Delaware | 001-38272 | 46-4132761 | ||
(State or other jurisdiction of incorporation) | (Commission File Number) | (I.R.S. Employer Identification Number) |
210 Sixth Avenue Pittsburgh, Pennsylvania | 15222 | |
(Address of principal executive offices) | (Zip code) |
☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4c)) |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | AQUA | New York Stock Exchange |
Exhibit No. | Description | |
99.1 | ||
Date: | May 10, 2019 | EVOQUA WATER TECHNOLOGIES CORP. | |||||
By: | /s/ Benedict J. Stas | ||||||
Benedict J. Stas | |||||||
Chief Financial Officer |
• | Consolidated revenues of $348.6 million, an increase of 4.5% over the prior year period, including 2.3% organic growth |
• | Net income of $1.6 million compared to net income of $13.0 million in the prior year period |
• | Adjusted EBITDA of $56.7 million, down 1.7% from the prior year period |
Second Quarter Segment Results |
• | Service revenue growth of $3.8 million, exclusive of acquisitions. |
• | Capital and aftermarket revenue grew by $7.6 million, exclusive of acquisitions, primarily in the microelectronics and food and beverage markets. |
• | Recently acquired businesses of Pure Water, ProAct and Isotope contributed $10.9 million of revenue compared to the same period in the prior year. |
• | Segment profitability improved $5.7 million driven by increased organic and acquisition related revenue volume as well as improved pricing across the business. |
• | Higher segment operating costs reduced profitability by $0.5 million, partially derived from higher employment costs. |
• | Segment profitability was also impacted by $2.8 million of higher depreciation and amortization, primarily driven by acquisitions and capital investment in service assets. |
• | Aftermarket revenue grew by $9.9 million, derived from multiple product lines. |
• | Capital products revenues declined by $14.5 million, primarily in higher margin product lines. |
• | Recently acquired business Pacific Ozone contributed $0.9 million of increased revenue. |
• | Revenue was also impacted by unfavorable foreign currency translation of $3.7 million. |
• | Improvements in profitability included operational leverage of $2.5 million, as well as lower employment costs of $2.7 million as compared to the prior year period. |
• | These improvements in profitability were offset by $7.1 million related to the decline in revenue volume and the underlying product mix, as well as the impact of benefits recognized in the prior year period of $3.6 million related to warranty reductions, net of losses from our Italian operations, which did not reoccur in the current year. |
• | Operating profit was also impacted by unfavorable foreign currency translation of $1.4 million. |
• | Other offsets to segment operating profit include impacts from product rationalization and facility consolidation, restructuring and costs associated with the remediation of a manufacturing defect caused by a third party vendor in an aggregate amount of $5.4 million, along with $0.5 million of higher depreciation expense. |
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Revenue | $ | 348,628 | $ | 333,690 | $ | 671,630 | $ | 630,740 | |||||||
Cost of product sales and services | (253,017 | ) | (225,693 | ) | (487,289 | ) | (434,364 | ) | |||||||
Gross Profit | 95,611 | 107,997 | 184,341 | 196,376 | |||||||||||
General and administrative expense | (48,215 | ) | (44,742 | ) | (103,046 | ) | (83,807 | ) | |||||||
Sales and marketing expense | (35,435 | ) | (34,330 | ) | (71,587 | ) | (68,571 | ) | |||||||
Research and development expense | (3,957 | ) | (4,021 | ) | (8,103 | ) | (8,674 | ) | |||||||
Total operating expenses | (87,607 | ) | (83,093 | ) | (182,736 | ) | (161,052 | ) | |||||||
Other operating income (expense), net | 3,464 | 904 | 3,504 | 311 | |||||||||||
Interest expense | (14,474 | ) | (10,810 | ) | (28,917 | ) | (28,053 | ) | |||||||
(Loss) income before income taxes | (3,006 | ) | 14,998 | (23,808 | ) | 7,582 | |||||||||
Income tax benefit (expense) | 4,579 | (2,018 | ) | 9,093 | 2,393 | ||||||||||
Net income (loss) | 1,573 | 12,980 | (14,715 | ) | 9,975 | ||||||||||
Net income attributable to non‑controlling interest | 189 | 477 | 631 | 1,185 | |||||||||||
Net income (loss) attributable to Evoqua Water Technologies Corp. | $ | 1,384 | $ | 12,503 | $ | (15,346 | ) | $ | 8,790 | ||||||
Basic income (loss) per common share | $ | 0.01 | $ | 0.11 | $ | (0.13 | ) | $ | 0.08 | ||||||
Diluted income (loss) per common share | $ | 0.01 | $ | 0.10 | $ | (0.13 | ) | $ | 0.07 |
(Unaudited) | |||||||
March 31, 2019 | September 30, 2018 | ||||||
ASSETS | |||||||
Current assets | $ | 551,617 | $ | 565,560 | |||
Cash and cash equivalents | 66,750 | 82,365 | |||||
Receivables, net | 232,324 | 254,756 | |||||
Inventories, net | 155,863 | 134,988 | |||||
Contract assets | 71,310 | 69,147 | |||||
Other current assets | 25,370 | 24,304 | |||||
Property, plant, and equipment, net | 333,023 | 320,023 | |||||
Goodwill | 407,572 | 411,346 | |||||
Intangible assets, net | 328,021 | 340,408 | |||||
Other non-current assets | 39,941 | 26,280 | |||||
Total assets | $ | 1,660,174 | $ | 1,663,617 | |||
LIABILITIES AND EQUITY | |||||||
Current liabilities | $ | 280,773 | $ | 284,719 | |||
Accounts payable | 133,730 | 141,140 | |||||
Current portion of debt | 12,303 | 11,555 | |||||
Contract liabilities | 25,068 | 17,652 | |||||
Accrued expenses and other liabilities | 94,659 | 97,672 | |||||
Other current liabilities | 15,013 | 16,700 | |||||
Non‑current liabilities | 1,024,024 | 1,016,882 | |||||
Long‑term debt | 933,116 | 928,075 | |||||
Other non-current liabilities | 90,908 | 88,807 | |||||
Total liabilities | 1,304,797 | 1,301,601 | |||||
Shareholders’ equity | |||||||
Common stock, par value $0.01: authorized 1,000,000 shares; issued 115,691 shares, outstanding 114,173 shares at March 31, 2019; issued 115,016 shares, outstanding 113,929 shares at September 30, 2018 | 1,151 | 1,145 | |||||
Treasury stock: 1,518 shares at March 31, 2019 and 1,087 shares at September 30, 2018 | (2,837 | ) | (2,837 | ) | |||
Additional paid‑in capital | 542,104 | 533,435 | |||||
Retained deficit | (180,618 | ) | (163,871 | ) | |||
Accumulated other comprehensive loss, net of tax | (7,615 | ) | (9,017 | ) | |||
Total Evoqua Water Technologies Corp. equity | 352,185 | 358,855 | |||||
Non‑controlling interest | 3,192 | 3,161 | |||||
Total shareholders’ equity | 355,377 | 362,016 | |||||
Total liabilities and shareholders’ equity | $ | 1,660,174 | $ | 1,663,617 |
Six Months Ended March 31, | |||||||
2019 | 2018 | ||||||
Operating activities | |||||||
Net (loss) income | $ | (14,715 | ) | $ | 9,975 | ||
Reconciliation of net (loss) income to cash flows provided by operating activities: | |||||||
Depreciation and amortization | 47,252 | 40,363 | |||||
Amortization of debt related costs (includes $0 and $2,994 write off of deferred financing fees) | 1,231 | 4,145 | |||||
Deferred income taxes | (11,411 | ) | (6,013 | ) | |||
Share-based compensation | 9,270 | 6,862 | |||||
(Gain) loss on sale of property, plant and equipment | (122 | ) | 102 | ||||
Foreign currency exchange losses (gains) on intercompany loans and other non-cash items | 5,228 | (2,934 | ) | ||||
Changes in assets and liabilities | (9,389 | ) | (10,649 | ) | |||
Net cash provided by operating activities | 27,344 | 41,851 | |||||
Investing activities | |||||||
Purchase of property, plant and equipment | (40,682 | ) | (31,670 | ) | |||
Purchase of intangibles | (2,898 | ) | (291 | ) | |||
Proceeds from sale of property, plant and equipment | 2,875 | 539 | |||||
Acquisitions, net of cash received of $0 and $39 | 2,048 | (10,224 | ) | ||||
Net cash used in investing activities | (38,657 | ) | (41,646 | ) | |||
Financing activities | |||||||
Issuance of debt, net of deferred issuance costs | 10,663 | (1,792 | ) | ||||
Borrowings under credit facility | 115,000 | 6,000 | |||||
Repayment of debt | (120,856 | ) | (111,161 | ) | |||
Repayment of capital lease obligation | (4,925 | ) | (5,489 | ) | |||
Payment of earn-out related to previous acquisitions | (461 | ) | — | ||||
Proceeds from issuance of common stock | 341 | 137,605 | |||||
Taxes paid related to net share settlements of share-based compensation awards | (936 | ) | (7,368 | ) | |||
Stock repurchases | — | (230 | ) | ||||
Cash paid for interest rate cap | (2,235 | ) | — | ||||
Distribution to non‑controlling interest | (600 | ) | (1,550 | ) | |||
Net cash (used in) provided by financing activities | (4,009 | ) | 16,015 | ||||
Effect of exchange rate changes on cash | (293 | ) | 268 | ||||
Change in cash and cash equivalents | (15,615 | ) | 16,488 | ||||
Cash and cash equivalents | |||||||
Beginning of period | 82,365 | 59,254 | |||||
End of period | $ | 66,750 | $ | 75,742 |
• | to assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance; |
• | in our management incentive compensation which is based in part on components of Adjusted EBITDA; |
• | in certain calculations under our senior secured credit facilities, which use components of Adjusted EBITDA. |
• | to evaluate the effectiveness of our business strategies; |
• | to make budgeting decisions; and |
• | to compare our performance against that of other peer companies using similar measures. |
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
(In millions) | 2019 | 2018 | 2019 | 2018 | |||||||||||
Net income (loss) | $ | 1.6 | $ | 13.0 | $ | (14.7 | ) | $ | 10.0 | ||||||
Income tax (benefit) expense | (4.6 | ) | 2.0 | (9.1 | ) | (2.4 | ) | ||||||||
Interest expense | 14.5 | 10.8 | 28.9 | 28.0 | |||||||||||
Operating profit | 11.5 | 25.8 | 5.1 | 35.6 | |||||||||||
Depreciation and amortization | 24.2 | 20.5 | 47.3 | 40.4 | |||||||||||
EBITDA | 35.7 | 46.3 | 52.4 | 76.0 | |||||||||||
Restructuring and related business transformation costs (a) | 8.3 | 8.2 | 14.0 | 16.3 | |||||||||||
Share-based compensation (b) | 4.7 | 4.3 | 9.3 | 6.9 | |||||||||||
Sponsor fees (c) | — | — | — | 0.3 | |||||||||||
Transaction costs (d) | 2.4 | 0.8 | 4.5 | 1.4 | |||||||||||
Other losses (gains) and expenses (e) | 5.6 | (1.9 | ) | 14.9 | (3.2 | ) | |||||||||
Adjusted EBITDA | $ | 56.7 | $ | 57.7 | $ | 95.1 | $ | 97.7 |
(a) | Represents: |
(i) | costs and expenses in connection with various restructuring initiatives since our acquisition, through our wholly-owned entities, EWT Holdings II Corp. and EWT Holdings III Corp., of all of the outstanding shares of Siemens Water Technologies, a group of legal entity businesses formerly owned by Siemens Aktiengesellschaft, on January 15, 2014 (the “AEA Acquisition”), including severance costs, relocation costs, recruiting expenses, and third‑party consultant costs to assist with these initiatives. This includes: |
(A) | $0.3 million for the six months ended March 31, 2018, (all of which is reflected as a component of Restructuring charges in Note 13, “Restructuring and Related Charges” to our Unaudited Consolidated Financial Statements to be included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2019 (the “Restructuring Footnote”)) related to our voluntary separation plan pursuant to which approximately 220 employees accepted separation packages; |
(B) | $0.2 million and $0.7 million for the three and six months ended March 31, 2019, respectively, reflected as components of Cost of product sales and services (“Cost of sales”) ($0.2 million and $0.5 million for the three and six month periods, respectively) and G&A expense ($0.2 million for the six month period) (all of which is reflected in the Restructuring Footnote); and $1.9 million and $5.4 million for the three and six months ended March 31, 2018, respectively, reflected as components of Cost of sales ($0.3 million and $1.6 million for the three and six month periods, respectively), R&D expense ($0.2 million and $0.5 million for the three and six month periods, respectively), S&M expense ($0.2 million and $0.5 million for the three and six month periods, respectively) and G&A expense ($1.2 million and $2.8 million for the three and six month periods, respectively) (all of which is reflected in the Restructuring Footnote) related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure; and |
(C) | $5.1 million and $7.0 million for the three and six months ended March 31, 2019, respectively, (all of which is reflected in the Restructuring Footnote), reflected as components of Cost of sales ($2.5 million and $2.7 million for the three and six month periods, respectively), S&M expense ($0.4 million and $0.6 million for the three and six month periods, respectively) and G&A expense ($2.1 million and $3.6 million for the three and six month periods, respectively) 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; |
(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 ($0.2 million and $0.6 million for the three and six months ended March 31, 2019, respectively, reflected as components of Cost of sales ($0.1 million for the six month period) and G&A |
(iii) | expenses associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes ($2.3 million and $5.1 million for the three and six months ended March 31, 2019, respectively, primarily reflected as components of Cost of sales ($0.1 million for the six month period) and G&A expense ($2.3 million and $5.0 million for the three and six month periods, respectively); and $3.4 million and $4.7 million in the three and six months ended March 31, 2018, respectively, primarily reflected as components of Cost of sales ($1.2 million and $2.2 million for the three and six month periods, respectively), S&M expense ($0.1 million for each of the three and six month periods) and G&A expense ($2.1 million and $2.4 million for the three and six month periods, respectively)); and |
(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, ($0.4 million and $0.5 million for the three and six months ended March 31, 2019, respectively, all reflected as a component of G&A expense; and $2.0 million and $5.0 million for the three and six months ended March 31, 2018, respectively, all reflected as a component of G&A expense). |
(b) | Represents non‑cash share‑based compensation expenses related to equity awards. See “Note 16. Share-Based Compensation” to our Unaudited Consolidated Financial Statements to be included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2019. |
(c) | Represents management fees paid to AEA pursuant to the management agreement. Pursuant to the management agreement, AEA provided advisory and consulting services to us in connection with the AEA Acquisition, 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 the IPO, the management agreement was terminated. See “Note 18. Related-Party Transactions” to our Unaudited Consolidated Financial Statements to be included in our Quarterly Report on Form 10-Q for the three months ended March 31, 2019 for further detail. |
(d) | Represents expenses associated with acquisition and divestiture related activities and post‑acquisition integration costs and accounting, tax, consulting, legal and other fees and expenses associated with acquisition transactions ($2.4 million and $4.5 million in the three and six months ended March 31, 2019, primarily reflected as components of Cost of sales ($1.1 million and $1.3 million for the three and six month periods, respectively) and G&A expense ($1.3 million and $3.2 million for the three and six month periods, respectively) and $0.8 million and $1.4 million in the three and six months ended March 31, 2018, respectively, primarily reflected as components of G&A expense). |
(e) | Represents: |
(i) | impact of foreign exchange gains and losses ($0.3 million loss and $5.0 million loss in the three and six months ended March 31, 2019, respectively, and $2.1 million gain and $3.7 million gain in the three and six months ended March 31, 2018, respectively); |
(ii) | foreign exchange impact related to headquarter allocations ($0.2 million gain for the three and six months ended March 31, 2018, respectively); |
(iii) | expenses on disposal related to maintaining non-operational business locations ($0.1 million and $0.6 million in the three and six months ended March 31, 2019, respectively and $0.5 million and $0.7 million in the three and six months ended March 31, 2018, respectively); |
(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 ($0.3 million and $1.3 million for the three and six months ended March 31, 2019, respectively, all reflected as a component of Cost of sales); |
(v) | charges incurred by the Company related to product rationalization in its electro-chlorination business ($0.1 million expense reduction and $3.0 million expense for the three and six months ended March 31, 2019, respectively, all reflected as a component of Cost of sales); and |
(vi) | expenses incurred by the Company related to the write-off of inventory in its aquatics business associated with product rationalization and facility consolidation ($5.1 million for the three and six months ended March 31, 2019, all reflected as a component of Cost of sales). |
Three Months Ended March 31, | |||||||||||||||
2019 | 2018 | ||||||||||||||
(In millions) | Integrated Solutions and Services | Applied Product Technologies | Integrated Solutions and Services | Applied Product Technologies | |||||||||||
Operating Profit | $ | 37.0 | $ | 11.3 | $ | 34.6 | $ | 24.1 | |||||||
Depreciation and amortization | 14.3 | 4.5 | 11.5 | 4.0 | |||||||||||
EBITDA | $ | 51.3 | $ | 15.8 | $ | 46.1 | $ | 28.1 | |||||||
Restructuring and related business transformation costs (a) | 0.1 | 0.2 | — | — | |||||||||||
Transaction costs (b) | — | — | — | — | |||||||||||
Other losses and expenses (c) | — | 5.2 | — | — | |||||||||||
Adjusted EBITDA | $ | 51.4 | $ | 21.2 | $ | 46.1 | $ | 28.1 |
Six Months Ended March 31, | |||||||||||||||
2019 | 2018 | ||||||||||||||
(In millions) | Integrated Solutions and Services | Applied Product Technologies | Integrated Solutions and Services | Applied Product Technologies | |||||||||||
Operating Profit | $ | 64.9 | $ | 15.8 | $ | 68.7 | $ | 32.2 | |||||||
Depreciation and amortization | 28.3 | 8.8 | 22.6 | 7.9 | |||||||||||
EBITDA | $ | 93.2 | $ | 24.6 | $ | 91.3 | $ | 40.1 | |||||||
Restructuring and related business transformation costs (a) | 0.4 | 0.5 | — | — | |||||||||||
Transaction costs (b) | 0.5 | 0.7 | — | — | |||||||||||
Other losses and expenses (c) | 0.2 | 9.3 | — | — | |||||||||||
Adjusted EBITDA | $ | 94.3 | $ | 35.1 | $ | 91.3 | $ | 40.1 |
(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 the three and six months ended March 31, 2019. 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 the acquisitions in the six months ended March 31, 2019, distinct to our Integrated Solutions and Services and Applied Product Technologies segments. |
(c) | Represents: |
(i) | expenses incurred by the Company in the six months ended March 31, 2019, distinct to our Integrated Solutions and Services segment, related to maintaining non-operational business locations; |
(ii) | expenses incurred by the Company in the three and six months ended March 31, 2019, distinct to our Applied Product Technologies segment, as a result of product rationalization in our electro-chlorination business and the remediation of manufacturing defects caused by a third party vendor for which the Company is seeking restitution; and |
(iii) | expenses incurred by the Company in the three and six ended March 31, 2019, distinct to our Applied Product Technologies segment, as a result of the write-off of inventory in the aquatics business associated with product rationalization and facility consolidation. |
Q2 FY19 Net Sales Growth % Change | |||||||||||
GAAP Reported | Currency | Acquisitions/ Divestitures | Organic | ||||||||
Evoqua Water Technologies | 4.5 | % | (1.3 | )% | 3.5 | % | 2.3 | % | |||
Integrated Solutions & Services | 10.9 | % | (0.3 | )% | 5.3 | % | 5.9 | % | |||
Applied Product Technologies | (5.7 | )% | (2.8 | )% | 0.6 | % | (3.5 | )% |