Evoqua Water Technologies Corp. - Quarter Report: 2019 March (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
March 31, 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 114,219,799 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of April 30, 2019.

EVOQUA WATER TECHNOLOGIES CORP.

TABLE OF CONTENTS




		Page
PART I - FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements		3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation		39
Item 3	Quantitative and Qualitative Disclosures About Market Risk		59
Item 4	Controls and Procedures		60
PART II - OTHER INFORMATION
Item 1	Legal Proceedings		62
Item 1A	Risk Factors		62
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		62
Item 3	Defaults Upon Senior Securities		63
Item 4	Mine Safety Disclosures		63
Item 5	Other Information		63
Item 6	Exhibits		63

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;


•	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.

Part I - Financial Information

Item 1. Consolidated Financial Statements

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Evoqua Water Technologies Corp.
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2019 (Unaudited) and September 30, 2018	4
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2019 and 2018	5
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended March 31, 2019 and 2018	6
Unaudited Consolidated Statements of Changes in Equity for the Three and Six Months Ended March 31, 2019 and 2018	7
Unaudited Consolidated Statements of Changes in Cash Flow for the Six Months Ended March 31, 2019 and 2018	9
Unaudited Supplemental Disclosure of Cash Flow Information for the Six Months Ended March 31, 2019 and 2018	10
Notes to Unaudited Consolidated Financial Statements	11

Evoqua Water Technologies Corp.

Consolidated Balance Sheets

(In thousands)



	(Unaudited)
	March 31, 2019			September 30, 2018
ASSETS
Current assets	$	551,617		$	565,560
Cash and cash equivalents	66,750			82,365
Receivables, net	232,324			254,756
Inventories, net	155,863			134,988
Contract assets	71,310			69,147
Prepaid and other current assets	24,987			23,854
Income tax receivable	383			450
Property, plant, and equipment, net	333,023			320,023
Goodwill	407,572			411,346
Intangible assets, net	328,021			340,408
Deferred income taxes	14,523			2,438
Other non‑current assets	25,418			23,842
Total assets	$	1,660,174		$	1,663,617
LIABILITIES AND EQUITY
Current liabilities	$	280,773		$	284,719
Accounts payable	133,730			141,140
Current portion of debt	12,303			11,555
Contract liabilities	25,068			17,652
Product warranties	8,800			8,907
Accrued expenses and other liabilities	94,659			97,672
Income tax payable	6,213			7,793
Non‑current liabilities	1,024,024			1,016,882
Long‑term debt	933,116			928,075
Product warranties	4,002			3,360
Other non‑current liabilities	75,756			74,352
Deferred income taxes	11,150			11,095
Total liabilities	1,304,797			1,301,601
Commitments and Contingent Liabilities (Note 19)
Shareholders’ equity
Common stock, par value $0.01: authorized 1,000,000 shares; issued 115,691 shares, outstanding 114,173 shares at March 31, 2019; issued 115,016 shares, outstanding 113,929 shares at September 30, 2018	1,151			1,145
Treasury stock: 1,518 shares at March 31, 2019 and 1,087 shares at September 30, 2018	(2,837		)	(2,837		)
Additional paid‑in capital	542,104			533,435
Retained deficit	(180,618		)	(163,871		)
Accumulated other comprehensive loss, net of tax	(7,615		)	(9,017		)
Total Evoqua Water Technologies Corp. equity	352,185			358,855
Non‑controlling interest	3,192			3,161
Total shareholders’ equity	355,377			362,016
Total liabilities and shareholders’ equity	$	1,660,174		$	1,663,617

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Operations

(In thousands except per share data)



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Revenue from product sales	$	206,868		$	204,364		$	386,956		$	371,488
Revenue from services	141,760			129,326			284,674			259,252
Revenue from product sales and services	348,628			333,690			671,630			630,740
Cost of product sales	(153,857		)	(133,830		)	(290,452		)	(249,636		)
Cost of services	(99,160		)	(91,863		)	(196,837		)	(184,728		)
Cost of product sales and services	(253,017		)	(225,693		)	(487,289		)	(434,364		)
Gross profit	95,611			107,997			184,341			196,376
General and administrative expense	(48,215		)	(44,742		)	(103,046		)	(83,807		)
Sales and marketing expense	(35,435		)	(34,330		)	(71,587		)	(68,571		)
Research and development expense	(3,957		)	(4,021		)	(8,103		)	(8,674		)
Total operating expenses	(87,607		)	(83,093		)	(182,736		)	(161,052		)
Other operating income	3,651			937			3,879			937
Other operating expense	(187		)	(33		)	(375		)	(626		)
Interest expense	(14,474		)	(10,810		)	(28,917		)	(28,053		)
(Loss) income before income taxes	(3,006		)	14,998			(23,808		)	7,582
Income tax benefit (expense)	4,579			(2,018		)	9,093			2,393
Net income (loss)	1,573			12,980			(14,715		)	9,975
Net income attributable to non‑controlling interest	189			477			631			1,185
Net income (loss) attributable to Evoqua Water Technologies Corp.	$	1,384		$	12,503		$	(15,346	)	$	8,790
Basic income (loss) per common share	$	0.01		$	0.11		$	(0.13	)	$	0.08
Diluted income (loss) per common share	$	0.01		$	0.10		$	(0.13	)	$	0.07

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(In thousands)



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Net income (loss)	$	1,573		$	12,980		$	(14,715	)	$	9,975
Other comprehensive income (loss)
Foreign currency translation adjustments	2,929			(276		)	1,582			(796		)
Unrealized derivative (loss) gain on cash flow hedges, net of tax	(626		)	(182		)	(180		)	3
Total other comprehensive income (loss)	2,303			(458		)	1,402			(793		)
Less: Comprehensive income attributable to non‑controlling interest	(189		)	(477		)	(631		)	(1,185		)
Comprehensive income (loss) attributable to Evoqua Water Technologies Corp.	$	3,687		$	12,045		$	(13,944	)	$	7,997

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Equity

(In thousands)



	Three Months Ended March 31, 2019
	Common Stock			Treasury Stock				Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest		Total
	Shares	Cost		Shares	Cost			Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest		Total
Balance at December 31, 2018	115,048	$	1,145	1,105	$	(2,837	)	$	538,013		$	(182,002	)	$	(9,918	)	$	3,003	$	347,404
Equity based compensation expense	—	—		—	—			4,745			—			—			—		4,745
Issuance of common stock	51	—		—	—			273			—			—			—		273
Shares withheld related to net share settlement (including tax withholdings)	592	6		413	—			(927		)	—			—			—		(921		)
Stock repurchases	—	—		—	—			—			—			—			—		—
Dividends paid to non-controlling interest	—	—		—	—			—			—			—			—		—
Net income	—	—		—	—			—			1,384			—			189		1,573
Other comprehensive income	—	—		—	—			—			—			2,303			—		2,303
Balance at March 31, 2019	115,691	$	1,151	1,518	$	(2,837	)	$	542,104		$	(180,618	)	$	(7,615	)	$	3,192	$	355,377



	Three Months Ended March 31, 2018
	Common Stock			Treasury Stock				Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
	Shares	Cost		Shares	Cost			Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
Balance at December 31, 2017	113,692	$	1,137	428	$	(2,837	)	$	529,120		$	(173,719	)	$	(6,324	)	$	5,345		$	352,722
Equity based compensation expense	—	—		—	—			4,250			—			—			—			4,250
Shares of common stock issued in initial public offering, net of offering costs	—	—		—	—			—			—			—			—			—
Shares withheld related to net share settlement (including tax withholdings)	1,018	5		513	—			(7,373		)	—			—			—			(7,368		)
Stock repurchases	—	—		—	—			—			—			—			—			—
Dividends paid to non-controlling interest	—	—		—	—			—			—			—			(1,050		)	(1,050		)
Net income	—	—		—	—			—			12,503			—			477			12,980
Other comprehensive loss	—	—		—	—			—			—			(458		)	—			(458		)
Balance at March 31, 2018	114,710	$	1,142	941	$	(2,837	)	$	525,997		$	(161,216	)	$	(6,782	)	$	4,772		$	361,076

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Equity (Continued)

(In thousands)



	Six Months Ended March 31, 2019
	Common Stock			Treasury Stock				Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
	Shares	Cost		Shares	Cost			Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
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	—	—		—	—			9,270			—			—			—			9,270
Issuance of common stock	62	—		—	—			341			—			—			—			341
Shares withheld related to net share settlement (including tax withholdings)	613	6		431	—			(942		)	—			—			—			(936		)
Dividends paid to non-controlling interest	—	—		—	—			—			—			—			(600		)	(600		)
Net (loss) income	—	—		—	—			—			(15,346		)	—			631			(14,715		)
Other comprehensive income	—	—		—	—			—			—			1,402			—			1,402
Balance at March 31, 2019	115,691	$	1,151	1,518	$	(2,837	)	$	542,104		$	(180,618	)	$	(7,615	)	$	3,192		$	355,377



	Six Months Ended March 31, 2018
	Common Stock			Treasury Stock				Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
	Shares	Cost		Shares	Cost			Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
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	—	—		—	—			6,862			—			—			—			6,862
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)	1,018	5		513	—			(7,373		)	—			—			—			(7,368		)
Stock repurchases	—	—		18	(230		)	—			—			—			—			(230		)
Dividends paid to non-controlling interest	—	—		—	—			—			—			—			(1,550		)	(1,550		)
Net income	—	—		—	—			—			8,790			—			1,185			9,975
Other comprehensive loss	—	—		—	—			—			—			(793		)	—			(793		)
Balance at March 31, 2018	114,710	$	1,142	941	$	(2,837	)	$	525,997		$	(161,216	)	$	(6,782	)	$	4,772		$	361,076

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Cash Flows

(In thousands)



	Six Months Ended March 31,
	2019			2018
Operating activities
Net (loss) income	$	(14,715	)	$	9,975
Reconciliation of net (loss) income to cash flows provided by operating activities:
Depreciation and amortization	47,252			40,363
Amortization of debt related costs (includes $0 and $2,994 write off of deferred financing fees)	1,231			4,145
Deferred income taxes	(11,411		)	(6,013		)
Share-based compensation	9,270			6,862
(Gain) loss on sale of property, plant and equipment	(122		)	102
Foreign currency exchange losses (gains) on intercompany loans and other non-cash items	5,228			(2,934		)
Changes in assets and liabilities
Accounts receivable	20,600			28,946
Inventories	(14,175		)	(14,936		)
Contract assets	(8,159		)	(7,848		)
Prepaids and other current assets	7,487			(5,156		)
Accounts payable	(8,875		)	22,821
Accrued expenses and other liabilities	(11,178		)	(30,810		)
Contract liabilities	5,774			(2,032		)
Income taxes	(1,742		)	1,849
Other non‑current assets and liabilities	879			(3,483		)
Net cash provided by operating activities	27,344			41,851
Investing activities
Purchase of property, plant and equipment	(40,682		)	(31,670		)
Purchase of intangibles	(2,898		)	(291		)
Proceeds from sale of property, plant and equipment	2,875			539
Acquisitions, net of cash received of $0 and $39	2,048			(10,224		)
Net cash used in investing activities	(38,657		)	(41,646		)
Financing activities
Issuance of debt, net of deferred issuance costs	10,663			(1,792		)
Borrowings under credit facility	115,000			6,000
Repayment of debt	(120,856		)	(111,161		)
Repayment of capital lease obligation	(4,925		)	(5,489		)
Payment of earn-out related to previous acquisitions	(461		)	—
Proceeds from issuance of common stock	341			137,605
Taxes paid related to net share settlements of share-based compensation awards	(936		)	(7,368		)
Stock repurchases	—			(230		)
Cash paid for interest rate cap	(2,235		)	—
Distribution to non‑controlling interest	(600		)	(1,550		)
Net cash (used in) provided by financing activities	(4,009		)	16,015
Effect of exchange rate changes on cash	(293		)	268
Change in cash and cash equivalents	(15,615		)	16,488
Cash and cash equivalents
Beginning of period	82,365			59,254
End of period	$	66,750		$	75,742

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Supplemental Disclosure of Cash Flow Information

(In thousands)



	Six Months Ended March 31,
	2019		2018
Supplemental disclosure of cash flow information
Cash paid for taxes	$	4,585	$	2,077
Cash paid for interest	$	26,180	$	20,503
Non‑cash investing and financing activities
Accrued earn-out related to acquisitions	$	—	$	461
Capital lease transactions	$	8,296	$	3,948

See accompanying notes to these Unaudited Consolidated Financial Statements

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 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.

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. If the costs of certain components of an item of property, plant, and equipment are significant in relation to the total cost of the item, they are accounted for and depreciated separately. 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.

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 our 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. Our 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 $186 and $248 of premium amortization to interest expense during the three and six months ended March 31, 2019, respectively.

Amortization of debt issuance costs and discounts included in interest expense were $489 and $606 for the three months ended March 31, 2019 and 2018, respectively and $983 and $1,151 for the six months ended March 31, 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 goods 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 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 other comprehensive income/loss within shareholders’ equity. Revenues and expenses are translated at the weighted‑average exchange rate for the period, with the resulting translation adjustments recorded in the Unaudited Consolidated Statements of Operations.

Foreign currency translation losses (gains) which aggregated $593 and $(2,305) for the three months ended March 31, 2019 and 2018, respectively and $5,408 and $(3,688) for the six months ended March 31, 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 $3,957 and $4,021 for the three months ended March 31, 2019 and 2018, respectively and $8,103 and $8,674 for the six months ended March 31, 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.

The following provides a summary of TWO’s balance sheet as of March 31, 2019 and September 30, 2018, and summarized financial information for the three and six months ended March 31, 2019 and 2018.



	March 31, 2019			September 30, 2018
Current assets (includes cash of $4,557 and $3,304)	$	5,300		$	5,486
Property, plant and equipment	4,648			4,441
Goodwill	2,206			2,206
Other non-current assets	3			3
Total liabilities	(3,567		)	(3,608		)



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Total revenues	$	3,222		$	3,577		$	6,378		$	9,566
Total operating expenses	(2,806		)	(2,622		)	(5,036		)	(7,196		)
Income from operations	$	416		$	955		$	1,342		$	2,370

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.

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 is working through its initial data and policy gap reviews and is continuing to assess the impact adoption of this guidance will have on the Company’s Unaudited Consolidated Financial Statements.

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 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. During the six months ended March 31, 2019, the Company did not complete any new acquisitions.

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 lower Revenue from product sales and services and Cost of product sales and services of $1,088 and $349, respectively, for the three months ended March 31, 2019 and lower Revenue from product sales and services and Cost of product sales and services of $894 and $277, respectively, for the six months ended March 31, 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 March 31, 2019 was higher Inventories, net of $894 as compared to what this amount would have been under the previous guidance. Also, $277 of contract assets were recognized on the consolidated balance sheet at March 31, 2019 related to this over-time revenue recognition.

Revenue Recognition

The Company recognizes sales of goods 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 six months ended March 31, 2019 was insignificant.

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 $240 and $1,267 were not recognized during the three and six months ended March 31, 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 $169,000 at March 31, 2019. This backlog represents the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that the majority of these performance obligations will be satisfied within the next twelve months.

The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of sales commissions. The Company’s costs incurred to obtain or fulfill a contract with a customer are classified as non-current assets and amortized to expense over the period of benefit of the related revenue. These costs are recorded within Cost of product sales and services. The amount of contract costs was insignificant at March 31, 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 an 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, 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 March 31, 2019		Six Months Ended March 31, 2019
Revenue from contracts with customers recognized under Topic 606	$	316,098	$	609,102
Other (1)	32,530		62,528
Total	$	348,628	$	671,630


(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 March 31, 2019						Six Months Ended March 31, 2019
	Integrated Solutions and Services		Applied Product Technologies		Total		Integrated Solutions and Services		Applied Product Technologies		Total
Revenue from capital projects	$	57,631	$	76,271	$	133,902	$	100,640	$	147,497	$	248,137
Revenue from aftermarket	32,474		40,492		72,966		63,270		75,549		138,819
Revenue from service	136,759		5,001		141,760		273,452		11,222		284,674
Total	$	226,864	$	121,764	$	348,628	$	437,362	$	234,268	$	671,630

Information regarding revenues disaggregated by geographic area is as follows:



	Three Months Ended March 31, 2019		Six Months Ended March 31, 2019
United States	$	280,468	$	539,186
Canada	17,660		37,963
Europe	23,141		44,558
Asia	20,496		39,404
Australia	6,863		10,519
Total	$	348,628	$	671,630

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	148,103
Reclassified to accounts receivable	(139,848		)
Foreign currency	14
Balance at March 31, 2019	$	71,310


(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	135,532
Amounts in beginning balance reclassified to revenue	(21,161		)
Current period amounts reclassified to revenue	(108,599		)
Foreign currency	(129		)
Balance at March 31, 2019	$	25,068

5. Fair Value Measurements

As of March 31, 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.

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 March 31, 2019
Assets:
Pension plan
Cash	$	—	$	15,332	$	—		$	—
Government Securities	2,801		—		—			—
Liability Driven Investment	3,243		—		—			—
Guernsey Unit Trust	984		—		—			—
Global Absolute Return	2,031		—		—			—
Deferred compensation plan assets
Trust Assets	—		45		—			—
Insurance	—		—		18,135			—
Interest rate cap	—		—		134			—
Foreign currency forward contracts	—		—		126			—
Liabilities:
Pension plan	—		—		(34,443		)	—
Deferred compensation plan liabilities	—		—		(20,535		)	—
Long‑term debt	—		—		(946,824		)	—
Foreign currency forward contracts	—		—		(162		)	—
Earn-outs related to acquisitions	—		—		—			(2,060		)

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		)

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 March 31, 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 March 31, 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	6			—			6
Balance at March 31, 2019	$	(914	)	$	(1,146	)	$	(2,060	)


(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:



	March 31, 2019			September 30, 2018
Accounts receivable	$	236,711		$	258,955
Allowance for doubtful accounts	(4,387		)	(4,199		)
Receivables, net	$	232,324		$	254,756

7. Inventories

The major classes of Inventories, net are as follows:



	March 31, 2019			September 30, 2018
Raw materials and supplies	$	73,870		$	69,176
Work in progress	18,461			19,461
Finished goods and products held for resale	65,698			53,786
Costs of unbilled projects	8,319			1,878
Reserves for excess and obsolete	(10,485		)	(9,313		)
Inventories, net	$	155,863		$	134,988

8. Property, Plant, and Equipment

Property, plant, and equipment consists of the following:



	March 31, 2019			September 30, 2018
Machinery and equipment	$	441,617		$	399,619
Land and buildings	74,628			76,459
Construction in process	63,891			60,803
	580,136			536,881
Less: accumulated depreciation	(247,113		)	(216,858		)
	$	333,023		$	320,023

Depreciation expense and maintenance and repairs expense for the three and six months ended March 31, 2019 and 2018 were as follows:



	Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2019		2018
Depreciation expense	$	16,146	$	13,980	$	31,355	$	27,987
Maintenance and repair expense	5,891		5,567		12,048		11,382

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
Measurement period adjustment	(1,937		)	63			(1,874		)
Foreign currency translation	(1,463		)	(437		)	(1,900		)
Balance at March 31, 2019	$	220,970		$	186,602		$	407,572

As of March 31, 2019 and September 30, 2018, $150,191 and $147,861, respectively, of goodwill was deductible for tax purposes.

10. Debt

Long‑term debt consists of the following:



	March 31, 2019			September 30, 2018
First Lien Term Facility, due December 20, 2024	$	933,492		$	938,230
Revolving Credit Facility	—			—
Equipment Financing	21,500			11,588
Notes Payable, due August 31, 2019 to July 31, 2023	1,844			2,106
Mortgage, due June 30, 2028	1,729			1,835
Total debt	958,565			953,759
Less unamortized discount and lender fees	(13,146		)	(14,129		)
Total net debt	945,419			939,630
Less current portion	(12,303		)	(11,555		)
Total long‑term debt	$	933,116		$	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 March 31, 2019, the interest rate on borrowings was 5.49%, comprised of 2.49% 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 $13,146 and $14,129, net of amortization, as of March 31, 2019 and September 30, 2018, respectively. These fees were included as a contra liability to debt on the Consolidated Balance Sheets.

The Company had borrowing availability under the Revolver of $125,000 at March 31, 2019 and September 30, 2018, reduced for outstanding letter of credit guarantees. Such letter of credit guarantees are subject to a $45,000 sublimit within the Revolver. The Company’s outstanding letter of credit guarantees under this agreement aggregated approximately

$14,541 and $11,777 at March 31, 2019 and September 30, 2018, respectively. The Company had no outstanding revolver borrowings as of March 31, 2019 and September 30, 2018, and unused amounts, defined as total revolver capacity less outstanding letters of credit and revolver borrowings, of $110,459 and $113,223, respectively. At March 31, 2019 and September 30, 2018, the Company had additional letters of credit of $241 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 six months ended March 31, 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 March 31, 2019 and September 30, 2018, the Company had equipment financings in an aggregate outstanding amount of $21,500 and $11,588, with interest rates ranging from 5.08% to 6.55%, and due dates ranging from June 30, 2024 to March 29, 2026.

Notes Payable

As of March 31, 2019 and September 30, 2018, the Company had notes payable in an aggregate outstanding amount of $1,844 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 ($1,796) 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 $1,729 and $1,835 principal outstanding under this facility at March 31, 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 March 31, 2019, are presented below:



Fiscal Year
Remainder of 2019	$	6,176
2020	12,280
2021	12,390
2022	12,507
2023	12,365
Thereafter	902,847
Total	$	958,565

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 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 $1,987 at March 31, 2019, of which $745 is included in Prepaid and other current assets and the remaining $1,242 is included in Other non‑current assets. The Company recorded $186 and $248 of premium amortization to interest expense during the three and six months ended March 31, 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 March 31, 2019, the notional amount of the forward contracts held to sell foreign currencies was $19,485.

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 six months ended March 31, 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	March 31, 2019	September 30, 2018
Interest rate cap	Prepaid and other current assets	134	—
Foreign currency forward contracts	Prepaid and other current assets	63	282



		Liability Derivative
	Balance Sheet Location	March 31, 2019		September 30, 2018
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	162	$	67

The following represents the amount of (loss) gain recognized in AOCI (net of tax) during the periods presented:



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Interest rate cap	$	(646	)	$	—		$	134		$	—
Foreign currency forward contracts	20			(182		)	(314		)	3

Based on the fair value amounts of the Company’s cash flow hedges at March 31, 2019, the Company expects that approximately $126 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	March 31, 2019		September 30, 2018
Foreign currency forward contracts	Prepaid and other current assets	$	63	$	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
	Six Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Balance at beginning of the period	$	8,907		$	11,164		$	3,360		$	6,110
Warranty provision for sales	3,218			2,116			954			270
Settlement of warranty claims	(3,304		)	(4,965		)	(241		)	(2,594		)
Foreign currency translation and other	(21		)	431			(71		)	4
Balance at end of the period	$	8,800		$	8,746		$	4,002		$	3,790

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:



	Six Months Ended March 31,
	2019		2018
Balance at beginning of the period	$	710	$	3,542
Restructuring charges related to two-segment realignment	7,046		—
Restructuring charges related to other initiatives	1,111		6,284
Write off charge and other non‑cash activity	(449)		(308)
Cash payments	(5,997)		(9,095)
Other adjustments	(72)		28
Balance at end of the period	$	2,349	$	451

The balances for accrued restructuring liabilities at March 31, 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 March 31, 2019 during the second half of 2019.

The table below sets forth the location of amounts recorded above on the Unaudited Consolidated Statements of Operations:



	Six Months Ended March 31,
	2019		2018
Cost of product sales and services	$	3,316	$	1,936
General and administrative expense	4,083		3,113
Sales and marketing expense	648		733
Research and development expense	110		502
	$	8,157	$	6,284

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.

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 March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Service cost	$	217		$	243		$	434		$	475
Interest cost	120			123			239			241
Expected return on plan assets	(30		)	(32		)	(60		)	(63		)
Amortization of actuarial losses	97			79			193			155
Pension expense for defined benefit plans	$	404		$	413		$	806		$	808

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

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 48.8% and 13.0% as of the six months ended March 31, 2019 and 2018, respectively. For the six months ended March 31, 2019, the PAETR of 48.8% 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. Though the Company reported positive earnings for the first time in 2017, 2018 and is projecting earnings in 2019, 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 March 31, 2019, the Company recognized an income tax benefit of $4,579 on a pretax loss of $3,006. The rate of 152.3% 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, as well as the impact of deferred tax liabilities related to indefinite lived intangibles. Discrete items during the period were not material.

For the three months ended March 31, 2018, the Company recognized income tax expense of $2,018 on pretax income of $14,998. The rate of 13.5% differed from the U.S. blended statutory rate of 24.5% primarily due to higher projected income in the U.S. for which no tax expense will be realized and the impact of deferred tax liabilities related to indefinite lived intangibles.

For the six months ended March 31, 2019, the Company recognized an income tax benefit of $9,093 on a pretax loss of $23,808. The rate of 38.2% differed from the statutory rate of 21.0% principally due to 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 six months ended March 31, 2018, the Company recognized an income tax benefit of $2,393 on pretax income of $7,582. The rate of 31.6% differed from the U.S. blended statutory rate of 24.5% primarily driven by a discrete benefit of $3,641 related 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%.

There are no amounts of unrecognized tax benefits recorded for the six months ended March 31, 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 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 March 31, 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 March 31, 2019, there were approximately 1,904 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 $4,764 and $9,323 during the three and six months ended March 31, 2019, respectively, of which $4,745 and $9,270 was non-cash. Share-based compensation expense was $4,250 and $6,862 during the three and six months ended March 31, 2018, respectively. The unrecognized compensation expense related to stock options and restricted stock units was $11,594 and $17,646, respectively at March 31, 2019, and is expected to be recognized over a weighted average period of 2.9 years and 1.6 years, respectively. The Company received $341 from the exercise of stock options during the six months ended March 31, 2019. The remaining stock options exercised during the six months ended March 31, 2019 were effected via a cashless net exercise.

A summary of the stock option activity as of March 31, 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	1,101		12.74
Exercised	(659	)	5.40
Cancelled	(9	)	20.88
Forfeited	(421	)	12.91
Expired	—		—
Outstanding at March 31, 2019	8,985		$	8.15	6.8 years	$	49,875
Options exercisable at March 31, 2019	6,352		$	5.66	5.8 years	$	46,378
Options vested and expected to vest at March 31, 2019	8,857		$	8.07	6.7 years	$	49,847

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 six months ended March 31, 2019 was $2,923.

A summary of the status of the Company's non-vested stock options as of and for the six months ended March 31, 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	1,101		3.87
Vested	(1,384	)	4.28
Forfeited	(421	)	5.80
Nonvested at end of period	2,631		$	4.80

The total fair value of options vested during the six months ended March 31, 2019, was $3,699.

Restricted Stock Units

The following is a summary of the RSU activity for the six months ended March 31, 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	871		12.68
Vested	(24	)	20.54
Forfeited	(6	)	17.26
Outstanding at March 31, 2019	2,054		$	17.42
Vested and expected to vest at March 31, 2019	1,929		$	17.55

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 three and six months ended March 31, 2019, the Company incurred compensation expense of $138 and $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 March 31, 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 six months ended March 31, 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 six months ended March 31, 2019 and only paid $333 during the three and six months ended March 31, 2018. In addition, the Company reimbursed AEA for normal and customary expenses incurred by AEA on behalf of the Company. The Company

incurred expenses, excluding advisory fees, of $9 and $43 in the six months ended March 31, 2019 and 2018, respectively. The Company owed no amounts to AEA at March 31, 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 $520 and $289 during the three months ended March 31, 2019 and 2018, respectively, and $1,353 and $585 during the six months ended March 31, 2019 and 2018, respectively, and was owed $1,460 and $3,139 from this customer at March 31, 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 $5,354 and $4,817 for the three months ended March 31, 2019 and 2018, respectively, and $10,916 and $9,754 for the six months ended March 31, 2019 and 2018, respectively.

Future minimum aggregate rental payments under non-cancelable operating leases are as follows:



Fiscal Year
Remainder of 2019	$	8,558
2020	14,182
2021	11,036
2022	7,575
2023	5,500
Thereafter	11,361
Total	$	58,212

Capital Leases

The gross and net carrying values of the equipment under capital leases as of March 31, 2019 and September 30, 2018 was as follows:



	March 31, 2019		September 30, 2018
Gross carrying amount	$	60,813	$	52,314
Net carrying amount	33,893		31,116

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 March 31, 2019.



Fiscal Year
Remainder of 2019	$	7,409
2020	11,762
2021	8,451
2022	5,859
2023	3,592
Thereafter	3,949
Total	41,022
Less amount representing interest (at rates ranging from 1.71% to 9.71%)	6,495
Present value of net minimum capital lease payments	34,527
Less current installments of obligations under capital leases	12,977
Obligations under capital leases, excluding current installments	$	21,550

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 March 31, 2019, future minimum lease payments receivable under operating leases are as follows:



Fiscal year
Remainder of 2019	$	3,066
2020	7,557
2021	5,547
2022	5,395
2023	4,410
Thereafter	58,945
Future minimum lease payments	$	84,920

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 March 31, 2019 and September 30, 2018 the Company had letters of credit totaling $14,541 and $11,777, respectively, and surety bonds totaling $133,555 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 March 31, 2019 was March 26, 2029. Additionally, as of March 31, 2019 and September 30, 2018, the Company had letters of credit totaling $0 and $857, respectively, and surety bonds totaling $2,429 and $2,469, respectively, outstanding under the Company’s prior arrangement with Siemens.

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:



	March 31, 2019		September 30, 2018
Salaries, wages and other benefits	$	30,950	$	34,688
Obligation under capital leases	12,977		12,236
Third party commissions	10,019		5,097
Taxes, other than income	5,194		11,561
Insurance liabilities	3,751		5,005
Severance payments	2,349		710
Provisions for litigation	1,880		1,137
Earn-outs related to acquisitions	914		770
Other	26,625		26,468
	$	94,659	$	97,672

21. Business Segments

The Company’s 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 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 operating segments for financial reporting purposes. Through the fiscal year ended September 30, 2018, the Company reported in three 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 operating segments.

As a result of this assessment, the Company now has two reportable 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), municipal services, including odor and corrosion control services and full-scale outsourcing of operations and maintenance.

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.



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Total sales
Integrated Solutions and Services	$	228,939		$	207,215		$	441,216		$	402,265
Applied Product Technologies	148,136			148,470			278,670			272,554
Total sales	377,075			355,685			719,886			674,819
Intersegment sales
Integrated Solutions and Services	2,075			2,740			3,854			5,884
Applied Product Technologies	26,372			19,255			44,402			38,195
Total intersegment sales	28,447			21,995			48,256			44,079
Sales to external customers
Integrated Solutions and Services	226,864			204,475			437,362			396,381
Applied Product Technologies	121,764			129,215			234,268			234,359
Total sales	348,628			333,690			671,630			630,740
Earnings before interest, taxes, depreciation and amortization (EBITDA)
Integrated Solutions and Services	51,325			46,126			93,209			91,312
Applied Product Technologies	15,779			28,082			24,630			40,131
Corporate	(31,474		)	(27,920		)	(65,478		)	(55,445		)
Total EBITDA	35,630			46,288			52,361			75,998
Depreciation and amortization
Integrated Solutions and Services	14,314			11,479			28,272			22,622
Applied Product Technologies	4,458			3,999			8,792			7,894
Corporate	5,390			5,002			10,188			9,847
Total depreciation and amortization	24,162			20,480			47,252			40,363
Operating profit (loss)
Integrated Solutions and Services	37,011			34,647			64,937			68,690
Applied Product Technologies	11,321			24,083			15,838			32,237
Corporate	(36,864		)	(32,922		)	(75,666		)	(65,292		)
Total operating profit	11,468			25,808			5,109			35,635
Interest expense	(14,474		)	(10,810		)	(28,917		)	(28,053		)
(Loss) income before income taxes	(3,006		)	14,998			(23,808		)	7,582
Income tax benefit (expense)	4,579			(2,018		)	9,093			2,393
Net income (loss)	$	1,573		$	12,980		$	(14,715	)	$	9,975
Capital expenditures
Integrated Solutions and Services	$	19,972		$	12,359		$	33,657		$	21,923
Applied Product Technologies	2,060			1,562			4,268			3,875
Corporate	1,081			2,492			2,757			5,872
Total capital expenditures	$	23,113		$	16,413		$	40,682		$	31,670



	March 31, 2019		September 30, 2018
Assets
Integrated Solutions and Services	$	721,000	$	711,622
Applied Product Technologies	664,381		677,993
Corporate	274,793		274,002
Total assets	$	1,660,174	$	1,663,617
Goodwill
Integrated Solutions and Services	$	220,970	$	224,370
Applied Product Technologies	186,602		186,976
Total goodwill	$	407,572	$	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 March 31,				Six Months Ended March 31,
	2019		2018		2019			2018
Numerator:
Numerator for basic and diluted loss per common share—Net income (loss) attributable to Evoqua Water Technologies Corp.	$	1,384	$	12,503	$	(15,346	)	$	8,790
Denominator:
Denominator for basic net income (loss) per common share—weighted average shares	114,525		113,770		114,525			113,770
Effect of dilutive securities:
Share‑based compensation	4,188		5,445		—			5,773
Denominator for diluted net income (loss) per common share—adjusted weighted average shares	118,713		119,215		114,525			119,543
Basic earnings (loss) attributable to Evoqua Water Technologies Corp. per common share	$	0.01	$	0.11	$	(0.13	)	$	0.08
Diluted earnings (loss) attributable to Evoqua Water Technologies Corp. per common share	$	0.01	$	0.10	$	(0.13	)	$	0.07

Since the Company was in a net loss position for the six months ended March 31, 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, 4,185 common share equivalents, comprised of employee stock options, have been excluded from the diluted EPS calculation for the six months ended March 31, 2019.

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 March 31, 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 segments that each draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes and corporate philosophies. Our reportable segments consist of: (i) our Integrated Solutions and Services and (ii) our Applied Product Technologies. The key factors used to identify these reportable 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.

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 twelve 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 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, further optimizing our engineering cost structure, 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 twelve 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.

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 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.

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

You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Adjusted EBITDA, you should be aware that in the future, we may incur expenses similar to the adjustments in the presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or non‑recurring items. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

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



	Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018
Net income (loss)	$	1.6		$	13.0		$	(14.7	)	$	10.0
Income tax (benefit) expense	(4.6		)	2.0			(9.1		)	(2.4		)
Interest expense	14.5			10.8			28.9			28.0
Operating profit	11.5			25.8			5.1			35.6
Depreciation and amortization	24.2			20.5			47.3			40.4
EBITDA	35.7			46.3			52.4			76.0
Restructuring and related business transformation costs (a)	8.3			8.2			14.0			16.3
Share-based compensation (b)	4.7			4.3			9.3			6.9
Sponsor fees (c)	—			—			—			0.3
Transaction costs (d)	2.4			0.8			4.5			1.4
Other losses (gains) and expenses (e)	5.6			(1.9		)	14.9			(3.2		)
Adjusted EBITDA	$	56.7		$	57.7		$	95.1		$	97.7


(a)	Represents:

(i)

costs and expenses in connection with various restructuring initiatives since our acquisition, through our wholly-owned entities, EWT Holdings II Corp. and EWT Holdings III Corp., of all of the outstanding shares of Siemens Water Technologies, a group of legal entity businesses formerly owned by Siemens Aktiengesellschaft, on January 15, 2014 (the “AEA Acquisition”), including severance costs, relocation costs, recruiting expenses, write‑offs of inventory and fixed assets and third‑party consultant costs to assist with these initiatives. This includes:

(A)

$0.3 million for the six months ended March 31, 2018, (all of which is reflected as a component of Restructuring charges in Note 13, “Restructuring and Related Charges” to our Unaudited Consolidated Financial Statements included in this Report (the “Restructuring Footnote”)) related to our voluntary separation plan pursuant to which approximately 220 employees accepted separation packages;

(B)

$0.2 million and $0.7 million for the three and six months ended March 31, 2019, respectively, reflected as components of Cost of product sales and services (“Cost of sales”) ($0.2 million and $0.5 million for the three and six month periods, respectively) and G&A expense ($0.2 million for the six month period) (all of which is reflected in the Restructuring Footnote); and $1.9 million and $5.4 million for the three and six months ended March 31, 2018, respectively, reflected as components of Cost of sales ($0.3 million and $1.6 million for the three and six month periods, respectively), R&D expense ($0.2 million and $0.5 million for the three and six month periods, respectively), S&M expense ($0.2 million and $0.5 million for the three and six month periods, respectively) and G&A expense ($1.2 million and $2.8 million for the three and six month periods, respectively) (all of which is reflected in the Restructuring Footnote) related to various other initiatives implemented to restructure and reorganize our business with the appropriate management team and cost structure); and

(C)

$5.1 million and $7.0 million for the three and six months ended March 31, 2019, respectively, (all of which is reflected in the Restructuring Footnote), reflected as components of Cost of sales ($2.5 million and $2.7 million for the three and six month periods, respectively), S&M expense ($0.4 million and $0.6 million for the three and six month periods, respectively) and G&A expense ($2.1 million and $3.6 million for the three and six month periods, respectively) related to the Company’s transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide;

(ii)

legal settlement costs and intellectual property related fees associated with legacy matters prior to the AEA Acquisition, including fees and settlement costs related to product warranty litigation on MEMCOR® products and certain discontinued products ($0.2 million and $0.6 million for the three and six months ended March 31, 2019, respectively, reflected as components of Cost of sales ($0.1 million for the six month period) and G&A expense ($0.2 million and $0.5 million for the three and six month periods, respectively); and $0.9 million and $1.0 million for the three and six months ended March 31, 2018, respectively, reflected as components of Cost of sales ($0.3 million and $0.4 million for the three and six month periods, respectively) and G&A expense ($0.6 million for each of the three and six month periods);

(iii)

expenses associated with our information technology and functional infrastructure transformation, including activities to optimize information technology systems and functional infrastructure processes ($2.3 million and $5.1 million for the three and six months ended March 31, 2019, respectively, primarily reflected as components of Cost of sales ($0.1 million for the six month period) and G&A expense ($2.3 million and $5.0 million for the three and six month periods, respectively); and $3.4 million and $4.7 million in the three and six months ended March 31, 2018, respectively, primarily reflected as components of Cost of sales ($1.2 million and $2.2 million for the three and six month periods, respectively), S&M expense ($0.1 million for each of the three and six month periods) and G&A expense ($2.1 million and $2.4 million for the three and six month periods, respectively)); and

(iv)

costs associated with our IPO and secondary offering as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs, ($0.4 million and $0.5 million for the three and six months ended March 31, 2019, respectively, all reflected as a component of G&A expense; and $2.0 million and $5.0 million for the three and six months ended March 31, 2018, respectively, all reflected as a component of G&A expense).


(b)	Represents non‑cash share‑based compensation expenses related to equity awards. See “Note 16. Share-Based Compensation” to our Unaudited Consolidated Financial Statements included in this Report for further detail.

(c)

Represents management fees paid to AEA pursuant to the management agreement. Pursuant to the management agreement, AEA provided advisory and consulting services to us in connection with the AEA Acquisition, including investment banking, due diligence, financial advisory and valuation services. AEA also provided ongoing advisory and consulting services to us pursuant to the management agreement. In connection with the IPO, the management agreement was terminated. See “Note 18. Related-Party Transactions” to our Unaudited Consolidated Financial Statements included in this Report for further detail.

(d)

Represents expenses associated with acquisition and divestiture related activities and post‑acquisition integration costs and accounting, tax, consulting, legal and other fees and expenses associated with acquisition transactions ($2.4 million and $4.5 million in the three and six months ended March 31, 2019, primarily reflected as components of Cost of sales ($1.1 million and $1.3 million for the three and six month periods, respectively) and G&A expense ($1.3 million and $3.2 million for the three and six month periods, respectively) and $0.8 million and $1.4 million in the three and six months ended March 31, 2018, respectively, primarily reflected as components of G&A expense).


(e)	Represents:


(i)	impact of foreign exchange gains and losses ($0.3 million loss and $5.0 million loss in the three and six months ended March 31, 2019, respectively, and $2.1 million gain and $3.7 million gain in the three and six months ended March 31, 2018, respectively);


(ii)	foreign exchange impact related to headquarter allocations ($0.2 million gain for the three and six months ended March 31, 2018, respectively);


(iii)	expenses on disposal related to maintaining non-operational business locations ($0.1 million and $0.6 million in the three and six months ended March 31, 2019, respectively and $0.5 million and $0.7 million in the three and six months ended March 31, 2018, respectively);


(iv)	expenses incurred by the Company related to the remediation of manufacturing defects caused by a third party vendor for which the Company is seeking restitution ($0.3 million and $1.3 million for the three and six months ended March 31, 2019, respectively, all reflected as a component of Cost of sales);


(v)	charges incurred by the Company related to product rationalization in its electro-chlorination business ($0.1 million expense reduction and $3.0 million expense for the three and six months ended March 31, 2019, respectively, all reflected as a component of Cost of sales); and


(vi)	expenses incurred by the Company related to the write-off of inventory in its aquatics business associated with product rationalization and facility consolidation ($5.1 million for the three and six months ended March 31, 2019, all reflected as a component of Cost of sales).

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated:



	Three Months Ended March 31,												Six Months Ended March 31,
	2019					2018							2019					2018
(In millions, except per share amounts)				% of Revenue					% of Revenue		% Variance					% of Revenue					% of Revenue		% Variance
Revenue	$	348.6		100.0	%	$	333.7		100.0	%	4.5	%	$	671.6		100.0	%	$	630.7		100.0	%	6.5	%
Cost of product sales and services	(253.0		)	(72.6	)%	(225.7		)	(67.6	)%	12.1	%	(487.3		)	(72.6	)%	(434.3		)	(68.9	)%	12.2	%
Gross Profit	95.6			27.4	%	108.0			32.4	%	(11.5	)%	184.3			27.4	%	196.4			31.1	%	(6.2	)%
General and administrative expense	(48.2		)	(13.8	)%	(44.8		)	(13.4	)%	7.6	%	(103.0		)	(15.3	)%	(83.8		)	(13.3	)%	22.9	%
Sales and marketing expense	(35.4		)	(10.2	)%	(34.3		)	(10.3	)%	3.2	%	(71.6		)	(10.7	)%	(68.6		)	(10.9	)%	4.4	%
Research and development expense	(4.0		)	(1.1	)%	(4.0		)	(1.2	)%	—	%	(8.1		)	(1.2	)%	(8.7		)	(1.4	)%	(6.9	)%
Other operating income (expense), net	3.5			1.0	%	0.9			0.3	%	288.9	%	3.5			0.5	%	0.3			—	%	1,066.7	%
Interest expense	(14.5		)	(4.2	)%	(10.8		)	(3.2	)%	34.3	%	(28.9		)	(4.3	)%	(28.0		)	(4.4	)%	3.2	%
(Loss) income before income taxes	(3.0		)	(0.9	)%	15.0			4.5	%	(120.0	)%	(23.8		)	(3.5	)%	7.6			1.2	%	(413.2	)%
Income tax benefit (expense)	4.6			1.3	%	(2.0		)	(0.6	)%	330.0	%	9.1			1.4	%	2.4			0.4	%	279.2	%
Net income (loss)	1.6			0.5	%	13.0			3.9	%	(87.7	)%	(14.7		)	(2.2	)%	10.0			1.6	%	(247.0	)%
Net income attributable to non‑controlling interest	0.2			0.1	%	0.5			0.1	%	(60.0	)%	0.6			0.1	%	1.2			0.2	%	(50.0	)%
Net income (loss) attributable to Evoqua Water Technologies Corp.	$	1.4		0.4	%	$	12.5		3.7	%	(88.8	)%	$	(15.3	)	(2.3	)%	$	8.8		1.4	%	(273.9	)%

Weighted average shares outstanding
Basic	114.5					113.8							114.5					113.8
Diluted	118.7					119.2							114.5					119.5
Earnings (loss) Earnings per share
Basic	$	0.01				$	0.11						$	(0.13	)			$	0.08
Diluted	$	0.01				$	0.10						$	(0.13	)			$	0.07

Other financial data:
Adjusted EBITDA(1)	$	56.7		16.3	%	$	57.7		17.3	%	(1.7	)%	$	95.1		14.2	%	$	97.7		15.5	%	(2.7	)%


(1)	For the definition of Adjusted EBITDA and a reconciliation to net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.”

Consolidated Results

Revenues-Revenues increased $14.9 million, or 4.5%, to $348.6 million in the three months ended March 31, 2019 from $333.7 million in the three months ended March 31, 2018. Revenues increased $40.9 million, or 6.5%, to $671.6 million in the six months ended March 31, 2019 from $630.7 million in the six months ended March 31, 2018.

The following table provides the change in revenues from product sales and revenues from services, respectively:



	Three Months Ended March 31,										Six Months Ended March 31,
	2019				2018				% Variance		2019				2018				% Variance
			% of Revenue				% of Revenue						% of Revenue				% of Revenue
Revenue from product sales	$	206.8	59.3	%	$	204.4	61.3	%	1.2	%	$	386.9	57.6	%	$	371.5	58.9	%	4.1	%
Revenue from services	141.8		40.7	%	129.3		38.7	%	9.7	%	284.7		42.4	%	259.2		41.1	%	9.8	%
	$	348.6	100.0	%	$	333.7	100.0	%	4.5	%	$	671.6	100.0	%	$	630.7	100.0	%	6.5	%

Revenues from product sales had a slight increase of $2.4 million, or 1.2%, to $206.8 million in the three months ended March 31, 2019 from $204.4 million in the three months ended March 31, 2018.

Revenues from product sales increased $15.4 million, or 4.1%, to $386.9 million in the six months ended March 31, 2019 from $371.5 million in the six months ended March 31, 2018. The increase was primarily due to the growth in aftermarket product revenues of $26.7 million, which were offset by a decline in capital revenue of $11.2 million.

Revenues from services increased $12.5 million, or 9.7%, to $141.8 million in the three months ended March 31, 2019 from $129.3 million in the three months ended March 31, 2018. The main driver of this increase was $10.5 million recognized from the Pure Water, ProAct and Isotope acquisitions.

Revenues from services increased $25.5 million, or 9.8%, to $284.7 million in the six months ended March 31, 2019 from $259.2 million in the six months ended March 31, 2018. The main driver of this increase was $23.4 million recognized from the Pure Water, ProAct and Isotope acquisitions.

Cost of Sales and Gross Margin-Total gross margin decreased to 27.4% in the three months ended March 31, 2019 from 32.4% in the three months ended March 31, 2018. Total gross margin decreased to 27.4% in the six months ended March 31, 2019 from 31.1% in the six months ended March 31, 2018.

The following table provides the change in cost of product sales and cost of services, respectively, along with related gross margins:



	Three Months Ended March 31,										Six Months Ended March 31,
	2019					2018					2019					2018
				Gross Margin %					Gross Margin %					Gross Margin %					Gross Margin %
Cost of product sales	$	(153.9	)	25.6	%	$	(133.8	)	34.5	%	$	(290.5	)	24.9	%	$	(249.6	)	32.8	%
Cost of services	(99.1		)	30.1	%	(91.9		)	28.9	%	(196.8		)	30.9	%	(184.7		)	28.7	%
	$	(253.0	)	27.4	%	$	(225.7	)	32.4	%	$	(487.3	)	27.4	%	$	(434.3	)	31.1	%

Gross margin from product sales decreased by 8.9% to 25.6% in the three months ended March 31, 2019 from 34.5% in the three months ended March 31, 2018. The decrease in gross margin was primarily driven by $5.1 million charge related to the write-off of inventory in the aquatics business associated with product rationalization and facility consolidation.

Gross margin from product sales decreased by 7.9% to 24.9% in the six months ended March 31, 2019 from 32.8% in the six months ended March 31, 2018. The decrease in gross margin was primarily driven by the $4.3 million of costs

incurred as a result of product rationalization in our electro-chlorination business and the remediation of manufacturing defects caused by a third party vendor, in addition to the $5.1 million charge mentioned above.

Gross margin from services increased slightly by approximately 1.2% to 30.1% in the three months ended March 31, 2019 from 28.9% in the three months ended March 31, 2018. Gross margin saw an increase of approximately 2.2% to 30.9% from 28.7% during the six months ended in the same periods. These increases are due to price realizations recognized in revenue.

Operating Expenses-Operating expenses increased $4.5 million, or 5.4%, to $87.6 million in the three months ended March 31, 2019 from $83.1 million in the three months ended March 31, 2018. Included in the three months ended March 31, 2019 was a loss from unfavorable foreign currency translation of $0.4 million, whereas included in the three months ended March 31, 2018 amount was a gain from favorable foreign currency translation of $1.5 million. This change in foreign currency resulted in an increase in operating expenses of $1.9 million. Additionally, the Company incurred increased expenses of $5.1 million associated with the acquisitions of Pure Water, Pacific Ozone, ProAct and Isotope, and another $1.7 million in higher employee related costs. The increased spending in the prior period of Property, plant and equipment resulted in an increase of depreciation expense of $0.6 million.

Operating expenses increased $21.6 million, or 13.4%, to $182.7 million in the six months ended March 31, 2019 from $161.1 million in the six months ended March 31, 2018. Included in the six months ended March 31, 2019 was a loss from unfavorable foreign currency translation of $5.0 million, whereas included in the three months ended March 31, 2018 amount was a gain from favorable foreign currency translation of $3.2 million. This change in foreign currency translation resulted in an increase in operating expenses of $8.2 million. Additionally, the Company incurred increased expenses of $10.2 million associated with the acquisitions of Pure Water, Pacific Ozone, ProAct and Isotope, and another $3.0 million in higher employee related costs. The increased spending on Property, plant and equipment in the prior period resulted in an increase of depreciation expense of $1.0 million. An additional $1.1 million increase was due to a change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in an increase to the fair valued amount of the earn-out recorded upon the acquisitions. These increases were partially offset by a continued reduction in research and development spending of $0.6 million.

A discussion of operating expenses by category is as follows:

Research and Development Expense - Research and development expenses remained flat during the three months ended March 31, 2019 as compared to March 31, 2018, and had a slight decrease during the six months ended of the same periods due to the Company’s continued efforts to reduce spending.

Sales and Marketing Expense - Sales and marketing expenses had an increase of $1.1 million and $3.0 million in the three and six month periods, respectively, mainly due the ProAct acquisition made in the prior year.

General and Administrative Expense - General and administrative expenses increased $3.4 million, or 7.6%, to $48.2 million in the three months ended March 31, 2019 from $44.8 million in the three months ended March 31, 2018. This increase in general and administrative expenses was primarily due to unfavorable foreign currency translation on the intercompany loans of $1.9 million, as described above, in addition to an increase of $2.3 million from the Pure Water, Pacific Ozone, ProAct and Isotope acquisitions. The remaining increase is due to $0.3 million of acquisition related amortization and depreciation expense, and employee related expenses of $0.5 million, primarily due to increased share-based compensation expense. These increases were partially offset due to $1.6 million of costs incurred in the prior year related to the secondary offering that did not occur again in the current year.

General and administrative expenses increased $19.2 million, or 22.9%, to $103.0 million in the six months ended March 31, 2019 from $83.8 million in the six months ended March 31, 2018. This increase in general and administrative expenses was primarily due to unfavorable foreign currency translation on the intercompany loans of $8.2 million, as described above, in addition to an increase of $5.2 million from the Pure Water, Pacific Ozone, ProAct and Isotope acquisitions. The remaining increase is due to employee related expenses of $3.6 million, primarily due to increased share-based compensation expense, $2.7 million of amortization and depreciation expense, mainly related to acquisitions, and another $1.1 million due to the earn-out adjustment mentioned above. These increases were partially offset due to $1.6 million of costs incurred in the prior year related to the secondary offering that did not occur again in the current year.

Other operating income(expense)-Other operating income (expense) increased $2.6 million, or 288.9%, to income of $3.5 million in the three months ended March 31, 2019 from income of $0.9 million in the three months ended March 31, 2018. This increase was mainly due to the release of an acquisition related contingency due to the passage of time.

Other operating (expense) income increased $3.2 million to income of $3.5 million in the six months ended March 31, 2019 from income of $0.3 million in the six months ended March 31, 2018. This increase was mainly due to the release of an acquisition related contingency discussed above and the collection of previously written off accounts.

Interest Expense-Interest expense increased $3.7 million, or 34.3%, to $14.5 million in the three months ended March 31, 2019 from $10.8 million in the three months ended March 31, 2018. Interest expense increased $0.9 million, or 3.2%, to $28.9 million in the six months ended March 31, 2019 from $28.0 million in the six months ended March 31, 2018. The increase in interest expense is related to the increased debt and interest rates as compared to the same period in the prior year.

Income tax benefit (expense)-An income tax benefit of $4.6 million and an income tax expense of $2.0 million was recorded for the three months ended March 31, 2019 and 2018, respectively. The increase in tax benefit from the prior year was primarily driven by a higher projected annual effective tax rate applied against a larger loss in the current period which was partially offset by a discrete benefit of $3.6 million in the prior period related 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%.

An income tax benefit of $9.1 million and an income tax benefit of $2.4 million was recorded for the six months ended March 31, 2019 and 2018, respectively.

Net Income-Net income decreased by $11.4 million, or 87.7%, to $1.6 million for the three months ended March 31, 2019 from $13.0 million in the three months ended March 31, 2018. This was primarily driven by the increase in operating expenses, mainly the unfavorable change in foreign currency impacts as described above in addition. Additional contributing factors to the period over period change include other non-cash charges such as higher depreciation costs associated with capital investment and acquisitions, as well as higher share-based compensation charges. Net income decreased by $24.7 million, or 247.0%, to a net loss of $14.7 million for the six months ended March 31, 2019 from income of $10.0 million in the six months ended March 31, 2018.

Adjusted EBITDA-Adjusted EBITDA decreased $1.0 million, or 1.7%, to $56.7 million for the three months ended March 31, 2019 from $57.7 million for the three months ended March 31, 2018. Increased revenue volume and the benefits derived from restructuring and operational efficiencies that were implemented in the current and prior fiscal year were somewhat offset by lower margins derived from product mix in the period as well as the release of warranty provisions in the prior year period based on improved warranty experience.

Adjusted EBITDA decreased $2.6 million, or 2.7%, to $95.1 million for the six months ended March 31, 2019 from $97.7 million for the six months ended March 31, 2018.

Segment Results



	Three Months Ended March 31,												Six Months Ended March 31,
	2019					2018					% Variance		2019					2018					% Variance
				% of Revenue					% of Revenue							% of Revenue					% of Revenue
Revenues
Integrated Solutions and Services	$	226.8		65.1	%	$	204.5		61.3	%	10.9	%	$	437.3		65.1	%	$	396.4		62.9	%	10.3	%
Applied Product Technologies	121.8			34.9	%	129.2			38.7	%	(5.7	)%	234.3			34.9	%	234.3			37.1	%	—	%
Total Consolidated	348.6			100.0	%	333.7			100.0	%	4.5	%	671.6			100.0	%	630.7			100.0	%	6.5	%
Operating profit (loss)
Integrated Solutions and Services	37.0			10.6	%	34.6			10.4	%	6.9	%	64.9			9.7	%	68.7			10.9	%	(5.5	)%
Applied Product Technologies	11.3			3.2	%	24.1			7.2	%	(53.1	)%	15.8			2.4	%	32.2			5.1	%	(50.9	)%
Corporate	(36.8		)	(10.6	)%	(32.9		)	(9.9	)%	11.9	%	(75.6		)	(11.3	)%	(65.3		)	(10.4	)%	15.8	%
Total Consolidated	11.5			3.3	%	25.8			7.7	%	(55.4	)%	5.1			0.8	%	35.6			5.6	%	(85.7	)%
EBITDA
Integrated Solutions and Services	51.3			14.7	%	46.1			13.8	%	11.3	%	93.2			13.9	%	91.3			14.5	%	2.1	%
Applied Product Technologies	15.8			4.5	%	28.1			8.4	%	(43.8	)%	24.6			3.7	%	40.1			6.4	%	(38.7	)%
Corporate and unallocated costs	(31.4		)	(9.0	)%	(27.9		)	(8.4	)%	12.5	%	(65.4		)	(9.7	)%	(55.4		)	(8.8	)%	18.1	%
Total Consolidated	$	35.7		10.2	%	$	46.3		13.9	%	(22.9	)%	$	52.4		7.8	%	$	76.0		12.1	%	(31.1	)%

Adjusted EBITDA on a segment basis is defined as earnings before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. The following is a reconciliation of our segment operating profit to Adjusted EBITDA:



	Three Months Ended March 31,								Six Months Ended March 31,
	2019				2018				2019				2018
	Integrated Solutions and Services		Applied Product Technologies		Integrated Solutions and Services		Applied Product Technologies		Integrated Solutions and Services		Applied Product Technologies		Integrated Solutions and Services		Applied Product Technologies
Operating Profit	$	37.0	$	11.3	$	34.6	$	24.1	$	64.9	$	15.8	$	68.7	$	32.2
Depreciation and amortization	14.3		4.5		11.5		4.0		28.3		8.8		22.6		7.9
EBITDA	$	51.3	$	15.8	$	46.1	$	28.1	$	93.2	$	24.6	$	91.3	$	40.1
Restructuring and related business transformation costs (a)	0.1		0.2		—		—		0.4		0.5		—		—
Transaction costs (b)	—		—		—		—		0.5		0.7		—		—
Other losses and expenses (c)	—		5.2		—		—		0.2		9.3		—		—
Adjusted EBITDA (d)	$	51.4	$	21.2	$	46.1	$	28.1	$	94.3	$	35.1	$	91.3	$	40.1


(a)	Represents costs and expenses in connection with restructuring initiatives distinct to our Integrated Solutions and Services and Applied Product Technologies segments, respectively, incurred in the three and six months ended March 31, 2019. Such expenses are primarily composed of severance and relocation costs.


(b)	Represents costs associated with a change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in an increase to the fair valued amount of the earn-out recorded upon the acquisitions in the six months ended March 31, 2019, distinct to our Integrated Solutions and Services and Applied Product Technologies segments.


(c)	Represents:


(i)	expenses incurred by the Company in the six months ended March 31, 2019, distinct to our Integrated Solutions and Services segment, related to maintaining non-operational business locations;


(ii)	expenses incurred by the Company in the three and six months ended March 31, 2019, distinct to our Applied Product Technologies segment, as a result of product rationalization in our electro-chlorination business and the remediation of manufacturing defects caused by a third party vendor for which the Company is seeking restitution; and


(iii)	expenses incurred by the Company in the three and six ended March 31, 2019, distinct to our Applied Product Technologies segment, as a result of the write-off of inventory in the aquatics business associated with product rationalization and facility consolidation.


(d)	For the definition of Adjusted EBITDA and a reconciliation to Net income (loss), its most directly comparable financial measure presented in accordance with GAAP, see “How We Assess the Performance of Our Business-Adjusted EBITDA.”

Integrated Solutions and Services

Revenues in the Integrated Solutions and Services segment increased $22.3 million, or 10.9%, to $226.8 million in the three months ended March 31, 2019 from $204.5 million in the three months ended March 31, 2018. The increase in revenue was driven by stronger service growth of $3.8 million, as well as capital and aftermarket growth of $7.6 million,

primarily in the microelectronics and food and beverage markets. These increases were augmented by price realization. Our acquisitions of Pure Water, ProAct and Isotope resulted in another increase of $10.9 million of revenue.

Revenues in the Integrated Solutions and Services segment increased $40.9 million, or 10.3%, to $437.3 million in the six months ended March 31, 2019 from $396.4 million in the six months ended March 31, 2018. The increase in revenue was driven by organic growth of $16.1 million. Our acquisitions of Pure Water, ProAct and Isotope resulted in another increase of $24.8 million of revenue.

Operating profit in the Integrated Solutions and Services segment increased $2.4 million, or 6.9%, to $37.0 million in the three months ended March 31, 2019 from $34.6 million in the three months ended March 31, 2019. The profitability generated by organic revenue volume in the period in addition to the acquisitions of Pure Water, ProAct and Isotope resulted in $5.7 million. Profitability was impacted by increased employment and benefit expenses of $0.5 million and $2.8 million from higher depreciation.

Operating profit in the Integrated Solutions and Services segment decreased $3.8 million, or 5.5%, to $64.9 million in the six months ended March 31, 2019 from $68.7 million in the six months ended March 31, 2019. The profitability generated by revenue volume in the period was offset by the change in product mix driven by higher capital volumes in food and beverage and lower service volumes in power and chemical processing markets. The net impact of these factors was a contribution to profit of $1.8 million. Additionally, profitability was impacted by increased employment and benefit expenses of $4.3 million, $5.7 million from higher depreciation and amortization expense and $0.5 million due to the change in estimated earn-outs related to prior acquisitions. These impacts to profitability were partially offset by increased profit, excluding the impact of depreciation and amortization, from the Pure Water, ProAct and Isotope acquisitions of $4.9 million.

EBITDA in the Integrated Solutions and Services segment increased $5.2 million, or 11.3%, to $51.3 million in the three months ended March 31, 2019, compared to $46.1 million in the three months ended March 31, 2018. Adjusted EBITDA increased $5.3 million, or 11.5%, to $51.4 million in the three months ended March 31, 2019, compared to $46.1 million in the three months ended March 31, 2018. The increase in EBITDA resulted from the same factors which impacted operating profit, less the change in depreciation and amortization. Adjusted EBITDA in the Integrated Solutions and Services segment excludes $0.1 million of restructuring and realignment costs incurred during the three months ended March 31, 2019, which was discrete to the Integrated Solutions and Services segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Integrated Solutions and Services segment.

EBITDA in the Integrated Solutions and Services segment increased $1.9 million, or 2.1%, to $93.2 million in the six months ended March 31, 2019, compared to $91.3 million in the six months ended March 31, 2018. Adjusted EBITDA increased $3.0 million, or 3.3%, to $94.3 million in the six months ended March 31, 2019, compared to $91.3 million in the six months ended March 31, 2018. The increase in EBITDA resulted from the same factors which impacted operating profit, less the change in depreciation and amortization. Adjusted EBITDA in the Integrated Solutions and Services segment excludes $0.4 million of restructuring and realignment costs incurred during the six months ended March 31, 2019, a charge of $0.5 million related to the change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in an increase to the fair valued amount of the earn-out recorded upon the acquisitions and $0.2 million related to costs incurred from inactive sites, all of which were discrete to the Integrated Solutions and Services segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Integrated Solutions and Services segment.

Applied Product Technologies

Revenues in the Applied Product Technologies segment decreased $7.4 million, or 5.7%, to $121.8 million in the three months ended March 31, 2019 from $129.2 million in the three months ended March 31, 2018. Capital products revenues declined by $14.5 million, primarily in higher margin product lines. Additionally, aftermarket grew by $9.9 million over the same period. The acquisition of Pacific Ozone contributed an increase in revenue of $0.9 million. These increases were offset by an unfavorable foreign currency translation impact of $3.7 million.

Revenues in the Applied Product Technologies segment were flat at $234.3 million in the six months ended March 31, 2019 from $234.3 million in the six months ended March 31, 2018. This is mainly attributable to capital revenues, which decreased by $13.0 million across multiple business lines. Additionally, sales of aftermarket grew by $16.3 million. The acquisition of Pacific Ozone contributed an increase in revenue of $2.1 million. These increases were offset by an unfavorable foreign currency translation impact of $5.4 million.

Operating profit in the Applied Product Technologies segment decreased $12.8 million, or 53.1%, to $11.3 million in the three months ended March 31, 2019 from $24.1 million in the three months ended March 31, 2018. The decrease in operating profit was due to volume and mix partially offset by price of $7.1 million and $1.4 million of unfavorable foreign currency impact. Additionally, recognized in the prior period was a benefit of $3.6 million related to warranty reductions based on improved warranty experience, net of losses from our Italian operations, which did not reoccur in the current period. Other offsets to segment operating profit include impacts from product rationalization and facility consolidation, restructuring and costs associated with the remediation of a manufacturing defect caused by a third party vendor of $5.4 million. Higher depreciation impacted profitability by another $0.5 million of increased costs. These impacts to profitability were partially offset by operational leverage of $2.5 million and lower employment costs of $2.7 million.

Operating profit in the Applied Product Technologies segment decreased $16.4 million, or 50.9%, to $15.8 million in the six months ended March 31, 2019 from $32.2 million in the six months ended March 31, 2018. The decrease in operating profit was due to volume and mix, partially offset by price of $5.3 million and $2.1 million of unfavorable foreign currency impact. Additionally, recognized in the prior period was a benefit of $5.9 million related to warranty reductions based on improved warranty experience, net of losses from our Italian operations, which did not reoccur in the current period. Other offsets to segment operating profit include impacts from product rationalization and facility consolidation, restructuring and costs associated with the remediation of a manufacturing defect caused by a third party vendor of $9.8 million. Higher depreciation impacted profitability by another $0.9 million of increased costs and $0.7 million of additional cost was due to the change in estimated amount of earn-outs expected to be paid out on prior acquisitions. These impacts to profitability were partially offset by operational leverage of $2.7 million and lower employment costs of $5.6 million.

EBITDA in the Applied Product Technologies segment decreased $12.3 million, or 43.8%, to $15.8 million in the three months ended March 31, 2019, compared to $28.1 million in the three months ended March 31, 2018. The decrease in EBITDA resulted from the same factors which impacted operating profit, less the change in depreciation and amortization, and $0.2 million in other income and expense. Adjusted EBITDA decreased $6.9 million, or 24.6%, to $21.2 million in the three months ended March 31, 2019, compared to $28.1 million in the three months ended March 31, 2018. Adjusted EBITDA excludes $5.2 million of expenses related to product rationalization and facility consolidation in connection with our two-segment realignment initiative as well as the remediation of manufacturing defects caused by a third party vendor, and $0.2 million of restructuring and realignment costs incurred during the three months ended March 31, 2019, all of which were discrete to the Applied Product Technologies segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Applied Product Technologies segment.

EBITDA in the Applied Product Technologies segment decreased $15.5 million, or 38.7%, to $24.6 million in the six months ended March 31, 2019, compared to $40.1 million in the six months ended March 31, 2018. The decrease in EBITDA resulted from the same factors which impacted operating profit, less the change in depreciation and amortization and $0.4 million in other income and expense. Adjusted EBITDA decreased $5.0 million, or 12.5%, to $35.1 million in the six months ended March 31, 2019, compared to $40.1 million in the six months ended March 31, 2018. Adjusted EBITDA excludes $9.3 million of expenses related to product rationalization and facility consolidation in connection with our two-segment realignment initiative as well as the remediation of manufacturing defects caused by a third party vendor, a charge of $0.7 million related to the change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in an increase to the fair valued amount of the earn-out recorded upon the acquisitions and $0.5 million of restructuring and realignment costs incurred during the six months ended March 31, 2019, all of which were discrete to the Applied Product Technologies segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Applied Product Technologies segment.

Liquidity and Capital Resources

Liquidity describes the ability of a company to generate sufficient cash flows to meet the cash requirements of its business operations, including working capital needs, debt service, acquisitions, other commitments and contractual obligations. We consider liquidity in terms of cash flows from operations and their sufficiency to fund our operating and investing activities.

Our principal sources of liquidity are our cash generated by operating activities and borrowings under our Revolving Credit Facility. Historically, we have financed our operations primarily from cash generated from operations and periodic

borrowings under our $125.0 million Revolving Credit Facility. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness, to fund working capital requirements and to make capital expenditures.

We expect to continue to finance our liquidity requirements through internally generated funds and borrowings under our Revolving Credit Facility. We believe that our projected cash flows generated from operations, together with borrowings under our Revolving Credit Facility are sufficient to fund our principal debt payments, interest expense, our working capital needs and our expected capital expenditures for the next twelve months. Our capital expenditures for the six months ended March 31, 2019 and 2018 were $40.7 million and $31.7 million, respectively. However, our budgeted capital expenditures can vary from period to period based on the nature of capital intensive project awards. We may draw on our Revolving Credit Facility from time to time to fund or partially fund an acquisition.

As of March 31, 2019, we had total indebtedness of $958.6 million, including $933.5 million of borrowings under the First Lien Term Loan Facility, no borrowings under our Revolving Credit Facility, $21.5 million in borrowings related to equipment financing, $1.8 million of notes payable related to certain equipment related contracts and $1.7 million related to a mortgage. We also had $14.5 million of letters of credit issued under our $125.0 million Revolving Credit Facility and an additional $0.2 million of letters of credit issued under a separate uncommitted facility as of March 31, 2019.

Our senior secured credit facilities contain a number of covenants imposing certain restrictions on our business. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise. The restrictions these covenants place on our business operations, include limitations on our or our subsidiaries’ ability to:


•	incur or guarantee additional indebtedness;


•	make certain investments;


•	pay dividends or make distributions on our capital stock;


•	sell assets, including capital stock of restricted subsidiaries;


•	agree to payment restrictions affecting our restricted subsidiaries;


•	consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;


•	enter into transactions with our affiliates;


•	incur liens; or


•	designate any of our subsidiaries as unrestricted subsidiaries.

We are a holding company and do not conduct any business operations of our own. As a result, our ability to pay cash dividends on our common stock, if any, is dependent upon cash dividends and distributions and other transfers from our operating subsidiaries. Under the terms of our senior secured credit facilities, our operating subsidiaries are currently limited in their ability to pay cash dividends to us, and we expect these limitations to continue in the future under the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries.

In addition, our Revolving Credit Facility, but not the First Lien Term Loan Facility, contains a financial covenant which requires us to comply with the maximum first lien net leverage ratio of 5.55 to 1.00 as of the last day of any quarter on which the aggregate amount of revolving loans and letters of credit outstanding under the Revolving Credit Facility (net of cash collateralized letters of credit and undrawn outstanding letters of credit in an amount of up to 50% of the Revolving Credit Facility) exceeds 25% of the total commitments thereunder.

As of March 31, 2019 and September 30, 2018, we were in compliance with the covenants contained in the senior secured credit facilities.

Our indebtedness could adversely affect our ability to raise additional capital, limit our ability to react to changes in the economy or our industry, expose us to interest rate risk and prevent us from meeting our obligations.

Cash Flows

The following table summarizes the changes to our cash flows for the periods presented:



	Six Months Ended March 31,
(In millions)	2019			2018
Statement of Cash Flows Data
Net cash provided by operating activities	$	27.3		$	41.9
Net cash used in investing activities	(38.6		)	(41.6		)
Net cash (used in) provided by financing activities	(4.0		)	16.0
Effect of exchange rate changes on cash	(0.3		)	0.2
Change in cash and cash equivalents	$	(15.6	)	$	16.5

Operating Activities

Cash flows from operating activities can fluctuate significantly from period‑to‑period as working capital needs and the timing of payments for restructuring activities and other items impact reported cash flows.

Net cash provided by operating activities decreased to a source of $27.3 million in the six months ended March 31, 2019 from a source of $41.9 million in the six months ended March 31, 2018.


•	Operating cash flows in the six months ended March 31, 2019 reflect a decrease in net earnings of $24.7 million as compared to the six months ended March 31, 2018 and decreased non‑cash charges of $8.9 million primarily relating to a reduction in deferred taxes and the foreign currency impact on the intercompany loans, partially offset by increased share-based compensation expenses.

•

The aggregate of receivables, inventories, contract assets and liabilities and accounts payable used $4.8 million in operating cash flows in the six months ended March 31, 2019 compared to a use of $27.0 million in operating cash flows in the six months ended March 31, 2018. The amount of cash flow generated from or used by the above mentioned accounts depends upon how effectively we manage our cash conversion cycle, which is a representation of the number of days that elapse from the date of purchase of raw materials and components to the collection of cash from customers. Our cash conversion cycle can be significantly impacted by the timing of collections and payments in a period.


•	The aggregate of prepaid expense and other current assets, income taxes and other non current assets and liabilities provided $6.6 million in operating cash flows in the six months ended March 31, 2019 compared to a use of $6.8 million in the six months ended March 31, 2018. This is mainly due to timing of payments.

•

Accrued expenses and other liabilities used $11.2 million in operating cash flows in the six months ended March 31, 2019 compared to a use of $30.8 million in the six months ended March 31, 2018. The reduced use of operational cash flow was mainly due to higher accrued expenses at September 30, 2017 as compared to September 30, 2018, due to the IPO in November of 2017 and higher accrued employee related costs which were subsequently paid out during the three months ended December 31, 2017.

Investing Activities

Net cash used in investing activities decreased $3.0 million to $38.7 million in the six months ended March 31, 2019 from $41.6 million in the six months ended March 31, 2018. This decrease was largely driven by lower cash paid for acquisitions during the six months ended March 31, 2019, partially offset by higher cash paid for property, plant and equipment in the current year period.

Financing Activities

Net cash used by financing activities decreased $20.0 million to a use of $4.0 million in the six months ended March 31, 2019 from a source of $16.0 million in the six months ended March 31, 2018. This lower amount of cash provided by financing activities for the six months ended March 31, 2019 was primarily due to the $137.6 million cash received upon the issuance of stock during the IPO in the prior year period, partially offset by the issuance of debt and higher borrowings under the credit facility in the current year period. In addition, we made higher repayments of debt in the current year period which was partially offset by reduced by share-based compensation activity.

Seasonality

Our business may exhibit seasonality resulting from our customers’ increasing demand for our products and services during the spring and summer months as compared to the fall and winter months. For example, our business servicing municipal customers experiences increased demand for our odor control product lines and services in the warmer months which, together with other factors, typically results in improved performance in the second half of our fiscal year. Inclement weather, such as hurricanes, droughts and floods, can also drive increased demand for our products and services. As a result, our results from operations may vary from period to period.

Off‑Balance Sheet Arrangements

As of March 31, 2019 and September 30, 2018, we had letters of credit totaling $14.8 million and $11.8 million, respectively, and surety bonds totaling $133.6 million and $123.4 million, respectively, outstanding under our credit arrangements. The longest maturity date of the letters of credit and surety bonds in effect as of March 31, 2019 was March 26, 2029. Additionally, as of March 31, 2019 and September 30, 2018, we had letters of credit totaling $0.0 million and $0.9 million, respectively, and surety bonds totaling $2.4 million and $2.5 million, respectively, outstanding under our prior arrangement with Siemens.

Critical Accounting Policies and Estimates

See Note 2, “Summary of Significant Accounting Policies” in the Unaudited Consolidated Financial Statements in Item 1 of this Report for a complete discussion of our significant accounting policies and recent accounting pronouncements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We have market risk exposure arising from changes in interest rates on our senior secured credit facilities, which bear interest at rates that are benchmarked against LIBOR. In November 2018, the Company entered into an interest rate cap to mitigate risks associated with variable rate debt. The LIBOR interest rate cap has a notional value of $600 million, is effective for a period of three years and has a strike price of 3.5%.

Based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2019, a 1% increase or decrease in interest rates would decrease or increase income (loss) before income taxes by approximately $9.4 million. By comparison, based on our overall interest rate exposure to variable rate debt outstanding as of March 31, 2018, a 1% increase or decrease in interest rates would have decreased or increased income (loss) before income taxes by approximately $7.9 million.

For a discussion of the Company’s exposure to market risk related to inflation, tariffs and foreign currency exchange rates, please refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, as filed with the SEC on December 11, 2018. There have been no material changes to the Company’s exposure to these market risks during the first half of fiscal 2019.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to a material weakness in internal control over financial reporting related to control deficiencies within the Company’s revenue recognition and recording processes that was disclosed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018.

While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

As disclosed under Item 9A., Controls and Procedures in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018, management identified a material weakness in internal control over financial reporting relating to the Company’s revenue recognition and recording process. We began implementing a remediation plan to address the material weakness mentioned above. The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively. We expect that the remediation of this material weakness will be completed prior to September 30, 2019.

Changes to Internal Control Over Financial Reporting

As described below, the Company has undertaken remediation actions to address the material weakness in our internal controls over financial reporting. These remediation actions continued throughout the quarter ended March 31, 2019, but have not materially affected our internal control over financial reporting.

The Company has now designed or redesigned a number of controls through the quarter ended March 31, 2019, that we are currently evaluating or awaiting additional testing samples to evaluate operating effectiveness. Controls that have been properly designed need to be operating effectively for acceptable periods of time. Due to the nature of the remediation process and the need to allow adequate time after implementation to evaluate and test the effectiveness of the controls, no assurance can be given as to the timing of remediation, but management has made further progress and expects the remediation to be completed by the fourth quarter of 2019.

Remediation Activities

Management continues to advance the design and implementation of financial reporting controls to ensure that the level of precision is adequate to address the assessed risks at an assertion level and the period of operation is sufficient to conclude on the operating effectiveness of the controls. Specifically, under the guidance of the Audit Committee, Management has undertaken the following:


•	Conducted additional training with stakeholders within the organization regarding revenue recognition policies and procedures, including best practices for documenting effective compliance with the operation of controls that address key risks.


•	Developed enhanced reporting tools that facilitate the ability of stakeholders to perform more detailed review of revenue transactions.


•	Established more formal processes for documentation of the review of pricing and other inputs of contract and sales order information that drive the recognition of revenue across the organization.


•	Designed and implemented more substantive controls that address the evaluation of shipping terms and recognition of revenue in the correct reporting period.

When fully implemented and operational, we believe the controls we have designed will remediate the control deficiencies that have led to the material weakness we have identified and strengthen our internal controls over financial reporting.

Notwithstanding the existence of the material weakness as described above, we believe that the Condensed Consolidated Financial Statements in this Quarterly Report fairly present, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods, presented, in conformity with U.S. GAAP.

Part II - Other Information

Item 1. Legal Proceedings

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

On or around November 6, 2018, a purported shareholder of the Company filed a class action lawsuit in the U.S. District Court for the Southern District of New York, captioned McWilliams v. Evoqua Water Technologies Corp., et al., Case No. 1:18-CV-10320, alleging that the Company and senior management violated federal securities laws. On January 31, 2019, the court appointed lead plaintiffs and lead counsel in connection with the action and captioned the action “In re Evoqua Water Technologies Corp. Securities Litigation,” Master File No. 1:18-CV-10320. On March 28, 2019, lead plaintiffs filed an amended complaint, which asserts claims pursuant to the Securities Exchange Act of 1934 and the Securities Act of 1933 against the Company, members of the Company’s Board of Directors, senior management, other executives and/or employees, AEA Investors LP and a number of its affiliated entities, and the underwriters of the Company’s initial public offering and secondary public offering. The amended complaint alleges that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s integration of acquired companies, the Company’s reduction-in-force, and the Company’s accounting practices. The lawsuit seeks compensatory damages in an unspecified amount to be proved at trial, an award of reasonable costs and expenses to the plaintiff and class counsel, and such other relief as the court may deem just and proper. The Company believes that this lawsuit is without merit and intends to vigorously defend itself against the allegations.

On or around April 10, 2019, a purported shareholder of the Company filed a shareholder derivative lawsuit ostensibly on behalf of the Company in the U.S. District Court for the Western District of Pennsylvania, captioned Dallas Torgersen, derivatively on behalf of Evoqua Water Technologies Corp. v. Ronald C. Keating, et al., Case No. 2:19-CV-410. The complaint names as defendants the Company’s CEO, the Company’s CFO, and members of the Company’s Board of Directors, and it names the Company as a nominal defendant. The complaint alleges, among other things, that the individual defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures in the period leading up to the Company’s October 30, 2018 disclosure and that they breached their fiduciary duties to the Company. The lawsuit seeks compensatory damages in an unspecified amount to be proved at trial, an award of reasonable costs and expenses, restitution from the individual defendants, an order directing the Company and the individual defendants to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures to comply with the law and to prevent the events alleged from reoccurring, including by putting forth for shareholder vote certain resolutions for amendments to the Company’s charter or bylaws, and such other relief as the court may deem just and proper. The Company believes that this lawsuit is without merit and intends to vigorously defend itself against the allegations.

Item 1A. Risk Factors

There have been no material changes to the information concerning risk factors as stated 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.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In the three months ended March 31, 2019, we issued 214,923 shares of our common stock to certain employees and former employees upon the exercise of stock options granted pursuant to the Stock Option Plan, which amount gives effect to the net exercise by certain of such individuals of a portion of their vested options to cover exercise price and applicable tax withholding obligations. These issuances were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act and/or Rule 701 promulgated thereunder. The securities were issued directly by the registrant and did not involve a public offering or general solicitation.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

The following exhibits are filed or furnished as a part of this report:



Exhibit No.	Exhibit Description
10.1*	Form of Nonqualified Stock Option Award Agreement under Evoqua Water Technologies Corp. 2017 Equity Incentive Plan
10.2*	Form of Restricted Stock Unit Award Agreement under the Evoqua Water Technologies Corp. 2017 Equity Incentive Plan
31.1*	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1*	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	EVOQUA WATER TECHNOLOGIES CORP.





May 10, 2019	/s/ RONALD C. KEATING
	By:	Ronald C. Keating
		Chief Executive Officer (Principal Executive Officer)





May 10, 2019	/s/ BENEDICT J. STAS
	By:	Benedict J. Stas
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)