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Evoqua Water Technologies Corp. - Quarter Report: 2019 June (Form 10-Q)




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
ý
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
June 30, 2019
or
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-38272
 
EVOQUA WATER TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
46-4132761
(I.R.S. Employer Identification No.)

210 Sixth Avenue
Pittsburgh, Pennsylvania
(Address of principal executive offices)
 

15222
(Zip code)
(724) 772-0044
(Registrant’s telephone number, including area code)
         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 ý   No o
         Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ý    No o
         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 o
 
Accelerated filer o
 
Non-accelerated filer ý
(Do not check if a
smaller reporting company)
 
Smaller reporting company o 
Emerging growth company o
         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. o
         Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
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
         There were 114,343,957 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of July 31, 2019.





EVOQUA WATER TECHNOLOGIES CORP.
TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, as amended (the “Securities Act”), 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 and statements regarding our two-segment restructuring actions and expected restructuring charges and cost savings for fiscal 2019 and beyond 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 “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as filed with the Securities and Exchange Commission (“SEC”) on December 11, 2018, and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this Quarterly Report (“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:
general global economic and business conditions;
our ability to compete successfully in our markets;
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 and 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 execute projects in a timely manner, consistent with our customers’ demands;
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;
risks associated with product defects and unanticipated or improper use of our products;
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;

1


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;
our increasing dependence on the continuous and reliable operation of our information technology systems;
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 (along with certain of its affiliates, collectively, “AEA”) ownership interest in us; and
other risks and uncertainties, including those listed under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as filed with the SEC on December 11, 2018, 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.


2


Part I - Financial Information

Item 1. Consolidated Financial Statements

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Evoqua Water Technologies Corp.
 
Unaudited Consolidated Financial Statements
 


3


Evoqua Water Technologies Corp.
Consolidated Balance Sheets
(In thousands)
 
(Unaudited)
 
 
 
June 30,
2019
 
September 30,
2018
ASSETS
 
 
 
Current assets
$
565,088

 
$
565,560

Cash and cash equivalents
61,122

 
82,365

Receivables, net
247,717

 
254,756

Inventories, net
161,020

 
134,988

Contract assets
70,018

 
69,147

Prepaid and other current assets
25,205

 
23,854

Income tax receivable
6

 
450

Property, plant, and equipment, net
341,404

 
320,023

Goodwill
410,286

 
411,346

Intangible assets, net
323,321

 
340,408

Deferred income taxes
7,239

 
2,438

Other non‑current assets
24,117

 
23,842

Total assets
$
1,671,455

 
$
1,663,617

LIABILITIES AND EQUITY
 
 
 
Current liabilities
$
281,696

 
$
284,719

Accounts payable
137,480

 
141,140

Current portion of debt
12,661

 
11,555

Contract liabilities
32,312

 
17,652

Product warranties
8,264

 
8,907

Accrued expenses and other liabilities
89,273

 
97,672

Income tax payable
1,706

 
7,793

Non‑current liabilities
1,026,168

 
1,016,882

Long‑term debt
935,507

 
928,075

Product warranties
3,741

 
3,360

Other non‑current liabilities
75,786

 
74,352

Deferred income taxes
11,134

 
11,095

Total liabilities
1,307,864

 
1,301,601

Commitments and Contingent Liabilities (Note 19)


 


Shareholders’ equity
 
 
 
Common stock, par value $0.01: authorized 1,000,000 shares; issued 115,968 shares, outstanding 114,312 shares at June 30, 2019; issued 115,016 shares, outstanding 113,929 shares at September 30, 2018
1,154

 
1,145

Treasury stock: 1,656 shares at June 30, 2019 and 1,087 shares at September 30, 2018
(2,837
)
 
(2,837
)
Additional paid‑in capital
546,767

 
533,435

Retained deficit
(176,483
)
 
(163,871
)
Accumulated other comprehensive loss, net of tax
(8,207
)
 
(9,017
)
Total Evoqua Water Technologies Corp. equity
360,394

 
358,855

Non‑controlling interest
3,197

 
3,161

Total shareholders’ equity
363,591

 
362,016

Total liabilities and shareholders’ equity
$
1,671,455

 
$
1,663,617

See accompanying notes to these Unaudited Consolidated Financial Statements

4


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Operations
(In thousands except per share data)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Revenue from product sales
$
210,363

 
$
211,486

 
$
597,319

 
$
582,973

Revenue from services
149,980

 
130,989

 
434,654

 
390,242

Revenue from product sales and services
360,343

 
342,475

 
1,031,973

 
973,215

Cost of product sales
(148,417
)
 
(140,345
)
 
(438,869
)
 
(389,980
)
Cost of services
(100,632
)
 
(100,123
)
 
(297,469
)
 
(284,852
)
Cost of product sales and services
(249,049
)
 
(240,468
)
 
(736,338
)
 
(674,832
)
Gross profit
111,294

 
102,007

 
295,635

 
298,383

General and administrative expense
(49,525
)
 
(56,961
)
 
(152,571
)
 
(140,767
)
Sales and marketing expense
(31,959
)
 
(33,888
)
 
(103,546
)
 
(102,459
)
Research and development expense
(3,281
)
 
(3,682
)
 
(11,384
)
 
(12,356
)
Total operating expenses
(84,765
)
 
(94,531
)
 
(267,501
)
 
(255,582
)
Other operating income
746

 
8,458

 
4,625

 
9,396

Other operating expense
(184
)
 
(1,096
)
 
(559
)
 
(1,722
)
Interest expense
(14,842
)
 
(12,370
)
 
(43,759
)
 
(40,423
)
Income (loss) before income taxes
12,249

 
2,468

 
(11,559
)
 
10,052

Income tax (expense) benefit
(7,959
)
 
(1,433
)
 
1,134

 
960

Net income (loss)
4,290

 
1,035

 
(10,425
)
 
11,012

Net income attributable to non‑controlling interest
155

 
242

 
786

 
1,427

Net income (loss) attributable to Evoqua Water Technologies Corp.
$
4,135

 
$
793

 
$
(11,211
)
 
$
9,585

Basic income (loss) per common share
$
0.04

 
$
0.01

 
$
(0.10
)
 
$
0.08

Diluted income (loss) per common share
$
0.03

 
$
0.01

 
$
(0.10
)
 
$
0.08

See accompanying notes to these Unaudited Consolidated Financial Statements


5


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
4,290

 
$
1,035

 
$
(10,425
)
 
$
11,012

Other comprehensive (loss) income
 
 
 
 
 
 
 
Foreign currency translation adjustments
(341
)
 
(2,015
)
 
1,241

 
(2,811
)
Unrealized derivative loss on cash flow hedges, net of tax
(251
)
 
(3
)
 
(431
)
 

Total other comprehensive (loss) income
(592
)
 
(2,018
)
 
810

 
(2,811
)
Less: Comprehensive income attributable to non‑controlling interest
(155
)
 
(242
)
 
(786
)
 
(1,427
)
Comprehensive income (loss) attributable to Evoqua Water Technologies Corp.
$
3,543

 
$
(1,225
)
 
$
(10,401
)
 
$
6,774

See accompanying notes to these Unaudited Consolidated Financial Statements


6


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Changes in Equity
(In thousands)
 
Three Months Ended June 30, 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 March 31, 2019
115,691

 
$
1,151

 
1,518

 
$
(2,837
)
 
$
542,104

 
$
(180,618
)
 
$
(7,615
)
 
$
3,192

 
$
355,377

Equity based compensation expense

 

 

 

 
4,978

 

 

 

 
4,978

Issuance of common stock
46

 

 

 

 

 

 

 

 

Shares withheld related to net share settlement (including tax withholdings)
231

 
3

 
138

 

 
(315
)
 

 

 

 
(312
)
Stock repurchases

 

 

 

 

 

 

 

 

Dividends paid to non-controlling interest

 

 

 

 

 

 

 
(150
)
 
(150
)
Net income

 

 

 

 

 
4,135

 

 
155

 
4,290

Other comprehensive income

 

 

 

 

 

 
(592
)
 

 
(592
)
Balance at June 30, 2019
115,968

 
$
1,154

 
1,656

 
$
(2,837
)
 
$
546,767

 
$
(176,483
)
 
$
(8,207
)
 
$
3,197

 
$
363,591

 
Three Months Ended June 30, 2018
 
Common Stock
 
Treasury Stock
 
Additional
Paid‑in
Capital
 
Retained
Deficit
 
Accumulated
Other Comprehensive Loss
 
Non‑controlling
Interest
 
Total
 
Shares
 
Cost
 
Shares
 
Cost
 
 
 
 
 
Balance at March 31, 2018
114,710

 
$
1,142

 
941

 
$
(2,837
)
 
$
525,997

 
$
(161,216
)
 
$
(6,782
)
 
$
4,772

 
$
361,076

Equity based compensation expense

 

 

 

 
4,395

 

 

 

 
4,395

Shares of common stock issued in initial public offering, net of offering costs

 

 

 

 

 

 

 

 

Shares withheld related to net share settlement (including tax withholdings)
61

 
1

 
19

 

 
(400
)
 

 

 

 
(399
)
Stock repurchases

 

 

 

 

 

 

 

 

Dividends paid to non-controlling interest

 

 

 

 

 

 

 
(875
)
 
(875
)
Net income

 

 

 

 

 
793

 

 
242

 
1,035

Other comprehensive loss

 

 

 

 

 

 
(2,018
)
 

 
(2,018
)
Balance at June 30, 2018
114,771

 
$
1,143

 
960

 
$
(2,837
)
 
$
529,992

 
$
(160,421
)
 
$
(8,800
)
 
$
4,139

 
$
363,216


7



Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Changes in Equity (Continued)
(In thousands)
 
Nine Months Ended June 30, 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, 2018
115,016

 
$
1,145

 
1,087

 
$
(2,837
)
 
$
533,435

 
$
(163,871
)
 
$
(9,017
)
 
$
3,161

 
$
362,016

Cumulative effect of adoption of new accounting standards

 

 

 

 

 
(1,401
)
 

 

 
(1,401
)
Equity based compensation expense

 

 

 

 
14,248

 

 

 

 
14,248

Issuance of common stock
108

 

 

 

 
341

 

 

 

 
341

Shares withheld related to net share settlement (including tax withholdings)
844

 
9

 
569

 

 
(1,257
)
 

 

 

 
(1,248
)
Dividends paid to non-controlling interest

 

 

 

 

 

 

 
(750
)
 
(750
)
Net (loss) income

 

 

 

 

 
(11,211
)
 

 
786

 
(10,425
)
Other comprehensive income

 

 

 

 

 

 
810

 

 
810

Balance at June 30, 2019
115,968

 
$
1,154

 
1,656

 
$
(2,837
)
 
$
546,767

 
$
(176,483
)
 
$
(8,207
)
 
$
3,197

 
$
363,591

 
Nine Months Ended June 30, 2018
 
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, 2017
105,359

 
$
1,054

 
410

 
$
(2,607
)
 
$
388,986

 
$
(170,006
)
 
$
(5,989
)
 
$
5,137

 
$
216,575

Equity based compensation expense

 

 

 

 
11,257

 

 

 

 
11,257

Shares of common stock issued in initial public offering, net of offering costs
8,333

 
83

 

 

 
137,522

 

 

 

 
137,605

Shares withheld related to net share settlement (including tax withholdings)
1,079

 
6

 
532

 

 
(7,773
)
 

 

 

 
(7,767
)
Stock repurchases

 

 
18

 
(230
)
 

 

 

 

 
(230
)
Dividends paid to non-controlling interest

 

 

 

 

 

 

 
(2,425
)
 
(2,425
)
Net income

 

 

 

 

 
9,585

 

 
1,427

 
11,012

Other comprehensive loss

 

 

 

 

 

 
(2,811
)
 

 
(2,811
)
Balance at June 30, 2018
114,771

 
$
1,143

 
960

 
$
(2,837
)
 
$
529,992

 
$
(160,421
)
 
$
(8,800
)
 
$
4,139

 
$
363,216

See accompanying notes to these Unaudited Consolidated Financial Statements


8


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Changes in Cash Flows
(In thousands)
 
Nine Months Ended
June 30,
 
2019
 
2018
Operating activities
 
 
 
Net (loss) income
$
(10,425
)
 
$
11,012

Reconciliation of net (loss) income to cash flows provided by operating activities:
 
 
 
Depreciation and amortization
71,397

 
61,924

Amortization of debt related costs (includes $0 and $2,994 write off of deferred financing fees)
1,916

 
4,926

Deferred income taxes
(4,115
)
 
(8,072
)
Share-based compensation
14,248

 
11,257

Gain on sale of property, plant and equipment
(588
)
 
(6,507
)
Foreign currency exchange losses (gains) on intercompany loans and other non-cash items
4,002

 
5,059

Changes in assets and liabilities
 
 
 
Accounts receivable
7,495

 
14,509

Inventories
(17,664
)
 
(20,385
)
Contract assets
(6,912
)
 
(18,519
)
Prepaids and other current assets
7,260

 
(5,559
)
Accounts payable
(2,819
)
 
26,910

Accrued expenses and other liabilities
(19,578
)
 
(33,548
)
Contract liabilities
13,051

 
(5,567
)
Income taxes
(6,786
)
 
3,471

Other non‑current assets and liabilities
3,875

 
(4,123
)
Net cash provided by operating activities
54,357

 
36,788

Investing activities
 
 
 
Purchase of property, plant and equipment
(63,948
)
 
(54,569
)
Purchase of intangibles
(4,775
)
 
(1,536
)
Proceeds from sale of property, plant and equipment
2,860

 
13,247

Proceeds from sale of business

 
430

Acquisitions, net of cash received of $2,073 and $28
(2,811
)
 
(10,235
)
Net cash used in investing activities
(68,674
)
 
(52,663
)
Financing activities
 
 
 
Issuance of debt, net of deferred issuance costs
15,965

 
3,394

Borrowings under credit facility
230,000

 
46,812

Repayment of debt
(238,908
)
 
(154,752
)
Repayment of capital lease obligation
(9,273
)
 
(5,990
)
Payment of earn-out related to previous acquisitions
(461
)
 
(1,719
)
Proceeds from issuance of common stock
341

 
137,605

Taxes paid related to net share settlements of share-based compensation awards
(1,248
)
 
(7,767
)
Stock repurchases

 
(230
)
Cash paid for interest rate cap
(2,235
)
 

Distribution to non‑controlling interest
(750
)
 
(2,425
)
Net cash (used in) provided by financing activities
(6,569
)
 
14,928

Effect of exchange rate changes on cash
(357
)
 
(1,000
)
Change in cash and cash equivalents
(21,243
)
 
(1,947
)
Cash and cash equivalents
 
 
 
Beginning of period
82,365

 
59,254

End of period
$
61,122

 
$
57,307

See accompanying notes to these Unaudited Consolidated Financial Statements

9


Evoqua Water Technologies Corp.
Unaudited Supplemental Disclosure of Cash Flow Information
(In thousands)
 
Nine Months Ended
June 30,
 
2019
 
2018
Supplemental disclosure of cash flow information
 
 
 
Cash paid for taxes
$
8,731

 
$
4,020

Cash paid for interest
$
39,409

 
$
31,179

Non‑cash investing and financing activities
 
 
 
Accrued earn-out related to acquisitions
$

 
$
1,395

Capital lease transactions
$
11,788

 
$
5,275

See accompanying notes to these Unaudited Consolidated Financial Statements

10


Evoqua Water Technologies Corp.
Notes to Unaudited Consolidated Financial Statements
(In thousands)
1. Description of the Company and Basis of Presentation
Background
Evoqua Water Technologies Corp. (referred to herein as the “Company” or “EWT”) was incorporated on October 7, 2013. On January 15, 2014, Evoqua Water Technologies Corp., acquired through its wholly owned entities, EWT Holdings II Corp. and EWT Holdings III Corp. (a/k/a Evoqua Water Technologies), 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”). The stock purchase price, net of cash received, was approximately $730,577. On November 6, 2017, the Company completed its initial public offering (“IPO”), pursuant to which an aggregate of 27,777 shares of common stock were sold, of which 8,333 were sold by the Company and 19,444 were sold by the selling shareholders, with a par value of $0.01 per share. After underwriting discounts and commissions and other expenses, the Company received net proceeds from the IPO of approximately $137,605. The Company used a portion of these proceeds to repay $104,936 of indebtedness (including accrued and unpaid interest) under EWT III’s senior secured first lien term loan facility and the remainder for general corporate purposes. The Company did not receive any proceeds from the sale of shares by the selling shareholders. On November 7, 2017, the selling shareholders sold an additional 4,167 shares of common stock as a result of the exercise in full by the underwriters of an option to purchase additional shares. On March 19, 2018, the Company completed a secondary public offering, pursuant to which 17,500 shares of common stock were sold by certain selling shareholders. On March 21, 2018, the selling shareholders sold an additional 2,625 shares of common stock as a result of the exercise in full by the underwriters of an option to purchase additional shares. The Company did not receive any proceeds from the sale of shares by the selling shareholders.
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 multi‑national corporation with operations in the United States (“U.S.”), Canada, the United Kingdom (“UK”), the Netherlands, Germany, Australia, China, and Singapore.
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 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. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as filed with the SEC on December 11, 2018 (“2018 Annual Report”), in preparing these Unaudited Consolidated Financial Statements, with the exception of accounting standard updates described in Note 2, “Summary of Significant Accounting Policies.” These Unaudited Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes included in our 2018 Annual Report. Certain prior period amounts have been reclassified to conform to the current period presentation.

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2. Summary of Significant Accounting Policies
Fiscal Year
The Company’s fiscal year ends on September 30.
Use of Estimates
The Unaudited Consolidated Financial Statements have been prepared in conformity with GAAP and require management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Actual results could differ from these estimates.
Cash and Cash Equivalents
Cash and cash equivalents are liquid investments with an original maturity of three or fewer months when purchased.
Accounts Receivable
Receivables are primarily comprised of uncollected amounts owed to us from transactions with customers and are presented net of allowances for doubtful accounts. Allowances are estimated based on historical write‑offs and the economic status of customers. The Company considers a receivable delinquent if it is unpaid after the term of the related invoice has expired. Write‑offs are recorded at the time all collection efforts have been exhausted.
Inventories
Inventories are stated at the lower of cost or market, where cost is generally determined on the basis of an average or first‑in, first‑out (“FIFO”) method. Production costs comprise direct material and labor and applicable manufacturing overheads, including depreciation charges. The Company regularly reviews inventory quantities on hand and writes off excess or obsolete inventory based on estimated forecasts of product demand and production requirements. Manufacturing operations recognize cost of product sales using standard costing rates with overhead absorption which generally approximates actual cost.
Property, Plant, and Equipment
Property, plant, and equipment is valued at cost less accumulated depreciation. Depreciation expense is recognized using the straight‑line method. Useful lives are reviewed annually and, if expectations differ from previous estimates, adjusted accordingly. Estimated useful lives for major classes of depreciable assets are as follows:
Asset Class
Estimated Useful Life
Machinery and equipment
3 to 20 years
Buildings and improvements
10 to 40 years
Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Costs related to maintenance and repairs that do not extend the assets’ useful life are expensed as incurred.
Acquisitions
Acquisitions are recorded using the purchase method of accounting. The purchase price of acquisitions is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. The excess of the acquisition price over those estimated fair values is recorded as goodwill. Changes to the acquisition date preliminary fair values prior to the expiration of the measurement period, a period not to exceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Contingent consideration resulting from acquisitions is recorded at its estimated fair value on the acquisition date. These obligations are revalued during each subsequent reporting period and changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Unaudited Consolidated Statements of Operations. Acquisition-related expenses and restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.

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Goodwill and Other Intangible Assets
Goodwill represents purchase consideration paid in a business combination that exceeds the value assigned to the net assets of acquired businesses. Other intangible assets consist of customer‑related intangibles, proprietary technology, software, trademarks and other intangible assets. The Company amortizes intangible assets with definite useful lives on a straight‑line basis over their respective estimated economic lives which range from 1 to 26 years.
The Company reviews goodwill to determine potential impairment annually during the fourth quarter of the fiscal year, or more frequently if events and circumstances indicate that the asset might be impaired. Impairment testing for goodwill is performed at a reporting unit level. The quantitative impairment testing utilizes both a market (guideline public company) and income (discounted cash flows) method for determining fair value. In estimating the fair value of the reporting unit utilizing a discounted cash flow (“DCF”) valuation technique, we incorporate our judgment and estimates of future cash flows, future revenue and gross profit growth rates, terminal value amount, capital expenditures and applicable weighted‑average cost of capital used to discount these estimated cash flows. The estimates and projections used in the estimate of fair value are consistent with our current budget and long‑range plans, including anticipated change in market conditions, industry trend, growth rates and planned capital expenditures, among other considerations.
Impairment of Long‑Lived Assets
Long‑lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of the asset or asset group is measured by comparison of its carrying amount to undiscounted future net cash flows the asset or asset group is expected to generate. If the carrying amount of an asset or asset group is not recoverable, the Company recognizes an impairment loss based on the excess of the carrying amount of the asset or asset group over its respective fair value which is generally determined as the present value of estimated future cash flows or as the appraised value.
Debt Issuance Costs and Debt Discounts
Debt issuance costs are capitalized and amortized over the contractual term of the underlying debt using the straight line method which approximates the effective interest method. Debt discounts and lender arrangement fees deducted from the proceeds have been included as a component of the carrying value of debt and are being amortized to interest expense using the effective interest method.
Beginning in the first quarter of 2019, the Company entered into an interest rate cap to mitigate risks associated with the Company’s variable rate debt. See Note 11, “Derivative Financial Instruments” for further details. The Company paid $2,235 as a premium for the interest rate cap, which is being amortized to interest expense over its three-year term. The Company recorded $187 and $435 of premium amortization to interest expense during the three and nine months ended June 30, 2019, respectively.
Amortization of debt issuance costs and discounts included in interest expense were $498 and $478 for the three months ended June 30, 2019 and 2018, respectively and $1,481 and $1,932 for the nine months ended June 30, 2019 and 2018, respectively.
In November 2017, the Company wrote off $1,844 of deferred financing fees related to a $100,000 prepayment of debt, then subsequently wrote off another $1,150 of fees in December of 2017 due to refinancing its First Lien Term Loan. The Company incurred another $2,131 of fees as a result of the December refinancing.
Revenue Recognition
The Company adopted Topic 606, Revenue from Contracts with Customers on October 1, 2018, and recognizes sales of products and services based on the five-step analysis of transactions as provided in Topic 606 which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services.
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. Sales of short‑term service arrangements are

13


recognized as the services are performed, and sales of long‑term service arrangements are typically recognized on a straight‑line basis over the life of the agreement.
For certain arrangements where there is significant customization to the product, the Company recognizes revenue either over time or at a point in time. These products include large capital water treatment projects, systems and solutions for municipal and industrial applications. The nature of the contracts is generally fixed price with milestone billings. The Company recognizes revenue over time if the product has no alternative use and the Company has an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. If these two criteria are not met, revenues from these contracts will not be recognized until construction is complete. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and the cumulative effect of such adjustments are recognized in current operations. The amount of such adjustments have not been material. See Note 4, “Revenue” for further details.
Product Warranties
Accruals for estimated expenses related to warranties are made at the time products are sold and are recorded as a component of Cost of product sales in the Unaudited Consolidated Statements of Operations. The estimated warranty obligation is based on product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs expected to be incurred in correcting a product failure, as well as specific obligations for known failures and other currently available evidence. The Company assesses the adequacy of the recorded warranty liabilities on a regular basis and adjusts amounts as necessary.
Shipping and Handling Cost
Shipping and handling costs are included as a component of Cost of product sales.
Derivative Financial Instruments
The Company’s risk-management strategy uses derivative financial instruments to manage interest rate risk and foreign currency exchange rate risk. The Company’s objective in using interest rate derivatives is to add stability to interest expense and manage its exposure to interest rate movements. To accomplish this objective, in November 2018, the Company entered into an interest rate cap which has been designated as a cash flow hedge. The Company uses foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges. The Company does not enter into derivatives for trading or speculative purposes. The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, “Derivatives and Hedging” (Topic No. 815). The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair values of derivatives that are not designated as hedges are recognized in earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in the hedged assets or liabilities through earnings or recognized in Accumulated other comprehensive income (loss), net of tax (“AOCI”) until the hedged item is recognized in earnings.
Income Taxes
The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are provided against deferred tax assets when it is deemed more likely than not that some portion or all of the deferred tax asset will not be realized within a reasonable time period. We assess tax positions using a two‑step process. A tax position is recognized if it meets a more‑likely‑than‑not threshold, and is measured at the largest amount of benefit that is greater than 50% percent of being realized. Uncertain tax positions are reviewed each balance sheet date.
Foreign Currency Translation and Transactions
The functional currency for the international subsidiaries is the local currency. Assets and liabilities are translated into U.S. dollars using current rates of exchange, with the resulting translation adjustments recorded in Accumulated other comprehensive loss, net of tax within shareholders’ equity. Revenues and expenses are translated at the weighted‑average

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exchange rate for the period, with the resulting translation adjustments recorded in the Unaudited Consolidated Statements of Operations.
Foreign currency translation (gains) losses, mainly related to intercompany loans, which aggregated $(772) and $9,340 for the three months ended June 30, 2019 and 2018, respectively and $4,636 and $5,652 for the nine months ended June 30, 2019 and 2018, respectively, are primarily included in General and administrative expenses in the Unaudited Consolidated Statements of Operations.
Research and Development Costs
Research and development costs are expensed as incurred. The Company recorded $3,281 and $3,682 for the three months ended June 30, 2019 and 2018, respectively and $11,384 and $12,356 for the nine months ended June 30, 2019 and 2018, respectively.
Equity‑based Compensation
The Company measures the cost of awards of equity instruments to employees based on the grant‑date fair value of the award. The grant‑date fair value of a non-qualified stock option is determined using the Black‑Scholes model. The fair value of restricted stock unit awards is determined using the closing price of our common stock on date of grant. Compensation costs resulting from equity-based payment transactions are recognized primarily within General and administrative expenses, at fair value over the requisite vesting period on a straight-line basis.
Earnings (Loss) Per Share
Basic earnings (loss) per common share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed based on the weighted average number of shares of common stock, plus the effect of diluted common shares outstanding during the period using the treasury stock method. Diluted potential common shares include outstanding stock options.
Retirement Benefits
The Company applies ASC Topic 715, Compensation—Retirement Benefits, which requires the recognition in pension obligations and accumulated other comprehensive income of actuarial gains or losses, prior service costs or credits and transition assets or obligations that have previously been deferred. The determination of retirement benefit pension obligations and associated costs requires the use of actuarial computations to estimate participant plan benefits to which the employees will be entitled. The significant assumptions primarily relate to discount rates, expected long‑term rates of return on plan assets, rate of future compensation increases, mortality, years of service, and other factors. The Company develops each assumption using relevant experience in conjunction with market‑related data for each individual country in which such plans exist. All actuarial assumptions are reviewed annually with third‑party consultants and adjusted as necessary. For the recognition of net periodic postretirement cost, the calculation of the expected return on plan assets is generally derived by applying the expected long‑term rate of return on the market‑related value of plan assets. The fair value of plan assets is determined based on actual market prices or estimated fair value at the measurement date.
Treated Water Outsourcing
Treated Water Outsourcing (“TWO”) is a joint venture between the Company and Nalco Water, an Ecolab company, in which the Company holds a 50% partnership interest. The Company is obligated to absorb all risk of loss up to 100% of the joint venture partner’s equity. As such, the Company fully consolidates TWO as a variable interest entity (“VIE”) under ASC 810, Consolidation. The Company has not provided additional financial support to this entity which it is not contractually required to provide, and the Company does not have the ability to use the assets of TWO to settle obligations of the Company’s other subsidiaries.

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The following provides a summary of TWO’s balance sheet as of June 30, 2019 and September 30, 2018, and summarized financial information for the three and nine months ended June 30, 2019 and 2018.
 
June 30,
2019
 
September 30,
2018
Current assets (includes cash of $5,921 and $3,304)
$
6,321

 
$
5,486

Property, plant and equipment
4,176

 
4,441

Goodwill
2,206

 
2,206

Other non-current assets
3

 
3

Total liabilities
(4,106
)
 
(3,608
)
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Total revenues
$
2,573

 
$
3,020

 
$
8,951

 
$
12,586

Total operating expenses
(2,231
)
 
(2,535
)
 
(7,267
)
 
(9,732
)
Income from operations
$
342

 
$
485

 
$
1,684

 
$
2,854

Recent Accounting Pronouncements
In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses which clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. ASU 2018-19 will be effective for the Company for the quarter ending December 31, 2020, with early adoptions permitted. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements.
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In addition, unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. ASU 2018-18 should be applied retrospectively to the date of initial adoption of Topic 606 and is effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-14 will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on the Company’s disclosures.
In June 2018, the FASB issued ASU 2018‑07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. ASU No. 2018‑07 will be effective for the Company for the quarter ending December 31, 2019. The Company does not expect the impact of adoption on the Company’s Unaudited Consolidated Financial Statements to be material.

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In August 2017, the FASB issued ASU 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which expands and refines hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements and also made certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. ASU 2017‑12 will be effective for the Company for the quarter ending December 31, 2019. The Company does not expect the impact of adoption on the Company’s Unaudited Consolidated Financial Statements to be material.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires entities to use a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates which generally will result in the earlier recognition of allowances for losses. ASU 2016-13 will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company does not expect the impact of adoption on the Unaudited Consolidated Financial Statements to be material.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU No. 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. ASU No. 2016-02 can be applied using a modified retrospective approach and will be effective for the Company for the quarter ending December 31, 2019, with early adoption permitted. Amendments to the standard were issued by the FASB in January, July and December 2018, and March 2019 including certain practical expedients, an amendment that provides an additional and optional transition method to adopt the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and certain narrow-scope improvements for lessors. The Company has completed its assessment of the existing lease portfolio including performing data and policy gap reviews. The Company is evaluating system requirements, updating processes and its accounting policies in order to comply with Topic 842 and is continuing to assess the impact adoption of this guidance will have on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
Accounting Pronouncements Recently Adopted
The Company adopted ASU 2017‑09, Scope of Modification Accounting, which amended Accounting Standards Code Topic 718 as of October 1, 2018. The FASB issued ASU 2017‑09 to reduce the cost and complexity when applying Topic 718 and standardize the practice of applying Topic 718 to financial reporting. The ASU was not developed to fundamentally change the definition of a modification, but instead to provide guidance for what changes would qualify as a modification. This adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements.
The Company adopted ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, as of October 1, 2018. This ASU requires the disaggregation of the service cost component from other components of net periodic benefit cost, clarifies how to present the service cost component and other components of net benefit costs in the Unaudited Consolidated Statements of Operations and allows only the service cost component of net benefit costs to be eligible for capitalization. The adoption of this guidance did not have an impact on the Company’s Unaudited Consolidated Financial Statements and had minimal impact to the related disclosures.
The Company adopted ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, as of October 1, 2018. The purpose of this update is to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The ASU requires the tax effects of all intra-entity sales of assets other than inventory to be recognized in the period in which the transaction occurs. The changes were required to be applied by means of a cumulative-effect adjustment recorded in retained earnings as of the beginning of the year of adoption, and as such the Company recorded a net increase to opening retained earnings of $181 at October 1, 2018. This adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements.
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), as of October 1, 2018. ASU No. 2014-09 clarifies the principles for recognizing revenue when an entity either enters into a contract with customers to transfer goods or services or enters into a contract for the transfer of non-financial assets. The Company utilized the modified retrospective approach and the cumulative effect of adoption resulted in a net decrease to opening retained earnings of $1,582 which was recognized at October 1, 2018. Based on the new guidance, the Company determined that for some of these contracts in which revenue was previously recognized over a period of time, revenue instead needs to be recognized at a point in time. This change is mainly due to the nature of certain products, which in some cases have an

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alternative use, and the Company’s right to payment in the event of termination for convenience. This adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements. See Note 4, “Revenue” for further details.
3. Acquisitions and Divestitures
Acquisitions support the Company’s strategy of delivering a broad solutions portfolio with robust technology across multiple geographies and end markets. The Company continues to evaluate potential strategic acquisitions of businesses, assets and product lines and believes that capex-like, tuck-in acquisitions present a key opportunity within its overall growth strategy.
On May 25, 2019, the Company acquired all of the issued and outstanding equity securities of ATG UV Technology Limited (“ATG UV”), a leading manufacturer of ultraviolet (“UV”) light disinfection systems used in a wide range of municipal, aquatics and industrial applications, for £5,500 ($6,931) paid in cash at closing. The Company incurred approximately $488 in acquisition costs, which are included in General and administrative expenses. ATG UV, based in Wigan, UK, is the exclusive technology supplier to Evoqua’s ETS-UVTM product line in North America and the acquisition expands Evoqua’s reach, allowing the Company to serve customers globally. ATG UV is part of the Applied Product Technologies segment.
The accounting for the acquisition has not yet been completed because the Company has not finalized the valuations of the acquired assets, assumed liabilities and identifiable intangible assets, including goodwill. The preliminary opening balance sheet for ATG UV is summarized as follows:
Current assets
$
6,169

Property, plant and equipment
441

Goodwill
1,610

Intangible assets
1,550

Total assets acquired
9,770

Total liabilities assumed
(2,839
)
Net assets acquired
$
6,931

4. Revenue
Adoption of ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”
As discussed in Note 2, “Summary of Significant Accounting Policies” the Company adopted ASU 2014-09 on October 1, 2018, using the modified retrospective approach to those contracts that were not completed or substantially complete as of October 1, 2018. Results for the reporting period beginning after October 1, 2018 are presented under Topic 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 605. The Company has applied the standard to all open contracts at the date of initial application. The Company recorded a net decrease to opening retained earnings of $1,582 as of October 1, 2018 as a result of the cumulative impact of adopting Topic 606 representing the unfavorable impact to prior results had the over-time revenue recognition for some customer agreements, as discussed below, been applied. In addition, a $6,106 reduction of contract assets, along with an increase of $6,194 to work-in-process inventory and an increase of $1,773 to contract liabilities was recorded as a result of the adoption using the modified retrospective method.
The impact to the Unaudited Consolidated Statements of Operations as a result of applying Topic 606 was higher Revenue from product sales and services and Cost of product sales and services of $1,009 and $1,264, respectively, for the three months ended June 30, 2019 and lower Revenue from product sales and services and higher Cost of product sales and services of $756 and $131, respectively, for the nine months ended June 30, 2019, as compared to what those amounts would have been under the previous revenue recognition guidance. In addition, the impact on the Consolidated Balance Sheets at June 30, 2019 was lower Inventories, net of $131 as compared to what this amount would have been under the

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previous guidance. Also, $756 of contract assets were recognized on the consolidated balance sheet at June 30, 2019 related to this over-time revenue recognition.
Revenue Recognition
The Company recognizes sales of products and services based on the five-step analysis of transactions as provided in 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 and nine months ended June 30, 2019 was insignificant.
For sales of aftermarket parts or products with a low level of customization and engineering time, the Company recognizes revenues at the time risks and rewards of ownership pass, 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. Revenues from construction-type contracts formerly recognized over time of approximately $1,640 and $249 were not recognized during the three and nine months ended June 30, 2019, respectively. Instead, revenues from these contracts will be recognized when construction is complete. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and the cumulative effect of such adjustments are recognized in current operations. The amount of such adjustments have not been material.
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.
The Company has also elected the following practical expedients:
Financing Component

As the Company’s standard payment terms are less than one year, the Company has elected the practical expedient not to assess whether a contract has a significant financing component.

Performance Obligations

The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations if the the product has an alternative use and the Company does not have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. The Company maintains a backlog of confirmed orders of approximately $125,000 at June 30, 2019. This backlog represents the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the

19


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 June 30, 2019.
The Company offers standard warranties that generally do not represent a separate performance obligation. In certain instances, a warranty is obtained separately from the original equipment sale or the warranty provides incremental services and as such is treated as a separate performance obligation.
Disaggregation of Revenue
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into source of revenue, reportable operating segment and geographical regions. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.
Information regarding the source of revenues:
 
Three Months Ended
June 30, 2019
 
Nine Months Ended
June 30, 2019
Revenue from contracts with customers recognized under Topic 606
$
325,009

 
$
934,111

Other (1)
35,334

 
97,862

Total
$
360,343

 
$
1,031,973

(1)
Other revenue relates to revenue recognized from Topic 840, Leases, mainly attributable to long term rentals.
Information regarding revenues disaggregated by source of revenue and segment is as follows:
 
Three Months Ended June 30, 2019
 
Nine Months Ended June 30, 2019
 
Integrated Solutions and Services
 
Applied Product Technologies
 
Total
 
Integrated Solutions and Services
 
Applied Product Technologies
 
Total
Revenue from capital projects
$
52,132

 
$
83,390

 
$
135,522

 
$
152,772

 
$
230,887

 
$
383,659

Revenue from aftermarket
29,968

 
44,873

 
74,841

 
93,238

 
120,422

 
213,660

Revenue from service
143,329

 
6,651

 
149,980

 
416,781

 
17,873

 
434,654

Total
$
225,429

 
$
134,914

 
$
360,343

 
$
662,791

 
$
369,182

 
$
1,031,973

Information regarding revenues disaggregated by geographic area is as follows:
 
Three Months Ended
June 30, 2019
 
Nine Months Ended
June 30, 2019
United States
$
284,737

 
$
823,923

Canada
20,873

 
58,836

Europe
26,677

 
71,235

Asia
23,007

 
62,411

Australia
5,049

 
15,568

Total
$
360,343

 
$
1,031,973


20


Contract Balances
The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company receives payments from customers based on a billing schedule as established in its contracts.
Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contract assets and liabilities are due to our performance under the contract.

The tables below provides a roll-forward of contract assets and contract liabilities balances for the periods presented:
 
Contract
Assets (a)
Balance at September 30, 2018
$
69,147

Cumulative effect of adoption of new accounting standards
(6,106
)
Recognized in current period
225,341

Reclassified to accounts receivable
(218,433
)
Foreign currency
69

Balance at June 30, 2019
$
70,018

(a)
Excludes receivable balances which are disclosed on the Consolidated Balance Sheets.
 
Contract Liabilities
Balance at September 30, 2018
$
17,652

Cumulative effect of adoption of new accounting standards
1,773

Recognized in current period
214,444

Amounts in beginning balance reclassified to revenue
(20,127
)
Current period amounts reclassified to revenue
(181,266
)
Foreign currency
(164
)
Balance at June 30, 2019
$
32,312

5. Fair Value Measurements
As of June 30, 2019 and September 30, 2018, 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 820. ASC Topic 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs in which little or no market data is available, therefore requiring an entity to develop its own assumptions.

21


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 June 30, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Pension plan
 
 
 
 
 
 
 
Cash
$

 
$
14,678

 
$

 
$

Government Securities
2,330

 

 

 

Liability Driven Investment
5,167

 

 

 

Guernsey Unit Trust
961

 

 

 

Global Absolute Return
2,015

 

 

 

Deferred compensation plan assets
 
 
 
 
 
 
 
Trust Assets

 
401

 

 

Insurance

 

 
17,978

 

Interest rate cap

 

 
56

 

Foreign currency forward contracts

 

 
102

 

Liabilities:
 
 
 
 
 
 
 
Pension plan

 

 
(34,625
)
 

Deferred compensation plan liabilities

 

 
(20,464
)
 

Long‑term debt

 

 
(954,455
)
 

Foreign currency forward contracts

 

 
(376
)
 

Earn-outs related to acquisitions

 

 

 
(2,064
)
 
 
 
 
 
 
 
 
As of September 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Pension plan
 
 
 
 
 
 
 
Cash
$

 
$
15,821

 
$

 
$

Government Securities
3,161

 

 

 

Liability Driven Investment
2,598

 

 

 

Guernsey Unit Trust
965

 

 

 

Global Absolute Return
2,038

 

 

 

Deferred compensation plan assets
 
 
 
 
 
 
 
Trust Assets

 
648

 

 

Insurance

 

 
18,448

 

Foreign currency forward contracts

 

 
345

 

Liabilities:
 
 
 
 
 
 
 
Pension plan

 

 
(35,541
)
 

Deferred compensation plan liabilities

 

 
(21,834
)
 

Long‑term debt

 

 
(957,441
)
 

Foreign currency forward contracts

 

 
(67
)
 

Earn-outs related to acquisitions

 

 

 
(1,916
)

22


The pension plan assets and liabilities and deferred compensation plan assets and liabilities are included in other non-current assets and other non-current liabilities at June 30, 2019 and September 30, 2018.
The Company records contingent consideration arrangements at fair value on a recurring basis and the associated balances presented as of June 30, 2019 and September 30, 2018 are earn-outs related to acquisitions. The fair value of earn-outs related to acquisitions is based on significant unobservable inputs including the achievement of certain performance metrics. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the earn-out each period until the related contingency has been resolved. Changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Unaudited Consolidated Statements of Operations.
A roll-forward of the activity in the Company’s fair value of earn-outs related to acquisitions is as follows:
 
Current Portion (1)
 
Long-term Portion (2)
 
Total
Balance at September 30, 2018
$
770

 
$
1,146

 
$
1,916

Payments
(993
)
 

 
(993
)
Fair value increase
1,143

 

 
1,143

Foreign currency
(2
)
 

 
(2
)
Balance at June 30, 2019
$
918

 
$
1,146

 
$
2,064

(1)
Included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.
(2)
Included in Other non‑current liabilities on the Consolidated Balance Sheets.
6. Accounts Receivable
Accounts receivable are summarized as follows:
 
June 30,
2019
 
September 30,
2018
Accounts receivable
$
252,014

 
$
258,955

Allowance for doubtful accounts
(4,297
)
 
(4,199
)
Receivables, net
$
247,717

 
$
254,756

7. Inventories
The major classes of Inventories, net are as follows:
 
June 30,
2019
 
September 30,
2018
Raw materials and supplies
$
78,087

 
$
69,176

Work in progress
19,934

 
19,461

Finished goods and products held for resale
67,012

 
53,786

Costs of unbilled projects
7,644

 
1,878

Reserves for excess and obsolete
(11,657
)
 
(9,313
)
Inventories, net
$
161,020

 
$
134,988


23


8. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
 
June 30,
2019
 
September 30,
2018
Machinery and equipment
$
452,386

 
$
399,619

Land and buildings
76,571

 
76,459

Construction in process
66,977

 
60,803

 
595,934

 
536,881

Less: accumulated depreciation
(254,530
)
 
(216,858
)
 
$
341,404

 
$
320,023

The Company entered into secured financing agreements that require providing a security interest in specified equipment. As of June 30, 2019, the gross and net amounts of those assets are as follows:
 
Gross
 
Net
Machinery and equipment
$
20,385

 
$
14,946

Construction in process
7,855

 
7,855

 
$
28,240

 
$
22,801

Depreciation expense and maintenance and repairs expense for the three and nine months ended June 30, 2019 and 2018 were as follows:
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Depreciation expense
$
15,979

 
$
14,530

 
$
47,334

 
$
42,518

Maintenance and repair expense
6,144

 
6,238

 
18,192

 
17,620

9. Goodwill
Changes in the carrying amount of goodwill are as follows:
 
Integrated Solutions and Services
 
Applied Product Technologies
 
Total
Balance at September 30, 2018
$
224,370

 
$
186,976

 
$
411,346

Business combinations

 
1,610

 
1,610

Measurement period adjustment
(1,937
)
 
63

 
(1,874
)
Foreign currency translation
(447
)
 
(349
)
 
(796
)
Balance at June 30, 2019
$
221,986

 
$
188,300

 
$
410,286

As of June 30, 2019 and September 30, 2018, $150,218 and $147,861, respectively, of goodwill was deductible for tax purposes.

24


10. Debt
Long‑term debt consists of the following:
 
June 30,
2019
 
September 30,
2018
First Lien Term Facility, due December 20, 2024
$
931,123

 
$
938,230

Revolving Credit Facility

 

Equipment Financing, due June 30, 2024 to May 21, 2026
26,252

 
11,588

Notes Payable, due August 31, 2019 to July 31, 2023
1,710

 
2,106

Mortgage, due June 30, 2028
1,730

 
1,835

Total debt
960,815

 
953,759

Less unamortized discount and lender fees
(12,647
)
 
(14,129
)
Total net debt
948,168

 
939,630

Less current portion
(12,661
)
 
(11,555
)
Total long‑term debt
$
935,507

 
$
928,075

Term Facilities and Revolving Credit Facility
On January 15, 2014, EWT Holdings III Corp. (“EWT III”), an indirect wholly-owned subsidiary of the Company, entered into a First Lien Credit Agreement and Second Lien Credit Agreement (the “Credit Agreements” or, after the prepayment and termination of the Second Lien Credit Agreement, the “First Lien Credit Agreement” or “Credit Agreement”) among EWT III, EWT Holdings II Corp., the lenders party thereto and Credit Suisse AG as administrative agent and collateral agent. The First Lien Credit Agreement provided for a seven-year term loan facility, and the Second Lien Credit Agreement provided for an eight-year term loan facility. The term loan facilities originally consisted of the “First Lien Term Loan” and “Second Lien Term Loan” in aggregate principal amounts of $505,000 and $75,000, respectively.  The First Lien Credit Agreement also made available to the Company a $75,000 revolving credit facility (the “Revolver”), which provided for a letter of credit sub-facility up to $35,000. During the year ended September 30, 2017, certain subsidiaries of the Company entered into three amendments to the First Lien Credit Agreement, which provided for, among other things, the payoff and termination of the Second Lien Term Loan, upsizes to the First Lien Term Loan, and the upsize of the Revolver.  

On December 20, 2017, certain subsidiaries of the Company entered into Amendment No. 5 (the “Fifth Amendment”), among EWT III, as the borrower, certain other subsidiaries of the Company, and Credit Suisse AG, as administrative agent and collateral agent, relating to the Credit Agreement. Pursuant to the Fifth Amendment, among other things, the Existing Term Loans were refinanced with the proceeds of refinancing term loans, the maturity date was extended to December 20, 2024 from January 15, 2021 and the interest rate spreads on Term Loan borrowing were reduced to 3.00% from 3.75%. In addition, the amendment increased the revolving credit commitment and letter of credit sublimit to $125,000 and $45,000 from $95,000 and $35,000, respectively. Borrowings under the Revolver bear interest at variable rates plus a margin.

In connection with the closing of the ProAct acquisition on July 26, 2018, EWT III entered into Amendment No. 6 (the “Sixth Amendment”) to the First Lien Credit Agreement. Pursuant to the Sixth Amendment, among other things, EWT III borrowed an additional $150,000 in incremental term loans. The other terms of the Existing Credit Agreement, including rates, remain generally the same. At June 30, 2019, the interest rate on borrowings was 5.44%, comprised of 2.44% LIBOR plus the 3.0% spread. As a result of the incremental borrowings, quarterly principal payments increased from $1,991 to $2,369.
Total deferred fees related to the First Lien Term Loan were $12,647 and $14,129, net of amortization, as of June 30, 2019 and September 30, 2018, respectively. These fees were included as a contra liability to debt on the Consolidated Balance Sheets.

At June 30, 2019 and September 30, 2018, the Company had no outstanding revolver borrowings and as a result, borrowing availability under the Revolver was $125,000 at June 30, 2019 and September 30, 2018, reduced for outstanding letters of credit. The Company’s outstanding letters of credit under this agreement aggregated approximately $13,262 and

25


$11,777 at June 30, 2019 and September 30, 2018, respectively. Unused amounts, defined as total revolver capacity less outstanding letters of credit and revolver borrowings, were $111,738 and $113,223 at June 30, 2019 and September 30, 2018, respectively. At June 30, 2019 and September 30, 2018, the Company had additional letters of credit of $214 and $64 issued under a separate arrangement, respectively.
  The First Lien Credit Agreement contains limitations on incremental borrowings, is subject to leverage ratios and allows for optional prepayments. Under certain circumstances, the Company may be required to remit excess cash flows as defined based upon exceeding certain leverage ratios. The Company did not exceed such ratios during the nine months ended June 30, 2019, does not anticipate exceeding such ratios during the year ending September 30, 2019, and therefore does not anticipate any additional repayments during the year ending September 30, 2019.
Equipment Financing
As of June 30, 2019 and September 30, 2018, the Company had equipment financings in an aggregate outstanding amount of $26,252 and $11,588, with interest rates ranging from 5.08% to 6.55%, and due dates ranging from June 30, 2024 to May 21, 2026.
Notes Payable
As of June 30, 2019 and September 30, 2018, the Company had notes payable in an aggregate outstanding amount of $1,710 and $2,106, with interest rates ranging from 6.26% to 7.39%, and due dates ranging from August 31, 2019 to July 31, 2023. These notes are related to certain equipment related contracts and are secured by the underlying equipment and assignment of the related contracts.
Mortgage
On June 29, 2018, the Company's subsidiary MAGNETO special anodes B.V. entered into a 10-year mortgage agreement for €1,600 ($1,822) to finance a facility in the Netherlands, subject to monthly principal payments of €7 ($8) at a blended interest rate of 2.4% with maturity in June 2028. The Company had $1,730 and $1,835 principal outstanding under this facility at June 30, 2019 and September 30, 2018, respectively.
Repayment Schedule
Aggregate maturities of all long‑term debt, including current portion of long‑term debt and excluding capital lease obligations as of June 30, 2019, are presented below:
Fiscal Year
 
Remainder of 2019
$
3,168

2020
12,702

2021
12,835

2022
12,977

2023
12,860

Thereafter
906,273

Total
$
960,815

11. Derivative Financial Instruments
Interest Rate Risk Management
    The Company is subject to market risk exposure arising from changes in interest rates on our senior secured credit facilities, which bear interest at rates that are indexed against LIBOR. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to mitigate its exposure to rising interest rates. To accomplish these objectives, the Company entered into an interest rate cap, designated as a cash flow hedge, to mitigate risks associated with variable rate debt effective November 28, 2018. The LIBOR interest rate cap covers a notional amount of $600,000 of the

26


Company’s senior secured debt, is effective for a period of three years and has a strike rate of 3.5%. Interest rate caps designated as cash flow hedges involve the receipt of stipulated amounts from a counterparty if interest rates rise above the strike rate defined in the contract. The premium paid for the interest rate cap was $2,235 and is being amortized to interest expense over its three-year term using the caplet method. The unamortized premium was $1,800 at June 30, 2019, of which $745 is included in Prepaid and other current assets and the remaining $1,055 is included in Other non‑current assets. The Company recorded $187 and $435 of premium amortization to interest expense during the three and nine months ended June 30, 2019, respectively.
Foreign Currency Risk Management
The Company’s functional currency is the U.S. dollar. By operating internationally, the Company is subject to foreign currency risk from transactions denominated in currencies other than the U.S. dollar (“foreign currencies”). To mitigate cross-currency transaction risk, the Company analyzes significant exposures where it has receipts or payments in a currency other than the functional currency of its operations, and from time to time may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. The Company is also subject to currency translation risk associated with converting the foreign operations’ financial statements into U.S. dollars. The Company uses foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges. As of June 30, 2019, the notional amount of the forward contracts held to sell foreign currencies was $30,003.
Credit Risk Management
The counterparties to the Company’s derivative contracts are highly rated financial institutions. The Company regularly reviews the creditworthiness of its financial counterparties and does not expect to incur a significant failure of any counterparties to perform under any agreements. The Company is not subject to any obligations to post collateral under derivative instrument contracts. The Company records all derivative instruments on a gross basis in the Consolidated Balance Sheets. Accordingly, there are no offsetting amounts that net assets against liabilities.
Derivatives Designated as Cash Flow Hedges
The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, “Derivatives and Hedging” (Topic No. 815). As required by Topic No. 815, the Company records all derivatives on the balance sheet at fair value and adjusts to market on a quarterly basis. The Company’s interest rate cap is valued based on readily observable market inputs, such as quotations on interest rates and LIBOR yield curves at the reporting date. The Company’s foreign currency forward contracts are valued based on quoted forward foreign exchange prices and spot rates at the reporting date. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in AOCI to the extent the derivative is effective at offsetting the changes in the cash flows being hedged until the hedged item affects earnings. To the extent there is any hedge ineffectiveness, changes in fair value relating to the ineffective portion are immediately recognized in earnings in the Unaudited Consolidated Statements of Operations. The Company recorded no hedge ineffectiveness during the three and nine months ended June 30, 2019. The Company does not use derivative financial instruments for trading or speculative purposes.
The following represents the fair value recorded for derivatives designated as cash flow hedges for the periods presented:
 
 
 
Asset Derivatives
 
Balance Sheet Location
 
June 30,
2019
 
September 30,
2018
Interest rate cap
Prepaid and other current assets
 
56

 

Foreign currency forward contracts
Prepaid and other current assets
 
102

 
282


27


 
 
 
Liability Derivative
 
Balance Sheet Location
 
June 30,
2019
 
September 30,
2018
Foreign currency forward contracts
Accrued expenses and other current liabilities
 
$
376

 
$
67

The following represents the amount of (loss) gain recognized in AOCI (net of tax) during the periods presented:
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Interest rate cap
$
(78
)
 
$

 
$
56

 
$

Foreign currency forward contracts
(173
)
 
(3
)
 
(487
)
 

Based on the fair value amounts of the Company’s cash flow hedges at June 30, 2019, the Company expects that approximately $149 of pre-tax net losses will be reclassified from AOCI into earnings during the next twelve months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle. In addition, $745 of caplet amortization will be amortized into interest expense during the next twelve months.
Derivatives Not Designated as Cash Flow Hedges
The following represents the fair value recorded for derivatives not designated as cash flow hedges for the periods presented:
 
 
 
Asset Derivative
 
Balance Sheet Location
 
June 30,
2019
 
September 30,
2018
Foreign currency forward contracts
Prepaid and other current assets
 
$

 
$
63

12. Product Warranties
The Company accrues warranty obligations associated with certain products as revenue is recognized. Provisions for the warranty obligations are based upon historical experience of costs incurred for such obligations, adjusted for site‑specific risk factors, and, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience.
A reconciliation of the activity related to the accrued warranty, including both the current and long‑term portions, is as follows:
 
Current Product Warranties
 
Non-Current Product Warranties
 
Nine Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Balance at beginning of the period
$
8,907

 
$
11,164

 
$
3,360

 
$
6,110

Warranty provision for sales
4,134

 
2,540

 
1,148

 
157

Settlement of warranty claims
(4,896
)
 
(5,511
)
 
(509
)
 
(2,710
)
Foreign currency translation and other
119

 
(433
)
 
(258
)
 
(12
)
Balance at end of the period
$
8,264

 
$
7,760

 
$
3,741

 
$
3,545


28


13. Restructuring and Related Charges
To better align its resources with its growth strategies and reduce the cost structure, the Company commits to restructuring plans as necessary. The Company has undertaken various restructuring initiatives, including the wind-down of the Company’s operations in Italy, restructuring of the Company’s operations in Australia, consolidation of functional support structures on a global basis, and consolidation of the Singaporean research and development center.

On October 30, 2018, the Company announced a transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide. This new structure was effective October 1, 2018 and combined the Municipal services business with the former Industrial segment into a new segment, Integrated Solutions and Services, a group entirely focused on engaging directly with end users. The former Products segment and Municipal products businesses have been combined into a new segment, Applied Product Technologies, which is focused on developing product platforms to be sold primarily through third party channels. The Company expects to incur $17 million to $22 million of cash costs over the next two fiscal years as a result of this transition, of which $6 million to $7 million are related to other non-employee related business optimizations.
The table below sets forth the amounts accrued for the restructuring components and related activity:
 
Nine Months Ended
June 30,
 
2019
 
2018
Balance at beginning of the period
$
710

 
$
3,542

Restructuring charges related to two-segment realignment
9,274

 

Restructuring charges related to other initiatives
2,086

 
8,752

Write off charge and other non‑cash activity
(520
)
 
(479)

Cash payments
(9,830)

 
(11,395)

Other adjustments
(76)

 
24

Balance at end of the period
$
1,644

 
$
444

The balances for accrued restructuring liabilities at June 30, 2019 and September 30, 2018, are recorded in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Restructuring charges primarily represent severance charges. The Company expects to pay the remaining amounts accrued as of June 30, 2019 during the last quarter of 2019.
The table below sets forth the location of amounts recorded above on the Unaudited Consolidated Statements of Operations:
 
Nine Months Ended
June 30,
 
2019
 
2018
Cost of product sales and services
$
4,912

 
$
3,086

General and administrative expense
4,929

 
3,830

Sales and marketing expense
891

 
750

Research and development expense
108

 
607


$
10,840

 
$
8,273

The Company continues to evaluate restructuring activities that may result in additional charges in the future.
14. Employee Benefit Plans
The Company maintains multiple employee benefit plans.

29


Certain of the Company’s employees in the UK were participants in a Siemens defined benefit plan established for employees of a UK-based operation acquired by Siemens in 2004. The plan was frozen with respect to future service credits for active employees, however the benefit formula recognized future compensation increases. The Company agreed to establish a replacement defined benefit plan, with the assets of the Siemens scheme transferring to the new scheme on April 1, 2015.
The Company’s employees in Germany also participate in a defined benefit plan. Assets equaling the plan’s accumulated benefit obligation were transferred to a German defined benefit plan sponsored by the Company upon the acquisition of EWT from Siemens. The German entity also sponsors a defined benefit plan for a small group of employees located in France.
The components of net periodic benefit cost for the plans were as follows:
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Service cost
$
214

 
$
230

 
$
648

 
$
705

Interest cost
118

 
116

 
357

 
357

Expected return on plan assets
(30
)
 
(30
)
 
(90
)
 
(93
)
Amortization of actuarial losses
95

 
75

 
288

 
230

Pension expense for defined benefit plans
$
397

 
$
391

 
$
1,203

 
$
1,199

The components of pension expense, other than the service cost component which is included in General and administrative expense, are included in the line item Other operating expense in the Unaudited Consolidated Statements of Operations.
15. Income Taxes
The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent projected annual effective tax rate (“PAETR”), adjusted for the tax effect of discrete items. Management estimates the PAETR each quarter based on the forecasted annual pretax income or (loss) of its U.S. and non-U.S. operations. The Company is required to reduce deferred tax assets by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion or all of the benefit of the deferred tax assets will not be realized in future periods. The Company also records the income tax impact of certain discrete, unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.
When a company maintains a valuation allowance in a particular jurisdiction, no net income tax expense or (benefit) will typically be provided on income (loss) for that jurisdiction on an annual basis. Jurisdictions with projected income that maintain a valuation allowance typically will form part of the PAETR calculation discussed above. However, jurisdictions with a projected loss for the year that maintain a valuation allowance are excluded from the PAETR calculation. Instead, the income tax for these jurisdictions is computed separately.
The actual year-to-date income tax expense (benefit) is the product of the most current PAETR and the actual year-to-date pretax income (loss) adjusted for any discrete tax items. The income tax expense (benefit) for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense (benefit) and the year-to-date calculation for the prior quarter. Items unrelated to current period ordinary income or (loss) are recognized entirely in the period identified as a discrete item of tax. Discrete items generally relate to changes in tax laws, adjustments to prior period’s actual liability determined upon filing tax returns, adjustments to previously recorded reserves for uncertain tax positions, initially recording or fully reversing valuation allowances, and excess stock-based compensation deductions. The inclusion of discrete items in a particular quarter can cause the actual effective rate for that quarter to vary significantly from the PAETR.
Therefore, the actual effective income tax rate for a particular quarter can vary significantly based upon the jurisdictional mix and timing of actual earnings compared to projected annual earnings, permanent items, earnings for those

30


jurisdictions that maintain a valuation allowance, tax associated with jurisdictions excluded from the PAETR calculation and discrete items.
Annual Effective Tax Rate
The PAETR, which excludes the impact of discrete items, was 38.9% and 13.0% as of the nine months ended June 30, 2019 and 2018, respectively. For the nine months ended June 30, 2019, the PAETR of 38.9% was higher than the U.S federal statutory rate of 21.0% primarily due to higher forecasted earnings in certain non-U.S. jurisdictions that have a higher statutory tax rate than the U.S, the U.S. valuation allowance provided on U.S. deferred tax assets as well as the impact of deferred tax liabilities related to indefinite lived intangibles.
The Company continues to maintain a full valuation on U.S. federal and state net deferred tax assets (excluding the tax effects of deferred tax liabilities associated with indefinite lived intangibles) for the year ending September 30, 2019 as a result of pretax losses incurred since the Company’s inception in early 2014. The Company reported positive pre-tax earnings for the first time in 2017 and is projecting positive pre-tax earnings in 2019, however, the Company generated pre-tax losses in all other years. Management believes it is prudent to retain a valuation allowance until a more consistent pattern of earnings is established and net operating loss carryforwards begin to be utilized.
Prior and Current Period Tax Expense
For the three months ended June 30, 2019, the Company recognized income tax expense of $7,959 on pretax income of $12,249. The rate of 65% differed from the U.S. statutory rate of 21.0% principally due to lower forecasted earnings in the U.S. due to restructuring initiatives for which no tax benefit will be realized, the impact of deferred tax liabilities related to indefinite lived intangibles as well as discrete items during the period related to the adjustment process for the difference between actual tax results per tax returns filed versus those expected from the prior year tax provision.
For the three months ended June 30, 2018, the Company recognized income tax expense of $1,433 on pretax income of $2,468. The rate of 58.1% differed from the U.S. blended statutory rate of 24.5% primarily due to lower forecasted earnings in the U.S. compared to prior quarters, and an increase in unbenefited foreign losses. Discrete items for the quarter were not material.
For the nine months ended June 30, 2019, the Company recognized an income tax benefit of $1,134 on a pretax loss of $11,559. The rate of 9.8% differed from the statutory rate of 21.0% principally due to the benefit on an overall year-to-date loss offset by higher forecasted earnings in certain non-U.S. jurisdictions that have a higher statutory tax rate than the U.S. as well as the impact of deferred tax liabilities related to indefinite lived intangibles.

For the nine months ended June 30, 2018, the Company recognized an income tax benefit of $960 on pretax income of $10,052. The rate of 9.6% differed from the estimated annual effective tax rate of 22.8% as a result of a discrete tax benefit of $3,641 due to the remeasurement of U.S. deferred tax liabilities associated with indefinite lived intangible assets for the reduction of the U.S. statutory rate from 35% to 21%. Other discrete items were not material.

There are no amounts of unrecognized tax benefits recorded for the nine months ended June 30, 2019 and 2018. Management does not reasonably expect any significant changes to unrecognized tax benefits within next twelve months of the reporting date.
Effects of the Tax Cuts and Jobs Act
New tax legislation, commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”), was enacted on December 22, 2017. Certain key aspects of the new law were not effective for September 30 fiscal year companies until October 1, 2018.

Significant provisions of the Tax Act include: an exemption from U.S. tax on dividends of future foreign earnings, a limitation on the current deductibility of net interest expense in excess of 30% of EBITDA determined by applying U.S. tax principles, a limitation on the use of net operating losses generated after fiscal 2018 to 80% of taxable income, an incremental tax (base erosion anti-abuse tax or “BEAT”) on excessive amounts paid to foreign related parties, and an income

31


inclusion for foreign earnings in excess of 10% of the foreign subsidiaries tangible assets (global intangible low-taxed income or “GILTI”). The Company has elected to account for GILTI in the period in which it is incurred.
16. Share-Based Compensation
The Company designs equity compensation plans to attract and retain employees while also aligning employees’ interests with the interests of the Company’s shareholders. In addition, members of the Company’s Board of Directors (the “Board”) participate in equity compensation plans in connection with their service on the Company’s Board.

The Company established the Evoqua Water Technologies Corp. Stock Option Plan (the “Stock Option Plan”) shortly after the acquisition date of January 16, 2014. The plan allows certain management employees and the Board to purchase shares in Evoqua Water Technologies Corp. Under the Stock Option Plan, the number of shares available for award was 11,083. As of June 30, 2019, there were approximately 1,704 shares available for future grants, however, the Company does not currently intend to make additional grants under the Stock Option Plan.    
In connection with the IPO, the Board adopted and the Company’s stockholders approved the Evoqua Water Technologies Corp. 2017 Equity Incentive Plan (or the “Equity Incentive Plan”), under which equity awards may be made in the respect of 5,100 shares of common stock of the Company. Under the Equity Incentive Plan, awards may be granted in the form of options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalent rights, share awards and performance-based awards (including performance share units and performance-based restricted stock). As of June 30, 2019, there were approximately 1,985 shares available for grants under the Equity Incentive Plan.

In addition to the establishment of the Equity Incentive Plan, in connection with the IPO, the Company entered into restricted stock unit (“RSU”) agreements with each of the executive officers and certain other key members of management. Pursuant to the RSU agreements, recipients received, in the aggregate 1,197 stock-settled RSUs, the aggregate value of which equals $25,000. The RSUs will vest and settle in full upon the second anniversary of the IPO (the “Vesting Date”), subject to the grantee’s continued employment with the Company or any of its subsidiaries through the Vesting Date; provided, however, that in the event that a Change in Control (as defined in the RSU agreements) occurs prior to the Vesting Date, the RSUs will vest and settle in full upon the date of such Change in Control, subject to the grantee’s continued employment with the Company or any of its subsidiaries through the Change in Control date. In the event that the grantee’s employment is terminated for any reason prior to the Vesting Date, the grantee will forfeit each of his or her RSUs for no consideration as of the date of such termination of employment; provided, that, if the grantee’s employment is terminated without Cause (as defined in the RSU agreement) prior to the Vesting Date, the RSUs will vest and settle in full upon the Vesting Date as though the grantee had remained employed through such date.

Option awards are granted at various times during the year, vest ratably at 25% per year, and are exercisable at the time of vesting. The options granted have a ten-year contractual term.
  
Total share-based compensation expense was $4,985 and $14,308 during the three and nine months ended June 30, 2019, respectively, of which $4,978 and $14,248 was non-cash. Share-based compensation expense was $4,405 and $11,257 during the three and nine months ended June 30, 2018, respectively. The unrecognized compensation expense related to stock options and restricted stock units was $10,218 and $13,002, respectively at June 30, 2019, and is expected to be recognized over a weighted average period of 2.7 years and 1.3 years, respectively. The Company received $341 from the exercise of stock options during the nine months ended June 30, 2019. The remaining stock options exercised during the nine months ended June 30, 2019 were effected via a cashless net exercise.
        

32


    A summary of the stock option activity as of June 30, 2019 is presented below:
(In thousands, except per share amounts)
Options
 
Weighted Average Exercise Price/Share
 
Weighted Average Remaining Contractual Term
 
Aggregate Intrinsic Value
Outstanding at September 30, 2018
8,973

 
$
7.57

 
6.9 years
 
$
95,864

Granted
1,110

 
12.73

 
 
 


Exercised
(890
)
 
5.25

 
 
 


Cancelled
(23
)
 
20.88

 
 
 
 
Forfeited
(494
)
 
12.24

 
 
 


Expired

 

 
 
 


Outstanding at June 30, 2019
8,676

 
$
8.16

 
6.6 years
 
$
60,368

Options exercisable at June 30, 2019
6,183

 
$
5.66

 
5.6 years
 
$
54,922

Options vested and expected to vest at June 30, 2019
8,580

 
$
8.09

 
6.5 years
 
$
60,221


The total intrinsic value of options exercised (which is the amount by which the stock price exceeded the exercise price of the options on the date of exercise) during the nine months ended June 30, 2019 was $4,608.
    
A summary of the status of the Company's non-vested stock options as of and for the nine months ended June 30, 2019 is presented below.
(In thousands, except per share amounts)
Shares
 
Weighted Average Grant Date Fair Value/Share
Nonvested at beginning of period
3,335

 
$
4.11

Granted
1,110

 
3.87

Vested
(1,458
)
 
2.62

Forfeited
(494
)
 
4.31

Nonvested at end of period
2,493

 
$
4.87


The total fair value of options vested during the nine months ended June 30, 2019, was $3,819.


33


Restricted Stock Units
The following is a summary of the RSU activity for the nine months ended June 30, 2019.
(In thousands, except per share amounts)
Shares
 
Weighted Average Grant Date Fair Value/Share
Outstanding at September 30, 2018
1,213

 
$
20.88

Granted
880

 
12.68

Vested
(24
)
 
20.75

Forfeited
(60
)
 
16.58

Outstanding at June 30, 2019
2,009

 
$
17.42

Vested and expected to vest at June 30, 2019
1,914

 
$
17.50

Employee Stock Purchase Plan    
Effective October 1, 2018, the Company implemented an employee stock purchase plan (“ESPP”) which allows employees to purchase shares of the Company’s stock at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last business day of a six-month purchase period within the offering period. These purchases will be offered twice throughout fiscal 2019, and will be paid by employees through payroll deductions over the respective six month purchase period, at which point the stock will be transferred to the employees. On December 21, 2018, the Company registered 11,297 shares of common stock, par value $0.01 per share, of which 5,000 are available for future issuance under the ESPP. During the nine months ended June 30, 2019, the Company incurred compensation expense of $293, respectively, in salaries and wages in respect of the ESPP, representing the fair value of the discounted price of the shares. These amounts are included in the total share-based compensation expense above. On April 1, 2019, 46 shares were issued under the ESPP plan.
17. Concentration of Credit Risk
The Company’s cash and cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with financial institutions that management believes are of high credit quality. Accounts receivable are derived from revenue earned from customers located in the U.S. and internationally and generally do not require collateral. The Company’s trade receivables do not represent a significant concentration of credit risk at June 30, 2019 and September 30, 2018 due to the wide variety of customers and markets into which products are sold and their dispersion across geographic areas. The Company does perform ongoing credit evaluations of its customers and maintains an allowance for potential credit losses on trade receivables. As of and for the three and nine months ended June 30, 2019 and 2018, no customer accounted for more than 10% of net sales or net accounts receivable.
The Company operates predominantly in eight countries worldwide and provides a wide range of proven product brands and advanced water and wastewater treatment technologies, mobile and emergency water supply solutions and service contract options through its Integrated Solutions and Services and Applied Product Technologies segments. The Company is a multi-national business but its sales and operations are primarily in the U.S. Sales to unaffiliated customers are based on the Company locations that maintain the customer relationship and transacts the external sale.
18. Related‑Party Transactions
Transactions with Investors
The Company historically paid an advisory fee per quarter to AEA Investors LP (“AEA”), the private equity firm and the Company’s ultimate majority shareholder pursuant to a management agreement. Upon the IPO, the management agreement terminated and the Company stopped paying these fees to AEA and as a result, paid no fee during the three and nine months ended June 30, 2019 and only paid $333 during the nine months ended June 30, 2018. In addition, the Company reimbursed AEA for normal and customary expenses incurred by AEA on behalf of the Company. The Company incurred

34


expenses, excluding advisory fees, of $18 and $43 in the nine months ended June 30, 2019 and 2018, respectively. The Company owed no amounts to AEA at June 30, 2019 and September 30, 2018.
The Company also has a related party relationship with one of its customers, who is also an affiliate of a shareholder of the Company. The Company had sales to this customer of $636 and $376 during the three months ended June 30, 2019 and 2018, respectively, and $1,989 and $961 during the nine months ended June 30, 2019 and 2018, respectively, and was owed $788 and $3,139 from this customer at June 30, 2019 and September 30, 2018, respectively.
19. Commitments and Contingencies
Operating Leases
The Company occupies certain facilities and operates certain equipment and vehicles under non‑cancelable lease arrangements. Lease agreements may contain lease escalation clauses and purchase and renewal options. The Company recognizes scheduled lease escalation clauses over the course of the applicable lease term on a straight-line basis in the Unaudited Consolidated Statements of Operations.
Total rent expense was $5,222 and $4,091 for the three months ended June 30, 2019 and 2018, respectively, and $16,138 and $13,843 for the nine months ended June 30, 2019 and 2018, respectively.
Future minimum aggregate rental payments under non-cancelable operating leases are as follows:
Fiscal Year
 
Remainder of 2019
$
4,287

2020
15,409

2021
11,761

2022
7,810

2023
5,499

Thereafter
11,446

Total
$
56,212

Capital Leases
The gross and net carrying values of the equipment under capital leases as of June 30, 2019 and September 30, 2018 was as follows:
 
June 30,
2019
 
September 30,
2018
Gross carrying amount
$
60,923

 
$
52,314

Net carrying amount
33,372

 
31,116


35


The following is a schedule showing the future minimum lease payments under capital leases by years and the present value of the minimum lease payments as of June 30, 2019.
Fiscal Year
 
Remainder of 2019
$
4,229

2020
12,303

2021
9,031

2022
6,415

2023
4,112

Thereafter
4,466

Total
40,556

Less amount representing interest (at rates ranging from 1.71% to 9.71%)
8,402

Present value of net minimum capital lease payments
32,154

Less current installments of obligations under capital leases
12,830

Obligations under capital leases, excluding current installments
$
19,324

The current installments of obligations under capital leases are included in Accrued expenses and other liabilities. Obligations under capital leases, excluding current installments, are included in Other non-current liabilities.
The Company is a lessor to multiple parties. The Company purchases equipment through internal funding or bank debt equal to the fair market value of the equipment. The equipment is then leased to customers for periods ranging from five to twenty years. As of June 30, 2019, future minimum lease payments receivable under operating leases are as follows:
Fiscal year
 
Remainder of 2019
$
746

2020
6,357

2021
5,385

2022
5,444

2023
4,462

Thereafter
61,407

Future minimum lease payments
$
83,801

Guarantees
From time to time, the Company is required to provide letters of credit, bank guarantees, or surety bonds in support of its commitments and as part of the terms and conditions on water treatment projects.  In addition, the Company is required to provide letters of credit or surety bonds to the Department of Environmental Protection or equivalent in some states in order to maintain its licenses to handle toxic substances at certain of its water treatment facilities.
These financial instruments typically expire after all Company commitments have been met, a period typically ranging from twelve months to ten years, or more in some circumstances.  The letters of credit, bank guarantees, or surety bonds are arranged through major banks or insurance companies. In the case of surety bonds, the Company generally indemnifies the issuer for all costs incurred if a claim is made against the bond. 
As of June 30, 2019 and September 30, 2018 the Company had letters of credit totaling $13,262 and $11,777, respectively, and surety bonds totaling $138,138 and $123,427 respectively, outstanding under the Company’s credit arrangements.  The longest maturity date of the letters of credit and surety bonds in effect as of June 30, 2019 was March 26, 2029. Additionally, as of June 30, 2019 and September 30, 2018, the Company had letters of credit totaling $0 and $857, respectively, and surety bonds totaling $1,241 and $2,469, respectively, outstanding under the Company’s prior arrangement with Siemens.

36


Litigation
From time to time, the Company is subject to various claims, charges and litigation matters that arise in the ordinary course of business. The Company believes these actions are a normal incident of the nature and kind of business in which the Company is engaged. While it is not feasible to predict the outcome of these matters with certainty, the Company does not believe that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations or prospects.

20. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
 
June 30,
2019
 
September 30,
2018
Salaries, wages and other benefits
$
27,397

 
$
34,688

Obligation under capital leases
12,830

 
12,236

Third party commissions
10,262

 
5,097

Taxes, other than income
5,571

 
11,561

Insurance liabilities
4,705

 
5,005

Provisions for litigation
1,856

 
1,137

Severance payments
1,644

 
710

Earn-outs related to acquisitions
918

 
770

Other
24,090

 
26,468

 
$
89,273

 
$
97,672

21. Business Segments
The Company’s reportable operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. The key factors used to identify these reportable operating segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type.
During the first quarter of 2019, the Company implemented changes to its organizational and management structure that resulted in changes to our reportable operating segments for financial reporting purposes. Through the fiscal year ended September 30, 2018, the Company had three reportable operating segments: Industrial, Municipal and Products. Changes in the management reporting structure during the first quarter of 2019 required an assessment to be conducted in accordance with ASC Topic 280, Segment Reporting, to determine the Company’s reportable operating segments.
As a result of this assessment, the Company now has two reportable operating segments, Integrated Solutions and Services and Applied Product Technologies. Prior period information has been revised to reflect this new segment structure. The business segments are described as follows:
Integrated Solutions and Services is a group entirely focused on engaging directly with end users through direct sales with a market vertical focus. Integrated Solutions and Services provides tailored services and solutions in collaboration with the customers backed by life‑cycle services including on‑demand water, outsourced water, recycle / reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance. Key offerings within this segment also include equipment systems for industrial needs (influent water, boiler feed water, ultrahigh purity, process water, wastewater treatment and recycle / reuse), full-scale outsourcing of operations and maintenance, and municipal services, including odor and corrosion control services.

37


Applied Product Technologies is focused on developing product platforms to be sold primarily through third party channels. This segment primarily engages in indirect sales through independent sales representatives, distributors and aftermarket channels. Applied Product Technologies provides a range of highly differentiated and scalable products and technologies specified by global water treatment designers, OEMs, engineering firms and integrators. Key offerings within this segment include filtration and separation, disinfection, wastewater solutions, anode and electrochlorination technology and aquatics technologies and solutions for the global recreational and commercial pool market.
The Company evaluates its business segments’ operating results based on earnings before interest, taxes, depreciation and amortization, and certain other charges that are specific to the activities of the respective segments. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and certain other charges. Certain other charges include restructuring and other business transformation charges that have been undertaken to align and reposition the Company to the current reporting structure, acquisition related costs (including transaction costs, certain integration costs and recognition of backlog intangible assets recorded in purchase accounting) and share-based compensation charges. 
Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the below table are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.

38


 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Total sales
 
 
 
 
 
 
 
Integrated Solutions and Services
$
227,815

 
$
211,238

 
$
669,031

 
$
613,503

Applied Product Technologies
158,526

 
152,835

 
437,196

 
425,388

Total sales
386,341

 
364,073

 
1,106,227

 
1,038,891

Intersegment sales
 
 
 
 
 
 
 
Integrated Solutions and Services
2,386

 
1,902

 
6,240

 
7,786

Applied Product Technologies
23,612

 
19,696

 
68,014

 
57,890

Total intersegment sales
25,998

 
21,598

 
74,254

 
65,676

Sales to external customers
 
 
 
 
 
 
 
Integrated Solutions and Services
225,429

 
209,336

 
662,791

 
605,717

Applied Product Technologies
134,914

 
133,139

 
369,182

 
367,498

Total sales
360,343

 
342,475

 
1,031,973

 
973,215

Earnings before interest, taxes, depreciation and amortization (EBITDA)
 
 
 
 
 
 
 
Integrated Solutions and Services
51,380

 
41,473

 
144,589

 
132,785

Applied Product Technologies
26,874

 
32,201

 
51,504

 
72,332

Corporate
(27,018
)
 
(37,274
)
 
(92,496
)
 
(92,718
)
Total EBITDA
51,236

 
36,400

 
103,597

 
112,399

Depreciation and amortization
 
 
 
 
 
 
 
Integrated Solutions and Services
14,035

 
12,253

 
42,307

 
34,875

Applied Product Technologies
4,350

 
4,146

 
13,142

 
12,040

Corporate
5,760

 
5,163

 
15,948

 
15,009

Total depreciation and amortization
24,145

 
21,562

 
71,397

 
61,924

Operating profit (loss)
 
 
 
 
 
 
 
Integrated Solutions and Services
37,345

 
29,220

 
102,282

 
97,910

Applied Product Technologies
22,524

 
28,055

 
38,362

 
60,292

Corporate
(32,778
)
 
(42,437
)
 
(108,444
)
 
(107,727
)
Total operating profit
27,091

 
14,838

 
32,200

 
50,475

Interest expense
(14,842
)
 
(12,370
)
 
(43,759
)
 
(40,423
)
Income (loss) before income taxes
12,249

 
2,468

 
(11,559
)
 
10,052

Income tax (expense) benefit
(7,959
)
 
(1,433
)
 
1,134

 
960

Net income (loss)
$
4,290

 
$
1,035

 
$
(10,425
)
 
$
11,012

Capital expenditures
 
 
 
 
 
 
 
Integrated Solutions and Services
$
19,646

 
$
15,672

 
$
53,303

 
$
37,595

Applied Product Technologies
1,720

 
4,688

 
5,988

 
8,563

Corporate
1,900

 
2,539

 
4,657

 
8,411

Total capital expenditures
$
23,266

 
$
22,899

 
$
63,948

 
$
54,569


39


 
June 30,
2019
 
September 30,
2018
Assets
 
 
 
Integrated Solutions and Services
$
745,280

 
$
711,622

Applied Product Technologies
666,206

 
677,993

Corporate
259,969

 
274,002

Total assets
$
1,671,455

 
$
1,663,617

Goodwill
 
 
 
Integrated Solutions and Services
$
221,986

 
$
224,370

Applied Product Technologies
188,300

 
186,976

Total goodwill
$
410,286

 
$
411,346

22. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings (loss) from continuing operations per common share (in thousands, except per share amounts):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Numerator for basic and diluted loss per common share—Net income (loss) attributable to Evoqua Water Technologies Corp.
$
4,135

 
$
793

 
$
(11,211
)
 
$
9,585

Denominator:
 
 
 
 
 
 
 
Denominator for basic net income (loss) per common share—weighted average shares
114,653

 
113,842

 
114,653

 
113,842

Effect of dilutive securities:
 
 
 
 
 
 
 
Share‑based compensation
4,781

 
5,205

 

 
6,094

Denominator for diluted net income (loss) per common share—adjusted weighted average shares
119,434

 
119,047

 
114,653

 
119,936

Basic earnings (loss) attributable to Evoqua Water Technologies Corp. per common share
$
0.04

 
$
0.01

 
$
(0.10
)
 
$
0.08

Diluted earnings (loss) attributable to Evoqua Water Technologies Corp. per common share
$
0.03

 
$
0.01

 
$
(0.10
)
 
$
0.08

Since the Company was in a net loss position for the nine months ended June 30, 2019, there was no difference between the number of shares used to calculate basic and diluted loss per share. Because of their anti-dilutive effect, 4,358 common share equivalents, comprised of employee stock options, have been excluded from the diluted EPS calculation for the nine months ended June 30, 2019.

40


23. Subsequent Events
On July 5, 2019, the Company completed an equipment financing for $19.5 million related to a large outsourced water project. The financing includes an imputed interest rate of 8.263% and fifteen year amortization with a bullet payment at year ten.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of our operations should be read in conjunction with the Unaudited Consolidated Financial Statements, including the notes, included in Item 1 of this Quarterly Report on Form 10-Q (this “Report”), and with our audited consolidated financial statements and the related notes thereto in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as filed with the SEC on December 11, 2018 (the “2018 Annual Report”). You should review the disclosures under the heading “Item 1A. Risk Factors” in the 2018 Annual Report, as well as any cautionary language in this report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless otherwise indicated or the context otherwise requires, all references to “the Company,” “Evoqua,” “Evoqua Water Technologies Corp.,” “EWT Holdings I Corp.,” “we,” “us,” “our” and similar terms refer to Evoqua Water Technologies Corp., together with its consolidated subsidiaries. Unless otherwise specified, all dollar amounts in this section are referred to in millions.
Overview and Background
We are 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. With over 200,000 installations worldwide, we hold leading positions in the industrial, commercial and municipal water treatment markets in North America. We offer a comprehensive portfolio of differentiated, proprietary technology solutions sold under a number of market‑leading and well‑established brands. We deliver and maintain these mission critical solutions through the largest service network in North America, assuring our customers continuous uptime with 85 branches as of June 30, 2019. We have an extensive service and support network, and as a result, a certified Evoqua Service Technician is generally no more than a two‑hour drive from more than 90% of our customers’ sites. We believe that the customer intimacy created through our service network is a significant competitive advantage.
Our solutions are designed to ensure that our customers have access to an uninterrupted quantity and level of quality of water that meets their unique product, process and recycle or reuse specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations and support their regulatory compliance and environmental sustainability. We have worked to protect water, the environment and our employees for over 100 years. As a result, we have earned a reputation for quality, safety and reliability and are sought out by our customers to solve the full range of their water treatment needs, and maintaining our reputation is critical to the success of our business.
Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers and performance” foster a corporate culture that is focused on establishing a workforce that is enabled, empowered and accountable, which creates a highly entrepreneurial and dynamic work environment. Our purpose is “Transforming water. Enriching life.” We draw from a long legacy of water treatment innovations and industry firsts, supported by more than 1,250 granted or pending patents, which in aggregate are imperative to our business. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals, and we are able to achieve purification levels which are 1,000 times greater than typical drinking water.
Business Segments
On October 30, 2018, the Company announced a transition from a three-segment structure to a two-segment structure designed to better serve the needs of customers worldwide. This new structure was effective October 1, 2018. Our business is organized by customer base and offerings into two reportable operating segments that each draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes and corporate philosophies. Our reportable operating segments consist of: (i) our Integrated Solutions and Services and (ii) our Applied

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Product Technologies. The key factors used to identify these reportable operating segments are the organization and alignment of our internal operations, the nature of the products and services and customer type.
Within the Integrated Solutions and Services segment, we primarily provide tailored solutions in collaboration with our customers backed by life‑cycle services including on‑demand water, outsourced water, recycle and reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance.
Within the Applied Product Technologies segment, we provide a highly differentiated and scalable range of products and technologies specified by global water treatment designers, OEMs, engineering firms and integrators.
We evaluate our business segments’ operating results based on income from operations and EBITDA or Adjusted EBITDA on a segment basis. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and certain other charges, which have not been allocated to business segments. As such, the segment results provided herein may not be comparable to other companies.
Organic Growth Drivers
Market Growth
We maintain a leading position among customers in growing industries that utilize water as a critical part of their operations or production processes, including pharmaceuticals and health sciences, microelectronics, food and beverage, hydrocarbon and chemical processing, power, general manufacturing, municipal drinking and wastewater, marine and aquatics. Water treatment is an essential, non‑discretionary market that is growing in importance as access to clean water has become an international priority. Underpinning this growth are a number of global, long‑term trends that have resulted in increasingly stringent effluent regulations, along with a growing demand for cleaner and sustainable waste streams for reuse. These trends include the growing global population, increasing levels of urbanization and continued global economic growth, and we have seen these trends manifest themselves within our various end markets creating multiple avenues of growth. For example, within the industrial market, water is an integral and meaningful component in the production of a wide‑range of goods spanning from consumer electronics to automobiles.
Our Existing Customer Base
We believe our strong brands, leading position in highly fragmented markets, scalable and global offerings, leading installed base and unique ability to provide complete treatment solutions will enable us to capture a larger share of our existing customers’ water treatment spend while expanding with existing and new customers into adjacent end‑markets and underpenetrated regions, including by investing in our sales force and cross‑selling to existing customers. We believe that we are uniquely positioned to further penetrate our core markets, with over 200,000 installations across over 38,000 global customers. We maintain a customer‑intimate business model with strong brand value and provide solutions‑focused offerings capable of serving a customer’s full lifecycle water treatment needs, both in current and new geographic regions.
Our Service Model
We selectively target high value projects with opportunities for recurring business through service, parts and other aftermarket opportunities over the lifecycle of the process or capital equipment. In particular, we have developed internet‑connected monitoring technologies through the deployment of our Water One® service platform, which enables customers to outsource their water treatment systems and focus on their core business, offering customers system optimization, predictive and proactive service, and simplified billing and pricing. Our Water One® platform also enables us to transition our customers to pricing models based on usage, which otherwise would not have been possible without technological advancement. Our technology solutions provide customers with increased stability and predictability in water‑related costs, while enabling us to optimize our service route network and on demand offerings through predictive analytics, which we believe will result in market share gains, improved service levels, increased barriers to entry and reduced costs.

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Product and Technology Development
We develop our technologies through in‑house research, development and engineering and targeted tuck‑in, vertical market and geography‑expanding, technology-enhancing acquisitions. We have a reservoir of recently launched technologies and a strong pipeline of new offerings designed to provide customers with innovative, value‑enhancing solutions. Furthermore, since April 2016, we have successfully completed thirteen acquisitions that expand our vertical markets and geographic reach and enhance our technologies, strengthening our existing capabilities and adding new capabilities and cross selling opportunities in areas such as mobile wastewater treatment, soil and air treatment, regenerative media filtration, anodes, UV and ozone disinfection, aerobic and anaerobic biological treatment technologies and electrochemical and electrochlorination cells. We are able to rapidly scale new technologies using our leading direct and third‑party sales channels and our relationships with key influencers, including municipal representatives, engineering firms, designers and other system specifiers. We believe our continued investment in driving penetration of our recently launched technologies, robust pipeline of new capabilities and best‑in‑class channels to market will allow us to continue to address our customer needs across the water lifecycle.
Operational Excellence
We believe that continuous improvement of our operations, processes and organizational structure is a key driver of our earnings growth. Effective October 1, 2018, we restructured our business into two reportable operating segments, which we expect to result in cost savings in the range of $15 million to $20 million on an annualized basis once fully implemented. We have separately identified and are pursuing a number of discrete initiatives which, if successful, we expect could result in additional cost savings over the next three years. These initiatives include our ePro and supply chain improvement program to consolidate and manage global spending, our improved logistics and transportation management program, implementation of shared service solutions within our back-office functions, further optimizing our engineering cost structure, capacity and efficiency, and capturing benefits of our Water One® platform. These improvements focus on creating value for customers through reduced lead times, improved quality and superior customer support, while also creating value for shareholders through enhanced earnings growth. Furthermore, as a result of significant investments we have made in our footprint and facilities, we believe that we have capacity to support our planned growth without commensurate increase in fixed costs.
Acquisitions and Divestitures
We believe that capex-like, tuck‑in acquisitions present a key opportunity within our overall growth strategy, which we will continue to evaluate strategically. These strategic acquisitions are expected to enable us to accelerate our growth by extending our critical mass in existing markets, as well as to expand in new geographies and new end market verticals. Our existing customer relationships, best‑in‑class channels to market and ability to rapidly commercialize technologies provide a strong platform to drive rapid growth in the businesses we acquire. To capitalize on these opportunities, we have built an experienced team dedicated to mergers and acquisitions that has, since April 2016, successfully completed thirteen acquisitions that expand our vertical markets and geographic reach and enhance our technologies, with purchase prices ranging from approximately $2.0 million to approximately $283.7 million, and pre‑acquisition revenues ranging from approximately $3.1 million to approximately $55.7 million.
Key Factors and Trends Affecting Our Business and Financial Statements
Various trends and other factors affect or have affected our operating results, including:
Overall economic trends. The overall economic environment and related changes in industrial, commercial and municipal spending impact our business. In general, positive conditions in the broader economy promote industrial, commercial and municipal customer spending, while economic weakness results in a reduction of new industrial, commercial and municipal project activity. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include population growth, total water consumption, municipal budgets, employment rates, business conditions, the availability of credit or capital, interest rates, tax rates, imposition of tariffs and regulatory changes. Since the businesses of our customers vary in cyclicality, periodic downturns in any specific sector typically have modest impacts on our overall business.

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Changes in costs and availability. We have significant exposures to certain commodities, including steel, caustic, carbon, calcium nitrate and iridium, and volatility in the market price and availability of these commodity input materials has a direct impact on our costs and our business. For example, the U.S. government and other governments have recently imposed greater restrictions on international trade, including tariffs and/or other trade restraints on certain materials. These restrictions, particularly those related to China, could increase the cost of our products and restrict availability of certain commodities, which may result in delays in our execution of projects. There can be no assurance that we will be able to recuperate these higher costs from our customers through product price increases. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross profit and gross margin. Further, additional potential acquisitions and international expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our management systems, financial and management controls and information systems. We will also be required to hire, train and retain operational and sales personnel, which affects our operating margins.
Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in costs due to commodity cost increases or general inflation which could lead to a reduction in our revenues as well as greater margin pressure as increased costs may not be able to be passed on to customers.
Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including funding, readiness of projects, regulatory approvals and significant weather events. In addition, our contracts for large capital water treatment projects, systems and solutions for industrial, commercial and municipal applications are generally fixed‑price contracts with milestone billings. As a result of these factors, our working capital requirements and demands on our distribution and delivery network may fluctuate during the year.
New products and technologies. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling array of products, services and solutions responsive to evolving customer innovations, preferences and specifications. We expect that increased use of water in industrial and commercial processes will drive increased customer demand in the future, and our ability to grow will depend in part on effectively responding to innovation in our customers’ processes and systems. Further, our ability to provide products that comply with evolving government regulations will also be a driver of the appeal of our products, services and solutions to industrial and commercial customers.
Government policies. Decaying water systems in the United States (“U.S.”) will require critical drinking water and wastewater repairs, often led by municipal governments. Further, as U.S. states increase regulation on existing and emerging contaminants, we expect that our customers will increasingly require sustainable solutions to their water‑related needs. In general, increased infrastructure investment and more stringent municipal, state and federal regulations promote increased spending on our products, services and solutions, while a slowdown in investment in public infrastructure or the elimination of key environmental regulations could result in lower industrial and municipal spending on water systems and products.
Availability of water. In general, we expect demand for our products and services to increase as the availability of clean water from public sources decreases. Secular trends that will drive demand for water across a multitude of industrial, commercial and municipal applications include global population growth, urbanization, industrialization and overall economic growth. In addition, the supply of clean water could be adversely impacted by factors including an aging water infrastructure within North America and increased levels of water stress from seasonal rainfall, inadequate water storage options or treatment technologies. Because water is a critical component and byproduct of many processes, including in manufacturing and product development, we expect that, as global consumption patterns evolve and water shortages persist, demand for our equipment and services will continue to increase.
Operational investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. Activities related to operational investments include employee training and development, integrating acquired businesses, implementing enhanced information systems, research, development and engineering investments and other activities to enable us to support our operating model.
Our ability to source and distribute products effectively. Our revenues are affected by our ability to purchase our inputs in sufficient quantities at competitive prices. While we believe our suppliers have adequate capacity to meet our

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current and anticipated demand, our level of revenues could be adversely affected in the event of constraints in our supply chain, including the inability of our suppliers to produce sufficient quantities of raw materials in a manner that is able to match demand from our customers.
Contractual relationships with customers. Due to our large installed base and the nature of our contractual relationships with our customers, we have high visibility into a large portion of our revenue. The one‑ to twenty‑year terms of many of our service contracts and the regular delivery and replacement of many of our products help to insulate us from the negative impact of any economic decline.
Exchange rates. The reporting currency for our Unaudited Consolidated Financial Statements is the U.S. dollar. We operate in numerous countries around the world and therefore, certain of our assets, liabilities, revenues and expenses are denominated in functional currencies other than the U.S. dollar, primarily in the euro, U.K. sterling, Chinese renminbi, Canadian dollar, Australian dollar and Singapore dollar. To prepare our Unaudited Consolidated Financial Statements we must translate those assets, liabilities, revenues and expenses into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in our Unaudited Consolidated Financial Statements, even if their value has not changed in the functional currency. While we believe that we are not susceptible to any material impact on our results of operations caused by fluctuations in exchange rates because our operations are primarily conducted in the U.S., if we expand our foreign operations in the future, substantial increases or decreases in the value of the U.S. dollar relative to these other currencies could have a significant impact on our results of operations.
How We Assess the Performance of Our Business
In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenue, gross profit, gross margin, operating expenses, net income (loss) and Adjusted EBITDA.
Revenue
Our sales are a function of sales volumes and selling prices, each of which is a function of the mix of product and service sales, and consist primarily of:
sales of tailored equipment systems for industrial needs (influent water, boiler feed water, ultrahigh purity, process water, wastewater treatment and recycle / reuse), municipal services, including odor and corrosion control services and full-scale outsourcing of operations and maintenance; and
sales of highly differentiated and scalable products and technologies specified by global water treatment designers, OEMs, engineering firms and integrators including filtration and separation, disinfection, wastewater solutions, anode and electrochlorination technology and aquatics technologies and solutions for the global recreational and commercial pool market.
Cost of Sales, Gross Profit and Gross Margin
Gross profit is determined by subtracting cost of product sales and cost of services from our product and services revenue. Gross margin measures gross profit as a percentage of our combined product and services revenue.
Cost of product sales consists of all manufacturing costs required to bring a product to a ready-for-sale condition, including direct and indirect materials, direct and indirect labor costs including benefits, freight, depreciation, information technology, rental and insurance, repair and maintenance, utilities, other manufacturing costs, warranties and third party commissions.
Cost of services primarily consists of the cost of personnel and travel for our field service, supply chain and technicians, depreciation of equipment and field service vehicles and freight costs.
Operating Expenses
Operating expenses consist primarily of general and administrative, sales and marketing and research and development expenses.

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General and Administrative. General and administrative expenses (“G&A expense”) consist of fixed overhead personnel expenses associated with our corporate functions and our service organization (including district and branch managers, customer service, contract renewals and regeneration plant management). We expect our general and administrative expenses to increase due to the anticipated growth of our business and related infrastructure as well as due to the legal, accounting, insurance, investor relations and other costs associated with being a public company.
Sales and Marketing. Sales and marketing expenses (“S&M expense”) consist primarily of advertising and marketing promotions of our products, services and solutions and related personnel expenses (including all Evoqua sales and application employees’ base compensation and incentives), as well as sponsorship costs, consulting and contractor expenses, travel, display expenses and related amortization. We expect our sales and marketing expenses to increase as we continue to actively promote our products, services and solutions.
Research and Development. Research and development expenses (“R&D expense”) consist primarily of personnel expenses related to research and development, patents, sustaining engineering, consulting and contractor expenses, tooling and prototype materials and overhead costs allocated to such expenses. Substantially all of our research and development expenses are related to developing new products and services and improving our existing products and services. To date, research and development expenses have been expensed as incurred, because the period between achieving technological feasibility and the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant.
R&D expense can fluctuate depending on our determination to invest in developing new products, services and solutions and enhancing our existing products, services and solutions versus adding these capabilities through a mergers and acquisitions strategy.
Net Income (Loss)
Net income (loss) is determined by subtracting operating expenses and interest expense from, and adding other operating income (expense), equity income from our partnership interest in Treated Water Outsourcing and income tax benefit (expense) to, gross profit. For more information on how we determine gross profit, see “Gross Profit.”
Adjusted EBITDA
Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, purchase accounting adjustment costs, non-cash share-based compensation, sponsor fees, transaction costs and other gains, losses and expenses. We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, 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, because it excludes , among other things, certain results of decisions that are outside the control of management, while other measures can differ significantly depending on 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 does not include certain charges that are presented within Corporate activities. These charges include

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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.
The following is a reconciliation of our Net income (loss) to Adjusted EBITDA (unaudited, amounts in millions):
 
Three Months Ended
June 30,
 
Nine Months Ended
June 30,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
4.3

 
$
1.0

 
$
(10.4
)
 
$
11.0

Income tax expense (benefit)
7.9

 
1.4

 
(1.2
)
 
(1.0
)
Interest expense
14.9

 
12.4

 
43.8

 
40.4

Operating profit
27.1

 
14.8

 
32.2

 
50.4

Depreciation and amortization
24.1

 
21.6

 
71.4

 
62.0

EBITDA
51.2

 
36.4

 
103.6

 
112.4

Restructuring and related business transformation costs (a)
4.5

 
8.9

 
18.5

 
25.3

Share-based compensation (b)
5.0

 
4.4

 
14.3