Evoqua Water Technologies Earnings 2020-12-31

Balance Sheet	Income Statement	Cash Flow
Assets, Equity	Rev, G Profit, Net Income	Ops, Inv, Fin

aqua-20201231

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒						Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
December 31, 2020
or
☐						Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
						For the transition period from _____ to _____

Commission File Number: 001-38272

EVOQUA WATER TECHNOLOGIES CORP.

(Exact name of registrant as specified in its charter)


Delaware		46-4132761
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
210 Sixth Avenue		15222
Pittsburgh,	Pennsylvania
(Address of principal executive offices)		(Zip Code)

(724) 772-0044

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

There were 119,650,959 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of January 31, 2021.

EVOQUA WATER TECHNOLOGIES CORP.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward‑looking statements by our use of forward‑looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would,” or the negative thereof, or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including growth of our various markets, our expectations, beliefs, plans, strategies, objectives, prospects, assumptions, or future events or performance, statements regarding our restructuring actions and expected restructuring charges and cost savings for fiscal 2021 and beyond, and statements related to the COVID-19 pandemic and its impact on our business contained in this Report are forward‑looking statements.

We have based these forward‑looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward‑looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in Part I, Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the Securities and Exchange Commission (“SEC”) on November 20, 2020, and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Report may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward‑looking statements or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward‑looking statements include, among other things:

•general global economic and business conditions, including the impacts of the COVID-19 pandemic and disruptions in global oil markets;

•our ability to compete successfully in our markets;

•our ability to execute projects on budget and on schedule;

•the potential for us to incur liabilities to customers as a result of warranty claims or failure to meet performance guarantees;

•our ability to meet our customers’ safety standards or the potential for 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;

•our ability to continue to develop or acquire new products, services and solutions and adapt our business to meet the demands of our customers, comply with changes to government regulations and achieve market acceptance with acceptable margins;

•our ability to implement our growth strategy, including acquisitions, and our ability to identify suitable acquisition targets;

•our ability to operate or integrate any acquired businesses, assets or product lines profitably or otherwise successfully implement our growth strategy;

•our ability to achieve the expected benefits of our restructuring actions, including restructuring our business into two segments;

•material and other cost inflation and our ability to mitigate the impact of inflation by increasing selling prices and improving our productivity efficiencies;

•our ability to accurately predict the timing of contract awards;

•delays in enactment or repeals of environmental laws and regulations;

•the potential for us to become subject to claims relating to handling, storage, release or disposal of hazardous materials;

•our ability to retain our senior management and other key personnel;

•our increasing dependence on the continuous and reliable operation of our information technology systems;

•risks associated with product defects and unanticipated or improper use of our products;

•litigation, regulatory or enforcement actions and reputational risk as a result of the nature of our business or our participation in large‑scale projects;

•seasonality of sales and weather conditions;

•risks related to government customers, including potential challenges to our government contracts or our eligibility to serve government customers;

•the potential for our contracts with federal, state and local governments to be terminated or adversely modified prior to completion;

•risks related to foreign, federal, state and local environmental, health and safety laws and regulations and the costs associated therewith;

•risks associated with international sales and operations, including our operations in China;

•our ability to adequately protect our intellectual property from third‑party infringement;

•risks related to our substantial indebtedness;

•our need for a significant amount of cash, which depends on many factors beyond our control;

•risks related to AEA Investors LP’s (together with certain of its affiliates, collectively, “AEA”) ownership interest in us; and

•other risks and uncertainties, including those listed under Part I, Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the SEC on November 20, 2020, and in other filings we may make from time to time with the SEC.

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 Report 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 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 Report, they may not be predictive of results or developments in future periods.

Any forward‑looking statement that we make in this Report speaks only as of the date of such statement. Except as required by law, we do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any of the forward‑looking statements, whether as a result of new information, future events or otherwise, after the date of this Report.

Part I - Financial Information

Item 1. Financial Statements

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


Evoqua Water Technologies Corp.
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2020 (Unaudited) and September 30, 2020			4
Unaudited Consolidated Statements of Operations for the Three Months Ended December 31, 2020 and 2019			5
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three Months Ended December 31, 2020 and 2019			6
Unaudited Consolidated Statements of Changes in Equity for the Three Months Ended December 31, 2020 and 2019			7
Unaudited Consolidated Statements of Changes in Cash Flow for the Three Months Ended December 31, 2020 and 2019			8
Unaudited Supplemental Disclosure of Cash Flow Information for the Three Months Ended December 31, 2020 and 2019			9
Notes to Unaudited Consolidated Financial Statements			10

Evoqua Water Technologies Corp.

Consolidated Balance Sheets

(In thousands)


	(Unaudited)
	December 31, 2020		September 30, 2020
ASSETS
Current assets	$	679,540	$	695,712
Cash and cash equivalents	197,920		193,001
Receivables, net	246,211		260,479
Inventories, net	155,026		142,379
Contract assets	59,825		80,759
Prepaid and other current assets	19,569		18,715
Income tax receivable	989		379

Property, plant, and equipment, net	369,915		364,461
Goodwill	408,593		397,205
Intangible assets, net	302,557		309,967
Deferred income taxes, net of valuation allowance	1,650		3,639
Operating lease right-of-use assets, net	48,245		45,965
Other non‑current assets	33,166		27,509

Total assets	$	1,843,666	$	1,844,458
LIABILITIES AND EQUITY
Current liabilities	$	326,126	$	349,555
Accounts payable	141,931		153,890
Current portion of debt, net of deferred financing fees	18,426		14,339
Contract liabilities	34,445		26,259
Product warranties	5,577		6,115
Accrued expenses and other liabilities	120,668		143,389
Income tax payable	5,079		5,563

Non‑current liabilities	1,015,579		1,012,840
Long-term debt, net of deferred financing fees	860,215		861,695
Product warranties	1,646		1,724
Obligation under operating leases	39,897		37,796
Other non‑current liabilities	102,517		98,456
Deferred income taxes	11,304		13,169

Total liabilities	1,341,705		1,362,395
Commitments and Contingent Liabilities (Note 20)
Shareholders’ equity
Common stock, par value $0.01: authorized 1,000,000 shares; issued 120,750 shares, outstanding 118,554 at December 31, 2020; issued 119,486 shares, outstanding 117,291 at September 30, 2020	1,202		1,189
Treasury stock: 2,196 shares at December 31, 2020 and 2,195 shares at September 30, 2020	(2,837)		(2,837)
Additional paid-in capital	582,197		564,928
Retained deficit	(56,231)		(62,664)
Accumulated other comprehensive loss, net of tax	(24,083)		(20,472)
Total Evoqua Water Technologies Corp. equity	500,248		480,144
Non-controlling interest	1,713		1,919
Total shareholders’ equity	501,961		482,063
Total liabilities and shareholders’ equity	$	1,843,666	$	1,844,458

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Operations

(In thousands, except per share data)


	Three Months Ended December 31,
		2020		2019
Revenue from product sales		$	180,015	$	196,560
Revenue from services		142,178		149,545
Revenue from product sales and services		322,193		346,105
Cost of product sales		(131,061)		(140,456)
Cost of services		(95,787)		(99,934)
Cost of product sales and services		(226,848)		(240,390)
Gross profit		95,345		105,715
General and administrative expense		(42,283)		(45,770)
Sales and marketing expense		(33,928)		(38,014)
Research and development expense		(3,123)		(3,684)
Total operating expenses		(79,334)		(87,468)
Other operating income		480		51,720
Other operating expense		(257)		(275)
Income before interest expense and income taxes		16,234		69,692
Interest expense		(8,673)		(13,583)
Income before income taxes		7,561		56,109
Income tax expense		(1,084)		(2,603)
Net income		6,477		53,506
Net income attributable to non‑controlling interest		44		361
Net income attributable to Evoqua Water Technologies Corp.		$	6,433	$	53,145
Basic income per common share		$	0.05	$	0.46
Diluted income per common share		$	0.05	$	0.44

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(In thousands)


	Three Months Ended December 31,
		2020		2019
Net income		$	6,477	$	53,506
Other comprehensive (loss) income
Foreign currency translation adjustments		(4,877)		8,057
Unrealized derivative gain (loss) on cash flow hedges, net of tax		1,002		(49)
Change in pension liability, net of tax		264		236
Total other comprehensive (loss) income		(3,611)		8,244
Less: Comprehensive income attributable to non‑controlling interest		(44)		(361)
Comprehensive income attributable to Evoqua Water Technologies Corp.		$	2,822	$	61,389

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Equity

(In thousands)


	Three Months Ended December 31, 2020
	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, 2020	119,486	$	1,189	2,195	$	(2,837)	$	564,928	$	(62,664)	$	(20,472)	$	1,919	$	482,063

Equity based compensation expense	—	—		—	—		3,019		—		—		—		$	3,019
Issuance of common stock, net	1,264	13		1	—		14,250		—		—		—		$	14,263


Dividends paid to non-controlling interest	—	—		—	—		—		—		—		(250)		$	(250)
Net income	—	—		—	—		—		6,433		—		44		$	6,477
Other comprehensive loss	—	—		—	—		—		—		(3,611)		—		$	(3,611)
Balance at December 31, 2020	120,750	$	1,202	2,196	$	(2,837)	$	582,197	$	(56,231)	$	(24,083)	$	1,713	$	501,961


	Three Months Ended December 31, 2019
	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, 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	—	—		—	—		—		(2,023)		—		—		$	(2,023)
Equity based compensation expense	—	—		—	—		3,680		—		—		—		$	3,680
Issuance of common stock, net	1,645	16		419	—		4,030		—		—		—		$	4,046


Dividends paid to non-controlling interest	—	—		—	—		—		—		—		(1,250)		$	(1,250)
Divestiture of Memcor product line	—	—		—	—		(16,895)		—		—		—		$	(16,895)
Net income	—	—		—	—		—		53,145		—		361		$	53,506
Other comprehensive income	—	—		—	—		—		—		8,244		—		$	8,244
Balance at December 31, 2019	117,653	$	1,170	2,083	$	(2,837)	$	543,237	$	(123,854)	$	(4,760)	$	2,174	$	415,130

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Cash Flows

(In thousands)


	Three Months Ended December 31,
	2020		2019
Operating activities
Net income	$	6,477	$	53,506
Reconciliation of net income to cash flows provided by operating activities:
Depreciation and amortization	27,391		25,143
Amortization of deferred financing fees	526		701
Deferred income taxes	258		(679)
Share-based compensation	3,019		3,680
Loss on sale of property, plant and equipment	19		173
Gain on sale of business	—		(58,279)
Foreign currency exchange gains on intercompany loans and other non-cash items	(6,459)		(6,086)
Changes in assets and liabilities
Accounts receivable	18,083		11,087
Inventories	(11,551)		(14,613)
Contract assets	21,458		3,042
Prepaids and other current assets	(465)		(631)
Accounts payable	(12,652)		(11,056)
Accrued expenses and other liabilities	(32,356)		(9,378)
Contract liabilities	8,010		4,651
Income taxes	(1,271)		1,388
Other non‑current assets and liabilities	(4,873)		2,083
Net cash provided by operating activities	15,614		4,732
Investing activities
Purchase of property, plant and equipment	(17,260)		(17,572)
Purchase of intangibles	(81)		(210)
Proceeds from sale of property, plant and equipment	127		251
Proceeds from sale of business, net of cash of $0 and $12,117	—		108,921
Acquisitions	(8,743)		(11,160)
Net cash (used in) provided by investing activities	(25,957)		80,230
Financing activities
Issuance of debt, net of deferred issuance costs	7,805		3,532
Borrowings under credit facility	—		13
Repayment of debt	(5,723)		(3,793)
Repayment of finance lease obligation	(3,821)		(4,162)
Payment of earn-out related to previous acquisitions	—		(175)
Proceeds from issuance of common stock	14,263		4,046





Distribution to non‑controlling interest	(250)		(1,250)
Net cash provided by (used in) financing activities	12,274		(1,789)
Effect of exchange rate changes on cash	2,988		1,849

Change in cash and cash equivalents	4,919		85,022
Cash and cash equivalents
Beginning of period	193,001		109,881
End of period	$	197,920	$	194,903

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Supplemental Disclosure of Cash Flow Information

(In thousands)


	Three Months Ended December 31,
	2020		2019
Supplemental disclosure of cash flow information
Cash paid for taxes	$	1,334	$	1,382
Cash paid for interest	$	7,624	$	12,268
Non‑cash investing and financing activities

Finance lease transactions	$	5,484	$	1,782
Operating lease transactions	$	5,954	$	4,734
Option and Purchase Right	$	—	$	7,673

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Notes to Unaudited Consolidated Financial Statements

(In thousands, except per share data)

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, the Company acquired through its wholly owned entities, EWT Holdings II Corp. and EWT Holdings III Corp. (“EWT III”), all of the outstanding shares of Siemens Water Technologies, a group of legal entity businesses formerly owned by Siemens AG (“Siemens”). The stock purchase closed on January 15, 2014 and was effective January 16, 2014 (the “Acquisition”). 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 12,000 shares of common stock were sold by certain selling shareholders. The Company did not receive any proceeds from the sale of shares by the selling shareholders in this secondary public offering.

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 branch network. Headquartered in Pittsburgh, Pennsylvania, EWT is a multinational 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 two 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 Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All intercompany transactions have been eliminated. Unless otherwise specified, all dollar and share amounts in these notes are referred to in thousands.

The interim Unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. In our opinion, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as filed with the SEC on November 20, 2020 (“2020 Annual Report”), in preparing these Unaudited Consolidated Financial Statements, with the exception of accounting standard updates described in Note 2, “Recent Accounting Pronouncements.” These Unaudited Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes included in our 2020 Annual Report. Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Recent Accounting Pronouncements

Accounting Pronouncements Not Yet Adopted

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial

Reporting, as amended in January 2021 (“ASU 2021-01”), which 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 discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 became effective immediately and expires on December 21, 2022. ASU 2020-04 allows eligible contracts that are modified to be accounted for as a continuation of those contracts, permits companies to preserve their hedging accounting during the transition period and enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. The Company is currently assessing the impact of the adoption of ASU 2020-04 on the Company’s Unaudited Consolidated Financial Statements and related disclosures.

Accounting Pronouncements Recently Adopted

The Company adopted ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments on October 1, 2020 (“ASU 2016-13”). ASU 2016-13 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. The Company adopted ASU 2016-13 using a modified 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 Unaudited Consolidated Financial Statements. See Note 7, “Accounts Receivable” for further details and related disclosures.

The following accounting pronouncements were adopted by the Company during the three months ended December 31, 2020 and the adoptions did not have a material impact on the Company’s Unaudited Consolidated Financial Statements or disclosures:


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 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 Accounting Standards Codification (“ASC”) Topic No. 810, Consolidation. The Company has not provided, and is not contractually required to provide, 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 summary of TWO’s balance sheet as of December 31, 2020 and September 30, 2020, and summarized financial information for the three months ended December 31, 2020 and 2019.


	December 31, 2020		September 30, 2020
Current assets (includes cash of $1,743 and $2,088)	$	3,560	$	4,016
Property, plant and equipment	1,084		1,145
Goodwill	2,206		2,206

Total liabilities	(1,219)		(1,324)


	Three Months Ended December 31,
		2020		2019
Total revenues		$	834	$	2,642
Total operating expenses		(737)		(1,958)
Income from operations		$	97	$	684

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. As the agreement to purchase the remaining interest was determined to be financing due to the mandatory Purchase Right, as per ASC Topic 480, Distinguishing Liabilities From Equity, the Company recognized a liability for the remaining 40% interest. Additionally, the Company fully consolidates Frontier as a VIE under ASC Topic No. 810, Consolidation.

The following provides a summary of Frontier’s balance sheet as of December 31, 2020 and September 30, 2020, and summarized financial information for the three months ended December 31, 2020 and 2019.


	December 31, 2020		September 30, 2020
Current assets (includes cash of $2,143 and $1,675)	$	3,528	$	4,024
Property, plant and equipment	3,210		3,159
Goodwill	1,798		1,798
Intangible assets, net	9,505		9,918
Total liabilities	(3,798)		(3,692)


	Three Months Ended December 31,
	2020		2019
Total revenues	$	770	$	1,645
Total operating expenses	(1,738)		(1,937)
Loss from operations	$	(968)	$	(292)

4. Acquisitions

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.

On December 17, 2020, the Company acquired the industrial water business of Ultrapure & Industrial Services, LLC (“Ultrapure”) for $8,743 cash paid at closing. 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 three months ended December 31, 2020, the Company incurred approximately $216 in acquisition costs, which are included in General and administrative expenses.

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 Ultrapure is summarized as follows:


Current assets	$	2,039
Property, plant and equipment	900
Goodwill	6,088
Other non-current assets	22
Total assets acquired	9,049
Liabilities assumed	(306)
Net assets acquired	$	8,743

5. Revenue

Revenue Recognition

The Company recognizes sales of products and services based on the five-step analysis of transactions as provided in ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“Topic 606”). For all 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. The Company then determines the transaction price 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 three months ended December 31, 2020 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, 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 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. These arrangements 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. 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. 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 has not been material.

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 that the total contract price is less than $100, will be recorded at the point in time when the construction is complete.

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, which totaled approximately $154,029 at December 31, 2020. 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 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 December 31, 2020.

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:


	Three Months Ended December 31,
		2020		2019
Revenue from contracts with customers recognized under Topic 606		$	285,188	$	308,602
Other (1)		37,005		37,503
Total		$	322,193	$	346,105

(1) Other revenue relates to revenue recognized pursuant to ASU 2016-02, Leases (Topic 842), mainly attributable to long term rentals.

Information regarding revenues disaggregated by source of revenue and segment is as follows:


	Three Months Ended December 31,
	2020						2019
	Integrated Solutions and Services		Applied Product Technologies		Total		Integrated Solutions and Services		Applied Product Technologies		Total
Revenue from capital projects	$	50,626	$	76,889	$	127,515	$	54,620	$	74,926	$	129,546
Revenue from aftermarket	27,146		25,354		52,500		29,673		37,341		67,014
Revenue from service	136,945		5,233		142,178		143,845		5,700		149,545
Total	$	214,717	$	107,476	$	322,193	$	228,138	$	117,967	$	346,105

Information regarding revenues disaggregated by geographic area is as follows:


	Three Months Ended December 31,
		2020		2019
United States		$	264,131	$	277,717
Asia		22,605		18,742
Europe		21,285		26,112
Canada		11,179		17,563
Australia		2,993		5,971
Total		$	322,193	$	346,105

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 the Company’s performance under the contract.

The tables below provide a roll-forward of contract assets and contract liabilities balances for the periods presented:


	Three Months Ended December 31,
Contract assets (a)	2020		2019
Balance at beginning of period	$	80,759	$	73,467

Recognized in current period	66,885		84,596
Reclassified to accounts receivable	(88,560)		(87,046)
Amounts related to sale of the Memcor product line	—		2,710
Foreign currency	741		182
Balance at end of period	$	59,825	$	73,909

(a) Excludes receivable balances which are disclosed on the Consolidated Balance Sheets.


	Three Months Ended December 31,
Contract Liabilities	2020		2019
Balance at beginning of period	$	26,259	$	39,051

Recognized in current period	96,230		88,616
Amounts in beginning balance reclassified to revenue	(24,895)		(37,624)
Current period amounts reclassified to revenue	(62,730)		(46,083)
Amounts related to sale of the Memcor product line	—		(700)
Foreign currency	(419)		374
Balance at end of period	$	34,445	$	43,634

6. Fair Value Measurements

As of December 31, 2020 and September 30, 2020, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

The Company measures the fair value of pension plan assets and liabilities, deferred compensation plan assets and liabilities on a recurring basis pursuant to ASC Topic No. 820, Fair Value Measurement. ASC Topic No. 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 plan 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 plan 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 fair value these assets and liabilities, therefore all are classified as Level 2 within the valuation 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 December 31, 2020
Assets:
Pension plan
Cash	$	—	$	769	$	—	$	—
Global Multi-Asset Fund	14,895		—		—		—
Government Securities	3,034		—		—		—
Liability Driven Investment	6,126		—		—		—
Guernsey Unit Trust	2,100		—		—		—
Global Absolute Return	2,223		—		—		—
Deferred compensation plan assets

Insurance	—		—		20,777		—


Foreign currency forward contracts	—		—		173		—
Liabilities:
Pension plan	—		—		(49,599)		—
Deferred compensation plan liabilities	—		—		(22,833)		—
Long‑term debt	—		—		(885,971)		—
Interest rate swap	—		—		(3,703)		—
Foreign currency forward contracts	—		—		(53)		—
Earn-outs related to acquisitions	—		—		—		(295)
Option and Purchase Right	—		—		—		(7,739)

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	—		—

Price	16.82	EPS	-0
Shares	115	P/E	-228
MCap	1,929	P/FCF	15
Net Debt	867	EBIT	73
TEV	2,797	TEV/EBIT	38
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-12-31	Filed 2021-02-02
10-K	2020-09-30	Filed 2020-11-20
10-Q	2020-06-30	Filed 2020-08-04
10-Q	2020-03-31	Filed 2020-05-06
10-Q	2019-12-31	Filed 2020-02-04
10-K	2019-09-30	Filed 2019-11-25
10-Q	2019-06-30	Filed 2019-08-06
10-Q	2019-03-31	Filed 2019-05-10
10-Q	2018-12-31	Filed 2019-02-05
10-K	2018-09-30	Filed 2018-12-11
10-Q	2018-06-30	Filed 2018-08-07
10-Q	2018-03-31	Filed 2018-05-08
S-1	2018-03-12	Public Filing
10-Q	2017-12-31	Filed 2018-02-07
10-K	2017-09-30	Filed 2017-12-04

8-K	2021-02-16	Shareholder Vote
8-K	2021-02-09	Other Events, Exhibits
8-K	2021-02-08	Other Events, Exhibits
8-K	2021-02-08	Other Events, Exhibits
8-K	2021-02-02	Earnings, Exhibits
8-K	2020-12-02	Other Events, Exhibits
8-K	2020-12-01	Other Events, Exhibits
8-K	2020-12-01	Other Events, Exhibits
8-K	2020-11-25
8-K	2020-11-17
8-K	2020-08-07
8-K	2020-08-06
8-K	2020-08-06
8-K	2020-08-04
8-K	2020-05-06
8-K	2020-04-14
8-K	2020-03-05
8-K	2020-03-05
8-K	2020-03-04
8-K	2020-02-21
8-K	2020-02-18
8-K	2020-02-04
8-K	2020-01-07
8-K	2019-12-20
8-K	2019-12-04
8-K	2019-11-21
8-K	2019-10-03
8-K	2019-08-06
8-K	2019-05-13
8-K	2019-05-10
8-K	2019-02-26
8-K	2019-02-20
8-K	2019-02-15
8-K	2019-02-14
8-K	2019-02-05
8-K	2018-12-11
8-K	2018-11-27
8-K	2018-10-30
8-K	2018-08-07
8-K	2018-08-01
8-K	2018-07-26
8-K	2018-06-20
8-K	2018-06-18
8-K	2018-06-04
8-K	2018-05-22
8-K	2018-05-07
8-K	2018-04-13
8-K	2018-04-03
8-K	2018-03-29
8-K	2018-03-14
8-K	2018-03-12
8-K	2018-02-28
8-K	2018-02-06
8-K	2018-01-09

EX-31.1	q1fy21ceocertexhibit311.htm
EX-31.2	q1fy21cfocertexhibit312.htm
EX-32.1	q1fy21soxcertexhibit321.htm
EX-32.2	q1fy21soxcertexhibit322.htm

AQUA 10Q Quarterly Report

Evoqua Water Technologies Earnings 2020-12-31