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)) |
Date: May 8, 2018 | EVOQUA WATER TECHNOLOGIES CORP. | |||||
By: | /s/ Benedict J. Stas | |||||
Benedict J. Stas | ||||||
Chief Financial Officer |
• | Consolidated revenues of $333.7 million, an 11.3% increase year-over-year |
• | Net income of $13.0 million, an improvement of 165.2% year-over-year |
• | Adjusted EBITDA of $57.7 million, up $13.8 million or 31.3% year-over-year |
• | Capital revenues increased $10.7 million, primarily in the power market and with remediation projects. |
• | Service revenues increased $0.6 million related to power, hydrocarbon processing and chemical processing. |
• | Acquisitions contributed $9.5 million of revenue from the additions of ADI, Noble and Pure Water. |
• | $3.5 million of benefits were experienced as a result of lower employment costs driven by restructuring and cost improvement initiatives implemented in the current and prior fiscal year. |
• | $2.3 million of profit was provided from the ADI, Noble and Pure Water acquisitions. |
• | Excluding the impact of acquisitions, Industrial segment profitability was tempered by the product mix of higher capital projects revenue growth as compared to higher margin services revenue growth. |
• | Additionally, profitability improvements were partially offset by $1.2 million related to higher depreciation and amortization driven by capital investment in service assets and the acquisitions mentioned above. |
• | Large projects saw an increase of $2.9 million due to growth within MEMCOR. |
• | Service revenue experienced growth of $0.2 million. |
• | Growth was partially offset by a decrease in revenue of $1.7 million related to timing of aftermarket product sales as compared to the same period of the prior year, and $0.6 million of lower revenue from our Italian operations as this portion of our business approached final wind down. |
• | $1.2 million improvement related primarily to lower employment expenses resulting from the shift to a customer focused organizational structure from administrative and back-office functions. |
• | $1.7 million associated with a reduction in warranty costs due to improved product quality and better project execution. |
• | Lower depreciation expense of $0.3 million. |
• | Operating profit decreased by $1.7 million as a result of the mix shift to higher capital projects revenue growth as compared to higher margin aftermarket revenue. |
• | Growth of $7.2 million in revenues across the segment, comprised of contributions from four of the five divisions. |
• | Acquisitions contributed $1.3 million from the additions of Olson and Pacific Ozone. |
• | The positive impact of foreign currency was $3.8 million, primarily related to transactions denominated in euro and pound sterling. |
• | Overall increased volume and mix of product offerings as well as operational efficiency delivered $2.8 million of operating profit. |
• | $2.5 million of benefits were experienced as a result of lower employment costs driven by restructuring and cost improvement initiatives implemented in the current and prior fiscal year as well as lower depreciation and amortization. |
• | The positive impact of foreign currency was $0.5 million; and |
• | The Olson and Pacific Ozone acquisitions contributed $0.2 million year over year. |
Three Months Ended March 31, | Six Months Ended March 31, | ||||||||||||||
2017 | 2018 | 2017 | 2018 | ||||||||||||
Revenue from product sales and services | $299,901 | $333,690 | $579,773 | $630,740 | |||||||||||
Cost of product sales and services | (205,568) | (225,693) | (403,372) | (434,364) | |||||||||||
Gross Profit | 94,333 | 107,997 | 176,401 | 196,376 | |||||||||||
General and administrative expense | (40,211) | (44,742) | (89,397) | (83,807) | |||||||||||
Sales and marketing expense | (36,690) | (34,330) | (71,783) | (68,571) | |||||||||||
Research and development expense | (5,086) | (4,021) | (10,091) | (8,674) | |||||||||||
Other operating (expense) income | (365) | 904 | 1,309 | 311 | |||||||||||
Interest expense | (11,898) | (10,810) | (26,651) | (28,053) | |||||||||||
Earnings (loss) before income taxes | 83 | 14,998 | (20,212) | 7,582 | |||||||||||
Income tax benefit (expense) | 4,812 | (2,018) | 11,907 | 2,393 | |||||||||||
Net income (loss) | 4,895 | 12,980 | (8,305) | 9,975 | |||||||||||
Net income attributable to non‑controlling interest | 1,697 | 477 | 2,096 | 1,185 | |||||||||||
Net income (loss) attributable to Evoqua Water Technologies Corp. | $3,198 | $12,503 | ($10,401) | $8,790 | |||||||||||
Weighted average shares outstanding | |||||||||||||||
Basic | 104,632 | 113,770 | 104,632 | 113,770 | |||||||||||
Diluted | 107,741 | 119,215 | 104,632 | 119,543 | |||||||||||
Earnings (loss) per share | |||||||||||||||
Basic | $ | 0.03 | $ | 0.11 | $ | (0.10 | ) | $ | 0.08 | ||||||
Diluted | $ | 0.03 | $ | 0.10 | $ | (0.10 | ) | $ | 0.07 |
(Unaudited) | |||||||
September 30, 2017 | March 31, 2018 | ||||||
ASSETS | |||||||
Current assets | $512,240 | $530,872 | |||||
Cash and cash equivalents | 59,254 | 75,742 | |||||
Receivables, net | 245,248 | 217,852 | |||||
Inventories, net | 120,047 | 136,251 | |||||
Cost and earnings in excess of billings on uncompleted contracts | 66,814 | 74,792 | |||||
Prepaid and other current assets | 20,046 | 25,394 | |||||
Income tax receivable | 831 | 841 | |||||
Property, plant, and equipment, net | 280,043 | 285,687 | |||||
Goodwill | 321,913 | 329,898 | |||||
Intangible assets, net | 333,746 | 323,515 | |||||
Deferred income taxes | 2,968 | 7,140 | |||||
Other non‑current assets | 22,399 | 22,747 | |||||
Total assets | $1,473,309 | $1,499,859 | |||||
LIABILITIES AND EQUITY | |||||||
Current liabilities | $291,899 | $282,645 | |||||
Accounts payable | 114,932 | 138,454 | |||||
Current portion of debt | 11,325 | 11,057 | |||||
Billings in excess of costs incurred | 27,124 | 25,040 | |||||
Product warranties | 11,164 | 8,746 | |||||
Accrued expenses and other liabilities | 121,923 | 91,998 | |||||
Income tax payable | 5,431 | 7,350 | |||||
Non‑current liabilities | 964,835 | 856,138 | |||||
Long‑term debt | 878,524 | 775,984 | |||||
Product warranties | 6,110 | 3,790 | |||||
Other non‑current liabilities | 67,673 | 66,080 | |||||
Deferred income taxes | 12,528 | 10,284 | |||||
Total liabilities | 1,256,734 | 1,138,783 | |||||
Commitments and Contingent Liabilities | |||||||
Shareholders’ equity | |||||||
Common stock, par value $0.01: authorized 1,000,000 shares; issued 105,359 shares, outstanding 104,949 shares at September 30, 2017; issued 114,710 shares, outstanding 113,769 shares at March 31, 2018. | 1,054 | 1,142 | |||||
Treasury stock: 410 shares at September 30, 2017 and 941 shares at March 31, 2018. | (2,607) | (2,837) | |||||
Additional paid‑in capital | 388,986 | 525,997 | |||||
Retained deficit | (170,006) | (161,216) | |||||
Accumulated other comprehensive loss, net of tax | (5,989) | (6,782) | |||||
Total Evoqua Water Technologies Corp. equity | 211,438 | 356,304 | |||||
Non‑controlling interest | 5,137 | 4,772 | |||||
Total shareholders’ equity | 216,575 | 361,076 | |||||
Total liabilities and shareholders’ equity | $1,473,309 | $1,499,859 |
Six Months Ended March 31, 2017 | Six Months Ended March 31, 2018 | ||||||
Operating activities | |||||||
Net (loss) income | $ | (8,305 | ) | $ | 9,975 | ||
Reconciliation of net (loss) income to cash flows from operating activities: | |||||||
Depreciation and amortization | 37,520 | 40,363 | |||||
Amortization of deferred financing costs (includes $2,075 and $2,994 write off of deferred financing fees) | 4,576 | 4,145 | |||||
Deferred income taxes | (11,015 | ) | (6,013 | ) | |||
Share based compensation | 1,020 | 6,862 | |||||
Gain on sale of property, plant and equipment | (446 | ) | 102 | ||||
Foreign currency losses on intracompany loans | 5,095 | (2,934 | ) | ||||
Changes in assets and liabilities | |||||||
Accounts receivable | (5,093 | ) | 28,946 | ||||
Inventories | (8,826 | ) | (14,936 | ) | |||
Cost and earnings in excess of billings on uncompleted contracts | 1,401 | (7,848 | ) | ||||
Prepaids and other current assets | (1,090 | ) | (5,156 | ) | |||
Accounts payable | (1,552 | ) | 22,821 | ||||
Accrued expenses and other liabilities | (13,152 | ) | (30,810 | ) | |||
Billings in excess of costs incurred | (1,205 | ) | (2,032 | ) | |||
Income taxes | (3,497 | ) | 1,849 | ||||
Other non‑current assets and liabilities | 4,223 | (3,483 | ) | ||||
Net cash (used in) provided by operating activities | (346 | ) | 41,851 | ||||
Investing activities | |||||||
Purchase of property, plant and equipment | (27,229) | (31,670) | |||||
Purchase of intangibles | (410) | (291) | |||||
Proceeds from sale of property, plant and equipment | 425 | 539 | |||||
Acquisitions, net of cash received of $0 | (10,730) | (10,224) | |||||
Net cash used in investing activities | (37,944) | (41,646) | |||||
Financing activities | |||||||
Issuance of debt | 150,000 | — | |||||
Capitalized deferred issuance costs related to refinancing | (4,198) | (1,792) | |||||
Borrowings under credit facility | 33,000 | 6,000 | |||||
Repayment of debt | (132,738) | (111,161) | |||||
Repayment of capital lease obligation | (2,656) | (5,489) | |||||
Shares of common stock issued in initial public offering, net of offering costs | 4,151 | 137,605 | |||||
Taxes paid related to net share settlements of share-based compensation awards | — | (7,368) | |||||
Stock repurchases | (543) | (230) | |||||
Distribution to non‑controlling interest | (3,500) | (1,550) | |||||
Net cash provided by financing activities | 43,516 | 16,015 | |||||
Effect of exchange rate changes on cash | (586) | 268 | |||||
Change in cash and cash equivalents | 4,640 | 16,488 | |||||
Cash and cash equivalents | |||||||
Beginning of period | 50,362 | 59,254 | |||||
End of period | $55,002 | $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, | |||||||||||||||
2017 | 2018 | 2017 | 2018 | |||||||||||||
Net income (loss) | $ | 4,895 | $ | 12,980 | $ | (8,305 | ) | $ | 9,975 | |||||||
Interest expense | 11,898 | 10,810 | 26,651 | 28,053 | ||||||||||||
Income tax (benefit) expense | (4,812 | ) | 2,018 | (11,907) | (2,393) | |||||||||||
Depreciation and amortization | 18,873 | 20,480 | 37,520 | 40,363 | ||||||||||||
| ||||||||||||||||
EBITDA | 30,854 | 46,288 | 43,959 | 75,998 | ||||||||||||
Restructuring and related business transformation costs (a) | 9,875 | 8,228 | 23,033 | 16,343 | ||||||||||||
Purchase accounting adjustment costs (b) | 10 | — | 229 | — | ||||||||||||
Share-based compensation (c) | 554 | 4,250 | 1,020 | 6,862 | ||||||||||||
Sponsor fees (d) | 1,000 | — | 2,000 | 333 | ||||||||||||
Transaction costs (e) | 2,400 | 846 | 3,759 | 1,360 | ||||||||||||
Other gains, losses and expenses (f) | (764 | ) | (1,912 | ) | 7,171 | (3,215 | ) | |||||||||
Adjusted EBITDA | $ | 43,929 | $ | 57,700 | $ | 81,171 | $ | 97,681 |
(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, write‑offs of inventory and fixed assets and third‑party consultant costs to assist with these initiatives (includes (A) $5.7 million and $15.9 million for the three and six months ended March 31, 2017, respectively, and $0.0 million and $0.3 million for the three months and six months ended March 31, 2018, respectively, (all of which is reflected as a component of Restructuring charges in “Note 11-Restructuring and Related Charges” to our unaudited condensed consolidated financial statements to be included in our Quarterly Report on Form 10-Q for the period ended March 31, 2018) related to our voluntary separation plan pursuant to which approximately 220 employees accepted separation packages, and (B) $1.5 million and $2.7 million for the three and six months ended March 31, 2017, respectively, reflected as a components of Cost of product sales and services ($0.9 million and $1.7 million for the three and six month periods, respectively), and General and administrative expense ($0.6 million and $1.0 million for the three and six month periods, respectively); and $1.9 million and $5.4 million for the three and six month periods ended March 31, 2018, respectively, reflected as components of Cost of product sales and services ($0.3 million and $1.6 million for the three and six month periods, respectively), Research and development expense ($0.2 million and $0.5 million for the three and six month periods, respectively), Sales and marketing expense ($0.2 million and $0.5 million for the three and six month periods, respectively) and General and administrative expense ($1.2 million and $2.8 million for the three and six month periods, respectively) (all of which is reflected as a component of Restructuring charges in “Note 11-Restructuring and Related Charges” to our unaudited condensed consolidated financial statements to be included in our Quarterly Report on Form 10-Q for the period ended March 31, 2018) related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure); |
(ii) | legal settlement costs and intellectual property related fees 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 ($0.3 million and $0.8 million for the three and six months ended March 31, 2017, respectively, reflected as components of Cost of product sales and services ($0.1 million and $0.2 million for the three and six month periods, respectively) and General and administrative expense ($0.2 million and $0.6 million for the three and six month periods, respectively), and $0.9 million and $1.0 million for the three and six months ended March 31, 2018, reflected as components of Cost of product sales and services ($0.3 million and $0.4 million for the three and six month periods, respectively) and General and administrative expense ($0.6 million and $0.6 million for the three and six month periods, respectively)); |
(iii) | expenses associated with our information technology and functional infrastructure transformation following the AEA Acquisition, including activities to optimize information technology systems and functional infrastructure processes ($2.3 million and $3.7 million for the three and six months ended March 31, 2017, primarily reflected as components of Cost of product sales and services ($1.2 million and $1.7 million for the three and six month periods, respectively), Sales and marketing expense ($0.2 million and $0.5 million for the three and six month periods, respectively) and General and administrative expense ($0.9 million and $1.5 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, primarily reflected as components of Cost of product sales and services ($1.2 million and $2.2 million for the three and six month periods, respectively), Sales and marketing expense ($0.1 million for the three and six months periods, respectively) and General and administrative expense ($2.1 million and $2.4 million for the three and six month periods, respectively)); and |
(iv) | costs incurred by us in connection with our IPO and secondary offering, including consultant costs and public company compliance costs ($2.0 million and $5.0 million for the three and six months ended March 31, 2018, respectively, all reflected as a component of General and administrative expense). |
(b) | Represents adjustments for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the acquisition of Magneto. |
(c) | Represents non‑cash stock‑based compensation expenses related to option awards. See “Note 14-Share Based Compensation” to our unaudited condensed consolidated financial statements to be included in our Quarterly Report on Form 10-Q for the period ended March 31, 2018 for further detail. |
(d) | 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 effective November 6, 2017. See “Note 16-Related-Party Transactions” to our unaudited condensed consolidated financial statements to be included in our Quarterly Report on Form 10-Q for the period ended March 31, 2018 for further detail. |
(e) | 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 $3.8 million in the three and six months ended March 31, 2017, respectively, and $0.8 million and $1.4 million in the three and six months ended March 31, 2018, respectively). |
(f) | Represents: |
(i) | impact of foreign exchange gains and losses ($2.5 million gain and $5.2 million loss in the three and six months ended March 31, 2017, 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 ($0.9 million loss and $1.1 million loss for the three and six months ended March 31, 2017, respectively, and $0.2 million gain for the three and six months ended March 31, 2018, respectively); and |
(iii) | expenses related to maintaining non-operational business locations ($0.6 million and $0.7 million in the three and six months ended March 31, 2017, respectively, and $0.5 million $0.7 million in the three and six months ended March 31, 2018, respectively). |
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