BusinessWire

Evoqua Water Technologies Reports Third Quarter 2020 Results

Third Quarter 2020 Financial Highlights:

  • Consolidated revenues of $347.8 million compared to $360.3 million in the prior year; organic revenues essentially flat
  • Net income of $21.8 million compared to net income of $4.3 million in the prior year
  • Adjusted EBITDA of $63.8 million, an increase of 5.3% over the prior year

PITTSBURGH--(BUSINESS WIRE)--Evoqua Water Technologies (NYSE:AQUA), an industry leader in mission-critical water treatment solutions, today reported results for its third quarter ended June 30, 2020.

Revenues for the third quarter of fiscal 2020 were $347.8 million, a decrease of 3.5% as compared to the prior year period. The change in revenue was driven primarily by the net impact of acquisitions and the divestiture of the Memcor product line, which resulted in a net decrease in revenue of 2.7% or $9.7 million, in addition to a small decline from negative currency translation. Organic revenues were generally consistent with the prior year period, declining by 0.3%. Net income for the quarter was $21.8 million, resulting in diluted earnings per share (“EPS”) of $0.18 as compared to $0.03 in the prior year period. Net income was favorably impacted year over year by $7.1 million of lower tax expense, $4.4 million of lower interest expense and $3.0 million of non-cash foreign currency translation gains. Adjusted EBITDA for the quarter was $63.8 million as compared to $60.6 million in the prior year period. Adjusted EPS was $0.20 for the quarter as compared to $0.09 in the prior year period. See the “Use of Non-GAAP Measures” section below for additional information regarding Adjusted EBITDA and Adjusted EPS.

“I am pleased with our execution and overall results for the quarter. Our employees have remained focused on safety first while adapting to overcome the challenges presented by COVID-19 at our customers’ locations. During the quarter, all of our facilities remained operational, and we effectively responded to our customers’ needs. Protecting the safety of our employees and stakeholders, ensuring the resiliency of our business and managing the business for liquidity are our key priorities in the current environment,” said Mr. Ron Keating, Evoqua’s CEO.

Mr. Keating continued, “Our third quarter organic revenues, primarily adjusting for the Memcor divestiture, remained consistent with the prior year period. Capital revenues for the quarter were driven by strong microelectronics demand, while service revenues had a slight decline as we experienced COVID-19 related customer shutdowns and lower demand for event driven services. Overall Adjusted EBITDA for the quarter was strong as margins improved over the prior year. Free cash flow conversion was strong, liquidity increased sequentially, and overall leverage improved sequentially during the quarter.”

Mr. Keating stated, “Our pipeline remains robust, and we are engaged with customers on a broad range of outsourced water opportunities. We will continue to protect our employees, capitalize on current market opportunities, remain operationally nimble and enhance our balance sheet flexibility while we prepare for an eventual market recovery. We are closely monitoring customer demand trends as COVID-19 continues to provide challenges to overall market visibility and order conversion timing.”

Third Quarter Segment Results

Evoqua has two reportable operating segments - Integrated Solutions and Services and Applied Product Technologies. The results of our segments for the third quarter are as follows:

Integrated Solutions and Services

Segment revenues increased $3.3 million, or 1.5%, to $228.7 million in the third quarter of fiscal 2020 as compared to the prior year period.

  • Capital revenue increased by $11.7 million, exclusive of acquisitions, as compared to the prior year period. The increase was primarily driven by continued strong demand for water solutions and systems in the microelectronics end market.
  • Service revenue decreased by $8.8 million as compared to the prior year period. The decline was evenly driven by the timing of completion of certain large projects in the prior year as well as the impact of COVID-19 shut-downs and delays, primarily in the refining and oil and gas end markets, partly offset by price realization related to established service contracts.
  • Aftermarket revenue declined by $1.0 million, while the recent investment in Frontier Water Systems, LLC contributed $1.4 million of revenue in the period.

Operating profit decreased by $4.8 million, or 12.8%, to $32.6 million in the third quarter of fiscal 2020 as compared to the prior year period.

  • Increased volume and price realization drove a $2.6 million increase in segment profitability as compared to the prior year period. Additionally, cost containment measures implemented in response to the uncertainties of COVID-19 accounted for an additional $2.1 million increase in segment profitability.
  • Profitability was negatively impacted by $2.8 million of operational variances related to lower service volumes and service related productivity due to customer shutdowns and enhanced safety protocols in response to COVID-19, as well as $2.9 million related to increased employee related expenses.
  • Depreciation and amortization expense increased by $3.8 million compared to the prior year as the segment continues to invest in revenue generating assets.

Segment Adjusted EBITDA decreased $0.8 million, or 1.6%, to $50.6 million in the third quarter of fiscal 2020 as compared to the prior year period. The decline in segment Adjusted EBITDA generally resulted from the same factors which impacted operating profit, other than the change in depreciation and amortization, and also excludes restructuring charges recognized in the period.

Applied Product Technologies

Segment revenues decreased by $15.8 million, or 11.7%, to $119.1 million in the third quarter of fiscal 2020 as compared to the same period in the prior year.

  • The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction in revenue of $11.1 million.
  • An additional $1.4 million reduction in revenue resulted from unfavorable foreign currency translation.
  • Revenue declined across multiple product lines in the Americas and EMEA by $3.6 million and $1.7 million, respectively, mainly due to COVID-19 related customer site closures and delays. These decreases were partially offset by organic revenue growth in Asia Pacific of $2.0 million, driven by volume in the Anodes & Aquatics product lines, as demand improved in the region as it recovers from COVID-19.

Operating profit increased $1.1 million to $23.6 million for the third quarter of fiscal 2020 as compared to the prior year period.

  • Increased operating profit was driven by mix and price performance improvements of $3.2 million and operational performance improvements of $2.7 million related to the cost reduction initiatives associated with two-segment realignment.
  • These increases were offset by the impact of decreased volume by $2.9 million, $0.9 million in materials inflation and employee expenses, $0.2 million due to the divestiture of the Memcor product line net of the acquisition of ATG UV Technology, and $0.2 million of unfavorable foreign currency translation.
  • Segment operating profit also includes the positive impact of $0.9 million of lower depreciation expense.
  • Further net operating profit decrease of $1.4 million was attributable to the change in other non-recurring charges or benefits as compared to the prior year period.

Segment Adjusted EBITDA increased $1.6 million, or 5.9%, to $28.9 million in the third quarter of fiscal 2020 as compared to $27.3 million in the same period of the prior year. The increase in segment Adjusted EBITDA was driven by the same factors which impacted segment operating profit, other than the change from depreciation and amortization, and for this segment also excludes restructuring and other activity incurred in the current year that increased Adjusted EBITDA by $1.4 million as compared to the prior year period.

Third Quarter Earnings Call and Webcast

The Company will hold its third quarter of fiscal 2020 earnings conference call Tuesday, August 4, 2020, at 10:00 a.m. E.T. The live audio webcast and presentation slides for the call will be accessible via Evoqua’s Investor Relations website, http://aqua.evoqua.com/. The link to the webcast replay as well as the presentation slides will also be posted on Evoqua’s Investor Relations website.

About Evoqua Water Technologies

Evoqua Water Technologies is a leading provider of mission critical water and wastewater treatment solutions, offering a broad portfolio of products, services and expertise to support industrial, municipal and recreational customers who value water. Evoqua has worked to protect water, the environment and its employees for more than 100 years, earning a reputation for quality, safety and reliability around the world. Headquartered in Pittsburgh, Pennsylvania, the company operates in more than 160 locations across ten countries. Serving more than 38,000 customers and 200,000 installations worldwide, our employees are united by a common purpose: Transforming Water. Enriching Life.

 

EVOQUA WATER TECHNOLOGIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(In thousands, except per share amounts)

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

 

2020

 

2019

 

2020

 

2019

Revenue

$

347,827

 

 

$

360,343

 

 

$

1,045,595

 

 

$

1,031,973

 

Cost of product sales and services

(237,593)

 

 

(249,049)

 

 

(718,440)

 

 

(736,338)

 

Gross profit

110,234

 

 

111,294

 

 

327,155

 

 

295,635

 

General and administrative expense

(44,867)

 

 

(49,525)

 

 

(152,767)

 

 

(152,571)

 

Sales and marketing expense

(29,855)

 

 

(31,959)

 

 

(101,845)

 

 

(103,546)

 

Research and development expense

(2,782)

 

 

(3,281)

 

 

(9,655)

 

 

(11,384)

 

Total operating expenses

(77,504)

 

 

(84,765)

 

 

(264,267)

 

 

(267,501)

 

Other operating income, net

336

 

 

562

 

 

61,025

 

 

4,066

 

Income before interest expense and income taxes

33,066

 

 

27,091

 

 

123,913

 

 

32,200

 

Interest expense

(10,485)

 

 

(14,842)

 

 

(37,320)

 

 

(43,759)

 

Income (loss) before income taxes

22,581

 

 

12,249

 

 

86,593

 

 

(11,559)

 

Income tax (expense) benefit

(740)

 

 

(7,959)

 

 

(3,336)

 

 

1,134

 

Net income (loss)

21,841

 

 

4,290

 

 

83,257

 

 

(10,425)

 

Net income attributable to non‑controlling interest

457

 

 

155

 

 

916

 

 

786

 

Net income (loss) attributable to Evoqua Water Technologies Corp.

$

21,384

 

 

$

4,135

 

 

$

82,341

 

 

$

(11,211)

 

Basic income (loss) per common share

$

0.18

 

 

$

0.04

 

 

$

0.71

 

 

$

(0.10)

 

Diluted income (loss) per common share

$

0.18

 

 

$

0.03

 

 

$

0.68

 

 

$

(0.10)

 

 

EVOQUA WATER TECHNOLOGIES CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In thousands, except per share amounts)

 

 

June 30,
2020

 

September 30,
2019

ASSETS

 

 

 

Current assets

$

642,722

 

 

$

637,293

 

Cash and cash equivalents

142,737

 

 

109,881

 

Receivables, net

242,898

 

 

257,585

 

Inventories, net

159,446

 

 

137,164

 

Contract assets

77,590

 

 

73,467

 

Other current assets

20,051

 

 

21,940

 

Assets held for sale

 

 

37,256

 

Property, plant, and equipment, net

356,424

 

 

333,584

 

Goodwill

393,427

 

 

392,890

 

Intangible assets, net

316,299

 

 

314,767

 

Operating lease right-of-use assets, net

39,427

 

 

 

Other non-current assets

29,597

 

 

28,505

 

Non-current assets held for sale

 

 

30,809

 

Total assets

$

1,777,896

 

 

$

1,737,848

 

LIABILITIES AND EQUITY

 

 

 

Current liabilities

$

335,292

 

 

$

322,221

 

Accounts payable

154,322

 

 

144,247

 

Current portion of debt

14,611

 

 

13,418

 

Contract liabilities

30,841

 

 

39,051

 

Accrued expenses and other liabilities

124,016

 

 

101,839

 

Other current liabilities

11,502

 

 

9,458

 

Liabilities held for sale

 

 

14,208

 

Non-current liabilities

995,274

 

 

1,049,805

 

Long-term debt

855,359

 

 

951,599

 

Obligation under operating leases

31,008

 

 

 

Other non-current liabilities

108,907

 

 

94,541

 

Non-current liabilities held for sale

 

 

3,665

 

Total liabilities

1,330,566

 

 

1,372,026

 

Shareholders’ equity

 

 

 

Common stock, par value $0.01: authorized 1,000,000 shares; issued 119,392 shares,
outstanding 117,197 at June 30, 2020; issued 116,008, outstanding 114,344 shares at September 30, 2019

1,187

 

 

1,154

 

Treasury stock: 2,195 shares at June 30, 2020 and 1,664 shares at September 30, 2019

(2,837)

 

 

(2,837)

 

Additional paid-in capital

578,842

 

 

552,422

 

Retained deficit

(93,972)

 

 

(174,976)

 

Accumulated other comprehensive loss, net of tax

(38,019)

 

 

(13,004)

 

Total Evoqua Water Technologies Corp. equity

445,201

 

 

362,759

 

Non-controlling interest

2,129

 

 

3,063

 

Total shareholders’ equity

447,330

 

 

365,822

 

Total liabilities and shareholders’ equity

$

1,777,896

 

 

$

1,737,848

 

 

EVOQUA WATER TECHNOLOGIES CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (Unaudited)
(In thousands)

 

 

Nine Months Ended
June 30,

 

2020

 

2019

Operating activities

 

 

 

Net income (loss)

$

83,257

 

 

$

(10,425)

 

Reconciliation of net income (loss) to cash flows provided by operating activities:

 

 

 

Depreciation and amortization

80,056

 

 

71,397

 

Amortization of debt related costs (includes $1,795 and $0 write off of deferred financing fees)

3,504

 

 

1,916

 

Deferred income taxes

(1,422)

 

 

(4,115)

 

Share-based compensation

8,504

 

 

14,248

 

Loss (gain) on sale of property, plant and equipment

767

 

 

(588)

 

Gain on sale of business

(68,051)

 

 

 

Foreign currency exchange losses on intercompany loans and other non-cash items

(2,438)

 

 

4,002

 

Changes in assets and liabilities

(21,691)

 

 

(22,078)

 

Net cash provided by operating activities

82,486

 

 

54,357

 

Investing activities

 

 

 

Purchase of property, plant and equipment

(65,924)

 

 

(63,948)

 

Purchase of intangibles

(708)

 

 

(4,775)

 

Proceeds from sale of property, plant and equipment

379

 

 

2,860

 

Proceeds from sale of business, net of cash of $12,117

118,894

 

 

 

Acquisitions, net of cash received of $0 and $2,073

(10,884)

 

 

(2,811)

 

Net cash provided by (used in) investing activities

41,757

 

 

(68,674)

 

Financing activities

 

 

 

Issuance of debt, net of deferred issuance costs

12,859

 

 

15,965

 

Borrowings under credit facility

2,597

 

 

230,000

 

Repayment of debt

(113,572)

 

 

(238,908)

 

Repayment of finance lease obligation

(9,988)

 

 

(9,273)

 

Payment of earn-out related to previous acquisitions

(175)

 

 

(461)

 

Proceeds from issuance of common stock

17,949

 

 

341

 

Taxes paid related to net share settlements of share-based compensation awards

 

 

(1,248)

 

Cash paid for interest rate cap

 

 

(2,235)

 

Distribution to non‑controlling interest

(1,850)

 

 

(750)

 

Net cash used in financing activities

(92,180)

 

 

(6,569)

 

Effect of exchange rate changes on cash

793

 

 

(357)

 

Change in cash and cash equivalents

32,856

 

 

(21,243)

 

Cash and cash equivalents

 

 

 

Beginning of period

109,881

 

 

82,365

 

End of period

$

142,737

 

 

$

61,122

 

 

Use of Non-GAAP Measures

Adjusted EBITDA

We use the non-GAAP financial measure “Adjusted EBITDA” in evaluating our past performance and future prospects. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, purchase accounting adjustment costs, non-cash share-based compensation, transaction costs and other gains, losses and expenses.

Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business. We present Adjusted EBITDA, which is a non-GAAP financial measure, because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results and provides greater clarity to management and our investors regarding the operational impact of long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA to supplement GAAP measures of performance as follows:

  • to assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance;
  • in our management incentive compensation which is based in part on components of Adjusted EBITDA;
  • in certain calculations under our senior secured credit facilities, which use components of Adjusted EBITDA;
  • to evaluate the effectiveness of our business strategies;
  • to make budgeting decisions; and
  • to compare our performance against that of other peer companies using similar measures.

In addition to the above, our chief operating decision maker uses EBITDA and Adjusted EBITDA of each reportable operating segment to evaluate the operating performance of such segments. EBITDA and Adjusted EBITDA of the reportable operating segments do not include certain charges that are presented within corporate activities. These charges include certain restructuring and other business transformation charges that have been incurred to align and reposition the Company to the current reporting structure, acquisition related costs (including transaction costs, integration costs and recognition of backlog intangible assets recorded in purchase accounting) and share-based compensation charges.

You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non-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.

Adjusted Net Income and Adjusted Earnings Per Share (“EPS”)

Adjusted Net Income is a non-GAAP financial measure that is calculated as net income (loss) adjusted to exclude restructuring and related business transformation costs, share-based compensation, transaction costs, and other (gains) losses and expenses as discussed in the “Adjusted EBITDA” section above, as well as extraordinary interest charges plus or minus the related changes in provision for income taxes.

We present Adjusted Net Income and Adjusted EPS because we believe they are frequently used by analysts, investors and other interested parties in evaluating companies in our industry. Further, we believe they provide greater clarity and comparability period over period to management and our investors regarding ongoing operating performance and highlighting related operating trends.

The following is a reconciliation of our Net income (loss) to Adjusted EBITDA (unaudited):

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

(In millions)

2020

 

2019

 

2020

 

2019

Net income (loss)

$

21.8

 

 

$

4.3

 

 

$

83.3

 

 

$

(10.4)

 

Income tax expense (benefit)

0.8

 

 

7.9

 

3.3

 

 

(1.2)

 

Interest expense

10.5

 

 

14.9

 

37.3

 

 

43.8

 

Operating profit

33.1

 

 

27.1

 

 

123.9

 

 

32.2

 

Depreciation and amortization

27.6

 

 

24.1

 

 

80.1

 

 

71.4

 

EBITDA

60.7

 

 

51.2

 

 

204.0

 

 

103.6

 

Restructuring and related business transformation costs (a)

3.1

 

 

4.5

 

 

11.0

 

 

18.5

 

Share-based compensation (b)

2.6

 

 

5.0

 

 

8.6

 

 

14.3

 

Transaction costs (c)

0.3

 

 

1.0

 

 

1.0

 

 

5.5

 

Other (gains) losses and expenses (d)

(2.9)

 

 

(1.1)

 

 

(60.5)

 

 

13.8

 

Adjusted EBITDA

$

63.8

 

 

$

60.6

 

 

$

164.1

 

 

$

155.7

 

 

(a)

Restructuring and related business transformation costs

 

Adjusted EBITDA is calculated prior to considering certain restructuring or business transformation events. These events may occur over extended periods of time, and in some cases it is reasonably possible that they could reoccur in future periods based on reorganizations of the business, cost reduction or productivity improvement needs, or in response to economic conditions. For the periods presented such events include the following:

 

(i)

Certain costs and expenses in connection with various restructuring initiatives, including severance costs, relocation costs, recruiting expenses, and third-party consultant costs to assist with these initiatives. This includes:

 

(A)

amounts related to the Company’s restructuring initiatives to reduce the cost structure and rationalize location footprint following the sale of the Memcor product line;
 

(B)

amounts related to the Company’s transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide; and
 

(C)

amounts related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure.
 
 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

(In millions)

2020

 

2019

 

2020

 

2019

Post Memcor divestiture restructuring(1)

$

1.2

 

 

$

 

 

$

4.9

 

 

$

 

Cost of product sales and services ("Cost of sales")

0.8

 

 

 

 

3.7

 

 

 

S&M expense

(0.1)

 

 

 

 

 

 

 

G&A expense

0.5

 

 

 

 

1.2

 

 

 

Two-segment restructuring(2)

$

0.6

 

 

$

2.9

 

 

$

1.9

 

 

$

9.9

 

Cost of sales

0.4

 

 

1.4

 

 

1.0

 

 

4.1

 

R&D expense

 

 

 

 

 

 

0.1

 

S&M expense

 

 

0.3

 

 

 

 

0.9

 

G&A expense

0.2

 

 

1.2

 

 

0.9

 

 

4.8

 

Various other initiatives(3)

$

0.5

 

 

$

0.6

 

 

$

1.0

 

 

$

1.3

 

Cost of sales

0.3

 

 

0.2

 

 

0.7

 

 

0.7

 

S&M expense

0.1

 

 

 

 

0.1

 

 

 

G&A expense

0.1

 

 

0.4

 

 

0.2

 

 

0.6

 

Total

$

2.3

 

 

$

3.5

 

 

$

7.8

 

 

$

11.2

 

 

(1)

of which $4.8 million is reflected in restructuring charges in Note 13, “Restructuring and Related Charges,” to our Consolidated Financial Statements to be included in our Quarterly Report on Form 10-Q for the three and nine months ended June 30, 2020 (the “Restructuring Footnote”) in the nine months ended June 30, 2020.

 

(2)

of which $1.9 million and $9.3 million is reflected in the Restructuring Footnote in the nine months ended June 30, 2020 and 2019, respectively.

 

(3)

all of which is reflected in the Restructuring Footnote for the nine months ended June 30, 2020 and 2019, respectively.

 

(ii)

legal settlement costs and intellectual property related fees associated with legacy matters prior to the AEA Acquisition, including fees and settlement costs related to product warranty litigation on Memcor products and certain discontinued products. This includes:

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

(In millions)

2020

 

2019

 

2020

 

2019

Cost of sales

$

0.3

 

 

$

0.1

 

 

$

0.5

 

 

$

0.2

 

G&A expense

0.1

 

 

0.2

 

 

0.3

 

 

0.7

 

Total

$

0.4

 

 

$

0.3

 

 

$

0.8

 

 

$

0.9

 

 

(iii)

expenses associated with our information technology and functional infrastructure transformation subsequent to the AEA Acquisition, including activities to optimize information technology systems and functional infrastructure processes. This includes:

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

(In millions)

2020

 

2019

 

2020

 

2019

Cost of sales

$

 

 

$

0.3

 

 

$

0.1

 

 

$

0.4

 

G&A expense

(0.1)

 

 

0.9

 

 

0.6

 

 

5.9

 

Total

$

(0.1)

 

 

$

1.2

 

 

$

0.7

 

 

$

6.3

 

 

(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:

 

 

Three Months Ended
June 30,

 

Nine Months Ended
June 30,

(In millions)

2020

 

2019

 

2020

 

2019

G&A expense

$

0.5

 

 

$

(0.5)

 

 

$

1.7

 

 

$

0.1

 

Total

$

0.5

 

 

$

(0.5)

 

 

$

1.7

 

 

$

0.1

 


Contacts

Investors
Dan Brailer
Vice President, Investor Relations
Evoqua Water Technologies
Telephone: 724-720-1605
Email: dan.brailer@evoqua.com

Media
Lisa Marchewka
Vice President, Brand and Strategy
Evoqua Water Technologies
Telephone: 978-614-7219
Email: lisa.marchewka@evoqua.com


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