saleMemcor product line of property of $0.4$57.7 million in the current year, resulting in a decline of $6.4 million. In addition, recognized in the prior year, which was $6.2net of $8.3 million of profit relateddiscretionary compensation payments to warranty reductions based on improved warranty experience, net of losses from our Italian operations, which did not reoccuremployees in the current year. Other offsets to segment operating profit include increased costs as compared to the prior year from product rationalization and facility consolidation, restructuring and costs associatedconnection with the remediationtransaction and $2.1 million in transaction costs incurred. Operating profit was also impacted by the reduction in sales volume as a result of a manufacturing defect caused by a third party vendor totaling $3.9 million. The unfavorable impactthe sale of foreign currency was $2.6 million higher, increased depreciation impacted profitability by another $1.0 million, and $0.7 million of additional cost was due to the change in estimated amount of earn-outs expected to be paid out on prior acquisitions.Memcor product line. These impacts to profitdeclines were partially offset by increasedfavorable revenue and operational variances including organic sales volume, product mix and pricefavorable price/cost, as well as the benefits of $8.3 millionplant consolidation benefits and reduced employee costs of $10.0 million.higher productivity. However, capital project variances and supply chain challenges unfavorably impacted operating profit.
Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA in the Applied Product Technologies segment decreased $1.5increased $6.5 million, or 1.7%6.6%, to $87.1$105.7 million in the year ended September 30, 2019 from $88.62021, compared to $99.2 million in the prior year.year ended September 30, 2020. The decrease in EBITDAincrease was the result ofdriven by the same factors whichthat impacted operating profit, during this year, lessother than the change fromin depreciation and amortization.
For a discussion Segment adjusted EBITDA also excludes other non-recurring activity, including the $57.7 million gain recognized in the prior year related to the divestiture of the resultsMemcor product line. See “Non-GAAP Reconciliations” in this Item 7 for a reconciliation of operationssegment adjusted EBITDA to segment operating profit.
Corporate
Operating loss in Corporate increased $19.3 million, or 17.3%, to $130.9 million in the year ended September 30, 2021, from $111.6 million in the year ended September 30, 2020. The increase period over period was primarily due to increased expenses associated with share-based compensation and legal matters in the current year as well as a decrease in foreign currency translation gains from the prior period, most of which was related to intercompany loans. Reductions in discretionary spending compared to the prior year partially offset these increases.
Non-GAAP Reconciliations
The following is a reconciliation of organic revenue to total revenue for the years ended September 30, 20182021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total Revenue | | Foreign Currency | | Inorganic Revenue(1) | | Organic Revenue |
| Year Ended September 30, | % Variance | | Year Ended September 30, | % Variance | | Year Ended September 30, | % Variance | | Year Ended September 30, | % Variance |
(In millions) | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 | | 2020 | 2021 |
Evoqua Water Technologies | $1,429.5 | $1,464.4 | 2.4 | % | | n/a | $18.1 | 1.3 | % | | $16.2 | $9.9 | (0.4) | % | | $1,413.3 | $1,436.4 | 1.6 | % |
Integrated Solutions & Services | $944.2 | $959.9 | 1.7 | % | | n/a | $2.8 | 0.3 | % | | $1.8 | $9.9 | 0.9 | % | | $942.4 | $947.2 | 0.5 | % |
Applied Product Technologies | $485.3 | $504.5 | 4.0 | % | | n/a | $15.3 | 3.2 | % | | $14.4 | $— | (3.0) | % | | $470.9 | $489.2 | 3.8 | % |
(1)Includes acquisition of our interest in Frontier on October 1, 2019, divestiture of the Memcor product line on December 31, 2019, divestiture of the Lange Product Line on March 1, 2021, acquisition of Aquapure on September 3, 2020, acquisition of Ultrapure on December 17, 2020 and acquisition of WCSI on April 1, 2021.
The following is a reconciliation of our Net income to adjusted EBITDA. Amounts excluded relate to items that management believes do not reflect the underlying, ongoing operational performance of the business as a result of their nature or size and/or are non-recurring and would not be expected to occur as part of our normal business on a regular basis.
| | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
(In millions) | 2021 | | 2020 | | % Variance | | |
Net income | $ | 51.7 | | | $ | 114.4 | | | (54.8) | % | | |
Income tax expense | 10.1 | | | 7.4 | | | 36.5 | % | | |
Interest expense | 37.5 | | | 46.6 | | | (19.5) | % | | |
Operating profit | $ | 99.3 | | | $ | 168.4 | | | (41.0) | % | | |
Depreciation and amortization | 113.7 | | | 107.3 | | | 6.0 | % | | |
EBITDA | $ | 213.0 | | | $ | 275.7 | | | (22.7) | % | | |
Restructuring and related business transformation costs(a) | 11.3 | | | 17.4 | | | (35.1) | % | | |
| | | | | | | |
Share-based compensation(b) | 17.7 | | | 10.5 | | | 68.6 | % | | |
Transaction costs(c) | 1.6 | | | 1.9 | | | (15.8) | % | | |
| | | | | | | |
Other losses (gains) and expenses(d) | 7.3 | | | (65.9) | | | (111.1) | % | | |
Adjusted EBITDA | $ | 250.9 | | | $ | 239.6 | | | 4.7 | % | | |
(a)Restructuring and related business transformation costs
Adjusted EBITDA is calculated prior to considering certain restructuring or business transformation events. These events may occur over extended periods of time and in some cases, it is reasonably possible that events of a similar nature could reoccur in future periods based on reorganizations of the business, cost reduction or productivity improvement needs, or in response to economic conditions. For the periods presented such events include the following:
(i)Certain costs and expenses in connection with various restructuring initiatives, including severance and other employee-related costs, relocation and facility consolidation costs, and third-party consultant costs to assist with these initiatives. This includes:
(A)amounts related to the Company’s restructuring initiatives to reduce the cost structure and rationalize location footprint following the sale of the Memcor product line;
(B)amounts related to the Company’s transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide; and
(C)amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure.
| | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | |
| | | | | |
Post Memcor divestiture restructuring | $ | 5.6 | | | $ | 9.1 | | | |
Cost of product sales and services ("Cost of sales") | 3.5 | | | 6.6 | | | |
| | | | | |
S&M expense | 0.3 | | | 0.2 | | | |
G&A expense | 1.5 | | | 1.9 | | | |
Other operating (income) expense | 0.3 | | | 0.4 | | | |
Two-segment restructuring | $ | 1.0 | | | $ | 2.1 | | | |
Cost of sales | 0.3 | | | 1.0 | | | |
| | | | | |
| | | | | |
G&A expense | 0.7 | | | 1.1 | | | |
| | | | | |
Various other initiatives | $ | 2.8 | | | $ | 1.0 | | | |
Cost of sales | 1.0 | | | 0.7 | | | |
| | | | | |
S&M expense | 0.1 | | | 0.1 | | | |
G&A expense | 0.9 | | | 0.2 | | | |
Other operating (income) expense | 0.8 | | | — | | | |
Total(1) | $ | 9.4 | | | $ | 12.2 | | | |
(1)Of which $9.1 million and $12.1 million for the year ended September 30, 2017 refer2021 and 2020, respectively, is reflected in restructuring charges in Note 15, “Restructuring and Related Charges,” in Part II, Item 8 of this Annual Report.
(ii)Legal settlement costs and intellectual property related fees, including fees and settlement costs associated with legacy matters related to Exhibit 99.1product warranty litigation on MEMCOR® products and certain discontinued products. This includes: | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | |
Cost of sales | $ | 0.4 | | | $ | 1.5 | | | |
G&A expense | 0.6 | | | 0.7 | | | |
Total | $ | 1.0 | | | $ | 2.2 | | | |
(iii)Expenses associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes. This includes:
| | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | |
Cost of sales | $ | 0.1 | | | $ | 0.1 | | | |
| | | | | |
G&A expense | 0.2 | | | 0.9 | | | |
| | | | | |
Total | $ | 0.3 | | | $ | 1.0 | | | |
(iv)Costs associated with the secondary public offering of common stock held by certain shareholders of the Company, as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs. This includes:
| | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | |
G&A expense | $ | 0.6 | | | $ | 2.0 | | | |
Total | $ | 0.6 | | | $ | 2.0 | | | |
(b)Share-based compensation
Adjusted EBITDA is calculated prior to considering share‑based compensation expenses related to equity awards. See Note 18, “Share-Based Compensation” in Part II, Item 8 of this Annual Report for further detail.
(c)Transaction related costs
Adjusted EBITDA is calculated prior to considering transaction, integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred as a result of the transaction decision. Integration and restructuring costs associated with a business combination may occur over several years and include, but are not limited to, consulting fees, legal fees, certain employee-related costs, facility consolidation and product rationalization costs, and fair value changes associated with contingent consideration. This includes:
| | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | |
Cost of sales | $ | 0.7 | | | $ | 0.1 | | | |
G&A expense | 0.9 | | | 1.8 | | | |
| | | | | |
Total | $ | 1.6 | | | $ | 1.9 | | | |
(d)Other losses, (gains) and expenses
Adjusted EBITDA is calculated prior to considering certain other significant losses, (gains), and expenses. For the periods presented such events include the following:
(i)impact of foreign exchange gains and losses;
(ii)net expense reduction related to the remediation of manufacturing defects caused by a third-party vendor for which partial restitution was received;
(iii)charges incurred by the Company related to product rationalization in its electrochlorination business;
(iv)amounts related to the prior year sale of the Memcor product line;
(v)expenses incurred by the Company as a result of the COVID-19 pandemic, including additional charges for personal protective equipment, increased costs for facility sanitization and one-time payments to certain employees;
(vi)legal fees incurred in excess of amounts covered by the Company’s insurance related to the Securities Litigation and SEC investigation; and
(vii)loss on divestiture of the Lange Product Line.
Other (gains), losses and expenses include the following for the periods presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2021 |
| Other Adjustments |
(In millions) | (i) | | | | | | | | (ii) | | (iii) | | (iv) | | | | | | (v) | | (vi) | | (vii) | | Total |
Cost of sales | $ | 0.1 | | | | | | | | | $ | — | | | $ | 2.4 | | | $ | 0.2 | | | | | | | $ | 0.3 | | | $ | — | | | $ | — | | | $ | 3.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
G&A expense | (1.8) | | | | | | | | | — | | | — | | | — | | | | | | | 0.2 | | | 5.7 | | | — | | | 4.1 | |
Other operating expense | — | | | | | | | | | — | | | — | | | — | | | | | | | — | | | — | | | 0.2 | | | 0.2 | |
Total | $ | (1.7) | | | | | | | | | $ | — | | | $ | 2.4 | | | $ | 0.2 | | | | | | | $ | 0.5 | | | $ | 5.7 | | | $ | 0.2 | | | $ | 7.3 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended September 30, 2020 |
| Other Adjustments |
(In millions) | (i) | | | | | | | | (ii) | | (iii) | | (iv) | | | | | | (v) | | (vi) | | (vii) | | Total |
Cost of sales | $ | (0.2) | | | | | | | | | $ | — | | | $ | 0.7 | | | $ | 0.1 | | | | | | | $ | 0.8 | | | $ | — | | | $ | — | | | $ | 1.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
G&A expense | (8.5) | | | | | | | | | — | | | — | | | 0.3 | | | | | | | 0.5 | | | — | | | — | | | (7.7) | |
Other operating (income) expense | — | | | | | | | | | (1.5) | | | — | | | (58.1) | | | | | | | — | | | — | | | — | | | (59.6) | |
Total | $ | (8.7) | | | | | | | | | $ | (1.5) | | | $ | 0.7 | | | $ | (57.7) | | | | | | | $ | 1.3 | | | $ | — | | | $ | — | | | $ | (65.9) | |
We do not present net income on a segment basis because we do not allocate interest expense or income tax benefit (expense) to our segments, making operating profit the most comparable GAAP metric. The following is a reconciliation of our segment adjusted EBITDA to segment operating profit, its most directly comparable financial measure presented in accordance with GAAP:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, | | $ Variance | | % Variance |
| 2021 | | 2020 | | |
| Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies |
Operating profit | $ | 147.3 | | | $ | 82.9 | | | $ | 145.7 | | | $ | 134.3 | | | $ | 1.6 | | | $ | (51.4) | | | 1.1 | % | | (38.3) | % |
Depreciation and amortization | 70.6 | | | 14.4 | | | 67.4 | | | 14.2 | | | 3.2 | | | 0.2 | | | 4.7 | % | | 1.4 | % |
EBITDA | 217.9 | | | 97.3 | | | 213.1 | | | 148.5 | | | $ | 4.8 | | | $ | (51.2) | | | 2.3 | % | | (34.5) | % |
Restructuring and related business transformation costs (a) | 1.8 | | | 5.9 | | | 0.6 | | | 9.7 | | | 1.2 | | | (3.8) | | | 200.0 | % | | (39.2) | % |
Transaction costs (b) | (0.6) | | | (0.1) | | | — | | | (0.5) | | | (0.6) | | | 0.4 | | | n/a | | (80.0) | % |
| | | | | | | | | | | | | | | |
Other (gains) losses and expenses (c) | 0.2 | | | 2.6 | | | — | | | (58.5) | | | 0.2 | | | 61.1 | | | n/a | | (104.4) | % |
Segment adjusted EBITDA | $ | 219.3 | | | $ | 105.7 | | | $ | 213.7 | | | $ | 99.2 | | | $ | 5.6 | | | $ | 6.5 | | | 2.6 | % | | 6.6 | % |
(a)Represents costs and expenses in connection with restructuring initiatives. Such expenses are primarily composed of severance, relocation, and facility consolidation costs.
(b)Represents costs associated with a change in the Company’s 8-K filed withcurrent estimate of certain acquisitions achieving their earn-out targets.
(c)Other losses, (gains) and expenses as discussed above, distinct to our Integrated Solutions and Services and Applied Product Technologies segments include the SEC on February 15, 2019.following:
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 |
(In millions) | Integrated Solutions and Services | | Applied Product Technologies | | Integrated Solutions and Services | | Applied Product Technologies |
Trailing costs from the sale of the Memcor product line | $ | — | | | $ | 0.2 | | | $ | — | | | $ | — | |
Net pre-tax benefit on sale of the Memcor product line | — | | | — | | | — | | | (57.7) | |
Remediation of manufacturing defects | — | | | — | | | — | | | (1.5) | |
Product rationalization in electro-chlorination business | — | | | 2.4 | | | — | | | 0.7 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Loss on divestiture of Lange Product Line | 0.2 | | | — | | | — | | | — | |
Total | $ | 0.2 | | | $ | 2.6 | | | $ | — | | | $ | (58.5) | |
Liquidity and Capital Resources
Liquidity describes the ability of a company to borrow or generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments, and contractual obligations. 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 our operating activities, and borrowings under our $125.0 millionthe 2021 Revolving Credit Facility.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 cash generated from operations and increased equipment financings.these sources. Our primary cash needs are for day to dayday-to-day operations, to pay interest and principal on our indebtedness, to fund working capital requirements and to make capital expenditures.
Our ability to fund our capital needs depends on our ongoing ability to generate cash from operations and access to bank financing and the capital markets. Although the COVID-19 pandemic has not materially impacted our liquidity to date, we plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary spending, and strategic investments in fiscal 2022. We have considered the impacts of the COVID-19 pandemic on our liquidity and capital resources to date, and we do not currently expect it to impact our ability to meet future liquidity needs or affect our ability to continue to comply with our applicable debt covenants. We believe we are currently well-positioned to manage our business and have the ability and sufficient capacity to meet our cash requirements by using available cash, internally generated funds, and borrowing under the 2021 Revolving Credit Facility.
As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including occasionally extending payment terms. We also facilitate a voluntary supply chain finance program (the “program”) to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. The amounts settled through the program and paid to participating financial institutions were $42.0 million and $39.7 million in the year ended September 30, 2021 and 2020, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit to participating in the program.
We expect to continue to finance our liquidity requirements through internally generated funds, and borrowings under our Revolving Credit Facility.revolving credit facility and equipment financing arrangements. We believe that our projected cash flows generated from operations, together with borrowings under ourthe 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 yearsyear ended September 30, 20192021 and 20182020 were $88.9
$75.3 million and $80.7$88.5 million, respectively. However, our budgeted capital expenditures can vary from period to period based on the nature of capital intensive project awards. WeOur focus on customer outsourced water projects will continue to be a driver of capital expenditures. From time to time, we may enter into financing arrangements related to capital expenditures for equipment used to provide services to our customers. During the year ended September 30, 2021 and 2020, we entered into equipment financing arrangements totaling $37.5 million and $23.3 million, respectively. In addition, we may draw on ourthe 2021 Revolving Credit Facility from time to time to fund or partially fund an acquisition.
As of September 30, 2019,2021, we had total indebtedness of $977.2$754.9 million, including $928.8$473.8 million of term loan borrowings under the Term Loan Facility, no borrowings2021 Credit Agreement, $37.3 million outstanding under ourthe 2021 Revolving Credit Facility, $46.0$150.1 million outstanding under the Securitization Facility which includes $0.1 million of accrued interest, $93.4 million in borrowings related to equipment financings, $0.8financing and $0.4 million of notes payable related to certain equipment related contracts and $1.6 million related to a mortgage.contracts. We also had $13.0$10.1 million of letters of credit issued under our 2021 Revolving Credit Facility and an additional $204 thousand of letters of credit issued under a separate uncommitted facility as of September 30, 2019.2021.
OurAs of September 30, 2021 and September 30, 2020, we were in compliance with the covenants contained in the 2021 Credit Agreement, including the 2021 Revolving Credit Facility.
2021 Credit Agreement
On April 1, 2021, EWT III entered into the 2021 Credit Agreement among EWT III, as borrower, EWT II, as parent guarantor, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and ING Capital, LLC, as sustainability coordinator. The 2021 Credit Agreement provides for a multi-currency senior secured revolving credit facility in an aggregate principal amount not to exceed the U.S. dollar equivalent of $350.0 million and a discounted senior secured term loan facility relating to a term loan in the amount of $475.0 million (together, the “Senior Facilities”). The 2021 Credit Agreement also provides for a letter of credit sub-facility not to exceed $60.0 million. On April 1, 2021, EWT III borrowed the full amount of $475.0 million under the 2021 Term Loan Facility and $105.0 under the 2021 Revolving Credit Facility. On September 30, 2021, the Company had $473.8 million outstanding under the 2021 Term Loan and $37.3 million outstanding on the 2021 Revolving Credit Facility.
The Senior Facilities are guaranteed by EWT II and certain existing and future direct or indirect wholly-owned domestic subsidiaries of EWT III (together with EWT III, collectively, the “Loan Parties”), and collateralized by a first lien on substantially all of the assets of the Loan Parties, with certain exceptions, including: (i) any equity interest in, and any assets sold to or held by, Evoqua Finance in connection with the Receivables Securitization Program, (ii) any equity interest in, and any assets sold to or held by, any other special purpose entity that is an indirect subsidiary of the Company in connection with any other securitization facility permitted under the 2021 Credit Agreement, and (iii) any real property with a fair market value of $5.0 million or less, when considered individually, or $30.0 million or less when taken together with all other real property owned by the Loan Parties.
With respect to the 2021 Revolving Credit Facility, containEWT III is required to pay a numbercommitment fee based on the daily unused portion of the 2021 Revolving Credit Facility, as well as certain other fees to the agents and the arrangers under the Senior Facilities. Subject to the terms of the 2021 Credit Agreement, to the extent not previously paid, any amount owed under the 2021 Revolving Credit Facility will become due and payable in full on April 1, 2026.
With respect to the 2021 Term Loan, EWT III pays quarterly installments of principal of approximately $1.2 million. Subject to the terms of the 2021 Credit Agreement, to the extent not previously paid, any amount owed under the 2021 Term Loan become due and payable in full on April 1, 2028.
Amounts outstanding under the Senior Facilities, at EWT III’s option, bear interest at either (i) a Base Rate determined in accordance with the terms of the 2021 Credit Agreement, (ii) with respect to any amounts denominated in U.S. dollars or Sterling, a LIBO rate, or replacement thereof, as determined in accordance with the terms of the 2021 Credit Agreement, or (iii) with respect to amounts denominated in Euros, the EURIBOR rate, or replacement thereof, as determined in accordance with the terms of the 2021 Credit Agreement. In the case of the 2021 Revolving Credit Facility, an applicable margin based on the consolidated total leverage of EWT III and its restricted subsidiaries, as calculated in accordance
with the terms of the 2021 Credit Agreement, is added to the interest rate elected by EWT III; provided that the interest rate may be adjusted if EWT III meets certain metrics for a sustainability price adjustment prior to December 31, 2021. In the case of the 2021 Term Loan, a fixed applicable margin, calculated in accordance with the terms of the 2021 Credit Agreement, is added to the interest rate elected by EWT III.
The net proceeds of the Senior Facilities, together with the net proceeds of the Receivables Securitization Program and cash on hand, were used to repay all outstanding indebtedness, in an aggregate principal amount of approximately $814.5 million, under the 2014 Credit Agreement. The proceeds of the 2021 Revolving Credit Facility may also be used to finance or refinance the working capital and capital expenditures needs of EWT III and certain of its subsidiaries and for general corporate purposes.
The 2021 Credit Agreement is subject to acceleration upon various events of default and contains customary representations, warranties, affirmative covenants, imposing certain restrictionsand negative covenants, each substantially similar to those included in the Credit Agreement, including, among other things, a springing maximum first lien leverage ratio of 5.55 to 1.00.
As a result of the refinancing, the Company wrote off approximately $1.3 million of deferred financing fees related to the 2014 Term Loan. In addition, the Company incurred approximately $5.0 million of fees as a result of the refinancing, of which $1.9 million were recorded as deferred financing fees on our business. These restrictions may affect our abilitythe Consolidated Balance Sheets and $3.1 million were expensed.
Receivables Securitization Program
On April 1, 2021, Evoqua Finance entered into the Receivables Securitization Program consisting of, among other agreements, (i) the Receivables Financing Agreement among Evoqua Finance, as the borrower, the Receivables Financing Lenders, PNC Bank, as administrative agent, EWT LLC, as initial servicer, and PNC Markets, as structuring agent, pursuant to operate our businesswhich the lenders have made available to Evoqua Finance the Securitization Facility in an amount up to $150.0 million and may limit our ability(ii) the Sale Agreement among Evoqua Finance, as purchaser, EWT LLC, as initial servicer and as an originator, and Neptune Benson, Inc., an indirectly wholly-owned subsidiary of the Company, as an originator. Under the Receivables Securitization Program, the Originators, pursuant to 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;
agreethe Sale Agreement, are required to payment restrictions affecting our restricted subsidiaries;
consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;their trade receivables and certain related rights to payment and obligations of the Originators with respect to such receivables (the “Receivables”) to Evoqua Finance, which, in turn, will obtain loans secured by the Receivables from the Receivables Financing Lenders pursuant to the Receivables Financing Agreement. On April 1, 2021, Evoqua Finance borrowed $142.2 million under the Securitization Facility. During the second half of 2021, Evoqua Finance borrowed additional amounts under the Securitization Facility and had $150.1 million outstanding at September 30, 2021, which includes $0.1 million of accrued interest.
enter into transactions with our affiliates;Pursuant to the Receivables Securitization Program, the aggregate principal amount of the loans made by the Receivables Financing Lenders will not exceed $150.0 million outstanding, subject to the borrowing base restrictions, unless so increased under the Receivables Financing Agreement. The Receivables Financing Lenders under the Receivables Securitization Program receive interest at LIBOR or LMIR as selected by Evoqua Finance. The Receivables Financing Agreement contains customary LIBOR benchmark replacement language. Additionally, PNC Bank and PNC Markets will receive certain fees as agents, and EWT LLC will receive a fee as servicer of the Receivables.
incur liens; or
designate any of our subsidiaries as unrestricted subsidiaries.
Our senior secured credit facilities also include an uncommitted incremental facility, which,The Receivables Securitization Program contains certain customary representations, warranties, affirmative covenants, and negative covenants, subject to certain conditions, provides for additional termcure periods in some cases, including the eligibility of the Receivables being sold by the Originators and securing the loans and/or revolving loans in an aggregate amount that does not cause our first lien net leverage ratio to exceed 4.50 to 1.00 (calculatedmade by the Receivables Financing Lenders, as the ratiowell as customary reserve requirements, events of consolidated funded first lien debt for borrowed money (net of unrestricted cashdefault, termination events, and cash equivalents) to trailing four-quarter Consolidated EBITDA (as defined therein), plus an additional $100 million (excluding incremental revolving credit loans or increases in revolving credit commitments not exceeding $30.0 million) (all of which remained available asservicer defaults. The Receivables Securitization Program matures on April 1, 2024. As of September 30, 2019).2021, we were in compliance with the covenants contained in the Receivables Securitization Program.
Contractual Obligations
We enter into long‑term obligations and commitments in the normal course of business, primarily debt obligations and non‑cancelable operating leases. As of September 30, 2021, our contractual cash obligations over the next several periods were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Total | | Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than 5 years |
Long‑term debt obligations(a) | $ | 754.9 | | | $ | 14.6 | | | $ | 179.7 | | | $ | 34.5 | | | $ | 526.1 | |
Interest payments on long‑term debt obligations | 124.7 | | | 22.2 | | | 39.7 | | | 36.1 | | | 26.7 | |
Operating lease commitments(b) | 56.3 | | | 15.1 | | | 22.5 | | | 13.6 | | | 5.1 | |
Finance lease commitments(c) | 40.9 | | | 13.4 | | | 19.2 | | | 7.9 | | | 0.4 | |
| | | | | | | | | |
Total | $ | 976.8 | | | $ | 65.3 | | | $ | 261.1 | | | $ | 92.1 | | | $ | 558.3 | |
(a)The amounts shown in this table do not include any net reductions for deferred financing fees. The amounts for current and long-term debt shown on the Consolidated Balance Sheets are net of deferred financing fees.
(b)We occupy certain facilities and operate certain equipment and vehicles under non‑cancelable lease arrangements. Lease agreements may contain lease escalation clauses and purchase and renewal options. We recognize scheduled lease escalation clauses over the course of the applicable lease term on a straight‑line basis.
(c)We lease certain equipment classified as finance leases. The leased equipment is depreciated on a straight line basis over the life of the lease and is included in depreciation expense.
Evoqua Water Technologies Corp. is a holding company and dodoes not conduct any business operations of ourits 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,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.
In addition, our Revolving Credit Facility, but not the First Lien Term Loan, 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 of September 30, 2019 and 2018, 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. See Part I, Item 1A, “Risk Factors-Our substantial indebtedness could adversely affect our financial condition and limit our ability to raise additional capital to fund our operations.”
Cash Flows
The following table summarizes the changes to our cash flows for the periods presented:
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
(In millions) | 2021 | | 2020 | | 2019 |
Statement of Cash Flows Data | | | | | |
Net cash provided by operating activities | $ | 178.7 | | | $ | 177.0 | | | $ | 125.2 | |
Net cash (used in) provided by investing activities | (97.2) | | | 12.0 | | | (94.5) | |
Net cash (used in) provided by financing activities | (130.3) | | | (108.1) | | | 5.7 | |
Effect of exchange rate changes on cash | 2.0 | | | 2.2 | | | (1.6) | |
Cash and cash equivalents classified as held for sale | — | | | — | | | (7.3) | |
Change in cash and cash equivalents | $ | (46.8) | | | $ | 83.1 | | | $ | 27.5 | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
(In millions) | 2019 | | 2018 | | 2017 |
Statement of Cash Flows Data | | | | | |
Net cash provided by operating activities | $ | 125.2 |
| | $ | 81.0 |
| | $ | 28.5 |
|
Net cash used in investing activities | (94.5 | ) | | (207.0 | ) | | (134.9 | ) |
Net cash provided by financing activities | 5.7 |
| | 150.6 |
| | 114.5 |
|
Effect of exchange rate changes on cash | (1.6 | ) | | (1.5 | ) | | 0.8 |
|
Cash and cash equivalents classified as held for sale | (7.3 | ) | | — |
| | — |
|
Change in cash and cash equivalents | $ | 27.5 |
| | $ | 23.1 |
| | $ | 8.9 |
|
Operating Activities
Cash flows from operating activities can fluctuate significantly from period‑to‑period as working capital needs and the timing of payments for restructuring activities and other items impact reported cash flows.
Net cash provided by operating activities increased to $125.2$178.7 million in the year ended September 30, 20192021 from $81.0$177.0 million in the year ended September 30, 2018.2020.
•Operating cash flows in the year ended September 30, 20192021 reflect a decrease in net income of $16.4$62.7 million from the year ended September 30, 2018 and increased2020, primarily driven by the sale of the Memcor product line.
•The add back of non‑cash charges increased operating cash flows by $130.5 million for the year ended September 30, 2021 as compared to an increase to operating cash flows of $30.0$45.3 million for the year ended September 30, 2020, resulting in an increase of $85.2 million. This increase was primarily relatingrelated to the gain on sale of the Memcor product line, which was reflected as a reduction of operating cash flows in the prior year, a decrease in the amount of foreign currency translation gains compared to the prior year, as well as increased share-based compensation expenses,and depreciation and amortization compared to the prior period. Non-cash changes in the foreign currency impactalso include amortization of deferred financing fees, deferred income taxes and loss on intercompany loanssale of property, plant, and deferred taxes.equipment.
•The aggregate of receivables, inventories, contract assets, accounts payable and contract billings used $7.8$17.5 million in operating cash flows in the year ended September 30, 20192021 compared to $3.0the providing of $23.1 million in the prior year. The amount of cash flow generated from or used by the above mentioned accounts depends upon how effectively we manage our cash conversion cycle, which is a representation of the number of days that elapse from the date of purchase of raw materials and components to the collection of cash from customers. Our cash conversion cycle can be significantly impacted by the timing of collections and payments in a period.
•The aggregate of prepaid expense and other assets, income taxes and other non currentthe remaining assets and liabilities provided $18.2used $18.8 million in operating cash flows in the year ended September 30, 20192021 compared to a usethe providing of $3.4 million in the prior year.
Accrued expenses and other liabilities used $9.2$39.9 million in operating cash flows in the prior year, ended September 30, 2019 comparedresulting in a decrease to a usecash flows of $22.9 million in the prior year. The reduced use of operational cash flow in 2019$58.7 million. This decrease was primarily due to thean increase in customer long term receivables and timing of cash payments associated with large outsourced water contracts.
•Income taxes used $2.1 million for various employee-related liabilities along with the payments of accrued expenses relatedyear end September 30, 2021, as compared to the earn-outs, IPO and other transactions which occurred inproviding of $0.6 million during the prior year.
Investing Activities
Net cash used in investing activities decreased $112.5$109.2 million to $94.5$97.2 million in the year ended September 30, 20192021 from $207.0net cash provided by investing activities of $12.0 million in the year ended September 30, 2018. Although there were2020. This decrease was more cash paid for property, plant and equipment and lowerlargely driven by proceeds from salesthe sale of the Memcor product line during 2019, thisthe year ended September 30, 2020, in addition to higher cash outflow associated with the Ultrapure and WCSI acquisitions in the current year period as compared to the Frontier acquisition that occurred in the prior period. This decrease was partially offset by lower cash outflow associated with acquisitions inpurchase of capital assets and intangibles compared to the current year.prior period. Other activity related to proceeds from the sale of property, plant and equipment remained relatively consistent with the prior period.
Financing Activities
Net cash provided byused in financing activities decreased $144.9increased $22.2 million to $5.7$130.3 million in the year ended September 30, 20192021 from $150.6net cash provided by financing activities of $108.1 million in the year ended September 30, 2018. This lower amount of2020. The increase in cash provided byused in financing activities in 2019for the year ended September 30, 2021 was primarily due to $137.6 million cash received upon the issuance of stock during the IPO in the prior year, partially offset by the issuance of debt and higher borrowings under the credit facility and other financing arrangementsrefinancing activities that occurred in the current year. In addition, we made higher repayments of debt in the current year whichThis increase was partially offset by reducedan increase in cash received from the exercise of stock options in the current period and a decrease in taxes paid related to net share settlements of share-based compensation activityawards and lower distributionsdistribution of dividends to non-controlling interest.
Seasonality
Our business may exhibit seasonality resulting from our customers’ increasing demand for our products and services during the spring and summer months asinterest declined compared to the fallprior period.
Seasonality
For more information regarding how seasonality may impact our business, results of operations and winter months. For example,financial condition, see Part I, Item 1A. “Risk Factors-Seasonality of sales and weather conditions may adversely affect, or cause volatility in, our Integrated Solutionsfinancial results.”
Seasonal trends historically displayed by our business could be impacted by the COVID-19 pandemic, and Services segment experiences increased demand for our odor control product lines and services in the warmer months which, together with other factors, typically results in improvedpast performance in the second halfshould not be considered indicative of our fiscal year. Inclement weather, such as hurricanes, droughts and floods, can also drive increased demand for our products and services. As a result, our results from operations may vary from period to period.future results.
Off‑Balance Sheet Arrangements
As of September 30, 2019 and 2018, weWe had letters of credit totaling $13.0 million and $11.8 million, respectively, and surety bonds totaling $144.7 million and $123.4 million, respectively,the following outstanding under our credit arrangements. arrangements at September 30, 2021 and September 30, 2020:
| | | | | | | | | | | |
(In millions) | September 30, 2021 | | September 30, 2020 |
Letters of credit | $ | 10.1 | | | $ | 13.0 | |
Surety bonds | $ | 147.8 | | | $ | 153.0 | |
The longest maturity date of the letters of credit and surety bonds in effect as of September 30, 20192021 was March 26, 2029. Additionally, as of September 30, 2018, the Company had letters of credit and surety bonds totaling $0.9 million and $2.5 million, respectively, outstanding under the Company’s prior arrangement with Siemens. No such amounts were outstanding as of September 30, 2019.
20, 2030.
Contractual Obligations
We enter into long‑term obligations and commitments in the normal course of business, primarily debt obligations and non‑cancelable operating leases. As of September 30, 2019, our contractual cash obligations over the next several periods were as follows:
|
| | | | | | | | | | | | | | | | | | | |
(In millions) | Total | | Less than 1 year | | 1 to 3 years | | 3 to 5 years | | More than 5 years |
Long‑term debt obligations | $ | 977.2 |
| | $ | 13.4 |
| | $ | 27.4 |
| | $ | 27.9 |
| | $ | 908.5 |
|
Interest payments on long‑term debt obligations | 263.2 |
| | 51.1 |
| | 99.8 |
| | 96.9 |
| | 15.4 |
|
Operating lease commitments (a) | 56.3 |
| | 16.0 |
| | 21.3 |
| | 10.2 |
| | 8.8 |
|
Capital lease commitments (b) | 41.6 |
| | 13.7 |
| | 17.9 |
| | 8.0 |
| | 2.0 |
|
Total | $ | 1,338.3 |
| | $ | 94.2 |
| | $ | 166.4 |
| | $ | 143.0 |
| | $ | 934.7 |
|
| |
(a) | We occupy certain facilities and operate certain equipment and vehicles under non‑cancelable lease arrangements. Lease agreements may contain lease escalation clauses and purchase and renewal options. We recognize scheduled lease escalation clauses over the course of the applicable lease term on a straight‑line basis. |
| |
(b) | We lease certain equipment classified as capital leases. The leased equipment is depreciated on a straight line basis over the life of the lease and is included in depreciation expense. |
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions about future events that affect amounts reported in our Consolidated Financial Statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements. Management evaluates its accounting policies, estimates and judgments on an on‑going basis. Management bases its estimates and judgments on historical experience, current trends and various other factors that are believed to be relevant at the time Consolidated Financial Statements are prepared. Actual results may differ from these estimates under different assumptions and conditions.
Management evaluated the development and selection of its critical accounting policies and estimates and believes that the following involve a higher degree of judgment, complexity or uncertainty and are most significant to reporting our results of operations and financial position, and are therefore discussed as critical. The following critical accounting
policies reflect the significant estimates and judgments used in the preparation of our Consolidated Financial Statements. Other than the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), in the first quarter of fiscal 2019, we have not made any material changes to our accounting policies or methodologies during the current year. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies” in Part II, Item 8 of this Annual Report on Form 10-K.Report.
Acquisitions and Purchase Price Allocation
We record acquisitions using the purchase method of accounting in accordance with ASCAccounting Standards Codification (“ASC”) 805, Business Combinations, which requires that the assets acquired and liabilities assumed, including contingent consideration, be recorded at their respective fair values at the acquisition date. The excess of the purchase price over the estimated fair values of the net tangible and intangible assets acquired is recorded as goodwill. The application of the purchase method of accounting requires management to make significant estimates and assumptions in the determination of the fair value of assets acquired and liabilities assumed, in order to properly allocate purchase price consideration. These assumptions and estimates include a market participant’s use of the asset and the appropriate discount rates for a market participant. Our estimates are based on historical experience, information obtained from themembers of management of the acquired companies and with the assistance of independent third-party appraisal firms. Significant assumptions and estimates include quoted market
prices, carrying values, and expected future cash flows, which includes consideration of future growth rates and margins, attrition rates, future changes in technology and brand awareness, loyalty, and the appropriate weighted-average cost of capital and the cost savings expected to be derived from acquiring an asset. These estimates are inherently uncertain and unanticipated events and circumstances may occur which could affect the accuracy or validity of estimates used in purchase accounting. The purchase price allocation recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition, as additional information about conditions existing at the acquisition date becomes available.
We record contingent consideration arrangements at fair value on a recurring basis as earn-outs related to acquisitions. The fair value of earn-outs related to acquisitions is based on significant unobservable inputs including the achievement of certain performance metrics. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the earn-out each period until the related contingency has been resolved. Changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Consolidated Statements of Operations.
Goodwill Impairment Review
We review goodwill to determine potential impairment annually during the fourth quarter of our fiscal year, or more frequently if events and circumstances indicate that the asset might be impaired. Impairment testing for goodwill is performed at a reporting unit level. A reporting unit is defined as an operating segment or one level below the operating segment. We have determined that we have three reporting units.
The fair values of reporting units are determined using a combination of two methods, one utilizing market revenue and earnings multiples derived from stocks of companies that are engaged in the same or similar lines of business and that are actively traded on a free and open market applied to the corresponding measure of our reporting unit’s financial performance (the market approach - guideline public company (“GPC”) method), and the other derived from discounted cash flow models with estimated cash flows based on internal forecasts of revenuesrevenue and expenses over a specified period plus a terminal value (the income approach discounted cash flows (“DCF”) method). In estimating the fair value of the reporting unit utilizing a DCF valuation technique, we incorporate our judgment and estimates of future cash flows, future revenue and gross profit growth rates, terminal value amount, capital expenditures and applicable weighted‑average cost of capital used to discount these estimated cash flows. The estimates and projections used in the estimate of fair value are consistent with our current budget and long‑range plans, including anticipated change in market conditions, industry trends, growth rates and planned capital expenditures, among other considerations.
We believe these two approaches are appropriate valuation techniques and we generally weight the two resulting values equally as an estimate of a reporting unit's fair value for the purposes of our impairment testing. However, we may weigh one value more heavily than the other when conditions merit doing so. If market conditions change compared to those used in our market approach, or if actual future results of operations fall below the projections used in the DCF method,
our goodwill could become impaired in the future. As a result of our goodwill impairment assessment, we have concluded that none of our goodwill was impaired as of September 30, 2019,2021, and we do not believe the risk of impairment is significant at this time.
Impairment of Long‑Lived Assets
Long‑lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in customer demand or business climate that could affect the value of an asset based on indicators of reduced profits or losses generated by the asset or asset group, a product recall, or an adverse action by a regulator, such as a successful challenge of patent rights.
When necessary, we record charges for impairments of long-lived assets for the amount by which the fair value is less than the carrying value of the asset or asset group. Fair value of long-lived assets areis determined using an appraised
value (obtained with the assistance of independent third-party appraisal firms) or using an income approach, specifically the discounted cash flow method. Starting with a forecast of the expected future net cash flows associated with an asset or group of assets, we then apply an asset-specific discount rate to arrive at a net present value amount. There were no material impairments of long-lived assets recorded in the current year.
We amortize long-lived assets with finite lives over their estimated useful lives on a straight‑line basis. This amortization methodology best matches the pattern of economic benefit that is expected from definite‑lived assets.
Revenue Recognition
For sales of aftermarket parts or products with a low level of customization and engineering time, the Company recognizes revenuesrevenue at the time risks and rewards of ownership pass, which is generally when products are shipped or delivered to the customer as the Company has no obligation for installation. The Company considers shipping and handling services to be fulfillment activities and as such they do not represent separate performance obligations for revenue recognition. Sales of short‑term service arrangements are recognized as the services are performed.performed, and sales of long‑term service arrangements are typically recognized on a straight‑line basis over the life of the agreement.
For certain arrangements where there is significant customization to the product and for long-term construction-type sales contracts, revenue may be recognized over time as performance is completed. In these instances, revenue is recognized using a measure of progress that applies an input method based on costs incurred in relation to total estimated costs at completion (the percentage-of-completion method). These arrangements include large water treatment projects, systems, and solutions for municipal and industrial applications. The nature of the contracts is generally fixed price with milestone billings. In order for revenue to be recognized over a period of time, the product must have no alternative use and the Company must have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. If these two criteria are not met, revenuesrevenue from these contracts will not be recognized until construction is complete. Contract costs include all direct materials, labor, subcontractors costs and indirect costs related to contract performance. We believe this is the most accurate measure of contract performance because it directly measures the value of the goods and services transferred to the customer.
The percentage-of-completion method of revenue recognition requires us to prepare estimates of cost to complete for contracts in progress. Due to the nature of the work performed on many of our performance obligations, the estimates of total revenue and cost at completion is complex, subject to many variables and may require significant judgment. In making such estimates, judgments are required to evaluate contingencies such as weather, potential variances in schedule and the cost of materials, labor cost and productivity, the impact of change orders, liability claims, contract disputes and achievement of contractual performance standards. As a significant change in one or more of these estimates could affect the profitability of our contracts, we routinely review and update our significant contract estimates through a disciplined project review process in which management reviews the progress and execution of our performance obligations and estimates at completion. Contract revenuesrevenue and cost estimates are reviewed and revised monthly and the cumulative effect of such adjustments are recognized in current operations. Such changes in contract estimates can result in the
recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in a prior period. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate. The amount of such adjustments havehas not been material.
For contracts with multiple performance obligations, we allocate the transaction price to each performance obligation using our best estimate of the standalone selling price of each distinct good or service in the contract. In cases where we do not provide the distinct good or service on a standalone basis, the primary method used to estimate standalone selling price is the expected cost plus a margin approach, under which we forecast our expected costs of satisfying a performance obligation and then add an appropriate margin for that distinct good or service. Our contracts are sometimes modified for changes in contract specifications and requirements. Judgment is required to determine if such modifications result in goods or services that are distinct from the existing contract. For customized products and long-term construction type contracts, most contract modifications are for goods and services that are not distinct due to the significant integration provided in the context of the contract and are accounted for as if they were part of the original contract on a cumulative catch-up basis. We account for contract modifications prospectively when it results in the promise to deliver additional goods and services that are distinct and the increase in price of the contract is for the same amount as the stand-alone selling price of the additional goods or services included in the modification.
Our contracts sometimes contain variable consideration in the form of incentive fees, performance bonuses, award fees, liquidated damages, or penalties. Other contract provisions also give rise to variable consideration such as claims and unpriced change orders that may either increase or decrease the transaction price. We estimate the amount of variable consideration at the most likely amount we expect to be entitled. Variable consideration is included in the transaction price when it is probable that a significant reversal of cumulative revenue recognized will not occur or when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include such amounts in the transaction price are based largely on our assessment of legal enforceability, anticipated performance, and any other information (historical, current, or forecasted) that is reasonably available to us. Variable consideration associated with claims and unapproved change orders is included in the transaction price only to the extent of costs incurred.
Product Warranties
Accruals for estimated expenses related to warranties are made at the time products are sold and are recorded as a component of cost of product sales in the Consolidated Statements of Operations in our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.Report. The estimated warranty obligation is based on product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs expected to be incurred in correcting a product failure, as well as specific obligations for known failures and other currently available evidence. We assess the adequacy of the recorded warranty liabilities on a regular basis and adjust amounts as necessary.
Deferred Taxes, Valuation Allowances, and Tax Contingencies
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includedincludes the enactment date. We record a valuation allowance to reduce certain deferred tax assets to amounts that are more-likely-than-not to be realized within a reasonable period of time. We evaluate the realizability of our deferred tax assets by assessing the valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization include our forecast of future taxable income exclusive of reversing temporary differences and carryforwards, future reversals of existing taxable temporary differences and available tax planning strategies that could be implemented to realize the net deferred tax assets.
We consider both positive and negative evidence when evaluating the need for a valuation allowance on our deferred tax assets in accordance with ASC 740, Income Taxes. Available evidence includes historical financial information supplemented by currently available information about future years. Generally, historical financial information is more objectively verifiable than projections of future income and is therefore given more weight in our assessment. We consider cumulative losses in the most recent twelve quarters to be significant negative evidence that is difficult to
overcome in considering whether a valuation allowance is required. Conversely, we consider a cumulative income position over the most recent twelve quarters, to be significant positive evidence that a valuation allowance may not be required.
Income tax positions must meet a more-likely-than-not recognition threshold to be recognized. Income tax positions that previously failed to meet the more-likely-than-not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. Uncertain tax positions are reviewed each balance sheet date. We recognize potential interest and penalties related to unrecognized tax benefits in income tax expense.
Recent Accounting Pronouncements
See Note 2, “Summary of Significant Accounting Policies” in Item 8, included in this Annual Report on Form 10-K for a complete discussion of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.
Item 7A. Quantitative and Qualitative Disclosures aboutAbout Market Risk
Interest Rate Risk
We have market risk exposure arising from changes in interest rates on our senior secured credit facilities, which bear interest at rates that are benchmarked against LIBOR. Based on our overall interest rate exposure to variable rate debt outstanding as of September 30, 2019,2021, a 1% increase or decrease in interest rates would decrease or increase income (loss) before income taxes by approximately $9.3$6.8 million. By comparison, a 1% increase or decrease in interest rates would have decreased or increased income (loss) before income taxes by approximately $9.4$8.2 million as of September 30, 20182020 based on our overall interest rate exposure to variable rate debt outstanding as of that date.
In November 2018,June 2021, the Company entered into an interest caprate swap with an effective date of August 1, 2022 to mitigate risk associated with a variable rate equipment financing. The interest rate swap provides for a fixed rate of 5.25%, has a notional amount of $31 million and a term of seven years.
In May 2020, the Company entered into an interest rate swap to mitigate risks associated with variable rate debt. The LIBOR interest rate capswap has a notional valuefive year term to hedge the variability of $600interest payments on the first $500 million is effective for a period of three yearsthe Company’s senior secured debt and has a strike pricefixes the LIBOR rate on this portion of 3.5%the senior secured debt at 0.61%.
Impact of Inflation and Tariffs
Our results of operations and financial condition are presented based on historical cost. Our financial results can be expected to be directly impacted by substantial increases in costs due to commodity cost increases, general inflation, and tariffs, which could lead to a reduction in our revenuesrevenue as well as decreased margins, as increased costs may not be able to be passed on to customers. It is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, but we believe that general inflationary pressures and increased tariffs have had an adverse effect on our margins in 2019 as compared to 2018. We cannot provide any assurance that our results of operations and financial condition will not be materially impacted by inflation in the future. The Company engages in activities to adjust pricing practices with customers to attempt to mitigate the inflationary cost impact incurred. Additionally, we believe thatwhile we have experienced supply chain disruptions, that were influenced by tariffs, includingto date we have managed restrictions in supply from domestic suppliers,material availability, delays in shipments andor disruptions associated with finding and qualifying alternate suppliers in order to mitigate the effect of tariffs.maintain our ability to fulfill customer requirements.
Foreign Currency Risk
We have global operations and therefore enter into transactions denominated in various foreign currencies. While we believe we are not susceptible to any material cash impact on our results of operations caused by fluctuations in exchange rates because our operations are primarily conducted in the United States (“U.S.”), if we expand our foreign operations in the future, substantial increases or decreases in the value of the U.S. dollar relative to these other currencies could have a significant impact on our results of operations.
To mitigate cross-currency transaction risk, we analyze significant exposures where we have receipts or payments in a currency other than the functional currency of our operations, and from time to time we may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. We also are subject to currency translation risk associated with converting our foreign operations’ financial statements into U.S. dollars. We use short-term foreign currency forward contracts and swaps to mitigate the impact of foreign exchange fluctuations on consolidated earnings. We use foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales, purchases, acquisitions, inventory, capital expenditures and certain intercompany transactions that are denominated in foreign currencies. We do not use derivative financial instruments for trading or speculative purposes.
Additionally, we are subject to foreign exchange translation risk due to changes in the value of foreign currencies in relation to our reporting currency, the U.S. Dollar. At this time the Company’s translation risk is primarily concentrated in the exchange rate between the U.S. Dollar and the Euro due to intercompany loans denominated in Euro used to facilitate the capital requirements of our non-U.S. subsidiaries. As the U.S. Dollar strengthens against the Euro, income will generally be negatively impacted, and as the U.S. Dollar weakens, income will generally be positively impacted. At this time these are non-cash impacts. We manage our worldwide cash requirements in accordance with availability in multiple jurisdictions and effectiveness with which those funds can be accessed. As a result, we may access cash from among international subsidiaries and the U.S. when it is cost effective to do so. We continually review our domestic and foreign cash profile, expected future cash generation and investment opportunities and reassess whether there is a need to repatriate funds held internationally to support our U.S. operations. Accordingly, we do not expect translation risk to have a material economic impact on our financial positions or results of operations.
Based on our overall foreign currency translation risk exposure related to intercompany loans denominated in Euro as of September 30, 2021 and 2020, a 1% increase or decrease in the Euro to U.S. Dollar exchange rate would decrease or increase income (loss) before income taxes by approximately $1.0 million in both periods.
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
SUPPLEMENTARY FINANCIAL INFORMATION
|
| | | | |
Evoqua Water Technologies Corp. | |
Audited Consolidated Financial Statements | |
| |
| |
| |
| |
| |
| |
| |
| |
| |
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Evoqua Water Technologies Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evoqua Water Technologies Corp. (the Company) as of September 30, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity and changes in cash flows for each of the three years in the period ended September 30, 2019,2021, and the related notes and the financial statement schedule listed inthe Index at Item 15(a)1 to the consolidated financial statements (collectively referred to as the “consolidated financial statements”).In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at September 30, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2019,2021, in conformity with U.S. generally accepted accounting principles. principles
.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2019,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated November 25, 201917, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition - contract cost estimates
| | | | | |
Description of the Matter | As explained in Notes 2 and 5 to the consolidated financial statements, when there is significant customization to the products associated with large water treatment projects for municipal and industrial applications, the Company recognizes revenue as performance is completed, using a measure of progress based on costs incurred in relation to estimated costs at completion. Because these estimates are subject to change during the performance of the contract, significant changes in estimates could have a material effect on the Company’s results of operations. Auditing the total cost estimates for projects where there is significant customization requires complex auditor judgment because of the significant management judgment necessary to develop the estimated total materials and labor costs at completion due to the size, uniqueness of and identified risks for each contract.
|
How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of relevant internal controls over the Company’s process relating to the determination of cost estimates for projects involving significant customer customization. For example, we evaluated the design and tested the operating effectiveness of controls over management’s review of the assumptions and data utilized to estimate costs to complete and the accumulation of actual costs incurred. To test the total cost estimation for projects, our audit procedures included, among others, obtaining an understanding of the contract, assessing management’s initial total cost estimate, including the materials and labor inputs for a sample of projects, as well as testing the detail of updates made to cost estimates. We analyzed cost estimates, including management’s evaluation of contract clauses and inputs used in cost calculations and assessed the measurement of project completion by performing a physical or virtual site inspection for a sample of in-progress contracts to assess estimates of project progress. Further, we tested cost accumulation for a sample of projects through performing physical and virtual site inspections to assess estimates of project progress, which included performing inquiries of project managers and controllers, as well as through agreement to contract summary data and testing of a sample of costs incurred by comparing amounts recorded to source documents and contracts. We also performed a retrospective review of management’s cost estimates for a sample of completed contracts by comparing initial estimates with the actual historical data to assess management’s ability to estimate. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2013.
Pittsburgh, Pennsylvania
November 25, 201917, 2021
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Evoqua Water Technologies Corp.
Opinion on Internal Control over Financial Reporting
We have audited Evoqua Water Technologies Corp.’s internal control over financial reporting as of September 30, 2019,2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Evoqua Water Technologies Corp. (the Company) maintained, in all material respects, effective internal control over financial reporting as of September 30, 2019,2021, based on the COSO criteria.
As indicated in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of ATG UV,WCSI, which is included in the 20192021 consolidated financial statements of the Company and constituted $4.1 million and $1.1 million0.7% of total and net assets respectively, as of September 30, 20192021 and $4.9 million and $1.0 million0.3% of revenues and net income, respectively,sales for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of ATG UV.WCSI.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive income (loss), changes in equity and changes in cash flows for each of the three years in the period ended September 30, 2019,2021, and the related notes and the financial statement schedule listed in the Index at Item 15(a)1 to the consolidated financial statements and our report dated November 25, 201917, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Pittsburgh, Pennsylvania
November 25, 201917, 2021
Evoqua Water Technologies Corp.
Consolidated Balance Sheets
(In thousands)
| | | | | | | | | | | |
| September 30, 2021 | | September 30, 2020 |
ASSETS | | | |
Current assets | $ | 678,458 | | | $ | 695,712 | |
Cash and cash equivalents | 146,244 | | | 193,001 | |
Receivables, net | 277,995 | | | 260,479 | |
Inventories, net | 158,503 | | | 142,379 | |
Contract assets | 72,746 | | | 80,759 | |
Prepaid and other current assets | 21,871 | | | 18,715 | |
Income tax receivable | 1,099 | | | 379 | |
| | | |
Property, plant, and equipment, net | 374,988 | | | 364,461 | |
Goodwill | 407,376 | | | 397,205 | |
Intangible assets, net | 290,075 | | | 309,967 | |
Deferred income taxes, net of valuation allowance | 8,285 | | | 3,639 | |
Operating lease right-of-use assets, net | 45,521 | | | 45,965 | |
Other non‑current assets | 64,188 | | | 27,509 | |
| | | |
Total assets | $ | 1,868,891 | | | $ | 1,844,458 | |
LIABILITIES AND EQUITY | | | |
Current liabilities | $ | 405,989 | | | $ | 349,555 | |
Accounts payable | 164,535 | | | 153,890 | |
Current portion of debt, net of deferred financing fees and discounts | 12,775 | | | 14,339 | |
Contract liabilities | 55,883 | | | 26,259 | |
Product warranties | 8,138 | | | 6,115 | |
Accrued expenses and other liabilities | 160,367 | | | 143,389 | |
Income tax payable | 4,291 | | | 5,563 | |
| | | |
Non‑current liabilities | $ | 880,683 | | | $ | 1,012,840 | |
Long‑term debt, net of deferred financing fees and discounts | 730,430 | | | 861,695 | |
Product warranties | 2,966 | | | 1,724 | |
Obligation under operating leases | 37,935 | | | 37,796 | |
Other non‑current liabilities | 92,909 | | | 98,456 | |
Deferred income taxes | 16,443 | | | 13,169 | |
| | | |
Total liabilities | $ | 1,286,672 | | | $ | 1,362,395 | |
Commitments and Contingent Liabilities (Note 22) | 0 | | 0 |
Shareholders’ equity | | | |
Common stock, par value $0.01: authorized 1,000,000 shares; issued 122,173 shares, outstanding 120,509 at September 30, 2021; issued 119,486 shares, outstanding 117,291 at September 30, 2020 | 1,223 | | | 1,189 | |
Treasury stock: 1,664 shares at September 30, 2021 and 2,195 shares at September 30, 2020 | (2,837) | | | (2,837) | |
Additional paid‑in capital | 582,052 | | | 564,928 | |
Retained deficit | (11,182) | | | (62,664) | |
Accumulated other comprehensive income (loss), net of tax | 11,415 | | | (20,472) | |
Total Evoqua Water Technologies Corp. equity | $ | 580,671 | | | $ | 480,144 | |
Non‑controlling interest | 1,548 | | | 1,919 | |
Total shareholders’ equity | $ | 582,219 | | | $ | 482,063 | |
Total liabilities and shareholders’ equity | $ | 1,868,891 | | | $ | 1,844,458 | |
|
| | | | | | | |
| September 30, 2019 | | September 30, 2018 |
ASSETS | | | |
Current assets | $ | 637,293 |
| | $ | 565,560 |
|
Cash and cash equivalents | 109,881 |
| | 82,365 |
|
Receivables, net | 257,585 |
| | 254,756 |
|
Inventories, net | 137,164 |
| | 134,988 |
|
Contract assets | 73,467 |
| | 69,147 |
|
Prepaid and other current assets | 21,940 |
| | 23,854 |
|
Income tax receivable | — |
| | 450 |
|
Assets held for sale | 37,256 |
| | — |
|
Property, plant, and equipment, net | 333,584 |
| | 320,023 |
|
Goodwill | 392,890 |
| | 411,346 |
|
Intangible assets, net | 314,767 |
| | 340,408 |
|
Deferred income taxes, net of valuation allowance | 2,790 |
| | 2,438 |
|
Other non‑current assets | 25,715 |
| | 23,842 |
|
Non-current assets held for sale | 30,809 |
| | — |
|
Total assets | $ | 1,737,848 |
| | $ | 1,663,617 |
|
LIABILITIES AND EQUITY | | | |
Current liabilities | $ | 322,221 |
| | $ | 284,719 |
|
Accounts payable | 144,247 |
| | 141,140 |
|
Current portion of debt, net of deferred financing fees | 13,418 |
| | 11,555 |
|
Contract liabilities | 39,051 |
| | 17,652 |
|
Product warranties | 4,922 |
| | 8,907 |
|
Accrued expenses and other liabilities | 101,839 |
| | 97,672 |
|
Income tax payable | 4,536 |
| | 7,793 |
|
Liabilities held for sale | 14,208 |
| | — |
|
Non‑current liabilities | 1,049,805 |
| | 1,016,882 |
|
Long‑term debt, net of deferred financing fees | 951,599 |
| | 928,075 |
|
Product warranties | 2,332 |
| | 3,360 |
|
Other non‑current liabilities | 78,661 |
| | 74,352 |
|
Deferred income taxes, net of valuation allowance | 13,548 |
| | 11,095 |
|
Non-current liabilities held for sale | 3,665 |
| | — |
|
Total liabilities | 1,372,026 |
| | 1,301,601 |
|
Commitments and Contingent Liabilities (Note 21) |
|
| |
|
|
Shareholders’ equity | | | |
Common stock, par value $0.01: authorized 1,000,000 shares; issued 116,008 shares, outstanding 114,344 at September 30, 2019; issued 115,016, outstanding 113,929 shares at September 30, 2018 | 1,154 |
| | 1,145 |
|
Treasury stock: 1,664 shares at September 30, 2019 and 1,087 shares at September 30, 2018 | (2,837 | ) | | (2,837 | ) |
Additional paid‑in capital | 552,422 |
| | 533,435 |
|
Retained deficit | (174,976 | ) | | (163,871 | ) |
Accumulated other comprehensive loss, net of tax | (13,004 | ) | | (9,017 | ) |
Total Evoqua Water Technologies Corp. equity | 362,759 |
| | 358,855 |
|
Non‑controlling interest | 3,063 |
| | 3,161 |
|
Total shareholders’ equity | 365,822 |
| | 362,016 |
|
Total liabilities and shareholders’ equity | $ | 1,737,848 |
| | $ | 1,663,617 |
|
See accompanying notes to these Consolidated Financial Statements
Evoqua Water Technologies Corp.
Consolidated Statements of Operations
(In thousands except per share data)
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Revenue from product sales | $ | 861,026 | | | $ | 839,857 | | | $ | 851,161 | |
Revenue from services | 603,403 | | | 589,599 | | | 593,280 | |
Revenue from product sales and services | $ | 1,464,429 | | | $ | 1,429,456 | | | $ | 1,444,441 | |
Cost of product sales | (607,693) | | | (588,264) | | | (615,171) | |
Cost of services | (399,384) | | | (391,389) | | | (403,308) | |
Cost of product sales and services | $ | (1,007,077) | | | $ | (979,653) | | | $ | (1,018,479) | |
Gross profit | $ | 457,352 | | | $ | 449,803 | | | $ | 425,962 | |
General and administrative expense | (206,455) | | | (192,597) | | | (217,013) | |
Sales and marketing expense | (143,110) | | | (136,167) | | | (138,936) | |
Research and development expense | (13,445) | | | (13,198) | | | (15,300) | |
Total operating expenses | $ | (363,010) | | | $ | (341,962) | | | $ | (371,249) | |
Other operating income | 5,743 | | | 61,662 | | | 5,613 | |
Other operating expense | (768) | | | (1,055) | | | (654) | |
Income before interest expense and income taxes | $ | 99,317 | | | $ | 168,448 | | | $ | 59,672 | |
Interest expense | (37,575) | | | (46,682) | | | (58,556) | |
Income before income taxes | $ | 61,742 | | | $ | 121,766 | | | $ | 1,116 | |
Income tax expense | (10,080) | | | (7,371) | | | (9,587) | |
Net income (loss) | $ | 51,662 | | | $ | 114,395 | | | $ | (8,471) | |
Net income attributable to non‑controlling interest | 180 | | | 746 | | | 1,052 | |
Net income (loss) attributable to Evoqua Water Technologies Corp. | $ | 51,482 | | | $ | 113,649 | | | $ | (9,523) | |
Basic income (loss) per common share | $ | 0.43 | | | $ | 0.97 | | | $ | (0.08) | |
Diluted income (loss) per common share | $ | 0.42 | | | $ | 0.94 | | | $ | (0.08) | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Revenue from product sales | $ | 851,161 |
| | $ | 802,302 |
| | $ | 718,098 |
|
Revenue from services | 593,280 |
| | 537,239 |
| | 529,326 |
|
Revenue | 1,444,441 |
| | 1,339,541 |
| | 1,247,424 |
|
Cost of product sales | (615,171 | ) | | (582,606 | ) | | (459,641 | ) |
Cost of services | (403,308 | ) | | (352,202 | ) | | (388,032 | ) |
Cost of product sales and services | (1,018,479 | ) | | (934,808 | ) | | (847,673 | ) |
Gross profit | 425,962 |
| | 404,733 |
| | 399,751 |
|
General and administrative expense | (217,013 | ) | | (193,816 | ) | | (169,617 | ) |
Sales and marketing expense | (138,936 | ) | | (136,009 | ) | | (142,441 | ) |
Research and development expense | (15,300 | ) | | (15,877 | ) | | (19,990 | ) |
Total operating expenses | (371,249 | ) | | (345,702 | ) | | (332,048 | ) |
Other operating income | 5,613 |
| | 8,406 |
| | 2,361 |
|
Other operating expense | (654 | ) | | (591 | ) | | (860 | ) |
Income before interest expense and income taxes | 59,672 |
| | 66,846 |
| | 69,204 |
|
Interest expense | (58,556 | ) | | (57,580 | ) | | (55,377 | ) |
Income before income taxes | 1,116 |
| | 9,266 |
| | 13,827 |
|
Income tax expense | (9,587 | ) | | (1,382 | ) | | (7,417 | ) |
Net (loss) income | (8,471 | ) | | 7,884 |
| | 6,410 |
|
Net income attributable to non‑controlling interest | 1,052 |
| | 1,749 |
| | 4,247 |
|
Net (loss) income attributable to Evoqua Water Technologies Corp. | $ | (9,523 | ) | | $ | 6,135 |
| | $ | 2,163 |
|
Basic (loss) income per common share | $ | (0.08 | ) | | $ | 0.05 |
| | $ | 0.02 |
|
Diluted (loss) income per common share | $ | (0.08 | ) | | $ | 0.05 |
| | $ | 0.02 |
|
See accompanying notes to these Consolidated Financial Statements
Evoqua Water Technologies Corp.
Consolidated Statements of Comprehensive Income (Loss)
(In thousands) | | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Net income (loss) | $ | 51,662 | | | $ | 114,395 | | | $ | (8,471) | |
Other comprehensive income (loss) | | | | | |
Foreign currency translation adjustments | 21,672 | | | (2,830) | | | 1,507 | |
Unrealized derivative gain (loss) on cash flow hedges, net of tax | 7,293 | | | (4,717) | | | 74 | |
Change in pension liability, net of tax | 2,922 | | | 79 | | | (5,568) | |
Total other comprehensive income (loss) | $ | 31,887 | | | $ | (7,468) | | | $ | (3,987) | |
Less: Comprehensive income attributable to non‑controlling interest | (180) | | | (746) | | | (1,052) | |
Comprehensive income (loss) attributable to Evoqua Water Technologies Corp. | $ | 83,369 | | | $ | 106,181 | | | $ | (13,510) | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Net (loss) income | $ | (8,471 | ) | | $ | 7,884 |
| | $ | 6,410 |
|
Other comprehensive income (loss) | | | | | |
Foreign currency translation adjustments | 1,507 |
| | (3,473 | ) | | 148 |
|
Unrealized derivative gain (loss) on cash flow hedges, net of tax of benefit of $154, $0 and $0, respectively | 74 |
| | (21 | ) | | (19 | ) |
Change in pension liability, net of tax expense of $26, $232 and $0, respectively | (5,568 | ) | | 466 |
| | 4,553 |
|
Total other comprehensive (loss) income | (3,987 | ) | | (3,028 | ) | | 4,682 |
|
Less: Comprehensive income attributable to non‑controlling interest | (1,052 | ) | | (1,749 | ) | | (4,247 | ) |
Comprehensive (loss) income attributable to Evoqua Water Technologies Corp. | $ | (13,510 | ) | | $ | 3,107 |
| | $ | 6,845 |
|
See accompanying notes to these Consolidated Financial Statements
Evoqua Water Technologies Corp.
Consolidated Statements of Changes in Equity
(In thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid‑in Capital | | Retained Deficit | | Accumulated Other Comprehensive (Loss) Income | | Non‑controlling Interest | | Total |
| Shares | | Cost | | Shares | | Cost | | | | | |
Balance at September 30, 2018 | 115,016 | | | $ | 1,145 | | | 1,087 | | | $ | (2,837) | | | $ | 533,435 | | | $ | (163,871) | | | $ | (9,017) | | | $ | 3,161 | | | $ | 362,016 | |
Cumulative effect of adoption of new accounting standards | — | | | — | | | — | | | — | | | — | | | (1,582) | | | — | | | — | | | $ | (1,582) | |
Equity based compensation expense | — | | | — | | | — | | | — | | | 19,903 | | | — | | | — | | | — | | | $ | 19,903 | |
Shares of common stock issued in initial public offering, net of offering costs | 108 | | | — | | | — | | | — | | | 363 | | | — | | | — | | | — | | | $ | 363 | |
Shares withheld related to net share settlement (including tax withholdings) | 884 | | | 9 | | | 577 | | | — | | | (1,279) | | | — | | | — | | | — | | | $ | (1,270) | |
| | | | | | | | | | | | | | | | | |
Dividends paid to non‑controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,150) | | | $ | (1,150) | |
Net (loss) income | — | | | — | | | — | | | — | | | — | | | (9,523) | | | — | | | 1,052 | | | $ | (8,471) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (3,987) | | | — | | | $ | (3,987) | |
Balance at September 30, 2019 | 116,008 | | | $ | 1,154 | | | 1,664 | | | $ | (2,837) | | | $ | 552,422 | | | $ | (174,976) | | | $ | (13,004) | | | $ | 3,063 | | | $ | 365,822 | |
Cumulative effect of adoption of new accounting standards | — | | | — | | | — | | | — | | | — | | | (1,337) | | | — | | | — | | | $ | (1,337) | |
Equity based compensation expense | — | | | — | | | — | | | — | | | 10,509 | | | — | | | — | | | — | | | $ | 10,509 | |
Issuance of common stock, net | 3,478 | | | 35 | | | 531 | | | — | | | 18,892 | | | — | | | — | | | — | | | $ | 18,927 | |
Divestiture of Memcor product line | — | | | — | | | — | | | — | | | (16,895) | | | — | | | — | | | — | | | $ | (16,895) | |
| | | | | | | | | | | | | | | | | |
Dividends paid to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (1,890) | | | $ | (1,890) | |
Net income | — | | | — | | | — | | | — | | | — | | | 113,649 | | | — | | | 746 | | | $ | 114,395 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (7,468) | | | — | | | $ | (7,468) | |
Balance at September 30, 2020 | 119,486 | | | $ | 1,189 | | | 2,195 | | | $ | (2,837) | | | $ | 564,928 | | | $ | (62,664) | | | $ | (20,472) | | | $ | 1,919 | | | $ | 482,063 | |
| | | | | | | | | | | | | | | | | |
Equity based compensation expense | — | | | — | | | — | | | — | | | 15,524 | | | — | | | — | | | — | | | $ | 15,524 | |
Issuance of common stock, net | 2,687 | | | 34 | | | (531) | | | — | | | 1,600 | | | — | | | — | | | — | | | $ | 1,634 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Dividends paid to non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (551) | | | $ | (551) | |
| | | | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | 51,482 | | | — | | | 180 | | | $ | 51,662 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 31,887 | | | — | | | $ | 31,887 | |
Balance at September 30, 2021 | 122,173 | | | $ | 1,223 | | | 1,664 | | | $ | (2,837) | | | $ | 582,052 | | | $ | (11,182) | | | $ | 11,415 | | | $ | 1,548 | | | $ | 582,219 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional Paid‑in Capital | | Retained Deficit | | Accumulated Other Comprehensive Loss | | Non‑controlling Interest | | Total |
| Shares | | Cost | | Shares | | Cost | | | | | |
Balance at September 30, 2016 | 104,495 |
| | $ | 1,045 |
| | 245 |
| | $ | (1,133 | ) | | $ | 381,223 |
| | $ | (172,169 | ) | | $ | (10,671 | ) | | $ | 5,640 |
| | $ | 203,935 |
|
Equity based compensation expense | — |
| | — |
| | — |
| | — |
| | 2,251 |
| | — |
| | — |
| | — |
| | 2,251 |
|
Issuance of common stock | 864 |
| | 9 |
| | — |
| | — |
| | 5,512 |
| | — |
| | — |
| | — |
| | 5,521 |
|
Stock repurchases | — |
| | — |
| | 165 |
| | (1,474 | ) | | — |
| | — |
| | — |
| | — |
| | (1,474 | ) |
Dividends paid to non‑controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,750 | ) | | (4,750 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 2,163 |
| | — |
| | 4,247 |
| | 6,410 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,682 |
| | — |
| | 4,682 |
|
Balance at September 30, 2017 | 105,359 |
| | 1,054 |
| | 410 |
| | (2,607 | ) | | 388,986 |
| | (170,006 | ) | | (5,989 | ) | | 5,137 |
| | 216,575 |
|
Equity based compensation expense | — |
| | — |
| | — |
| | — |
| | 15,742 |
| | — |
| | — |
| | — |
| | 15,742 |
|
Shares of common stock issued in initial public offering, net of offering costs | 8,333 |
| | 83 |
| | — |
| | — |
| | 137,522 |
| | — |
| | — |
| | — |
| | 137,605 |
|
Shares withheld related to net share settlement (including tax withholdings) | 1,324 |
| | 8 |
| | 659 |
| | — |
| | (8,815 | ) | | — |
| | — |
| | — |
| | (8,807 | ) |
Stock repurchases | — |
| | — |
| | 18 |
| | (230 | ) | | — |
| | — |
| | — |
| | — |
| | (230 | ) |
Dividends paid to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,725 | ) | | (3,725 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 6,135 |
| | — |
| | 1,749 |
| | 7,884 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,028 | ) | | — |
| | (3,028 | ) |
Balance at September 30, 2018 | 115,016 |
| | 1,145 |
| | 1,087 |
| | (2,837 | ) | | 533,435 |
| | (163,871 | ) | | (9,017 | ) | | 3,161 |
| | 362,016 |
|
Cumulative effect of adoption of new accounting standards | — |
| | — |
| | — |
| | — |
| | — |
| | (1,582 | ) | | — |
| | — |
| | (1,582 | ) |
Equity based compensation expense | — |
| | — |
| | — |
| | — |
| | 19,903 |
| | — |
| | — |
| | — |
| | 19,903 |
|
Issuance of common stock | 108 |
| | — |
| | — |
| | — |
| | 363 |
| | — |
| | — |
| | — |
| | 363 |
|
Shares withheld related to net share settlement (including tax withholdings) | 884 |
| | 9 |
| | 577 |
| | — |
| | (1,279 | ) | | — |
| | — |
| | — |
| | (1,270 | ) |
Dividends paid to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1,150 | ) | | (1,150 | ) |
Net (loss) income | — |
| | — |
| | — |
| | — |
| | — |
| | (9,523 | ) | | — |
| | 1,052 |
| | (8,471 | ) |
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (3,987 | ) | | — |
| | (3,987 | ) |
Balance at September 30, 2019 | 116,008 |
| | $ | 1,154 |
| | 1,664 |
| | $ | (2,837 | ) | | $ | 552,422 |
| | $ | (174,976 | ) | | $ | (13,004 | ) | | $ | 3,063 |
| | $ | 365,822 |
|
See accompanying notes to these Consolidated Financial Statements
Evoqua Water Technologies Corp.
Consolidated Statements of Changes in Cash Flows
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Operating activities | | | | | |
Net income (loss) | $ | 51,662 | | | $ | 114,395 | | | $ | (8,471) | |
Reconciliation of net income to cash flows provided by operating activities: | | | | | |
Depreciation and amortization | 113,664 | | | 107,268 | | | 98,236 | |
Amortization of deferred financing fees (includes $1,333, $1,795, and $0 write off of deferred financing fees) | 3,280 | | | 4,026 | | | 2,612 | |
Deferred income taxes | (2,363) | | | (1,234) | | | 1,948 | |
Share-based compensation | 15,524 | | | 10,509 | | | 19,903 | |
Loss (gain) on sale of property, plant, and equipment | 1,287 | | | 950 | | | (932) | |
Loss (gain) on sale of business | 193 | | | (68,051) | | | — | |
Foreign currency exchange (gains) losses on intercompany loans and other non-cash items | (1,094) | | | (8,202) | | | 10,713 | |
Changes in assets and liabilities | | | | | |
Accounts receivable | (13,281) | | | (6,844) | | | (13,235) | |
Inventories | (15,985) | | | (7,604) | | | (1,469) | |
Contract assets | 8,426 | | | (4,136) | | | (23,827) | |
Prepaids and other current assets | 260 | | | 2,088 | | | 9,447 | |
Accounts payable | 9,824 | | | 8,017 | | | 9,408 | |
Accrued expenses and other liabilities | 21,881 | | | 22,078 | | | (9,159) | |
Contract liabilities | 28,447 | | | (12,556) | | | 21,311 | |
Income taxes | (2,091) | | | 592 | | | (3,651) | |
Other non‑current assets and liabilities | (40,929) | | | 15,730 | | | 12,362 | |
Net cash provided by operating activities | $ | 178,705 | | | $ | 177,026 | | | $ | 125,196 | |
Investing activities | | | | | |
Purchase of property, plant, and equipment | $ | (75,293) | | | $ | (88,456) | | | $ | (88,869) | |
Purchase of intangibles | (3,780) | | | (6,529) | | | (6,426) | |
Proceeds from sale of property, plant, and equipment | 2,041 | | | 1,191 | | | 3,636 | |
Proceeds from sale of business, net of cash of $0, $12,117, and $0 | 897 | | | 118,894 | | | — | |
Acquisitions, net of cash received $0, $0, and $2,073 | (21,037) | | | (13,108) | | | (2,873) | |
Net cash (used in) provided by investing activities | $ | (97,172) | | | $ | 11,992 | | | $ | (94,532) | |
Financing activities | | | | | |
Issuance of debt, net of deferred issuance costs | $ | 761,915 | | | $ | 21,959 | | | $ | 38,381 | |
Borrowings under credit facility | — | | | 2,597 | | | 292,825 | |
Repayment of debt | (898,024) | | | (117,131) | | | (307,809) | |
Repayment of finance lease obligation | (13,396) | | | (13,441) | | | (12,900) | |
Payment of earn-out related to previous acquisitions | (170) | | | (470) | | | (461) | |
| | | | | |
Proceeds from issuance of common stock | 21,205 | | | 10,091 | | | 363 | |
Taxes paid related to net share settlements of share-based compensation awards | (1,323) | | | (9,832) | | | (1,270) | |
| | | | | |
| | | | | |
Cash paid for interest rate cap | — | | | — | | | (2,235) | |
Distribution to non‑controlling interest | (551) | | | (1,890) | | | (1,150) | |
Net cash (used in) provided by financing activities | $ | (130,344) | | | $ | (108,117) | | | $ | 5,744 | |
Effect of exchange rate changes on cash | 2,054 | | | 2,219 | | | (1,601) | |
Cash and cash equivalents classified as held for sale | — | | | — | | | (7,291) | |
Change in cash and cash equivalents | $ | (46,757) | | | $ | 83,120 | | | $ | 27,516 | |
Cash and cash equivalents | | | | | |
Beginning of period | 193,001 | | | 109,881 | | | 82,365 | |
End of period | $ | 146,244 | | | $ | 193,001 | | | $ | 109,881 | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Operating activities | | | | | |
Net (loss) income | $ | (8,471 | ) | | $ | 7,884 |
| | $ | 6,410 |
|
Reconciliation of net income to cash flows provided by operating activities: | | | | | |
Depreciation and amortization | 98,236 |
| | 85,860 |
| | 77,886 |
|
Amortization of debt related costs (includes $0, $5,575 and $3,094 write off of deferred financing fees) | 2,612 |
| | 8,073 |
| | 8,511 |
|
Deferred income taxes | 1,948 |
| | (6,232 | ) | | 1,273 |
|
Share-based compensation | 19,903 |
| | 15,742 |
| | 2,251 |
|
Gain on sale of property, plant and equipment | (932 | ) | | (6,750 | ) | | 1,230 |
|
Foreign currency exchange losses (gains) on intercompany loans and other non-cash items | 10,713 |
| | 5,766 |
| | (5,625 | ) |
Changes in assets and liabilities | | | | | |
Accounts receivable | (13,235 | ) | | (3,139 | ) | | (44,047 | ) |
Inventories | (1,469 | ) | | (12,051 | ) | | (5,948 | ) |
Contract assets | (23,827 | ) | | (3,544 | ) | | (17,296 | ) |
Prepaids and other current assets | 9,447 |
| | (3,773 | ) | | (2,971 | ) |
Accounts payable | 9,408 |
| | 24,945 |
| | 4,707 |
|
Accrued expenses and other liabilities | (9,159 | ) | | (22,851 | ) | | (2,243 | ) |
Contract liabilities | 21,311 |
| | (9,254 | ) | | 1,301 |
|
Income taxes | (3,651 | ) | | 2,777 |
| | 6,656 |
|
Other non‑current assets and liabilities | 12,362 |
| | (2,436 | ) | | (3,593 | ) |
Net cash provided by operating activities | 125,196 |
| | 81,017 |
| | 28,502 |
|
Investing activities | | | | | |
Purchase of property, plant and equipment | (88,869 | ) | | (80,713 | ) | | (57,775 | ) |
Purchase of intangibles | (6,426 | ) | | (1,950 | ) | | (4,914 | ) |
Proceeds from sale of property, plant and equipment | 3,636 |
| | 21,641 |
| | 5,422 |
|
Proceeds from sale of business | — |
| | 430 |
| | — |
|
Acquisitions, net of cash received of $2,073, $27 and $209 | (2,873 | ) | | (146,443 | ) | | (77,628 | ) |
Net cash used in investing activities | (94,532 | ) | | (207,035 | ) | | (134,895 | ) |
Financing activities | | | | | |
Issuance of debt, net of deferred issuance costs | 38,381 |
| | 155,270 |
| | 415,602 |
|
Borrowings under credit facility | 292,825 |
| | 129,000 |
| | 131,000 |
|
Repayment of debt | (307,809 | ) | | (242,470 | ) | | (423,418 | ) |
Repayment of capital lease obligation | (12,900 | ) | | (10,474 | ) | | (7,962 | ) |
Payment of earn-out related to previous acquisitions | (461 | ) | | (5,528 | ) | | — |
|
Proceeds from issuance of common stock | 363 |
| | 137,605 |
| | 5,521 |
|
Taxes paid related to net share settlements of share-based compensation awards | (1,270 | ) | | (8,807 | ) | | — |
|
Stock repurchases | — |
| | (230 | ) | | (1,474 | ) |
Cash paid for interest rate cap | (2,235 | ) | | — |
| | — |
|
Distribution to non‑controlling interest | (1,150 | ) | | (3,725 | ) | | (4,750 | ) |
Net cash provided by financing activities | 5,744 |
| | 150,641 |
| | 114,519 |
|
Effect of exchange rate changes on cash | (1,601 | ) | | (1,512 | ) | | 766 |
|
Cash and cash equivalents classified as held for sale | (7,291 | ) | | — |
| | — |
|
Change in cash and cash equivalents | 27,516 |
| | 23,111 |
| | 8,892 |
|
Cash and cash equivalents | | | | | |
Beginning of period | 82,365 |
| | 59,254 |
| | 50,362 |
|
End of period | $ | 109,881 |
| | $ | 82,365 |
| | $ | 59,254 |
|
See accompanying notes to these Consolidated Financial Statements
Evoqua Water Technologies Corp.
Supplemental Disclosure of Cash Flow Information
(In thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Supplemental disclosure of cash flow information | | | | | |
Cash paid for taxes | $ | 14,194 | | | $ | 8,427 | | | $ | 10,340 | |
Cash paid for interest | $ | 26,502 | | | $ | 38,680 | | | $ | 52,786 | |
Non‑cash investing and financing activities | | | | | |
Accrued earn-out related to acquisitions | $ | — | | | $ | 204 | | | $ | — | |
Finance lease transactions | $ | 14,351 | | | $ | 12,600 | | | $ | 18,640 | |
Operating lease transactions | $ | 12,894 | | | $ | 23,727 | | | $ | — | |
Option and Purchase Right | $ | 8,305 | | | $ | 7,739 | | | $ | — | |
Landlord incentives | $ | — | | | $ | — | | | $ | 1,000 | |
| | | | | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Supplemental disclosure of cash flow information | | | | | |
Cash paid for taxes | $ | 10,340 |
| | $ | 4,450 |
| | $ | 3,017 |
|
Cash paid for interest | $ | 52,786 |
| | $ | 43,596 |
| | $ | 43,426 |
|
Non‑cash investing and financing activities | | | | | |
Accrued earn-out related to acquisitions | $ | — |
| | $ | 1,570 |
| | $ | 7,479 |
|
Capital lease transactions | $ | 18,640 |
| | $ | 10,595 |
| | $ | 15,513 |
|
Landlord incentives | $ | 1,000 |
| | $ | — |
| | $ | 1,700 |
|
Cloud computing related intangible transaction | $ | — |
| | $ | — |
| | $ | 5,544 |
|
See accompanying notes to these Consolidated Financial Statements
Evoqua Water Technologies Corp.
Notes to Audited Consolidated Financial Statements
(In thousands)
1. Description of the Company and Basis of Presentation
Background
Evoqua Water Technologies Corp. (referred to herein as the “Company” or “EWT”) is a holding company and does not conduct any business operations of its own. The Company was incorporated on October 7, 2013. On January 15, 2014, Evoqua Water Technologies Corp.,the Company acquired, through its wholly owned entities,subsidiaries, EWT Holdings II Corp. (“EWT II”) and EWT Holdings III Corp. (a/k/a Evoqua Water Technologies)(“EWT III”), all of the outstanding shares of Siemens Water Technologies a group of legal entity businessesbusiness unit formerly owned by Siemens AG (“Siemens”). The stock purchase closed on January 15, 2014 and was effective January 16, 2014 (the “Acquisition”). The stock purchase price, net of cash received, was approximately $730,577. On November 6, 2017, the Company completed its initial public offering (“IPO”),.
On December 4, 2020, the Company completed a secondary public offering, pursuant to which an aggregate of 27,77712,000 shares of common stock were sold by certain selling shareholders. On February 11, 2021, the Company completed an additional secondary public offering, pursuant to which 16,383 shares of which 8,333common stock were sold by the Company and 19,444 were sold by thecertain selling shareholders, with a par value of $0.01 per share. After underwriting discounts and commissions and expenses, the Company received net proceeds from the IPO of approximately $137,605. The Company used a portionshareholders. Upon completion of these proceeds to repay $104,936offerings, AEA Investors LP disposed of indebtedness (including accrued and unpaid interest) under EWT III’s senior secured first lien term loan facility andall of their shares of the remainder for general corporate purposes.Company’s common stock. The Company did not receive any proceeds from the sale of shares by the selling shareholders. On November 7, 2017, the selling shareholders sold an additional 4,167 sharesin either of common stock as a result of the exercise in full by the underwriters of an option to purchase additional shares. On March 19, 2018, the Company completed athese secondary public offering, pursuant to which 17,500 shares of common stock were sold by certain selling shareholders. On March 21, 2018, the selling shareholders sold an additional 2,625 shares of common stock as a result of the exercise in full by the underwriters of an option to purchase additional shares. The Company did not receive any proceeds from the sale of shares by the selling shareholders.offerings.
The Business
EWT provides a wide range of product brands and advanced water and wastewater treatment systems and technologies, as well as mobile and emergency water supply solutions and service contract options through its segment branch network. Headquartered in Pittsburgh, Pennsylvania, EWT is a multi‑nationalmultinational corporation with operations in the United States (“U.S.”), Canada, the United Kingdom (“UK”), the Netherlands, Germany, Australia, the People’s Republic of China, Singapore, the Republic of Korea, and India.
The Company is organizationally structured into two2 reportable operating segments for the purpose of making operational decisions and assessing financial performance: (i) Integrated Solutions and Services and (ii) Applied Product Technologies.
Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) from the accounting records of the Company and reflect the consolidated financial position and results of operations for the fiscal years ended September 30, 2019, 20182021, 2020 and 2017.2019. Unless otherwise specified, references in this section to a year refer to its fiscal year. All intercompany transactions have been eliminated. Unless otherwise specified, all dollar and share amounts in this section are referred to in thousands. Certain prior period amounts have been reclassified to conform to the current period presentation. The Company’s fiscal year ends on September 30 of each year and references in this section to a year refer to the Company’s fiscal year. As such, references to: 2021 relates to the fiscal year ended September 30, 2021, 2020 relates to the fiscal year ended September 30, 2020 and 2019 relates to the fiscal year ended September 30, 2019.
Correction of Immaterial Errors
During the quarter ended March 31, 2021, the Company identified errors related to the reporting of tax remittances associated with certain equity awards, resulting in a classification error of $18,669 between additional paid in capital and accumulated other comprehensive loss. Management recorded the correction to additional paid in capital and accumulated other comprehensive balances during the quarter ended March 31, 2021. Management considered both the quantitative and qualitative factors within the provisions of SEC Staff Accounting Bulletin No. 99, Materiality, and Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. Based on evaluation of the errors, management has concluded that the prior period
errors were immaterial to the previously issued financial statements. As a result of that classification error, management also identified a second, related immaterial classification error for the understatement of net cash provided by operating cash flows of $18,669 and an overstatement of net cash provided by financing activities of $18,669 for the period from October 1, 2019 to September 30, 2020. The Company has elected to voluntarily correct the identified immaterial classification error in the prior period Consolidated Statements of Changes to Cash Flows to enhance comparability. In doing so, balances in the Consolidated Statements of Changes to Cash Flows included in this Form 10-K have been adjusted to reflect the voluntary immaterial classification error correction of $18,669 between financing and operating in the prior period. Future filings that include prior periods will be corrected, as needed, when filed.
The correction of the above classification errors did not have any effect on the Consolidated Statements of Operations in any of the periods previously presented.
2. Summary of Significant Accounting Policies
Fiscal Year
The Company’s fiscal year ends on September 30.
Use of Estimates
The Consolidated Financial Statements have been prepared in conformity with GAAP and require management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the audited Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions are used for, but not limited to: (i) revenue recognition; (ii) allowance for doubtful accounts;credit losses; (iii) inventory valuation, asset valuations, impairment, and recoverability assessments; (iv) depreciable lives of assets; (v) useful lives of intangible assets; (vi) income tax reserves and valuation allowances; and (vii) product warranty and litigation reserves. Estimates are revised as additional information becomes available. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents are liquid investments with an original maturity of three or fewer months when purchased.
Accounts Receivable
Receivables are primarily comprised of uncollected amounts owed to the Company from transactions with customers and are presentedreported on the Consolidated Balance Sheets at the outstanding principal amount adjusted for any allowance for credit losses and any charge offs. The Company provides an allowance for credit losses to reduce trade receivables to their estimated net of allowances for doubtful accounts. Allowances arerealizable value equal to the amount that is expected to be collected. This allowance is estimated based on historical write‑offscollection experience, the aging of receivables, specific current and expected future macroeconomic and market conditions, and assessments of the current creditworthiness and economic status of customers. The Company considers a receivable delinquent if it is unpaid after the term of the related invoice has expired. Write‑offs are recorded at the time all collection efforts have been exhausted. The Company reviews its allowance for credit losses on a quarterly basis.
Inventories
Inventories are stated at the lower of cost or market,net realizable value, where cost is generally determined on the basis of an average or first‑in, first‑out (“FIFO”) method. Production costs comprise direct material and labor and applicable manufacturing overheads, including depreciation charges. The Company regularly reviews inventory quantities on hand and writes off excess or obsolete inventory based on estimated forecasts of product demand and production requirements. Manufacturing operations recognize cost of product sales using standard costing rates with overhead absorption which generally approximates actual cost.
Property, Plant, and Equipment
Property, plant, and equipment is valued at cost less accumulated depreciation. Depreciation expense is recognized using the straight‑line method. Useful lives are reviewed annually and, if expectations differ from previous estimates, adjusted accordingly. Estimated useful lives for major classes of depreciable assets are as follows:
|
| | | | |
Asset Class | Estimated Useful Life |
Machinery and equipment | 3 to 20 years |
Buildings and improvements | 10 to 40 years |
Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Costs related to maintenance and repairs that do not extend the assets’ useful life are expensed as incurred.
Acquisitions
Acquisitions are recorded using the purchase method of accounting. The purchase price of acquisitions is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. The excess of the acquisition price over those estimated fair values is recorded as goodwill. Changes to the acquisition date preliminary fair values prior to the expiration of the measurement period, a period not to exceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Contingent consideration resulting from acquisitions is recorded at its estimated fair value on the acquisition date. These obligations are revalued during each subsequent reporting period and changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Consolidated Statements of Operations. Acquisition-related expenses and restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.
Goodwill and Other Intangible Assets
Goodwill represents purchase consideration paid in a business combination that exceeds the value assigned to the net assets of acquired businesses. Other intangibleIntangible assets consist of customer‑related intangibles, proprietary technology, software, trademarks, and other intangible assets. The Company amortizes intangible assets with definite useful lives on a straight‑line basis over their respective estimated economic lives which range from 1 to 26 years.
The Company reviews goodwill and indefinite-lived intangible assets to determine potential impairment annually during the fourth quarter of its fiscal year, or more frequently if events and circumstances indicate that the asset might be impaired. Impairment testing for goodwill is performed at a reporting unit level and the Company has determined that it has three reporting units. The quantitative impairment testing for goodwill utilizes both a market (guideline public company) and income (discounted cash flows) method for determining fair value. In estimating the fair value of the reporting unit utilizing a discounted cash flow (“DCF”) valuation technique, the Company incorporates its judgment and estimates of future cash flows, future revenue and gross profit growth rates, terminal value amount, capital expenditures and applicable weighted‑average cost of capital used to discount these estimated cash flows. The estimates and projections used in the estimate of fair value are consistent with the Company’s current budget and long‑range plans, including anticipated change in market conditions, industry trend, growth rates and planned capital expenditures, among other considerations.
The impairment test for indefinite-lived intangibles consists of a comparison of the asset’s fair value with its carrying value. The fair value is calculated using the income approach DCF method. Impairment is determined to exist when the fair value is less than the carrying value of the assets being tested.
Impairment of Long‑Lived Assets
Long‑lived assets, such as property, plant, and equipment, and purchased intangibles and lease right-of-use assets subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of the asset or asset group is measured by comparison of its carrying amount to undiscounted future net cash flows the asset or asset group is expected to generate.
If the carrying amount of an asset or asset group is not recoverable, the Company recognizes an impairment loss based on the excess of the carrying amount of the asset or asset group over its respective fair value which is generally determined as the present value of estimated future cash flows or as the appraised value.
Assets Held for Sale
Assets and liabilities (the “disposal group”) are classified as held for sale when all of the following criteria are met: (i) the Company commits to a plan to sell the disposal group; (ii) it is unlikely the disposal plan will be significantly modified or discontinued; (iii) the disposal group is available for immediate sale in its present condition; (iv) actions required to complete the sale of the disposal group have been initiated; (v) the sale of the asset is probable and the completed sale is expected to occur within one year; and (vi) the disposal group is actively being marketed for sale at a price that is reasonable given its current market value. Upon classification as held for sale, such assets are no longer depreciated or depleted, and a measurement for impairment is performed to determine if there is any excess of carrying value over fair value less costs to sell. Subsequent changes to estimated fair value less the cost to sell will impact the measurement of assets held for sale if the fair value is determined to be less than the carrying value of the assets.
Debt Issuance Costs and Debt Discounts
Debt issuance costs are capitalized and amortized over the contractual term of the underlying debt using the straight line method which approximates the effective interest method. Debt discounts and lender arrangement fees deducted from the proceeds have been included as a component of the carrying value of debt and are being amortized to interest expense using the effective interest method.
Beginning in the first quarter of 2019, the Company entered into an interest rate cap to mitigate risks associated with the Company’s variable rate debt. See Note 12, “Derivative Financial Instruments” for further details. The Company paid $2,235 as a premium for the interest rate cap, which is being amortized to interest expense over its three-year term. The Company recorded $621 of premium amortization to interest expense during the year ended September 30, 2019.
Amortization of debt issuance costs and debt discounts/premiums included in interest expense were $1,991, $2,498 and $4,607 for the years ended September 30, 2019, 2018 and 2017, respectively.
In July 2018, the Company wrote off $2,581 of deferred financing fees and incurred and expensed an additional $1,346 of fees related to the sixth amendment of its First Lien Term Facility in which an additional $150,000 was borrowed.
In November 2017, the Company wrote off $1,844 of deferred financing fees related to a $100,000 prepayment of debt, then subsequently wrote off another $1,150 of fees in December of 2017 due to the refinancing of its First Lien Term Loan. The Company incurred another $2,131 of fees as a result of the December refinancing.
In August 2017, the Company wrote off $1,829 of deferred financing fees related to the extinguishment of debt and incurred another $1,188 of fees related to an amendment of its First Lien Term Facility.
In October 2016, the Company wrote off $2,075 of deferred financing fees related to the extinguishment of debt and incurred another $481 of fees related to a tack-on financing the Company completed in October 2016.
Revenue Recognition
The Company adopted Topic 606, Revenue from Contracts with Customers on October 1, 2018, and recognizes sales of products and services based on the five-step analysis of transactions as provided in Topic 606, which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services.Revenue from Contracts with Customers.
For sales of aftermarket parts or products with a low level of customization and engineering time, the Company recognizes revenuesrevenue at the time risks and rewards of ownership pass, which is generally when products are shipped or delivered to the customer as the Company has no obligation for installation. The Company considers shipping and handling services to be fulfillment activities and as such they do not represent separate performance obligations for revenue recognition. Sales of short‑term service arrangements are recognized as the services are performed, and sales of long‑term service arrangements are typically recognized on a straight‑line basis over the life of the agreement.
For certain arrangements where there is significant customization to the product the Company recognizesand for long-term construction-type sales contracts, revenue eithermay be recognized over time or at a point in time. These productsarrangements include large capital water treatment projects, systems, and solutions for municipal and industrial applications. The nature of the contracts is generally fixed price with milestone billings. The Company recognizesContract revenue over time if the product has no alternative use and the Company has an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. If these two criteria are not met, revenues from these contracts will not be recognized until construction is complete. Contract revenues and cost estimates are reviewed and revised at least quarterly at a minimum and the cumulative effect of such adjustments are recognized in current operations. The amount of such adjustments havehas not been material. See Note 4, “Revenue”Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contract assets and liabilities are due to the Company’s performance under the contract.
The Company has made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price and that long-term construction-type sales contracts, or those contracts for further details.products with significant customization that the total contract price is less than $100 will be recorded at the point in time when the construction is complete.
The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of sales commissions. The Company’s costs incurred to obtain or fulfill a contract with a customer are classified as non-current assets and amortized to expense over the period of benefit of the related revenue. These costs are recorded within Cost of product sales and services. The amount of contract costs was insignificant at September 30, 2021.
The Company offers standard warranties that generally do not represent a separate performance obligation. In certain instances, a warranty is obtained separately from the original equipment sale or the warranty provides incremental services and as such is treated as a separate performance obligation.
Variable consideration in contracts for the years ended September 30, 2021 and 2020 was insignificant.
Product Warranties
Accruals for estimated expenses related to warranties are made at the time products are sold and are recorded as a component of Cost of product sales in the Consolidated Statements of Operations. The estimated warranty obligation is based on product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs expected to be incurred in correcting a product failure, as well as specific obligations for known failures and other currently available evidence. The Company assesses the adequacy of the recorded warranty liabilities on a regular basis and adjusts amounts as necessary.
The Company accrues warranty obligations associated with certain products as revenue is recognized. Provisions for the warranty obligations are based upon historical experience of costs incurred for such obligations, adjusted for site‑specific risk factors, and, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience.
Leases
The Company accounts for leases in accordance with ASC Topic No. 842, Leases.
Lessee Accounting
The Company leases office space, buildings, vehicles, forklifts, computers, copiers and other assets under non-cancelable operating and finance leases. The Company determines whether an arrangement is or contains a lease at the inception of the arrangement based on the terms and conditions in the contract. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. If the arrangement contains a lease, the Company recognizes a right-of-use (“ROU”) asset and an operating lease liability as of the lease commencement date. Any lease arrangements with a term of 12 months or less are not recorded on the Consolidated Balance Sheets, and lease costs for these arrangements are recognized on a straight-line basis over the lease term. Many of the Company’s lease arrangements provide for an option to exercise one or more renewal terms or to terminate the lease arrangement. The Company includes these options when the Company is reasonably certain to exercise them in the leased term used to establish the ROU asset and lease liabilities. The discount rate utilized in calculating the lease liability is the rate implicit in the lease, if known, otherwise, the incremental borrowing rate (“IBR”) for the expected lease term is used.
Operating lease assets and finance lease assets are included in Operating lease right-of-use assets, net and Property, plant, and equipment, net, respectively, on the Consolidated Balance Sheets. The corresponding operating lease liabilities are included in Accrued expenses and other liabilities and Obligation under operating leases on the Consolidated Balance Sheets. The corresponding finance lease liabilities are included in Accrued expenses and other liabilities and Other non‑current liabilities on the Consolidated Balance Sheets.
Lessor Accounting
The Company generates revenue through the lease of its water treatment equipment and systems to customers. In certain instances, the Company enters into a contract with a customer but must construct the underlying asset prior to its lease. At the time of contract inception, the Company determines if an arrangement is or contains a lease. These contracts generally contain both lease and non-lease components, including installation, maintenance, and monitoring services of the Company-owned equipment, in addition to sale of certain constructed assets. In situations where arrangements contain multiple elements, contract consideration is allocated based on relative standalone selling price. Lease components associated with underlying assets that have an alternative use are classified as operating leases with revenue recognized over time throughout the lease term. Lease components associated with underlying assets that have no alternative are classified as sales-type leases, with point in time revenue recognition at the on-set of the lease, or classified as financing transactions, with over time revenue recognition at the on-set of the construction of the underlying assets. In order for a component to be separate, the customer would be able to benefit from the right of use of the component separately or with other resources readily available to the customer and the right of the use is not highly dependent or highly interrelated with the other rights to use the other underlying assets or components.
Shipping and Handling Cost
Shipping and handling costs are included as a component of Cost of product sales.
Derivative Financial Instruments
The Company’s risk-management strategy uses derivative financial instruments to manage interest rate risk, and foreign currency exchange rate risk. The Company’s objective in using interest rate derivatives is to add stability to interest expenserisk, equity price risk and manage its exposure to interest rate movements. To accomplish this objective, in November 2018, the Company entered into an interest rate cap which has been designated as a cash flow hedge. The Company uses foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges.commodity price risk. The Company does not enter into derivatives for trading or speculative purposes.
The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, “DerivativesDerivatives and Hedging” (TopicHedging (“Topic No. 815)815”). TheAs required by Topic No. 815, the Company recognizesrecords all derivatives on the balance sheetConsolidated Balance Sheets at fair value.value and adjusts to market on a quarterly basis. Changes in the fair values of derivatives that are not designated as hedges are recognized in earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the changerecorded in the hedged assets or liabilities through earnings or recognized in Accumulated other comprehensive income (loss), net of tax (“AOCI”) until, based on whether the instrument is designated and effective as a hedge transaction. Gains and losses on derivative instruments recorded to AOCI are reclassified to earnings in the period the hedged item is recognized inaffects earnings.
The Company’s interest rate swaps are valued based on readily-observable market inputs, such as quotations on interest rates and LIBOR yield curves at the reporting date. The Company’s foreign currency forward contracts are valued based on quoted forward foreign exchange prices and spot rates at the reporting date. The Company’s total return swaps are valued using closing stock prices at the reporting date.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includedincludes the enactment date. Valuation allowances are provided against deferred tax assets when it is deemedconsidered more likely than not that some portion or all of the deferred tax asset will not be realized within a reasonable time period. The Company assesses tax positions using a two‑step process. A tax position is recognized if it meets a more‑likely‑than‑not threshold and is measured at the largest amount of benefit that ishas a greater than 50.0%50% percent likelihood of being realized. Uncertain tax positions are reviewed each balance sheet date.
Foreign Currency Translation and Transactions
The functional currency for the international subsidiaries is the local currency. Assets and liabilities are translated into U.S. dollars using current rates of exchange, with the resulting translation adjustments recorded in Accumulated other comprehensive loss, net of tax within shareholders’ equity. RevenuesRevenue and expenses are translated at the weighted‑average exchange rate for the period, with the resulting translation adjustments recorded in the Consolidated Statements of Operations.
Foreign currency translation (gains) losses, (gains), mainly related to intercompany loans, which aggregated $12,599, $7,018($927), $(8,216) and $(7,111)$12,599 for the years ended September 30, 2019, 20182021, 2020 and 2017,2019, respectively, are primarily included in General and administrative expenses in the Consolidated Statements of Operations.
Research and Development Costs
Research and development costs are expensed as incurred. The Company recorded $15,300, $15,877 and $19,990 of costs for the years ended September 30, 2019, 2018 and 2017, respectively.
Equity‑based Compensation
The Company measures the cost of awards of equity instruments to employees based on the grant‑date fair value of the award. The grant‑date fair value of a non-qualified stock option is determined using the Black‑Scholes model. The grant-date fair value of restricted stock unit awards is determined using the closing price of ourthe Company’s common stock on date of grant. As there is a market condition associated with the award, the grant-date fair value of the performance share units was determined using a Monte Carlo Simulation. Compensation costs resulting from equity-based payment transactions are recognized primarily within General and administrative expenses, at fair value over the requisite vesting period on a straight-line basis.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed based on the weighted average number
of shares of common stock, plus the effect of diluted common shares outstanding during the period using the treasury stock method. Diluted potential common shares include outstanding stock options.
Retirement Benefits
The Company applies ASC Topic 715, Compensation—Retirement Benefits, which requires the recognition in pension obligations and accumulated other comprehensive income of actuarial gains or losses, prior service costs or credits and transition assets or obligations that have previously been deferred. The determination of retirement benefit pension obligations and associated costs requires the use of actuarial computations to estimate participant plan benefits to which the employees will be entitled. The significant assumptions primarily relate to discount rates, expected long‑term rates of return on plan assets, rate of future compensation increases, mortality, years of service, and other factors. The Company develops each assumption using relevant experience in conjunction with market‑related data for each individual country in which such plans exist. All actuarial assumptions are reviewed annually with third‑party consultants and adjusted as necessary. For the recognition of net periodic postretirement cost, the calculation of the expected return on plan assets is generally derived by applying the expected long‑term rate of return on the market‑related value of plan assets. The fair value of plan assets is determined based on actual market prices or estimated fair value at the measurement date.
Treated Water Outsourcing
Treated Water Outsourcing (“TWO”) is a joint venture between the Company and Nalco Water, an Ecolab company, in which the Company holds a 50% partnership interest. The Company is obligated to absorb all risk of loss up to 100% of the joint venture partner’s equity. As such, the Company fully consolidates TWO as a variable interest entity (“VIE”) under ASC 810, Consolidation. The Company has not provided additional financial support to this entity which it is not contractually required to provide, and the Company does not have the ability to use the assets of TWO to settle obligations of the Company’s other subsidiaries.
The following provides a summary of TWO’s balance sheet as of September 30, 2019 and 2018, and summarized financial information for the years ended September 30, 2019, 2018 and 2017.
|
| | | | | | | |
| September 30, 2019 | | September 30, 2018 |
Current assets (includes cash of $3,903 and $3,304) | $ | 6,324 |
| | $ | 5,486 |
|
Property, plant and equipment | 2,186 |
| | 4,441 |
|
Goodwill | 2,206 |
| | 2,206 |
|
Other non-current assets | 3 |
| | 3 |
|
Total liabilities | (2,388 | ) | | (3,608 | ) |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Total revenues | $ | 10,633 |
| | $ | 15,526 |
| | $ | 22,039 |
|
Total operating expenses | (8,732 | ) | | (12,996 | ) | | (14,835 | ) |
Income from operations | $ | 1,901 |
| | $ | 2,530 |
| | $ | 7,204 |
|
Recent Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
In November 2018,March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-19, Codification Improvements2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and also issued subsequent amendments to the initial guidance (collectively, “Topic 848”). Topic 326, Financial Instruments—Credit Losses which clarifies848 became effective immediately and expires on December 21, 2022. Topic 848 allows eligible contracts that receivables from operating leases are modified to be accounted for usingas a continuation of those contracts, permits companies to preserve their hedging accounting during the lease guidancetransition period and not as financial instruments. ASU 2018-19 willenables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. Topic 848 provides optional expedients and exceptions for contracts, hedging relationships and other transactions that reference the London Inter-Bank Offered Rate (“LIBOR”) or another reference rate expected to be effective for the Company for the quarter ending December 31, 2020, with early adoptions permitted.discontinued because of reference rate reform if certain criteria are met. The Company is currently assessing the impact of adoption on the Company’s Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In addition, unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. ASU 2018-18 should be applied retrospectively to the date of initial adoption of Topic 606 and is effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on the Company’s Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-13 will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on the Company’s disclosures.
In June 2018, the FASB issued ASU 2018‑07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The Company adopted this standard on October 1, 2019 but noted that this adoption did not have an impact on its Consolidated Financial Statements.
In August 2017, the FASB issued ASU 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements and also made certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. The Company adopted this standard on October 1, 2019 but noted that this adoption did not have a material impact on its Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates which generally will result in the earlier recognition of allowances for losses. ASU 2016-13 will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company does not expect the impact of adoption on the Consolidated Financial Statements to be material.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. Amendments to the standard were issued by the FASB in January, July and December 2018, and March 2019 including certain practical expedients, an amendment that provides an additional and optional transition method to adopt the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and certain narrow-scope improvements for lessors. The Company adopted this standard on October 1, 2019 using the modified retrospective approach. In order to comply with Topic 842, the Company completed an assessment of the existing lease portfolio including performing data and policy gap reviews, implemented a new lease accounting system, and updated its processes and accounting policies. The Company expects the impact of adoption on the Consolidated Financial Statements and related disclosures to result in an increase to the Consolidated Balance Sheet in the range of $38 million to $42 million. The Company continues to evaluate certain aspects of lessor accounting, however, it is not expected that this will have a material impact on the Consolidated Financial Statements.disclosures.
Accounting Pronouncements Recently Adopted
The Company adopted ASU 2017‑09, Scope2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Modification Accounting, which amended Accounting Standards Code Topic 718 as ofCredit Losses on Financial Instruments on October 1, 2018. The FASB issued 2020 (“ASU 2017‑092016-13”). ASU 2016-13 requires entities to reduce the costuse a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and complexity when applying Topic 718 and standardize the practice of applying Topic 718 to financial reporting. The ASU was not developed to fundamentally change the definitionrequires consideration of a modification, but insteadbroader range of reasonable and supportable information to provide guidanceinform credit loss estimates, which generally will result in the earlier recognition of allowances for what changes would qualify aslosses. The Company adopted ASU 2016-13 using a modification. Thismodified retrospective approach and determined that there was no cumulative-effect adjustment to its beginning Retained deficit on the Consolidated Balance Sheets. The adoption of this standard did not have a material impact on the Company’s Consolidated Financial Statements. See Note 7, “Accounts Receivable” for further details and related disclosures.
The following accounting pronouncements were adopted by the Company on October 1, 2020, and the adoptions did not have a material impact on the Company’s Consolidated Financial Statements. Statements or disclosures:
The | | |
Accounting Standards Updates |
ASU 2020-03, Codification Improvements to Financial Instruments |
ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses |
ASU 2018-18, Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606 |
ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement |
3. Variable Interest Entities
Treated Water Outsourcing (“TWO”) is a joint venture between the Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as of October 1, 2018. This ASU requires the disaggregation of the service cost component from other components of net periodic benefit cost, clarifies how to present the service cost component and other components of net benefit costs in the Statements of Consolidated Operations and allows only the service cost component of net benefit costs to be eligible for capitalization. The adoption of this guidance did not haveNalco Water, an impact on the Consolidated Financial Statements and had a minimal impact to the related disclosures.
The Company adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, as of October 1, 2018. The purpose of this update is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the periodEcolab company, in which the transaction occurs.Company holds a 50% partnership interest. The changes wereCompany is obligated to absorb all risk of loss up to 100% of the joint venture partner’s equity. As such, the Company fully consolidates TWO as a variable interest entity (“VIE”) under ASC Topic No. 810, Consolidation. The Company has not provided, and is not contractually required to be applied by meansprovide, additional financial support to this entity, and the Company does not have the ability to use the assets of TWO to settle obligations of the Company’s other subsidiaries.
The following provides a cumulative-effect adjustment recorded to retained earningssummary of TWO’s balance sheet as of September 30, 2021 and September 30, 2020 and summarized financial information for the beginningfiscal years ended September 30, 2021, 2020 and 2019.
| | | | | | | | | | | |
| September 30, 2021 | | September 30, 2020 |
Current assets (includes cash of $1,380 and $2,088) | $ | 3,202 | | | $ | 4,016 | |
Property, plant, and equipment | 903 | | | 1,145 | |
Goodwill | 2,206 | | | 2,206 | |
| | | |
Total liabilities | (1,009) | | | (1,324) | |
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Total revenue | $ | 3,315 | | | $ | 5,944 | | | $ | 10,633 | |
Total operating expenses | (2,922) | | | (4,519) | | | (8,732) | |
Income from operations | $ | 393 | | | $ | 1,425 | | | $ | 1,901 | |
On October 1, 2019, the Company acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”). The Frontier acquisition is a VIE because it has insufficient equity to finance its activities due to key assets being assigned to the Company upon acquisition. The Company is the primary beneficiary of Frontier because the Company has the power to direct the activities that most significantly affect Frontier’s economic performance.
In addition, the Company entered into an agreement to acquire the remaining 40% interest in Frontier on or prior to March 30, 2024. This agreement (a) gave holders of the yearremaining 40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately 10% of adoption. This adoption did not have an impact on the Company’s Consolidated Financial Statements.
Theoutstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners between January 1, 2021 and February 28, 2021 (the “Option”), and (b) obligates the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as of October 1, 2018. ASU 2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. The Company utilized the modified retrospective approachpurchase and the cumulative effectMinority Owners to sell all of adoption resultedthe Minority Owners’ remaining interest in a net decreaseFrontier at the fair market value at the time of sale on or prior to opening retained earnings of $1,582 whichMarch 30, 2024 (the “Purchase Right”). The Purchase Right may be exercised early by the Minority Owners. The agreement to purchase the remaining interest was recognized at October 1, 2018. Based on the new guidance, the Company determined that for some of these contracts in which revenue was previously recognized over a period of time, revenue instead needs to be recognized at a point in time. This change is mainlyfinancing due to the naturemandatory Purchase Right, as per ASC Topic 480, Distinguishing Liabilities From Equity, and as such, the Company recognized a liability for the remaining 40% interest. The Minority Owners exercised the Option, and on April 8, 2021, the Company completed the purchase of certain products, whichan additional 8% of the outstanding equity in some cases have an alternative use, andFrontier for approximately $1,490. As a result, the Company’s rightownership position in Frontier increased to payment in68%.
Additionally, the eventCompany fully consolidates Frontier as a VIE under ASC Topic No. 810, Consolidation.
The following provides a summary of terminationFrontier’s balance sheet as of September 30, 2021 and September 30, 2020, and summarized financial information for convenience. This adoption did not have a material impact on the Company’s Consolidated Financial Statements. See Note 4, “Revenue” for further details.fiscal years ended September 30, 2021 and 2020.
| | | | | | | | | | | |
| September 30, 2021 | | September 30, 2020 |
Current assets (includes cash of $2,095 and $1,675) | $ | 12,495 | | | $ | 4,024 | |
Property, plant, and equipment | 2,113 | | | 3,159 | |
Goodwill | 1,798 | | | 1,798 | |
Intangible assets, net | 8,265 | | | 9,918 | |
Total liabilities | (9,425) | | | (3,692) | |
3. | | | | | | | | | | | | | | | | | |
| | | Year Ended September 30, |
| | | | | 2021 | | 2020 | | |
Total revenue | | | | | $ | 14,340 | | | $ | 5,365 | | | |
Total operating expenses | | | | | (14,362) | | | (8,219) | | | |
Loss from operations | | | | | $ | (22) | | | $ | (2,854) | | | |
4. Acquisitions and Divestitures
Acquisitions support the Company’s strategy of delivering a broad solutions portfolio with robust technology across multiple geographies and end markets. The Company continues to evaluate potential strategic acquisitions of businesses, assets and product lines and believes that capex-like, tuck-in acquisitions present a key opportunity within its overall growth strategy.
2021 Acquisitions
On May 25, 2019,April 1, 2021, the Company acquired allthe assets of the issued and outstanding equity securities of ATG UV Technology LimitedWater Consulting Specialists, Inc. (“ATG UV”), a leading manufacturer of ultraviolet (“UV”WCSI”) light disinfection systems used in a wide range of municipal, aquatics and industrial applications, for £5,500 ($6,931)$12,025 cash paid in cash at closing. In addition, the Company recorded a liability of $761 at closing associated with an earn-out related to the WCSI acquisition, which was subsequently revalued to $150 and is included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. During the year ended September 30, 2019,2021, the Company received cash of $21 from the seller as a result of net working capital adjustments. WCSI is a leader in the design, manufacturing, and service of industrial high-purity water treatment systems. The acquisition strengthens the Company’s portfolio of high-purity water treatment systems and provides the opportunity to further expand its digitally enabled solutions and services in key industrial markets. WCSI is a part of the Integrated Solutions and Services segment. During the year ended September 30, 2021, the Company incurred approximately $193$83 in acquisition costs, which are included in General and administrative expenses. ATG UV, based in Wigan, UK, isexpense on the exclusive technology supplier to Evoqua’s ETS-UVTM product line in North America and the acquisition expands Evoqua’s reach, allowing the Company to serve customers globally. ATG UV is partConsolidated Statements of the Applied Product Technologies segment.Operations.
The accounting for the acquisition has not yet been completed because the Company has not finalized the valuations of the acquired assets, assumed liabilities, and identifiable intangible assets, including goodwill. The preliminary opening balance sheet for ATG UV as of September 30, 2019WCSI is summarized as follows:
| | | | | |
Current assets | $ | 1,813 | |
Property, plant, and equipment | 221 | |
Goodwill | 4,340 | |
Intangible assets, net | 7,336 | |
Other non-current assets | 86 | |
Total assets acquired | 13,796 | |
Liabilities assumed | (1,792) | |
Net assets acquired | $ | 12,004 | |
|
| | | |
Current assets | $ | 6,296 |
|
Property, plant and equipment | 362 |
|
Goodwill | 1,738 |
|
Intangible assets | 2,277 |
|
Total assets acquired | 10,673 |
|
Total liabilities assumed | (3,742 | ) |
Net assets acquired | $ | 6,931 |
|
On December 17, 2020, the Company acquired the industrial water business of Ultrapure & Industrial Services, LLC (“Ultrapure”) for $8,743 cash paid at closing. On April 1, 2021, the Company paid an additional $290 as a result of net working capital adjustments. Ultrapure, based out of Texas, provides customers across multiple end markets with a variety of water treatment products and services, including service deionization, reverse osmosis, UV, and ozonation. Ultrapure will strengthen the Company’s service capabilities in the Houston and Dallas markets and is a part of the Integrated Solutions and Services segment. During the year ended September 30, 2021, the Company incurred approximately $230 in acquisition costs, which are included in General and administrative expense on the Consolidated Statements of Operations.The opening balance sheet for Ultrapure is summarized as follows:
| | | | | |
Current assets | $ | 2,366 | |
Property, plant, and equipment | 963 | |
Goodwill | 2,836 | |
Intangible assets, net | 3,751 | |
Other non-current assets | 21 | |
Total assets acquired | 9,937 | |
Liabilities assumed | (904) | |
Net assets acquired | $ | 9,033 | |
2021 Divestitures
On March 1, 2021, the Company completed the divestiture of the Lange containment system, geomembrane and geosynthetic liner product line (the “Lange Product Line”) for $897 in cash at closing. The Lange Product Line was a part of the Integrated Solutions and Services segment. During the year ended September 30, 2021, the Company recognized a loss of $193 on the divestiture.
2020 Acquisitions
On September 3, 2020, the Company acquired the assets of privately held Aquapure Technologies of Cincinnati (“Aquapure”), a Hamilton, Ohio based water service and equipment company. Aquapure serves the commercial and light industrial markets and provides customers with a variety of water treatment products and services, including deionization, reverse osmosis, softeners, and filtration systems. Aquapure is part of the Integrated Solutions and Services segment.
On October 1, 2019, the Company entered intoacquired a Purchase and Sale Agreement with DuPont de Nemours, Inc., pursuant to60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”) for a purchase price of $10,885, which the Company will divest their Memcor® low pressure membrane product line (including the product line’s global workforce, its manufacturing site in Windsor, Australia, associated operations and intellectual property) (“Memcor”) to DuPont. In connection with this transaction, DuPont will purchase 100%is net of the corporateworking capital of the Australian Subsidiaries and all of the assets related to the Memcor® low pressure membrane product line.
The Company expects to recognizeadjustments. Frontier is a gain on this transaction upon closing. The agreement to sell Memcor met all of the criteria to classify its assets and liabilities as held for salepioneer in the fourth quarterdevelopment of 2019, which are included withinpatented, engineered equipment packages for high-rate treatment and removal of selenium, nitrate, and other metals from complex water systems. During the Company’s APT segment’s total assets. The sale of Memcor does not represent a strategic shift that will have a major effect on the Company’s operations and financial results and is, therefore, not classified as discontinued operations in accordance with ASU 2014-08. As part of the required evaluation under the held for sale guidance, the Company determined that the approximate fair value less costs to sell the operations exceeded the carrying value of the net assets and no impairment charge was recorded.
The following represents the carrying amounts of assets and liabilities, by major class, classified as held for sale on the Consolidated Balance Sheets atyear September 30, 2019:
|
| | | |
ASSETS | |
Cash and cash equivalents | $ | 7,291 |
|
Receivables, net | 9,603 |
|
Inventories, net | 6,456 |
|
Contract assets | 13,025 |
|
Prepaid and other current assets | 881 |
|
Current assets held for sale | 37,256 |
|
Property, plant and equipment, net | 14,827 |
|
Goodwill | 14,911 |
|
Intangible assets, net | 1,024 |
|
Other non-current assets | 47 |
|
Non-current assets held for sale | 30,809 |
|
Total assets held for sale | $ | 68,065 |
|
LIABILITIES | |
Accounts payable | $ | 5,646 |
|
Contract liabilities | 1,302 |
|
Product warranties | 3,264 |
|
Accrued expenses and other liabilities | 3,996 |
|
Current liabilities held for sale | 14,208 |
|
Product warranties | 1,594 |
|
Other non-current liabilities | 2,071 |
|
Non-current liabilities held for sale | 3,665 |
|
Total liabilities held for sale | $ | 17,873 |
|
The above amounts are excluded from2020, the respective balance sheet footnotes at September 30, 2019. The Company incurred aggregate deal costs related to this divestiture of $2,795 during the year ended September 30, 2019, which are primarily included in General and administrative expenses.
2018 Acquisitions
On August 31, 2018, the Company acquired substantially all of the assets of Le Groupe IsH20Top Inc. (“Isotope”), a Quebec-based provider of high-purity water treatment equipment and systems, equipment maintenance services and service deionization for CAD 3,651 ($2,804); CAD 3,171 ($2,435) cash at closing in addition to earn-out payments one year after the closing. Included in consideration is CAD 226 ($175), which represents the fair value of earn-out payments at the date of acquisition if certain revenue targets are achieved, with the maximum earn-out payment of CAD 480 ($369). Isotope serves the ultrapure pharmaceutical, laboratory, medical, university, industrial and microelectronics markets in the Quebec region and provides its customer base with a variety of solutions including reverse osmosis, deionized water systems and steam purification. The Company incurred approximately $188 of$591 in acquisition costs, which are included in General and administrative expenses. IsotopeFrontier is part of the Integrated Solutions and Services segmentsegment.
The Company entered into an agreement to acquire the remaining 40% interest in Frontier on or prior to March 30, 2024. This agreement (a) gives holders of the remaining 40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately 10% of the outstanding equity in Frontier at a predetermined price, which right may be exercised by the Minority Owners between January 1, 2021 and strengthens the Company’s Canadian service capabilities.
On July 26, 2018,February 28, 2021 (the “Option”), and (b) obligates the Company acquiredto purchase and the Minority Owners to sell all of the issued and outstanding equity securitiesMinority Owners’ remaining interest in Frontier at the fair market value at the time of ProAct Services Corporation (“ProAct”sale on or prior to March 30, 2024 (the “Purchase Right”) and its subsidiaries for $133,772 paid in cash at closing which. The Purchase Right may be exercised early by the Minority Owners. The agreement to purchase the remaining interest was funded through incremental borrowings under the Company’s Term Loan. ProAct is a leading provider of on-site treatment services of contaminated water in all 50 states. ProAct will operate within the Company’s Integrated Solutions and Services segment and will continuedetermined to be financing due to the mandatory Purchase Right, as per ASC Topic 480, Distinguishing Liabilities From Equity, and as such, the Company recognized a liability for the remaining 40% interest.
The value of the Option was determined to be $506 using a Black Scholes model, and was included within Accrued expenses and other liabilities on the Consolidated Balance Sheets.
The value of the Purchase Right was determined to be $6,661 and was included within Other non‑current liabilities on the Consolidated Balance Sheets, based in Ludington, Michigan with a nationwide service footprint and facilities in California, Florida, Michigan,
Minnesota, New Jersey, Virginia and Texas. ProAct provides an arrayupon the enterprise value of expanded offerings across the Company’s existing environmental solutions and enhances its existing service capabilities in mobile/temporary process water and wastewaster treatment, hydrostatic water treatment and coal ash pond remediation. The Company incurred approximately $1,067 of acquisition costs, which are included in General and administrative expenses. The operating results of ProAct have been included in the Company’s Consolidated Statements of Operations sinceFrontier upon the acquisition date and resulted in $8,042 and $590 of revenue and net income, respectively, for the year ended September 30, 2018.
The following table presents the unaudited pro forma results for the years ended September 30, 2018 and 2017. The unaudited pro forma financial information combines the results of operations of EWT and ProAct as thoughper ASC Topic 480, Distinguishing Liabilities From Equity. Pursuant to ASC Topic 480, the Company had been combineddetermined that this should be recorded as of the beginning of years ended September 30, 2018a liability and 2017, and the pro forma information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken placeshould be recognized at such time. Pro forma results for other acquisitions completed in the year ended September 30, 2018 were determined to not be material. The unaudited pro forma results presented below include adjustments for increased fair value of acquired intangible assets and related amortization charges, acquisition costs, and interest.
|
| | | | | | | |
| Year Ended September 30, |
| 2018 | | 2017 |
Total revenues | $ | 1,385,159 |
| | $ | 1,294,167 |
|
Net loss attributable to Evoqua Water | 2,116 |
| | 1,527 |
|
On March 9, 2018, the Company acquired all of the issued and outstanding equity securities of Pacific Ozone Technology, Inc. (“Pacific Ozone”), a provider of advanced ozone disinfection systems, testing products and support services for $8,557; $6,557 cash at closing in addition to earn-out payments to be paid out over three years after the closing. Included in consideration is $934, which represents the fair value at the time of earn-out payments if certain performance metrics are achieved,inception, adjusted for any consideration or unstated rights or privileges. The liability will be subsequently measured at an amount that would be paid on the reporting date with any change in value from the previous reporting date recognized as interest cost. Refer to Note 6, “Fair Value Measurements” for a maximum amountdiscussion of $2,000. The Company incurred approximately $191 of acquisition costs, which are included in General and administrative expenses. Pacific Ozone, based in Benecia, California, is partsubsequent measurement of the Applied Product Technologies segmentOption and adds a new technology, ozone disinfection, to the portfolio and further enhances the Company’s ability in the industrial water treatment and aquatics market.
On January 31, 2018, the Company acquired substantially all of the assets of Pure Water Solutions, LLC (“Pure Water”), a provider of high-purity water equipment and systems, service deionization and resin regeneration, with service operations in suburban Denver, Colorado and Santa Fe, New Mexico for $4,699; $3,706 cash at closing in addition to earn-out payments to be paid out one year after the closing. Included in consideration is $993, which represents the fair value of earn-out payments if certain revenue targets are achieved, with a maximum amount of $461. The Company incurred approximately $132 of acquisition costs, which are included in General and administrative expenses. Pure Water is part of the Integrated Solutions and Services segment, and extends the Company’s service network.
Purchase Right.
The opening balance sheet for the acquisitionsFrontier is summarized as follows:
| | | | | |
Current assets | $ | 3,186 | |
Property, plant, and equipment | 2,963 | |
Goodwill | 1,798 | |
Intangible assets | 11,571 | |
Total assets acquired | $ | 19,518 | |
Liabilities related to Option and Purchase Right | (7,167) | |
Other liabilities assumed | (1,466) | |
Net assets acquired | $ | 10,885 | |
|
| | | | | | | | | | | | | | | | | | | |
| Isotope | | ProAct | | Pacific Ozone | | Pure Water | | Total |
Current Assets | $ | 627 |
| | $ | 11,513 |
| | $ | 1,822 |
| | $ | 295 |
| | $ | 14,257 |
|
Property, plant and equipment | — |
| | 26,272 |
| | 151 |
| | 156 |
| | 26,579 |
|
Goodwill | 1,266 |
| | 84,308 |
| | 4,337 |
| | 2,506 |
| | 92,417 |
|
Intangible assets | 933 |
| | 27,464 |
| | 2,678 |
| | 1,488 |
| | 32,563 |
|
Other non-current assets | — |
| | — |
| | 135 |
| | — |
| | 135 |
|
Total asset acquired | 2,826 |
| | 149,557 |
| | 9,123 |
| | 4,445 |
| | 165,951 |
|
Total liabilities assumed | (216 | ) | | (15,785 | ) | | (1,632 | ) | | (278 | ) | | (17,911 | ) |
Net assets acquired | $ | 2,610 |
| | $ | 133,772 |
| | $ | 7,491 |
| | $ | 4,167 |
| | $ | 148,040 |
|
20182020 Divestitures
On April 9, 2018,December 31, 2019, the Company completed the previously-announced sale of 100% of the corporate capital of Evoqua Water Technologies S.r.l., which includes the Company’s former operations in Italy,Memcor product line to Giotto Water S.r.l.DuPont de Nemours, Inc. (“Giotto”DuPont”). The aggregate purchase price paid in cash by GiottoDuPont in the transactionTransaction was €350 ($430),$110,000 in cash, subject to certain earn-outadjustments. Following adjustments to befor cash and net working capital, gross proceeds paid by GiottoDuPont were $131,011. During the year September 30, 2020, the Company recognized a $57,700 net pre-tax benefit on the sale of the Memcor product line, net of $8,300 of discretionary compensation payments to employees in connection with the realizationtransaction and $2,100 in transaction costs incurred. The Company utilized $100,000 of specified tax benefits relatingthe proceeds from the transaction to previous years, and resulted inrepay a nominal gain which is included in Other operating income on the Consolidated Statementsportion of Operations.
4. Revenue
Adoption of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”
As discussed in Note 2, “Summary of Significant Accounting Policies” the Company adopted ASU 2014-09 on October 1, 2018, using the modified retrospective approach to those contracts that were not completed or substantially complete as of October 1, 2018. Results for the reporting period beginning after October 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. The Company has applied the standard to all open contracts at the dateFirst Lien Term Loans in January 2020.
5. Revenue
Disaggregation of initial application. The Company recorded a net decrease to opening retained earnings of $1,582 as of October 1, 2018 as a result of the cumulative impact of adopting Topic 606 representing the unfavorable impact to prior results had the over-time revenue recognition for some customer agreements, as discussed below, been applied. Revenue
In addition, a $6,106 reduction of contract assets, alongaccordance with an increase of $6,194 to work-in-process inventory and an increase of $1,773 to contract liabilities was recorded as a result of the adoption using the modified retrospective method.
The impact to the Consolidated Statements of Operations as a result of applying Topic 606 was higher Revenue from product sales and services and higher Cost of product sales and services of $2,066 and $1,508, respectively, for the year ended September 30, 2019, as compared to what those amounts would have been under the previous revenue recognition guidance. In addition, the impact on the Consolidated Balance Sheets at September 30, 2019 was lower Inventories, net of $135 as compared to what this amount would have been under the previous guidance. Also, $644 of contract assets were recognized on the consolidated balance sheet at September 30, 2019 related to this over-time revenue recognition. As a result of adopting Topic 606, the Company reevaluated how they view the types ofdisaggregates revenue between product sales and services, and their related cost of sales. As a result, the Company reclassified amounts between the two categories on the Consolidated Statements of Operations.
Revenue Recognition
The Company recognizes sales of products and services based on the five-step analysis of transactions as provided in Topic 606. For allfrom contracts with customers the Company first identifies the contract which usually is established when the customer’s purchase order is accepted or acknowledged. Next the Company identifies the performance obligations in the contract. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer.into source of revenue, reportable operating segment, and geographical regions. The Company then determinesdetermined that disaggregating revenue into these categories meets the transaction pricedisclosure objective in the arrangement and allocates the transaction price to each performance obligation identified in the contract. The Company’s allocation of the transaction price to the performance obligations are based on the relative standalone selling prices for the goods and services contained in a particular performance obligation. The transaction price is adjusted for the Company’s estimate of variable consideration which may include discounts if the Company would fail to meet certain performance requirements, volume discounts or early payment discounts. To estimate variable consideration, the Company utilizes historical experience and known terms. Variable consideration in contracts for the year ended September 30, 2019 was insignificant.
For sales of aftermarket parts or products with a low level of customization and engineering time, the Company recognizes revenues at the time risks and rewards of ownership pass,Topic 606 which is generally when productsto depict how the nature, amount, timing and uncertainty of revenue and cash flows are shipped or deliveredaffected by economic factors.
Information regarding the source of revenue:
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Revenue from contracts with customers recognized under Topic 606 | $ | 1,274,096 | | | $ | 1,279,772 | | | $ | 1,309,303 | |
Other(1) | 190,333 | | | 149,684 | | | 135,138 | |
Total | $ | 1,464,429 | | | $ | 1,429,456 | | | $ | 1,444,441 | |
(1) Other revenue relates to the customer as the Company has no obligation for installation. The Company considers shippingrevenue recognized pursuant to ASU 2016-02, Leases (Topic 842), primarily attributable to long term rentals.
Information regarding revenue disaggregated by segment and handling services to be fulfillment activities and as such they do not represent separate performance obligations for revenue recognition. Salessource of service arrangements are recognized as the services are performed.
For certain arrangements where there is significant customization to the product and for long-term construction-type sales contracts, revenue may be recognized over time. In these instances, revenue is recognized using a measure of progress that applies an input method based on costs incurred in relation to total estimated costs. Approximately $326,035, of revenues from construction-type contracts was recognized over time during the year ended September 30, 2019. These arrangements include large capital water treatment projects, systems and solutions for municipal and industrial applications. The nature of the contractsas follows:
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Integrated Solutions and Services | | | | | |
Revenue from capital projects | $ | 250,187 | | | $ | 257,528 | | | $ | 219,289 | |
Revenue from aftermarket | 128,585 | | | 119,051 | | | 122,719 | |
Revenue from service | 581,114 | | | 567,603 | | | 568,826 | |
Total | $ | 959,886 | | | $ | 944,182 | | | $ | 910,834 | |
Applied Product Technologies | | | | | |
Revenue from capital projects | $ | 365,791 | | | $ | 335,227 | | | $ | 344,097 | |
Revenue from aftermarket | 116,463 | | | 128,051 | | | 165,056 | |
Revenue from service | 22,289 | | | 21,996 | | | 24,454 | |
Total | $ | 504,543 | | | $ | 485,274 | | | $ | 533,607 | |
Total Revenue | | | | | |
Revenue from capital projects | $ | 615,978 | | | $ | 592,755 | | | $ | 563,386 | |
Revenue from aftermarket | $ | 245,048 | | | $ | 247,102 | | | $ | 287,775 | |
Revenue from service | $ | 603,403 | | | $ | 589,599 | | | $ | 593,280 | |
Total | $ | 1,464,429 | | | $ | 1,429,456 | | | $ | 1,444,441 | |
Information regarding revenue disaggregated by geographic area is generally fixed price with milestone billings. In order for revenue to be recognized over a period of time, the product must have no alternative use and the Company must have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. If these two criteria are not met, revenues from these contracts will not be recognized until construction is complete. Revenues from construction-type contracts formerly recognized over time of approximately $1,068 were not recognized during the year ended September 30, 2019. Instead, revenues from these contracts will be recognized when construction is complete. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and the cumulative effect of such adjustments are recognized in current operations. The amount of such adjustments have not been material.as follows:
The Company has made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price and that long-term construction-type sales contracts, or those contracts for products with significant customization for which the total contract price is less than $100 will be recorded at the point in time when the construction is complete or the product is delivered. Approximately $19,815 of revenues from construction-type contracts was recognized on a completed contract method during the year ended September 30, 2019. This represents projects that are either below the $100 threshold, or the product has no alternative use, but the Company does not have an enforceable right to payment. | | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
United States | $ | 1,174,474 | | | $ | 1,164,634 | | | $ | 1,147,649 | |
Europe | 113,559 | | | 108,139 | | | 102,998 | |
Asia | 113,316 | | | 77,253 | | | 90,273 | |
Canada | 49,952 | | | 65,223 | | | 80,083 | |
Australia | 13,128 | | | 14,207 | | | 23,438 | |
Total | $ | 1,464,429 | | | $ | 1,429,456 | | | $ | 1,444,441 | |
The Company has also elected the following practical expedients:
Financing Component
As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient not to assess whether a contract has a significant financing component.
Performance Obligations
The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations if the product has an alternative use and the Company does not have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. The Company maintains a backlog of confirmed orders of approximately $179,341$275,589 at September 30, 2019.2021. This backlog represents the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that the majority of these performance obligations will be satisfied within the next twelve to twenty-four months.
The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of sales commissions. The Company’s costs incurred to obtain or fulfill a contract with a customer are classified as non-current assets and amortized to expense over the period of benefit of the related revenue. These costs are recorded within Cost of product sales and services. The amount of contract costs was insignificant at September 30, 2019.
The Company offers standard warranties that generally do not represent a separate performance obligation. In certain instances, a warranty is obtained separately from the original equipment sale or the warranty provides incremental services and as such is treated as a separate performance obligation.
Disaggregation of Revenue
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into source of revenue, reportable operating segment and geographical regions. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Information regarding the source of revenues:
|
| | | |
| Year Ended September 30, 2019 |
Revenue from contracts with customers recognized under Topic 606 | $ | 1,309,303 |
|
Other (1) | 135,138 |
|
Total | $ | 1,444,441 |
|
| |
(1) | Other revenue relates to revenue recognized from Topic 840, Leases, mainly attributable to long term rentals. |
Information regarding revenues disaggregated by source of revenue and segment is as follows:
|
| | | | | | | | | | | |
| Year Ended September 30, 2019 |
| Integrated Solutions and Services | | Applied Product Technologies | | Total |
Revenue from capital | $ | 219,289 |
| | $ | 344,097 |
| | $ | 563,386 |
|
Revenue from aftermarket | 122,719 |
| | 165,056 |
| | 287,775 |
|
Revenue from service | 568,826 |
| | 24,454 |
| | 593,280 |
|
Total | $ | 910,834 |
| | $ | 533,607 |
| | $ | 1,444,441 |
|
Information regarding revenues disaggregated by geographic area is as follows:
|
| | | |
| Year Ended September 30, 2019 |
United States | $ | 1,147,649 |
|
Europe | 102,998 |
|
Asia | 90,273 |
|
Canada | 80,083 |
|
Australia | 23,438 |
|
Total | $ | 1,444,441 |
|
Contract Balances
The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company receives payments from customers based on a billing schedule as established in its contracts.
Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contract assets and liabilities are due to our performance under the contract.
The tables below providesprovide a roll-forward of contract assets and contract liabilities balances for the periods presented:
| | | | | | | | | | | |
| Year Ended September 30, |
Contract assets(a) | 2021 | | 2020 |
Balance at beginning of period | $ | 80,759 | | | $ | 73,467 | |
| | | |
Recognized in current period | 316,864 | | | 347,660 | |
Reclassified to accounts receivable | (325,405) | | | (342,371) | |
Amounts related to sale of the Memcor product line | — | | | 2,710 | |
Foreign currency | 528 | | | (707) | |
Balance at end of period | $ | 72,746 | | | $ | 80,759 | |
(a) Excludes receivable balances which are disclosed on the Consolidated Balance Sheets.
| | | | | | | | | | | |
| Year Ended September 30, |
Contract Liabilities | 2021 | | 2020 |
Balance at beginning of period | $ | 26,259 | | | $ | 39,051 | |
| | | |
Recognized in current period | 349,046 | | | 322,595 | |
Amounts in beginning balance reclassified to revenue | (25,523) | | | (39,100) | |
Current period amounts reclassified to revenue | (294,033) | | | (295,085) | |
Amounts related to sale of the Memcor product line | — | | | (700) | |
Foreign currency | 134 | | | (502) | |
Balance at end of period | $ | 55,883 | | | $ | 26,259 | |
|
| | | |
| Contract Assets (a) |
Balance at September 30, 2018 | $ | 69,147 |
|
Cumulative effect of adoption of new accounting standards | (6,106 | ) |
Recognized in current period | 325,289 |
|
Reclassified to accounts receivable | (302,055 | ) |
Foreign currency | 217 |
|
Reclassified to assets held for sale | (13,025 | ) |
Balance at September 30, 2019 | $ | 73,467 |
|
| |
(a) | Excludes receivable balances which are disclosed on the Consolidated Balance Sheets. |
|
| | | |
| Contract Liabilities |
Balance at September 30, 2018 | $ | 17,652 |
|
Cumulative effect of adoption of new accounting standards | 1,773 |
|
Recognized in current period | 319,722 |
|
Amounts in beginning balance reclassified to revenue | (20,754 | ) |
Current period amounts reclassified to revenue | (276,002 | ) |
Foreign currency | (2,038 | ) |
Reclassified to liabilities held for sale | (1,302 | ) |
Balance at September 30, 2019 | $ | 39,051 |
|
5.6. Fair Value Measurements
As of September 30, 20192021 and 2018,2020, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximateapproximated carrying values due to the short maturity of these items.
The Company measures the fair value of pension plan assets and liabilities, deferred compensation and plan assets and liabilities on a recurring basis pursuant to ASC Topic 820. ASC Topic 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs in which little or no market data is available, therefore requiring an entity to develop its own assumptions.
The following table presents the Company’s financial assets and liabilities at fair value. The fair values related to the pension assets are determined using net asset value (“NAV”) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value. The reported carrying amounts of deferred compensation assets and liabilities and debt approximate their fair values. The Company uses interest rates and other relevant information generated by market transactions involving similar instruments to measure the fair value of these assets and liabilities, therefore, all are classified as Level 2 within the valuation hierarchy. For the years ended September 30, 2019 and 2018, there were no transfers between Level 1 and 2 of the fair value hierarchy.
|
| | | | | | | | | | | | | | | |
| Net Asset Value | | Quoted Market Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
As of September 30, 2019 | | | | | | | |
Assets: | | | | | | | |
Pension plan | | | | | | | |
Cash | $ | — |
| | $ | 14,607 |
| | $ | — |
| | $ | — |
|
Government Securities | 4,703 |
| | — |
| | — |
| | — |
|
Liability Driven Investment | 3,261 |
| | — |
| | — |
| | — |
|
Guernsey Unit Trust | 997 |
| | — |
| | — |
| | — |
|
Global Absolute Return | 1,957 |
| | — |
| | — |
| | — |
|
Deferred compensation plan assets | | |
| |
| |
|
Trust Assets | — |
| | 16 |
| | — |
| | — |
|
Insurance | — |
| | — |
| | 18,684 |
| | — |
|
Interest rate cap | — |
| | — |
| | 19 |
| | — |
|
Foreign currency forward contracts | — |
| | — |
| | 278 |
| | — |
|
Liabilities: | | | | | | | |
Pension plan | — |
| | — |
| | (42,948 | ) | | — |
|
Deferred compensation plan liabilities | — |
| | — |
| | (21,318 | ) | | — |
|
Long‑term debt | — |
| | — |
| | (979,357 | ) | | — |
|
Foreign currency forward contracts | — |
| | — |
| | (154 | ) | | — |
|
Earn-outs related to acquisitions | — |
| | — |
| | — |
| | (1,545 | ) |
| | | | | | | |
As of September 30, 2018 | | | | | | | |
Assets: | | | | | | | |
Pension plan | | | | | | | |
Cash | $ | — |
| | $ | 15,821 |
| | $ | — |
| | $ | — |
|
Government Securities | 3,161 |
| | — |
| | — |
| | — |
|
Liability Driven Investment | 2,598 |
| | — |
| | — |
| | — |
|
Guernsey Unit Trust | 965 |
| | — |
| | — |
| | — |
|
Global Absolute Return | 2,038 |
| | — |
| | — |
| | — |
|
Deferred compensation plan assets | | | | | | | |
Trust Assets | — |
| | 648 |
| | — |
| | — |
|
Insurance | — |
| | — |
| | 18,448 |
| | — |
|
Foreign currency forward contracts | — |
| | — |
| | 345 |
| | — |
|
Liabilities: | | | | | | | |
Pension plan | — |
| | — |
| | (35,541 | ) | | — |
|
Deferred compensation plan liabilities | — |
| | — |
| | (21,834 | ) | | — |
|
Long‑term debt | — |
| | — |
| | (957,441 | ) | | — |
|
Foreign currency forward contracts | — |
| | — |
| | (67 | ) | | — |
|
Earn-outs related to acquisitions | — |
| | — |
| | — |
| | (1,916 | ) |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net Asset Value | | Quoted Market Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
As of September 30, 2021 | | | | | | | |
Assets: | | | | | | | |
Pension plan | | | | | | | |
Cash | $ | — | | | $ | 831 | | | $ | — | | | $ | — | |
Global Multi-Asset Fund | 15,244 | | | — | | | — | | | — | |
Government Securities | 5,158 | | | — | | | — | | | — | |
Liability Driven Investment | 2,793 | | | — | | | — | | | — | |
Guernsey Unit Trust | 2,387 | | | — | | | — | | | — | |
Global Absolute Return | 2,225 | | | — | | | — | | | — | |
Deferred compensation plan assets | | | | | | | |
Cash | — | | | 1,251 | | | — | | | — | |
Mutual Funds | — | | | 17,806 | | | — | | | — | |
| | | | | | | |
Interest rate swaps | — | | | — | | | 3,127 | | | — | |
Foreign currency forward contracts | — | | | — | | | 24 | | | — | |
Liabilities: | | | | | | | |
Pension plan | — | | | — | | | (46,013) | | | — | |
Deferred compensation plan liabilities | — | | | — | | | (24,382) | | | — | |
Total return swaps—deferred compensation | — | | | — | | | (130) | | | — | |
Long‑term debt | — | | | — | | | (752,988) | | | — | |
Interest rate swaps | — | | | — | | | (303) | | | — | |
Foreign currency forward contracts | — | | | — | | | (102) | | | — | |
Commodity swaps | — | | | — | | | (19) | | | — | |
Earn-outs related to acquisitions | — | | | — | | | — | | | (150) | |
Purchase Right | — | | | — | | | — | | | (8,305) | |
| | | | | | | |
As of September 30, 2020 | | | | | | | |
Assets: | | | | | | | |
Pension plan | | | | | | | |
Cash | $ | — | | | $ | 15,061 | | | $ | — | | | $ | — | |
Government Securities | 4,924 | | | — | | | — | | | — | |
Liability Driven Investment | 3,604 | | | — | | | — | | | — | |
Guernsey Unit Trust | 1,881 | | | — | | | — | | | — | |
Global Absolute Return | 2,060 | | | — | | | — | | | — | |
Deferred compensation plan assets | | | | | | | |
Trust Assets | — | | | 55 | | | — | | | — | |
Insurance | — | | | — | | | 19,804 | | | — | |
| | | | | | | |
Foreign currency forward contracts | — | | | — | | | 140 | | | — | |
Liabilities: | | | | | | | |
Pension plan | — | | | — | | | (47,389) | | | — | |
Deferred compensation plan liabilities | — | | | — | | | (21,439) | | | — | |
Long‑term debt | — | | | — | | | (872,441) | | | — | |
Interest rate swap | — | | | — | | | (4,669) | | | — | |
Foreign currency forward contracts | — | | | — | | | (47) | | | — | |
Earn-outs related to acquisitions | — | | | — | | | — | | | (295) | |
Option and Purchase Right | — | | | — | | | — | | | (7,739) | |
The pension plan assets and liabilities and deferred compensation assets and liabilities are included in other non-current assets and other non-current liabilities on the Consolidated Balance Sheets at September 30, 20192021 and 2018.2020. The unrealized gain on mutual funds was $445 at September 30, 2021.
The Company records contingent consideration arrangements at fair value on a recurring basis and the associated balances presented as of September 30, 20192021 and 20182020 are earn-outs related to acquisitions. See Note 3,4, “Acquisitions and Divestitures” for further discussion regarding the earn-outs recorded for specific acquisitions. The fair value of earn-outs related to acquisitions is based on significant unobservable inputs including the achievement of certain performance metrics.
Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the earn-out each period until the related contingency has been resolved. Changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Consolidated Statements of Operations.
A rollforward of the activity in the Company’s fair value of earn-outs related to acquisitions is as follows:
| | | | | | | | | | | | | | | | | |
| Current Portion(1) | | Long-term Portion(2) | | Total |
Balance at September 30, 2019 | $ | 611 | | | $ | 934 | | | $ | 1,545 | |
| | | | | |
Payments | (187) | | | — | | | (187) | |
Reclassifications | 204 | | | — | | | 204 | |
Fair value adjustment | (333) | | | (934) | | | (1,267) | |
| | | | | |
Balance at September 30, 2020 | $ | 295 | | | $ | — | | | $ | 295 | |
Acquisitions | 761 | | | — | | | 761 | |
| | | | | |
Payments | (170) | | | — | | | (170) | |
Fair value adjustment | (736) | | | — | | | (736) | |
| | | | | |
Balance at September 30, 2021 | $ | 150 | | | $ | — | | | $ | 150 | |
(1) Included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.
(2) Included in Other non‑current liabilities on the Consolidated Balance Sheets.
Pursuant to the acquisition of Frontier, the Company recorded a liability for the Option and Purchase Right to purchase the remaining 40% interest. The fair value of the options is based upon significant unobservable inputs including future earnings and other market factors. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the options each period until the purchase of the remaining 40% interest has occurred. Changes in the fair value can result from earnings achieved over the passage of time and will be recorded in Interest expense in the Consolidated Statements of Operations. The Minority Owners exercised the Option, and on April 8, 2021 the Company completed the purchase of an additional 8% of the outstanding equity in Frontier for approximately $1,490. During the year ended September 30, 2021, the Company recorded an increase in the fair value of the Purchase Right liability for $2,056, which was recorded to Interest expense on the Consolidated Statements of Operations. As of September 30, 2021, $8,305 is included in Other non‑current liabilities related to the Purchase Right on the Consolidated Balance Sheets. As of September 30, 2020, $7,739 is included in Other non‑current liabilities related to the Purchase Right on the Consolidated Balance Sheets.
|
| | | | | | | | | | | |
| Current Portion (1) | | Long-term Portion (2) | | Total |
Balance at September 30, 2017 | $ | 4,304 |
| | $ | 1,691 |
| | $ | 5,995 |
|
Acquisitions | 634 |
| | 934 |
| | 1,568 |
|
Payments | (8,111 | ) | | — |
| | (8,111 | ) |
Reclassifications | 1,479 |
| | (1,479 | ) | | — |
|
Fair value increase | 2,619 |
| | — |
| | 2,619 |
|
Foreign currency | (155 | ) | | — |
| | (155 | ) |
Balance at September 30, 2018 | 770 |
| | 1,146 |
| | 1,916 |
|
Payments | (1,650 | ) | | — |
| | (1,650 | ) |
Reclassifications | 212 |
| | (212 | ) | | — |
|
Fair value increase | 1,283 |
| | — |
| | 1,283 |
|
Foreign currency | (4 | ) | | — |
| | (4 | ) |
Balance at September 30, 2019 | $ | 611 |
| | $ | 934 |
| | $ | 1,545 |
|
| |
(1) | Included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. |
| |
(2) | Included in Other non‑current liabilities on the Consolidated Balance Sheets. |
6.7. Accounts Receivable
Accounts receivable are summarized as follows:
| | | September 30, 2019 | | September 30, 2018 | | September 30, 2021 | | September 30, 2020 |
Accounts Receivable | $ | 262,491 |
| | $ | 258,955 |
| Accounts Receivable | $ | 282,819 | | | $ | 264,536 | |
Allowance for Doubtful Accounts | (4,906 | ) | | (4,199 | ) | |
Allowance for Credit Losses | | Allowance for Credit Losses | (4,824) | | | (4,057) | |
Receivables, net | $ | 257,585 |
| | $ | 254,756 |
| Receivables, net | $ | 277,995 | | | $ | 260,479 | |
The movement in the allowance for doubtful accountscredit losses was as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Balance at beginning of period | $ | (4,057) | | | $ | (4,906) | | | $ | (4,199) | |
Charged to costs and expenses | (1,733) | | | (537) | | | (788) | |
Write-offs | 780 | | | 1,277 | | | 39 | |
Foreign currency and other | 186 | | | 109 | | | 42 | |
Balance at end of period | $ | (4,824) | | | $ | (4,057) | | | $ | (4,906) | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Balance at beginning of period | $ | (4,199 | ) | | $ | (3,494 | ) | | $ | (4,784 | ) |
Charged to costs and expenses | (788 | ) | | (1,832 | ) | | (1,206 | ) |
Write-offs | 39 |
| | 1,387 |
| | 2,481 |
|
Foreign currency and other | 42 |
| | (260 | ) | | 15 |
|
Balance at end of period | $ | (4,906 | ) | | $ | (4,199 | ) | | $ | (3,494 | ) |
7.8. Inventories
The major classes of inventory, net are as follows:
| | | September 30, 2019 | | September 30, 2018 | | September 30, 2021 | | September 30, 2020 |
Raw materials and supplies | $ | 75,223 |
| | $ | 69,176 |
| Raw materials and supplies | $ | 86,469 | | | $ | 78,319 | |
Work in progress | 14,741 |
| | 19,461 |
| Work in progress | 19,842 | | | 15,654 | |
Finished goods and products held for resale | 58,223 |
| | 53,786 |
| Finished goods and products held for resale | 59,624 | | | 56,435 | |
Costs of unbilled projects | 2,347 |
| | 1,878 |
| Costs of unbilled projects | 2,277 | | | 3,438 | |
Reserves for excess and obsolete | (13,370 | ) | | (9,313 | ) | Reserves for excess and obsolete | (9,709) | | | (11,467) | |
Inventories, net | $ | 137,164 |
| | $ | 134,988 |
| Inventories, net | $ | 158,503 | | | $ | 142,379 | |
The following is the activity in the reserves for excess and obsolete inventory:
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Balance at beginning of period | $ | (11,467) | | | $ | (13,370) | | | $ | (9,313) | |
Change to reserve requirement | 265 | | | (310) | | | (5,754) | |
| | | | | |
Write-offs | 1,516 | | | 2,197 | | | 1,541 | |
Foreign currency and other | (23) | | | 16 | | | 156 | |
Balance at end of period | $ | (9,709) | | | $ | (11,467) | | | $ | (13,370) | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Balance at beginning of period | $ | (9,313 | ) | | $ | (10,599 | ) | | $ | (10,141 | ) |
Additions charged to expense | (5,754 | ) | | (419 | ) | | (1,004 | ) |
Write-offs | 1,541 |
| | 104 |
| | 947 |
|
Foreign currency and other | 156 |
| | 1,601 |
| | (401 | ) |
Balance at end of period | $ | (13,370 | ) | | $ | (9,313 | ) | | $ | (10,599 | ) |
8.9. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
| | | September 30, 2019 | | September 30, 2018 | | September 30, 2021 | | September 30, 2020 |
Machinery and equipment | $ | 488,924 |
| | $ | 399,619 |
| Machinery and equipment | $ | 388,352 | | | $ | 357,650 | |
Rental equipment | | Rental equipment | 246,257 | | | 221,953 | |
Land and buildings | 64,165 |
| | 76,459 |
| Land and buildings | 70,048 | | | 70,245 | |
Construction in process | 40,599 |
| | 60,803 |
| Construction in process | 59,737 | | | 48,325 | |
| 593,688 |
| | 536,881 |
| | $ | 764,394 | | | $ | 698,173 | |
Less: accumulated depreciation | (260,104 | ) | | (216,858 | ) | Less: accumulated depreciation | (389,406) | | | (333,712) | |
Property, plant, and equipment, net | $ | 333,584 |
| | $ | 320,023 |
| Property, plant, and equipment, net | $ | 374,988 | | | $ | 364,461 | |
The Company entered into secured financing agreements that require providing a security interest in specified equipment. As of September 30, 2019,2021 and September 30, 2020, the gross and net amounts of those assets are as follows:
| | | | | | | | September 30, 2021 | | September 30, 2020 |
| Gross | | Net | | Gross | | Net | | Gross | | Net |
Machinery and equipment | $ | 48,288 |
| | $ | 42,162 |
| Machinery and equipment | $ | 89,115 | | | $ | 72,666 | | | $ | 63,305 | | | $ | 52,620 | |
Construction in process | 2,531 |
| | 2,531 |
| Construction in process | 30,504 | | | 30,504 | | | 8,098 | | | 8,098 | |
| $ | 50,819 |
| | $ | 44,693 |
| | $ | 119,619 | | | $ | 103,170 | | | $ | 71,403 | | | $ | 60,718 | |
Depreciation expense and maintenance and repairs expense for the years ended September 30, 2019, 20182021, 2020 and 20172019 were as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended September 30, |
| 2021 | | 2020 | | 2019 |
Depreciation expense | $ | 76,279 | | | $ | 73,002 | | | $ | 66,031 | |
Maintenance and repair expense | $ | 22,354 | | | $ | 20,303 | | | $ | 23,861 | |
|
| | | | | | | | | | | |
| Year Ended September 30, |
| 2019 | | 2018 | | 2017 |
Depreciation expense | $ | 66,031 |
| | $ | 59,017 |
| | $ | 53,327 |
|
Maintenance and repair expense | 23,861 |
| | 23,343 |
| | 21,392 |
|
9.10. Goodwill
Changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | Integrated Solutions and Services | | Applied Product Technologies | | Total |
| Integrated Solutions and Services | | Applied Product Technologies | | Total | |
Balance at September 30, 2017 | $ | 138,181 |
| | $ | 183,732 |
| | $ | 321,913 |
| |
Business combinations | 88,080 |
| | 4,192 |
| | 92,272 |
| |
Measurement period adjustment | (404 | ) | | (311 | ) | | (715 | ) | |
Foreign currency translation | (1,487 | ) | | (637 | ) | | (2,124 | ) | |
Balance at September 30, 2018 | 224,370 |
| | 186,976 |
| | 411,346 |
| |
Balance at September 30, 2019 | | Balance at September 30, 2019 | $ | 222,013 | | | $ | 170,877 | | | $ | 392,890 | |
Business combinations and divestitures | — |
| | 1,738 |
| | 1,738 |
| Business combinations and divestitures | 2,723 | | | (405) | | | $ | 2,318 | |
Measurement period adjustments | (1,937 | ) | | 63 |
| | (1,874 | ) | Measurement period adjustments | — | | | 298 | | | $ | 298 | |
Goodwill reclassified to assets held for sale | — |
| | (14,911 | ) | | (14,911 | ) | |
| Foreign currency translation | (420 | ) | | (2,989 | ) | | (3,409 | ) | Foreign currency translation | (355) | | | 2,054 | | | $ | 1,699 | |
Balance at September 30, 2019 | $ | 222,013 |
| | $ | 170,877 |
| | $ | 392,890 |
| |
Balance at September 30, 2020 | | Balance at September 30, 2020 | $ | 224,381 | | | $ | 172,824 | | | $ | 397,205 | |
Business combinations and divestitures | | Business combinations and divestitures | 10,349 | | | — | | | $ | 10,349 | |
Measurement period adjustments | | Measurement period adjustments | (3,216) | | | — | | | $ | (3,216) | |
| Foreign currency translation | | Foreign currency translation | 2,316 | | | 722 | | | $ | 3,038 | |
Balance at September 30, 2021 | | Balance at September 30, 2021 | $ | 233,830 | | | $ | 173,546 | | | $ | 407,376 | |
The Company reviewed the recoverability of the carrying value of goodwill of its reporting units. As the fair value of the Company’s reporting units was determined to be in excess of the carrying values at July 1, 20192021 and 2018,2020, no further analysis was performed.