Annual Statements Open main menu

Evoqua Water Technologies Corp. - Quarter Report: 2023 March (Form 10-Q)



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
March 31, 2023
Or
 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 001-38272
EVOQUA WATER TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
 
Delaware46-4132761
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
210 Sixth Avenue15222
Pittsburgh, Pennsylvania
(Address of principal executive offices) (Zip Code)
(724) 772-0044
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareAQUANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes     No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No 
There were 122,370,428 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of April 28, 2023.



EVOQUA WATER TECHNOLOGIES CORP.
TABLE OF CONTENTS
    Page  
 
    
    
    
    
 
    
    
    
    
    
    
    






CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (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 “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “might,” “plan,” “progress,” “potential,” “predict,” “projection,” “seek,” “should,” “will,” or “would,” or the negative thereof, or other variations thereon or comparable terminology.
All of these forward‑looking statements are based 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 may cause our actual results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by these forward‑looking statements or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward‑looking statements include, among other things:
the failure to complete the proposed transaction with Xylem Inc. (“Xylem”) (the “Merger”) on the anticipated terms and timing, or at all;
the failure to obtain stockholder approvals or to satisfy any of the other conditions to the Merger on a timely basis or at all, or other delays in completing the Merger;
the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the Merger);
the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Company’s merger agreement with Xylem;
the possibility that the Merger may be less accretive than expected, or may be dilutive;
the possibility that the anticipated benefits of the Merger will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and Xylem do business;
the possibility that the Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
diversion of management’s attention from ongoing business operations and opportunities, as a result of the Merger; the risk that stockholder litigation in connection with the Merger may affect the timing or occurrence of the Merger or result in significant costs of defense, indemnification and liability;
the effect of the announcement of the Merger on our ability to maintain relationships with customers, suppliers, and other third parties; uncertainty as to the long-term value of Xylem common stock;
material, freight, and labor inflation, commodity and component availability constraints, and disruptions in global supply chains and transportation services;
general global economic and business conditions, including the impacts of rising interest rates, recessionary conditions, geopolitical conflicts, such as the conflict between Russia and Ukraine and tensions between China and the U.S., and the COVID-19 pandemic;
our ability to execute projects on budget and on schedule;
the potential for us to incur liabilities to customers as a result of warranty claims or failure to meet performance guarantees;
our ability to meet our own and our customers’ safety standards;
failure to effectively treat emerging contaminants;
1


our ability to continue to develop or acquire new products, services, and solutions that allow us to compete successfully in our markets;
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;
our ability to achieve the expected benefits of our restructuring actions;
delays in enactment or repeals of environmental laws and regulations;
the potential for us to become subject to claims relating to handling, storage, release, or disposal of hazardous materials;
our ability to retain our senior management, skilled technical, engineering, sales, and other key personnel and to attract and retain key talent in increasingly competitive labor markets, including as a result of the announcement of the Merger;
risks associated with international sales and operations;
our ability to adequately protect our intellectual property from third-party infringement;
risks related to our contracts with federal, state, and local governments, including risk of termination or modification prior to completion;
risks associated with product defects and unanticipated or improper use of our products;
our ability to accurately predict the timing of contract awards;
risks related to our substantial indebtedness;
our increasing dependence on the continuous and reliable operation of our information technology systems;
risks related to foreign, federal, state, and local environmental, health, and safety laws and other applicable laws and regulations and the costs associated therewith;
our ability to execute on our strategies related to environmental, social, and governance matters, and achieve related goals and targets, including as a result of evolving standards, laws, regulations, processes, and assumptions, delayed scientific and technological developments, increased costs, and changes in carbon markets; and
other risks and uncertainties, including those listed under Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the SEC on November 16, 2022, and in other filings we may make from time to time with the SEC.

All statements other than statements of historical fact included in this Report are forward-looking statements, including, but not limited to, certain plans, expectations, goals, projections, and statements about the benefits of the Merger, the expected timing of completion of the Merger, expectations for fiscal year 2023, expectations related to customer demand, our book to bill ratio, pricing initiatives, supply chain challenges, inflation, material and labor availability, and general macroeconomic conditions, and expectations with respect to the integration and performance of our recent acquisitions, including the realization of expected synergies.
Any forward-looking statements made in this Report speak only as of the date of this Report. 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 made herein, whether as a result of new information, future events or otherwise after the date of this Report. These forward-looking statements should not be relied upon as representing the Company’s views as of any date subsequent to the date of this Report.
2


Part I - Financial Information

Item 1. Financial Statements

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

3


Evoqua Water Technologies Corp.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
March 31,
2023
September 30,
2022
ASSETS
Current assets
$844,441 $831,389 
Cash and cash equivalents
113,243 134,005 
Receivables, net
303,855 305,712 
Inventories, net
240,713 229,351 
Contract assets115,461 102,123 
Prepaid and other current assets
59,070 59,971 
Income tax receivable
477 227 
Current assets held for sale11,622 — 
Property, plant, and equipment, net
414,080 405,289 
Goodwill
468,929 473,572 
Intangible assets, net
299,302 317,733 
Deferred income taxes, net of valuation allowance
3,000 5,841 
Operating lease right-of-use assets, net56,568 53,540 
Other non‑current assets
93,517 103,499 
Non-current assets held for sale29,733 — 
Total assets
$2,209,570 $2,190,863 
LIABILITIES AND EQUITY
Current liabilities
$474,491 $483,716 
Accounts payable
216,893 213,518 
Current portion of debt, net of deferred financing fees and discounts19,376 17,266 
Contract liabilities75,512 62,439 
Product warranties
6,556 6,740 
Accrued expenses and other liabilities
153,110 178,272 
Income tax payable
2,557 5,481 
Current liabilities held for sale487 — 
Non‑current liabilities
$995,774 $997,054 
Long-term debt, net of deferred financing fees and discounts853,599 863,534 
Product warranties
3,327 3,465 
Obligation under operating leases45,650 43,961 
Other non‑current liabilities
76,641 69,889 
Deferred income taxes
13,854 16,205 
Non-current liabilities held for sale2,703 — 
Total liabilities
$1,470,265 $1,480,770 
Commitments and Contingent Liabilities (Note 19)
Shareholders’ equity
Common stock, par value $0.01: authorized 1,000,000 shares; issued 123,944 shares, outstanding 122,280 at March 31, 2023; issued 123,411 shares, outstanding 121,747 at September 30, 2022
$1,240 $1,235 
Treasury stock: 1,664 shares at March 31, 2023 and 1,664 shares at September 30, 2022
(2,837)(2,837)
Additional paid-in capital620,056 607,748 
Retained earnings80,916 61,016 
Accumulated other comprehensive income, net of tax39,930 42,931 
Total shareholders’ equity$739,305 $710,093 
Total liabilities and shareholders’ equity$2,209,570 $2,190,863 
See accompanying notes to these Unaudited Consolidated Financial Statements
4


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Revenue from product sales$292,651 $259,775 $553,042 $472,343 
Revenue from services185,146 166,953 360,601 320,653 
Revenue from product sales and services$477,797 $426,728 $913,643 $792,996 
Cost of product sales(203,101)(185,330)(388,141)(339,125)
Cost of services(122,800)(112,512)(243,297)(214,477)
Cost of product sales and services$(325,901)$(297,842)$(631,438)$(553,602)
Gross profit$151,896 $128,886 $282,205 $239,394 
General and administrative expense(77,758)(66,976)(141,834)(124,805)
Sales and marketing expense(43,215)(39,859)(83,601)(76,308)
Research and development expense(4,582)(3,751)(8,417)(7,203)
Total operating expenses$(125,555)$(110,586)$(233,852)$(208,316)
Other operating income1,827 1,415 3,124 3,072 
Other operating expense(4,711)(143)(4,788)(290)
Income before interest expense and income taxes$23,457 $19,572 $46,689 $33,860 
Interest expense
(10,303)(9,950)(20,377)(16,529)
Income before income taxes$13,154 $9,622 $26,312 $17,331 
Income tax expense(2,522)(2,248)(6,412)(3,869)
Net income$10,632 $7,374 $19,900 $13,462 
Net income attributable to non‑controlling interest— 44 — 145 
Net income attributable to Evoqua Water Technologies Corp.$10,632 $7,330 $19,900 $13,317 
Basic income per common share$0.09 $0.06 $0.16 $0.11 
Diluted income per common share$0.08 $0.06 $0.16 $0.11 
See accompanying notes to these Unaudited Consolidated Financial Statements

5


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Net income$10,632 $7,374 $19,900 $13,462 
Other comprehensive income (loss)
Foreign currency translation adjustments753 2,176 4,315 3,785 
Unrealized derivative (loss) gain on cash flow hedges, net of tax(5,502)21,730 (7,288)28,311 
Change in pension liability, net of tax(15)166 (28)335 
Total other comprehensive (loss) income$(4,764)$24,072 $(3,001)$32,431 
Less: Comprehensive income attributable to non‑controlling interest— (44)— (145)
Comprehensive income attributable to Evoqua Water Technologies Corp.$5,868 $31,402 $16,899 $45,748 
See accompanying notes to these Unaudited Consolidated Financial Statements

6


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Changes in Equity
(In thousands)
Common Stock
Treasury Stock
Additional
Paid‑in
Capital
Retained
Earnings
Accumulated
Other Comprehensive Income
Non‑controlling
Interest
Total
Shares
Cost
Shares
Cost
Balance at September 30, 2022123,411 $1,235 1,664 $(2,837)$607,748 $61,016 $42,931 $— $710,093 
Equity based compensation expense— — — — 6,196 — — — $6,196 
Issuance of common stock, net156 — — 2,410 — — — $2,412 
Net income— — — — — 9,268 — — $9,268 
Other comprehensive income (loss)— — — — — — 1,763 — $1,763 
Balance at December 31, 2022123,567 $1,237 1,664 $(2,837)$616,354 $70,284 $44,694 $— $729,732 
Equity based compensation expense— — — — 6,004 — — — $6,004 
Issuance of common stock, net377 — — (2,302)— — — $(2,299)
Net income— — — — — 10,632 — — $10,632 
Other comprehensive income (loss)— — — — — — (4,764)— $(4,764)
Balance at March 31, 2023123,944 $1,240 1,664 $(2,837)$620,056 $80,916 $39,930 $— $739,305 
Common Stock
Treasury Stock
Additional
Paid‑in
Capital
Retained
Deficit
Accumulated
Other Comprehensive Income
Non‑controlling
Interest
Total
Shares
Cost
Shares
Cost
Balance at September 30, 2021122,173 $1,223 1,664 $(2,837)$582,052 $(11,182)$11,415 $1,548 $582,219 
Equity based compensation expense— — — — 5,203 — — — $5,203 
Issuance of common stock, net199 — — 822 — — — $824 
Dividends paid to non-controlling interest— — — — — — — (100)$(100)
Net income— — — — — 5,987 — 101 $6,088 
Other comprehensive income— — — — — — 8,359 — $8,359 
Balance at December 31, 2021122,372 $1,225 1,664 $(2,837)$588,077 $(5,195)$19,774 $1,549 $602,593 
Equity based compensation expense— — — — 5,386 — — — $5,386 
Issuance of common stock, net394 — — (1,358)— — — $(1,354)
Net income— — — — — 7,330 — 44 $7,374 
Other comprehensive income— — — — — — 24,072 — $24,072 
Balance at March 31, 2022122,766 $1,229 1,664 $(2,837)$592,105 $2,135 $43,846 $1,593 $638,071 
See accompanying notes to these Unaudited Consolidated Financial Statements
7


Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Six Months Ended
March 31,
20232022
Operating activities
Net income$19,900 $13,462 
Reconciliation of net income to cash flows (used in) provided by operating activities:
Depreciation and amortization66,647 61,156 
Amortization of deferred financing fees943 926 
Deferred income taxes3,195 592 
Share-based compensation12,200 10,589 
Gain on sale of property, plant, and equipment(1,403)(61)
Loss (gain) on sale of business2,857 (193)
Impairment of long-lived assets1,703 — 
Foreign currency exchange (gains) losses on intercompany loans and other non-cash items(9,805)3,728 
Changes in assets and liabilities
Accounts receivable4,954 16,554 
Inventories(19,561)(26,754)
Contract assets(12,560)(26,910)
Prepaids and other current assets(4,294)(14,049)
Accounts payable1,929 19,589 
Accrued expenses and other liabilities(45,947)(13,648)
Contract liabilities12,590 (382)
Income taxes(3,494)135 
Other non‑current assets and liabilities4,333 (15,586)
Net cash provided by operating activities$34,187 $29,148 
Investing activities
Purchase of property, plant, and equipment$(53,211)$(36,320)
Purchase of intangibles(2,479)(1,582)
Proceeds from sale of property, plant, and equipment3,621 1,940 
Proceeds from sale of business, net of cash of $0 and $0
67 356 
Acquisitions 816 (194,976)
Net cash used in investing activities$(51,186)$(230,582)
Financing activities
Borrowing of debt$157,774 $223,793 
Repayment of debt(166,542)(33,362)
Repayment of finance lease obligation(7,156)(6,571)
Receipt of earn-out related to previous acquisitions7,824 — 
Proceeds from issuance of common stock4,700 5,274 
Taxes paid related to net share settlements of share-based compensation awards(4,734)(5,144)
Distribution to non‑controlling interest— (100)
Net cash (used in) provided by financing activities$(8,134)$183,890 
Effect of exchange rate changes on cash 4,371 800 
Change in cash and cash equivalents (20,762)(16,744)
Cash and cash equivalents
Beginning of period$134,005 $146,244 
End of period$113,243 $129,500 
See accompanying notes to these Unaudited Consolidated Financial Statements
8


Evoqua Water Technologies Corp.
Unaudited Supplemental Disclosure of Cash Flow Information
(In thousands)
Six Months Ended
March 31,
20232022
Supplemental disclosure of cash flow information
Cash paid for taxes$7,039 $2,889 
Cash paid for interest$18,241 $12,537 
Non‑cash investing and financing activities
Finance lease transactions$8,770 $6,199 
Operating lease transactions$12,102 $11,385 
Cloud computing related intangible transaction$15,877 $— 
See accompanying notes to these Unaudited Consolidated Financial Statements
9


Evoqua Water Technologies Corp.
Notes to Unaudited Consolidated Financial Statements
(In thousands, except per share data)
1. Description of the Company and Basis of Presentation
Background
Evoqua Water Technologies Corp. (referred to herein as the “Company” or “EWT”) is a holding company and does not conduct any business operations of its own. The Company was incorporated on October 7, 2013. On November 6, 2017, the Company completed its initial public offering (“IPO”).
The Business
EWT provides a wide range of product brands and advanced water and wastewater treatment systems and technologies, as well as mobile and emergency water supply solutions and service contract options through its branch network. Headquartered in Pittsburgh, Pennsylvania, EWT is a multinational corporation with operations in the United States (“U.S.”), Canada, the United Kingdom (“UK”), the Netherlands, Germany, Australia, the People’s Republic of China, Singapore and India.
The Company is organizationally structured into two reportable operating segments for the purpose of making operational decisions and assessing financial performance: (i) Integrated Solutions and Services and (ii) Applied Product Technologies.
Basis of Presentation
The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All intercompany transactions have been eliminated. Unless otherwise specified, all dollar and share amounts in these notes are referred to in thousands.
The interim Unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. In our opinion, all adjustments considered necessary for a fair presentation of the financial statements have been included, and all adjustments are of a normal and recurring nature. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2022, as filed with the SEC on November 16, 2022 (“2022 Annual Report”), in preparing these Unaudited Consolidated Financial Statements, with the exception of accounting standard updates described in Note 2, “Recent Accounting Pronouncements.” These Unaudited Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes included in our 2022 Annual Report. Certain prior period amounts have been reclassified to conform to the current period presentation.
Proposed Merger with Xylem Inc.
On January 22, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Xylem Inc., an Indiana corporation (“Xylem”), and Fore Merger Sub, Inc., a Delaware corporation and a direct, wholly owned subsidiary of Xylem (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a direct, wholly owned subsidiary of Xylem (the “Merger”).
At the effective time of the Merger (the “Effective Time”) and upon consummation of the Merger, subject to the terms and conditions set forth in the Merger Agreement, each share of the common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time (other than treasury shares held by the Company and shares of the Company’s common stock owned, directly or indirectly, by Xylem or Merger Sub) will be converted into and become exchangeable for 0.48 shares of common stock, par value $0.01 per share, of Xylem (the “Xylem Shares”) to be issued by Xylem as consideration for the Merger. Cash will be issued in lieu of fractional shares.
10


Upon the closing of the Merger, legacy Company stockholders will own approximately 25% and legacy Xylem shareholders will own approximately 75% of the combined company.
The consummation of the Merger is subject to the satisfaction or waiver of certain customary mutual conditions, including (a) the receipt of the required approvals from the Company’s stockholders and Xylem’s shareholders at meetings currently scheduled for May 11, 2023, (b) receipt of required regulatory approvals under antitrust and foreign investment laws in applicable jurisdictions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act (collectively, “Regulatory Clearances”) (at 11:59 p.m. Eastern Time on March 6, 2023, the 30-day Hart-Scott-Rodino waiting period expired without issuance of a Request for Additional Information and Documentary Material), (c) the absence of any temporary or permanent order, injunction, law or other legal restraint prohibiting or making illegal the consummation of the Merger, (d) the Xylem Shares issuable to the stockholders of the Company in connection with the Merger having been approved for listing on the New York Stock Exchange, subject to official notice of issuance, and (e) Xylem’s registration statement on Form S-4 having been declared effective under the Securities Act of 1933 (the registration statement was declared effective by the SEC on April 6, 2023). The obligation of each party to consummate the Merger is also conditioned upon (a) the accuracy of the representations and warranties of the other party as of the date of the Merger Agreement and as of the closing (subject to customary materiality qualifiers) and (b) compliance by the other party in all material respects with its respective pre-closing obligations under the Merger Agreement. Subject to the satisfaction or waiver of the conditions to the closing, the Merger is expected to close in mid-2023.
The Merger Agreement contains certain termination rights that may be exercised by either the Company or Xylem. In certain of those cases, we may be required to pay Xylem a termination fee of $225,000.
In connection with the Merger, we recognized costs of $10,040 and $10,240 for the three and six months ended March 31, 2023, respectively, included in General and administrative expenses in the Unaudited Consolidated Statements of Operations. These costs primarily relate to legal and consulting fees incurred in connection with the Merger.
For further information on the Merger Agreement, refer to the Merger Agreement, a copy of which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on January 23, 2023.
11


2. Recent Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances transparency about an entity’s use of supplier finance programs by requiring quarterly and annual disclosures about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts annually, and a description of where in the financial statements outstanding amounts are presented. The guidance is effective for fiscal years beginning after December 15, 2022. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends Accounting Standards Codification (“ASC”) 805 to require an acquirer to, at the date of acquisition, recognize and measure contract assets and contract liabilities acquired in accordance with ASU 2014-9, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), as if the entity had originated the contracts, rather than adjust them to fair value at the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2022 and is to be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
Accounting Pronouncements Recently Adopted
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU is one of the subsequent amendments to ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Revenue Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, ASU 2022-06 was issued to defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company adopted ASU 2022-06 during the three months ended December 31, 2022 and the adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
3. Variable Interest Entities
Treated Water Outsourcing (“TWO”) was a joint venture between the Company and Nalco Water, an Ecolab company (“Nalco”), in which the Company held a 50% partnership interest. The Company acquired the remaining partnership interest in TWO from Nalco on April 1, 2022. Prior to acquisition, the Company was obligated to absorb all risk of loss up to 100% of the joint venture partner’s equity. As such, the Company fully consolidated TWO as a variable interest entity (“VIE”) under ASC Topic No. 810, Consolidation.
The following provides TWO’s summarized financial information for the three and six months ended March 31, 2022. As a result of the acquisition of the remaining partnership interest in TWO on April 1, 2022, there is no summarized financial information for the three and six months ended March 31, 2023.
Three Months Ended
March 31, 2022
Six Months Ended March 31, 2022
Total revenue$796 $1,641 
Total operating expenses(703)(1,440)
Income from operations$93 $201 

On October 1, 2019, the Company acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”). The Frontier acquisition was a VIE because it had insufficient equity to finance its activities due to key
12


assets being assigned to the Company upon acquisition.  The Company was the primary beneficiary of Frontier because the Company had the power to direct the activities that most significantly affect Frontier’s economic performance.
In addition, the Company entered into an agreement to purchase the remaining 40% interest in Frontier on or prior to March 30, 2024. This agreement (a) gave holders of the remaining 40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately 10% of the outstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners between January 1, 2021 and February 28, 2021 (the “Option”), and (b) obligated the Company to purchase and the Minority Owners to sell all of the Minority Owners’ remaining interest in Frontier at the fair market value at the time of sale on or prior to March 30, 2024 (the “Purchase Right”). The Company acquired an additional 8% equity interest in Frontier in April 2021. On April 1, 2022, the Company purchased the remaining 32% outstanding equity in Frontier.
The following provides Frontier’s summarized financial information for the three and six months ended March 31, 2022. As a result of the acquisition of the remaining equity interest in Frontier on April 1, 2022, there is no summarized financial information for the three and six months ended March 31, 2023.
Three Months Ended March 31, 2022Six Months Ended
March 31, 2022
Total revenue$6,414 $13,363 
Total operating expenses(6,149)(12,135)
Income from operations$265 $1,228 
4. 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. Divestitures support the Company’s strategy of focusing on core business operations and delivering on long-term operational goals.
2023 Acquisitions and Divestitures
On March 31, 2023, the Company completed its divestiture of its blood filter and water filter product lines that are sold into renal and other medical applications (the “Filtration Business”) to Medica USA Inc., a subsidiary of Medica S.p.A. (“Medica”), for $67 in cash at closing. The Company recognized a loss on sale of $2,857, which is included in Other operating expense on the Consolidated Statements of Operations during the three months ended March 31, 2023. The Filtration Business was included in the Integrated Solutions and Services segment and was determined by management not to be core to the Company’s long-term business strategy or operations. The sale of the Filtration Business does not represent a strategic shift that will have a major effect on the Company’s operations and financial results and is, therefore, not classified as discontinued operations in accordance with ASU 2014-08. The Company entered into a supply agreement with Medica under which the Company will purchase water filters used by its customers in the Company’s dialysis water systems.
On February 28, 2023, the Company completed its acquisition of the Texas-based industrial water service business accounts and deionization and carbon tank assets of Kemco Systems (“Kemco”) for $900 in cash at closing. This acquisition expands the Company’s service and aftermarket business in the Texas market while strengthening the Company’s ability to better support and service its industrial customers in the region. The acquisition did not meet the definition of a business under ASC 805, and as such was accounted for as an asset acquisition. The acquired business is included within the Integrated Solutions and Services segment.
13


On February 14, 2023, the Company entered into a definitive agreement to divest its carbon reactivation and slurry operations (the “Carbon Business”) to Desotec US LLC, a subsidiary of Desotec N.V. (“Desotec”). The sale of the Carbon Business will allow the Company to focus on its core service business, which includes carbon services and the sale of high-quality activated carbon. At the closing of the transaction, the Company will enter into a supply agreement with Desotec under which the Company will purchase reactivated carbon to continue to service its customers. During the three months ended March 31, 2023, the assets and liabilities of the Carbon Business met the accounting criteria to be classified as held for sale on the Consolidated Balance Sheets. As part of the required evaluation under the held for sale guidance, the Company determined that the approximate fair value less costs to sell the operations exceeded the carrying value of the net assets and as such, no impairment charge was recorded. As of March 31, 2023, the transaction had not closed and is expected to close in the third quarter of 2023. Gross proceeds upon closing of the transaction are anticipated to be $100,000 and the Company expects to record a gain on sale. The Carbon Business is included in the Integrated Solutions and Services segment.
The following represents the carrying value of the assets and liabilities within the disposal group at March 31, 2023:

Inventories, net$11,622 
Current assets held for sale11,622 
Property, plant, and equipment, net6,744 
Operating lease right-of-use assets, net2,312 
Goodwill7,830 
Intangible assets, net12,847 
Non-current assets held for sale29,733 
Total assets held for sale$41,355 
Accrued expenses and other liabilities487 
Current liabilities held for sale487 
Obligation under operating leases2,703 
Non-current liabilities held for sale2,703 
Total liabilities held for sale$3,190 

2022 Acquisitions

On July 15, 2022, the Company completed the acquisition of Epicor, Inc. (“Epicor”) for $4,339 cash paid at closing. During the three months ended December 31, 2022, the Company paid cash of $38 to the seller as a result of net working capital adjustments. Epicor has supplied specialty resins for power steam system treatment for fifty years. The resins provide a cost-effective and efficient method for creating and maintaining a continual supply of ultra-pure water for power plants. Epicor is included within the Integrated Solutions and Services segment.

On July 1, 2022, the Company completed the acquisition of Smith Engineering, Inc. (“Smith Engineering”) for $18,878 cash paid at closing, of which $2,895 was paid into an escrow account. Smith Engineering is a leader in the design, manufacturing, and service of custom high purity water treatment equipment serving the biotech/pharmaceutical, data center, food and beverage, healthcare, medical device, and microelectronics markets. With over 1,200 customers in North America, Smith Engineering offers a variety of water treatment products and services, including filtration, UV, reverse osmosis, and deionization. Smith Engineering is included within the Integrated Solutions and Services segment.

The acquisition of Smith Engineering has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. Due to the nature of the net assets acquired, at March 31, 2023, the valuation process to determine fair values is not complete and further adjustments are expected in the remainder of fiscal year 2023. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition.

14


The preliminary fair value of assets acquired and liabilities assumed were as follows:

Receivables, net$2,501 
Inventories, net1,345 
Other current assets937 
Property, plant, and equipment, net532 
Goodwill7,820 
Intangible assets, net9,815 
Other non-current assets796 
Total assets acquired$23,746 
Current liabilities(1,834)
Non-current liabilities(3,034)
Total liabilities assumed$(4,868)
Net assets acquired$18,878 

On December 20, 2021, the Company and its indirect wholly-owned subsidiaries Evoqua Water Technologies LLC (“EWT LLC”) and Evoqua Water Technologies Ltd. (together with EWT LLC, the “Buyer”) entered into an Asset Purchase Agreement (the “Agreement”) with Cantel Medical LLC, Mar Cor Purification, Inc., and certain of their affiliates (collectively, the “Sellers”), each wholly-owned subsidiaries of Steris plc, pursuant to which the Buyer agreed to acquire certain assets of the Sellers and assume certain liabilities of the Sellers that are owned or used or arise in connection with the global operation of the Sellers’ renal business (the “Mar Cor Business”) for an aggregate purchase price of $196,300 in cash at closing (the “Purchase Price”), subject to customary adjustments, including for working capital (the “Transaction”). On January 3, 2022, the Company completed the Transaction to acquire the Mar Cor Business for $194,976 paid in cash at closing, following adjustments. During the six months ended March 31, 2022, the Company received cash of $1,754 from the Sellers as a result of net working capital adjustments, thus resulting in a final purchase price of $193,222. The Company utilized cash on hand and borrowed an additional $160,000 under the 2021 Revolving Credit Facility (as defined below) to fund the Transaction. The Mar Cor Business is included within the Integrated Solutions and Services segment.

The Purchase Price included a $12,300 earn out, which was being held in escrow and was to be paid, pro rata, to the Sellers if the Mar Cor Business met certain sales performance goals through December 31, 2022 (the “Earn Out”). During the three months ended March 31, 2023, the Company received cash of $12,300 for the Earn Out asset. See Note 6, “Fair Value Measurements”, for further discussion.

The acquisition of the Mar Cor Business has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date.

15


The opening balance sheet for the Mar Cor Business is summarized as follows:

Receivables, net$21,275 
Inventories, net32,350 
Earn Out asset7,824 
Other current assets1,844 
Property, plant, and equipment, net19,150 
Goodwill67,000 
Intangible assets, net57,094 
Other non-current assets7,694 
Total assets acquired$214,231 
Current liabilities(15,467)
Non-current liabilities(5,542)
Total liabilities assumed$(21,009)
Net assets acquired$193,222 
5. Revenue
Performance Obligations
The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations if the product has an alternative use and the Company does not have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. The Company maintains a backlog of confirmed orders, which totaled approximately $407,197 at March 31, 2023. 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 to twenty-four months.
Disaggregation of Revenue
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into source of revenue, reportable operating segment, and geographical regions. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606, which is to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Information regarding the source of revenue:
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Revenue from contracts with customers recognized under Topic 606
$429,239 $382,758 $820,670 $700,529 
Other(1)
48,558 43,970 92,973 92,467 
Total$477,797 $426,728 $913,643 $792,996 
(1)     Other revenue relates to revenue recognized pursuant to ASU 2016-02, Leases (Topic 842), primarily attributable to long term rentals.
16


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

Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Integrated Solutions and Services
Capital$87,761 $70,702 $165,407 $137,804 
Aftermarket60,805 62,271 118,245 91,569 
Service180,333 161,867 350,673 310,513 
Total$328,899 $294,840 $634,325 $539,886 
Applied Product Technologies
Capital$99,412 $91,778 $187,477 $175,662 
Aftermarket44,673 35,024 81,913 67,308 
Service4,813 5,086 9,928 10,140 
Total$148,898 $131,888 $279,318 $253,110 
Total Revenue
Capital$187,173 $162,480 $352,884 $313,466 
Aftermarket105,478 97,295 200,158 158,877 
Service185,146 166,953 360,601 320,653 
Total$477,797 $426,728 $913,643 $792,996 

Information regarding revenue disaggregated by geographic area is as follows:
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
United States$394,143 $352,639 $755,365 $647,347 
Asia33,447 28,042 67,968 58,947 
Europe33,377 28,641 57,864 54,270 
Canada13,085 13,748 26,259 26,409 
Australia3,745 3,658 6,187 6,023 
Total$477,797 $426,728 $913,643 $792,996 
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. Changes in contract assets and liabilities are due to the Company’s performance under the contract.
17


The tables below provide a roll-forward of contract assets and contract liabilities balances for the periods presented:
Six Months Ended
March 31,
Contract assets(a)
20232022
Balance at beginning of period$102,123 $72,746 
Recognized in current period205,347 206,859 
Reclassified to accounts receivable(193,671)(179,967)
Foreign currency1,662 (136)
Balance at end of period$115,461 $99,502 
(a)     Excludes receivable balances which are disclosed on the Consolidated Balance Sheets.
Six Months Ended
March 31,
Contract Liabilities 20232022
Balance at beginning of period$62,439 $55,883 
Recognized in current period212,122 174,518 
Amounts in beginning balance reclassified to revenue(49,217)(44,292)
Current period amounts reclassified to revenue(150,520)(130,629)
Foreign currency688 113 
Balance at end of period$75,512 $55,593 
6. Fair Value Measurements
As of March 31, 2023 and September 30, 2022, the fair values of cash and cash equivalents, accounts receivable, and accounts payable approximated carrying values due to the short maturity of these items.
The Company measures the fair value of pension plan assets and liabilities, deferred compensation plan assets and liabilities on a recurring basis pursuant to ASC Topic No. 820, Fair Value Measurement. ASC Topic No. 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs in which little or no market data is available, therefore requiring an entity to develop its own assumptions.
The following table presents the Company’s financial assets and liabilities at fair value. The fair values related to the pension plan assets are determined using net asset value (“NAV”) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value. The reported carrying amounts of deferred compensation plan assets and liabilities and debt approximate their fair values. The Company uses interest rates and other relevant information generated by market transactions involving similar instruments to measure the fair value of these assets and liabilities, therefore all are classified as Level 2 within the valuation hierarchy.

18


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, 2023
Assets:
Pension plan
Cash $— $1,552 $— $— 
Global Multi-Asset Fund12,996 — — — 
Government Securities 3,071 — — — 
Guernsey Unit Trust 2,277 — — — 
Global Absolute Return 1,462 — — — 
Deferred compensation plan assets
Cash— 723 — — 
Mutual Funds— 12,805 — — 
Total return swaps—deferred compensation— — 205 — 
Interest rate swaps— — 40,352 — 
Foreign currency forward contracts— — 11 — 
Commodity swaps— — — 
Liabilities:
Pension plan — — (29,557)— 
Deferred compensation plan liabilities — — (20,234)— 
Long‑term debt — — (880,349)— 
Foreign currency forward contracts— — (674)— 
Commodity swaps— — (7)— 
19


Net Asset ValueQuoted Market
Prices in Active
Markets (Level 1)
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
As of September 30, 2022
Assets:
Pension plan
Cash$— $40 $— $— 
Global Multi-Asset Fund11,632 — — — 
Government Securities3,343 — — — 
Liability Driven Investment928 — — — 
Guernsey Unit Trust2,048 — — — 
Global Absolute Return1,299 — — — 
Deferred compensation plan assets
Cash— 902 — — 
Mutual Funds— 12,330 — — 
Earn-out assets related to acquisitions— — — 11,597 
Interest rate swaps— — 49,952 — 
Foreign currency forward contracts— — 507 — 
Liabilities:
Pension plan— — (26,654)— 
Deferred compensation plan liabilities— — (20,081)— 
Total return swaps—deferred compensation— — (632)— 
Long‑term debt— — (884,517)— 
Foreign currency forward contracts— — (872)— 
Commodity swaps— — (7)— 
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, 2023 and September 30, 2022. The unrealized loss on mutual funds was $1,208 at March 31, 2023.
The Company records contingent consideration arrangements at fair value on a recurring basis, and the associated balances presented as of September 30, 2022 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 assets 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. As a result of the Mar Cor Business acquisition on January 3, 2022, the Company recorded an Earn Out asset for $7,824 which represented the fair value of amounts expected to be received back from escrow based on the forecasted achievement of certain sales performance goals at the acquisition date. During the year ended September 30, 2022, the Company recorded an increase in the fair value of the Earn Out asset of $3,773 based on updated forecast information. During the six months ended March 31, 2023, the Company recorded an increase in the fair value of the Earn Out asset of $703 based on results of sales performance goals. The Company received cash of $12,300 for the Earn Out asset during the three months ended March 31, 2023. As of March 31, 2023 and September 30, 2022, the Earn Out asset related to the Mar Cor Business acquisition totaled $0 and $11,597, respectively, and is included in Prepaid and other current assets on the Consolidated Balance Sheets.
20


7. Accounts Receivable
Accounts receivable are summarized as follows:
March 31,
2023
September 30,
2022
Accounts receivable$310,792 $312,600 
Allowance for credit losses
(6,937)(6,888)
Receivables, net
$303,855 $305,712 
The movement in the allowance for credit losses was as follows for the six months ended March 31, 2023:
Balance at September 30, 2022$(6,888)
Charged to costs and expenses
(362)
Write-offs
316 
Foreign currency and other
(3)
Balance at March 31, 2023$(6,937)
8. Inventories
The major classes of Inventories, net are as follows:
March 31,
2023
September 30,
2022
Raw materials and supplies$130,294 $120,532 
Work in progress38,631 36,499 
Finished goods and products held for resale80,257 80,811 
Costs of unbilled projects2,968 2,309 
Reserves for excess and obsolete
(11,437)(10,800)
Inventories, net
$240,713 $229,351 
21


9. Property, Plant, and Equipment
Property, plant, and equipment consists of the following:
March 31,
2023
September 30,
2022
Machinery and equipment$400,714 $401,334 
Rental equipment277,644 267,345 
Land and buildings79,748 82,985 
Construction in process
94,168 72,184 
852,274 823,848 
Less: accumulated depreciation
(438,194)(418,559)
Property, plant, and equipment, net$414,080 $405,289 
Depreciation expense and maintenance and repairs expense for the three and six months ended March 31, 2023 and 2022 were as follows:
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Depreciation expense$22,247 $20,722 $43,286 $40,042 
Maintenance and repair expense8,714 7,475 16,944 13,594 
10. Goodwill
Changes in the carrying amount of goodwill are as follows:
Integrated Solutions and ServicesApplied Product Technologies
Total
Balance at September 30, 2022$306,935 $166,637 $473,572 
Measurement period adjustment(1,754)— (1,754)
Reclassified to non-current assets held for sale(7,831)— (7,831)
Foreign currency translation
626 4,316 4,942 
Balance at March 31, 2023$297,976 $170,953 $468,929 
As of March 31, 2023 and September 30, 2022, $248,781 and $250,636, respectively, of goodwill was deductible for tax purposes.
22


11. Debt
Long‑term debt, including accrued interest, consists of the following:
March 31,
2023
September 30,
2022
2021 Term Loan, due April 1, 2028 (1)
$466,713 $469,063 
2021 Revolving Credit Facility, due April 1, 2026 (2)
140,162 151,254 
Securitization Facility, due April 1, 2024 (3)
145,282 150,201 
Equipment Financing, due September 30, 2023 to September 30, 2032, interest rates ranging from 3.59% to 8.41%
129,748 120,155 
Total debt881,905 890,673 
Less unamortized deferred financing fees(8,930)(9,873)
Total net debt872,975 880,800 
Less current portion(19,376)(17,266)
Total long‑term debt$853,599 $863,534 
(1)The interest rate on the 2021 Term Loan was 6.94% as of March 31, 2023, comprised of 4.69% LIBOR plus a 2.25% spread. Includes accrued interest of $25 at March 31, 2023.
(2)The 2021 Revolving Credit Facility includes $136,000 outstanding with an interest rate of 7.08% as of March 31, 2023, comprised of 4.88% LIBOR plus a 2.20% spread, and $4,000 outstanding with an interest rate of 9.20% as of March 31, 2023, comprised of 8.25% LIBOR plus a 0.95% spread. Includes accrued interest of $162 and $254, at March 31, 2023 and September 30, 2022, respectively.
(3)The interest rate on the Securitization Facility was 6.11% as of March 31, 2023, comprised of 4.86% LIBOR plus a 1.25% spread. Includes accrued interest of $282 and $201 at March 31, 2023 and September 30, 2022, respectively.

2021 Credit Agreement
On April 1, 2021, EWT Holdings III Corp. (“EWT III”), a subsidiary of the Company, entered into a Credit Agreement (the “2021 Credit Agreement”) among EWT III, as borrower, EWT Holdings II Corp. (“EWT II”), as parent guarantor, the lenders from time to time party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and ING Capital, LLC, as sustainability coordinator. The 2021 Credit Agreement provides for a multi-currency senior secured revolving credit facility in an aggregate principal amount not to exceed the U.S. dollar equivalent of $350,000 (the “2021 Revolving Credit Facility”) and a discounted senior secured term loan (the “2021 Term Loan”) in the amount of $475,000 (together with the 2021 Revolving Credit Facility, the “Senior Facilities”). The 2021 Credit Agreement also provides for a letter of credit sub-facility not to exceed $60,000.

The 2021 Credit Agreement contains customary representations, warranties, affirmative covenants, and negative covenants, including, among other things, a springing maximum first lien leverage ratio of 5.55 to 1.00. The Company did not exceed this ratio during the six months ended March 31, 2023, does not anticipate exceeding this ratio during the year ending September 30, 2023, and therefore does not anticipate any additional repayments during the year ending September 30, 2023.
The following table summarizes the amount of the Company’s outstanding borrowings and outstanding letters of credit under the 2021 Revolving Credit Facility as of March 31, 2023 and September 30, 2022.
March 31,
2023
September 30,
2022
Borrowing availability$350,000 $350,000 
Outstanding borrowings140,000 151,000 
Outstanding letters of credit7,416 9,317 
Unused amounts$202,584 $189,683 
23


Receivables Securitization Program
On April 1, 2021, Evoqua Finance LLC (“Evoqua Finance”), an indirect wholly-owned subsidiary of the Company, entered into an accounts receivable securitization program (the “Receivables Securitization Program”) consisting of, among other agreements, (i) a Receivables Financing Agreement (the “Receivables Financing Agreement”) among Evoqua Finance, as the borrower, the lenders from time to time party thereto (the “Receivables Financing Lenders”), PNC Bank, National Association (“PNC Bank”), as administrative agent, EWT LLC, as initial servicer, and PNC Capital Markets LLC (“PNC Markets”), as structuring agent, pursuant to which the lenders have made available to Evoqua Finance a receivables finance facility (the “Securitization Facility”) in an amount up to $150,000 and (ii) a Sale and Contribution Agreement (the “Sale Agreement”) among Evoqua Finance, as purchaser, EWT LLC, as initial servicer and as an originator, and Neptune Benson, Inc., an indirectly wholly-owned subsidiary of the Company, as an originator (together with EWT LLC, the “Originators”).
The Receivables Securitization Program contains certain customary representations, warranties, affirmative covenants, and negative covenants, subject to certain cure periods in some cases, including the eligibility of the receivables being sold by the Originators and securing the loans made by the Receivables Financing Lenders, as well as customary reserve requirements, events of default, termination events, and servicer defaults. The Company was in compliance with all covenants during the six months ended March 31, 2023, does not anticipate becoming noncompliant during the year ending September 30, 2023, and therefore, subject to limitations arising from collateral availability, does not anticipate any additional repayments during the year ending September 30, 2023.
Equipment Financings
During the six months ended March 31, 2023, the Company completed the following equipment financings:
Date EnteredDueInterest Rate as of March 31, 2023Principal Amount
March 31, 2023April 30, 20306.14 %$5,116 
March 31, 2023
September 30, 2032(1)
5.30 %1,888 
December 30, 2022
September 30, 2032(1)
5.30 %1,452 
December 19, 2022
May 31, 2029(2)
5.03 %2,041 
October 31, 2022June 30, 20296.33 %6,208 
$16,705 
(1)Represents an advance received from the lender on a multiple draw term loan in which the Company is making interest only payments through September 30, 2023 based on an interest rate of 5.30% including a 3.05% Bloomberg Short-Term Bank Yield Index plus a 2.25% spread as of March 31, 2023.
(2)Represents an advance received from the lender on a multiple draw term loan with interest payments based on a 2.28% Secured Overnight Financing Rate plus a 2.75% spread.
24


The Company has secured financing agreements that require providing a security interest in specified equipment and, in some cases, the underlying contract and related receivables. As of March 31, 2023 and September 30, 2022, the gross and net amounts of those assets are included on the Consolidated Balance Sheets as follows:
March 31,
2023
September 30,
2022
Gross
Net
GrossNet
Property, plant, and equipment, net
Machinery and equipment$82,163 $56,499 $86,294 $62,459 
Construction in process
20,393 20,393 14,201 14,201 
Receivables, net1,820 1,820 108 108 
Prepaid and other current assets4,172 4,172 3,276 3,276 
Other non‑current assets54,702 54,357 51,877 51,550 
$163,250 $137,241 $155,756 $131,594 
Deferred Financing Fees and Discounts
Deferred financing fees and discounts related to the Company’s long-term debt were included as a contra liability to debt on the Consolidated Balance Sheets as follows:
March 31,
2023
September 30,
2022
Current portion of deferred financing fees and discounts(1)
$(1,920)$(1,899)
Long-term portion of deferred financing fees and discounts(2)
(7,010)(7,974)
Total deferred financing fees and discounts$(8,930)$(9,873)
(1)Included in Current portion of debt, net of deferred financing fees and discounts on the Consolidated Balance Sheets.
(2)Included in Long-term debt, net of deferred financing fees and discounts on the Consolidated Balance Sheets.
Amortization of deferred financing fees and discounts included in interest expense was $467 and $459 for the three months ended March 31, 2023 and 2022 and $943 and $926 for the six months ended March 31, 2023 and 2022, respectively.
Repayment Schedule
Aggregate maturities of all long‑term debt, including current portion of long‑term debt and excluding finance lease obligations as of March 31, 2023, are presented below:
Fiscal Year
Remainder of 2023$11,074 
2024165,231 
202521,860 
2026165,244 
202722,994 
Thereafter
495,502 
Total
$881,905 
25


12. Derivative Financial Instruments
Interest Rate Risk Management
The Company is subject to market risk exposure arising from changes in interest rates on the senior secured credit facilities as well as variable rate equipment financings, 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. As of March 31, 2023, the notional amount of the Company’s interest rate swaps was $540,000.
Foreign Currency Risk Management
The Company’s functional currency is the U.S. dollar. By operating internationally, the Company is subject to foreign currency translation risk associated with converting the foreign operations’ financial statements into U.S. dollars transactions denominated in currencies other than the U.S. dollar (“foreign currencies”). The Company is also subject to currency risk from transactions denominated in 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 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, 2023, the notional amount of the forward contracts was $25,667.

Equity Price Risk Management
The Company is exposed to variability in compensation charges related to certain deferred compensation obligations to employees. Equity price movements affect the compensation expense as certain investments made by the Company’s employees in the deferred compensation plan are revalued. Although not designated as accounting hedges, the Company utilizes derivatives such as total return swaps to economically hedge a portion of this exposure and offset the related compensation expense. As of March 31, 2023, the notional amount of the total return swaps was $5,016.
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 fully expects the counterparties to perform under their respective 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 following represents the fair value recorded for derivatives designated as cash flow hedges for the periods presented:
Asset Derivatives
Balance Sheet LocationMarch 31,
2023
September 30,
2022
Interest rate swapsPrepaid and other current assets$22,492 $19,186 
Foreign currency forward contractsPrepaid and other current assets11 467 
Commodity swapsPrepaid and other current assets— 
Interest rate swapsOther non‑current assets17,860 30,766 
26


Liability Derivatives
Balance Sheet LocationMarch 31,
2023
September 30,
2022
Foreign currency forward contractsAccrued expenses and other current liabilities626 872 
Commodity swapsAccrued expenses and other current liabilities
The following represents the amount of (loss) gain recognized in Accumulated other comprehensive income (loss) (“AOCI”) (net of tax) during the periods presented:
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Interest rate swaps$(54)$21,077 $2,045 $26,948 
Foreign currency forward contracts(401)100 (790)82 
Commodity swaps(7)28 
$(462)$21,185 $1,256 $27,058 
The following represents the amount of (loss) gain reclassified from AOCI into earnings during the periods presented:
Three Months Ended
March 31,
Six Months Ended
March 31,
Location of (Loss) Gain2023202220232022
Cost of product sales and services$(137)$$(243)$(79)
General and administrative expense(56)— (458)(7)
Selling and marketing expense— (1)— — 
Interest expense5,233 (550)9,245 (1,167)
$5,040 $(545)$8,544 $(1,253)
Based on the fair value amounts of the Company’s cash flow hedges at March 31, 2023, the Company expects that approximately $545 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.
Derivatives Not Designated as Hedging Instruments
The following represents the fair value recorded for derivatives not designated as cash flow hedges for the periods presented:
Asset Derivatives
Balance Sheet LocationMarch 31,
2023
September 30,
2022
Total return swaps—deferred compensationPrepaid and other current assets$205 $— 
Foreign currency forward contractsPrepaid and other current assets— 40 
Liability Derivatives
Balance Sheet LocationMarch 31,
2023
September 30,
2022
Total return swaps—deferred compensationAccrued expenses and other current liabilities$— $632 
Foreign currency forward contractsAccrued expenses and other current liabilities48 — 
27


The following represents the amount of gain (loss) recognized in earnings for derivatives not designated as hedges during the periods presented:
Three Months Ended
March 31,
Six Months Ended
March 31,
Location of Gain (Loss)2023202220232022
General and administrative expense$215 $(352)$590 $(41)
13. Product Warranties
A reconciliation of the activity related to the accrued warranty, including both the current and long‑term portions, is as follows:
Current Product WarrantiesNon-Current Product Warranties
Six Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Balance at beginning of the period$6,740 $8,138 $3,465 $2,966 
Warranty provision for sales3,186 2,797 545 609 
Settlement of warranty claims(3,338)(3,345)(811)(338)
Foreign currency translation and other
(32)(92)128 (46)
Balance at end of the period
$6,556 $7,498 $3,327 $3,191 
14. Restructuring and Related Charges
To better align its resources with its growth strategies and reduce its cost structure, the Company commits to various restructuring plans as necessary. The Company has undertaken various restructuring initiatives, including activities to reduce the cost structure and rationalize location footprint, realigning operating models designed to better serve the needs of customers worldwide, and various initiatives within the Integrated Solutions and Services segment to drive efficiency and effectiveness in certain divisions.
The Company currently expects to incur in future periods approximately $3,400 to $4,400 of costs related to restructuring programs initiated in prior periods.
The table below sets forth the amounts accrued for the restructuring components and related activity:
Six Months Ended
March 31,
20232022
Balance at beginning of the period$658 $304 
Restructuring charges related to organizational realignment1,768 987 
Restructuring charges related to facility consolidation589 1,874 
Restructuring charges related to other initiatives138 
Release of prior reserves(223)(66)
Cash payments(1,968)(2,220)
Other adjustments
Balance at end of the period
$963 $888 
The balances for accrued restructuring liabilities at March 31, 2023 and September 30, 2022, are recorded in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Restructuring charges primarily represent severance charges and other employee costs, fixed asset write-offs, and certain relocation expenses. The Company expects to pay the remaining amounts accrued as of March 31, 2023 during the remainder of fiscal 2023.
28


The table below sets forth the location of amounts recorded above on the Unaudited Consolidated Statements of Operations:
Six Months Ended
March 31,
20232022
Cost of product sales and services$910 $867 
General and administrative expense1,010 1,719 
Sales and marketing expense282 — 
Research and development expense138 
Other operating expense, net(68)215 
$2,272 $2,802 
The Company continues to evaluate restructuring activities that may result in additional charges in the future.
15. 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,
2023202220232022
Service cost$143 $227 $280 $459 
Interest cost205 107 401 215 
Expected return on plan assets(114)(129)(222)(261)
Amortization of actuarial (gains) losses
(15)166 (28)335 
Pension expense for defined benefit plans
$219 $371 $431 $748 
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.
16. Income Taxes
Year-to-date income tax expense or benefit is the product of the most current projected annual effective tax rate (“PAETR”) and the actual year-to-date pretax income (loss) adjusted for any discrete tax items. The income tax expense or benefit for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense or 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.
29


Annual Effective Tax Rate
The PAETR, which excludes the impact of discrete items, was 32.4% and 22.6% as of the six months ended March 31, 2023 and 2022, respectively. For the six months ended March 31, 2023, the PAETR was higher than the U.S. federal statutory rate of 21.0% primarily due to the mix of earnings between countries, most of which have higher statutory rates than the U.S., state income tax expense, projected Global Intangible Low Tax Income inclusion, and non-deductible expenses primarily incurred in the U.S. The PAETR at March 31, 2022 was favorably impacted by maintaining a valuation allowance on U.S. deferred tax assets. On September 30, 2022, the valuation allowance on U.S. deferred tax assets was reversed. As a result, the March 31, 2023 PAETR is higher than the PAETR at March 31, 2022.
Current and Prior Period Tax Expense
For the three months ended March 31, 2023, the Company recognized income tax expense of $2,522 on pretax income of $13,154. The rate of 19.2% differed from the U.S. statutory rate of 21.0% and was negatively impacted by tax based on a higher projected annual tax rate due to the mix of earnings between countries, most of which have higher statutory tax rates than the U.S., state income tax expense, residual U.S. tax due to Global Intangible Low Tax Income inclusion, and non-deductible expenses primarily incurred in the U.S., which was offset by a favorable discrete item related to the impact of tax deductions greater than those for financial reporting related to equity compensation.
For the three months ended March 31, 2022, the Company recognized income tax expense of $2,248 on pretax income of $9,622. The rate of 23.4% differed from the U.S. statutory rate of 21.0% as the mix of earnings between countries, most of which have higher statutory tax rates than the U.S., was mostly offset by the impact of maintaining a U.S. valuation allowance that is provided on U.S. deferred tax assets.

For the six months ended March 31, 2023, the Company recognized income tax expense of $6,412 on pretax income of $26,312 The rate of 24.4% differed from the U.S. statutory rate of 21% primarily due to the negative impacts of the mix of earnings between countries, most of which have higher statutory tax rates than the U.S., state income tax expense, residual U.S. tax due to Global Intangible Low Tax Income inclusion, and non-deductible expenses primarily incurred in the U.S., partially offset by a favorable discrete item related to the impact of tax deductions greater than those for financial reporting related to equity compensation

For the six months ended March 31, 2022, the Company recognized income tax expense of $3,869 on pretax income of $17,331. The rate of 22.3% differed from the U.S. statutory rate of 21.0% as the mix of earnings between countries, most of which have higher statutory tax rates than the U.S., was mostly offset by the impact of maintaining a U.S. valuation allowance that is provided on U.S. deferred tax assets.

At March 31, 2023 and 2022, the Company had gross unrecognized tax benefits of $1,850 and $2,071 respectively.
17. 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, non-employee members of the Company’s Board of Directors (the “Board”) participate in equity compensation plans in connection with their service on the Board.

The Company established the Evoqua Water Technologies Corp. Stock Option Plan (the “Stock Option Plan”) on March 6, 2014. The plan allows certain management employees and the Board to purchase shares in the Company. Under the Stock Option Plan, the number of shares available for award was 11,083. As of March 31, 2023, there were approximately 2,177 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 shareholders approved, the Evoqua Water Technologies Corp. 2017 Equity Incentive Plan (the “Equity Incentive Plan”), under which equity awards may be granted in the form of options, restricted stock, restricted stock units (“RSUs”), stock appreciation rights, dividend equivalent rights, share awards, and performance-based awards (including performance share units and performance-based restricted stock).

30


As of March 31, 2023, there were approximately 3,559 shares available for grants under the Equity Incentive Plan.

Outstanding option awards vest ratably at 25% per year, and are exercisable on and after vesting. The options granted have a ten-year contractual term.

A summary of the stock option activity, including stock appreciation rights, as of March 31, 2023 is presented below:
(In thousands, except per share amounts)OptionsWeighted Average Exercise Price/ShareWeighted Average Remaining Contractual TermAggregate Intrinsic Value
Outstanding at September 30, 20224,265 $14.74 5.2 years$78,218 
Granted42.42 
Exercised(199)15.95 
Forfeited(7)24.36 
Outstanding at March 31, 20234,066 $14.71 4.7 years$142,350 
Options exercisable at March 31, 20233,589 $13.40 4.3 years$130,334 
Options vested and expected to vest at March 31, 20234,062 $14.70 4.7 years$142,253 
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, 2023 was $5,968.
    
A summary of the status of the Company's unvested stock options as of and for the six months ended March 31, 2023 is presented below.
(In thousands, except per share amounts)SharesWeighted Average Grant Date Fair Value/Share
Unvested at beginning of period1,042 $6.82 
Granted21.39 
Vested(564)5.93 
Forfeited(8)7.95 
Unvested at end of period477 $8.21 
The total fair value of options vested during the six months ended March 31, 2023, was $3,346.

During the six months ended March 31, 2023, the Company granted RSUs and performance share units under the Equity Incentive Plan to certain employees of the Company. The final number of performance share units that may be earned is dependent on the Company’s achievement of performance goals related to cumulative revenue growth dollars and average adjusted EBITDA margin over a three-year measurement period. The maximum payout cannot exceed 250% of the applicable target award, which also considers that the final number of performance share units that may be earned is subject to a relative total stockholder return (“TSR”) modifier. The TSR modifier operates by increasing or decreasing the total number of shares earned by up to 25% based on the Company’s TSR relative to the TSR of the U.S. constituents of the S&P Global Water Index. In order to receive shares earned at the end of the performance period, the recipient must remain employed by the Company or its subsidiaries through the end of the three-year period (except in the event of retirement, death, disability or, in certain circumstances, related to change in control).
31


The following is a summary of the RSU activity for the six months ended March 31, 2023.
(In thousands, except per share amounts)SharesWeighted Average Grant Date Fair Value/Share
Outstanding at September 30, 2022980 $30.18 
Granted312 42.83 
Vested(398)27.73 
Forfeited(36)38.64 
Outstanding at March 31, 2023858 $35.56 
Expected to vest at March 31, 2023827 $35.35 
The following is a summary of the performance share unit activity for the six months ended March 31, 2023, assuming target award level.
(In thousands, except per share amounts)SharesWeighted Average Grant Date Fair Value/Share
Unvested at beginning of period592 $23.36 
Granted154 43.46 
Forfeited(4)44.84 
Unvested at end of period742 $27.42 
Expected to vest701 $27.17 
Expense Measurement and Recognition
The Company recognizes share-based compensation for all currently outstanding awards and, in future periods, will recognize compensation costs for the unvested portion of awards based on grant date fair values. Total share-based compensation expense was $6,884 and $6,068 during the three months ended March 31, 2023 and 2022, respectively, of which $6,004 and $5,386 was non-cash, respectively. Total share-based compensation expense was $13,201 and $11,402 during the six months ended March 31, 2023 and 2022, respectively, of which $12,200 and $10,589 was non-cash, respectively. The unrecognized compensation expense related to stock options, RSUs, and performance share units (measured at a target award level) was $3,289, $25,266 and $13,052, respectively at March 31, 2023, and is expected to be recognized over a weighted average period of 1.4 years, 1.9 years and 1.6 years, respectively. The Company received $4,700 from the exercise of stock options during the six months ended March 31, 2023.

Employee Stock Purchase Plan    
Effective October 1, 2018, the Company implemented an employee stock purchase plan (the “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 or last business day of the applicable six-month offering period. These purchases are offered twice throughout each fiscal year, and are paid by employees through payroll deductions over the respective six month purchase period, at the end of which the stock is 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 months ended March 31, 2023 and 2022, the Company incurred compensation expense of $291 and $198, respectively, in salaries and wages with respect to the ESPP, representing the fair value of the discounted price of the shares. During the six months ended March 31, 2023 and 2022, the Company incurred compensation expense of $607 and $419, respectively. These amounts are included in the total share-based compensation expense above. On October 4, 2022 and April 1, 2023, 62 and 66 shares, respectively, were issued under the ESPP.
32


18. 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, 2023 and September 30, 2022 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, 2023 and 2022, no customer accounted for more than 10% of net sales or net accounts receivable.
The Company operates predominantly in nine 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 transacted with the Company location that maintains the customer relationship.
19. Commitments and Contingencies
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. 
The following summarizes the Company’s outstanding letters of credit and surety bonds as of March 31, 2023 and September 30, 2022, respectively.
March 31,
2023
September 30,
2022
Revolving credit capacity$60,000 $60,000 
Letters of credit outstanding7,416 9,317 
Remaining revolving credit capacity$52,584 $50,683 
Surety capacity$287,173 $261,959 
Surety issuances179,187 134,037 
Remaining surety available$107,986 $127,922 
The longest maturity date of letters of credit and surety bonds in effect as of March 31, 2023 was March 20, 2030.
Litigation
From time to time, as a normal incident of the nature and kind of business in which the Company is engaged, various claims or charges are asserted and litigation is commenced against it arising from or related to: product liability; personal injury; trademarks, trade secrets, or other intellectual property; shareholder disputes; labor and employee disputes; commercial or contractual disputes; breach of warranty; or environmental matters. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. While it is not feasible to predict the outcome of these matters with certainty, and some lawsuits, claims, or
33


proceedings may be disposed or decided unfavorably, the Company does not expect that any asserted or un-asserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its results of operations, or financial condition.
As previously disclosed, in October 2020, the Company learned that the SEC and the United States Attorney’s Office for the District of Massachusetts (“USAO”) are investigating whether financial misstatements were made in the Company’s public filings and earnings announcements prior to October 2018. In December 2022, the Company received a “Wells Notice” from the staff of the SEC (the “Staff”) relating to the SEC’s investigation. The Wells Notice informed the Company that the Staff had made a preliminary determination to recommend that the SEC file a civil enforcement action against the Company that would allege certain violations of the federal securities laws relating to the reported financial results of the Company during fiscal years 2016, 2017, and 2018, and to the adequacy and accuracy of the Company’s books and records and internal controls over financial reporting for those fiscal years. The allegations arise from revenue recognition practices of the Neptune-Benson business that the Company acquired in fiscal 2016. A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. The Company negotiated a settlement with the SEC under which it neither admits nor denies the SEC’s allegations, and in March 2023 the SEC flied a complaint in the United States District Court for the District of Rhode Island against the Company and a former employee of the Neptune-Benson business, together with a proposed judgment on consent against the Company. The SEC’s complaint against the Company is grounded in negligence-based theories and books and records violations for matters arising from the Neptune-Benson business with respect to fiscal years 2016 to 2018. The proposed final judgment, which is awaiting Court approval, requires the Company to pay a penalty of $8,500 and to undertake various improvements to its internal controls over financial reporting. In accordance with ASC Topic No. 450, Contingencies, the Company recorded a charge of $8,500 in the first quarter of fiscal 2023 for the settlement of the SEC investigation. The Company continues to cooperate with the USAO investigation, which is ongoing. Although the Company is unable to predict the outcome of these ongoing investigations, we currently believe that these matters will not have a material adverse effect on our business, financial condition, results of operations, or prospects. However, no assurance can be given that these matters will be resolved for the amount recorded.

On March 13, 2023, a purported Evoqua stockholder filed an action against Evoqua and the Evoqua Board captioned O’Dell v. Evoqua Water Technologies Corp., et al., No. 23-cv-2122, in the United States District Court for the Southern District of New York (the “O’Dell Action”). The plaintiff in the O’Dell Action alleges that Evoqua and the Evoqua Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading preliminary proxy statement in connection with the Merger. On April 11, 2023, another purported Evoqua stockholder filed an action against Evoqua and the Evoqua Board captioned Bushansky v. Evoqua Water Technologies Corp., et al., No. 23-cv-3042, in the United States District Court for the Southern District of New York (the “Bushansky Action”), and on April 20, 2023, a third purported Evoqua stockholder filed an action against Evoqua and the Evoqua Board captioned Morgan v. Evoqua Water Technologies Corp., et al., No. 23-cv-431, in the United States District Court for the District of Delaware (the “Morgan Action” and together with the O’Dell Action and the Bushansky Action, the “Actions”). The plaintiffs in the Bushansky Action and the Morgan Action allege that Evoqua and the Evoqua Board violated federal securities laws, including Sections 14(a) and 20(a) of the Exchange Act and Rule 14a-9 promulgated under the Exchange Act, by issuing a materially incomplete and misleading definitive proxy statement in connection with the Merger. The plaintiffs in each of the Actions seek, among other things, to enjoin the transactions contemplated by the Merger Agreement and an award of attorneys’ and expert fees and expenses. Xylem and Evoqua believe that the allegations in the Actions are without merit. Additional lawsuits arising out of the Merger may also be filed in the future.
34


20. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following:
March 31,
2023
September 30,
2022
Salaries, wages, and other benefits$48,906 $83,618 
Obligation under operating leases16,082 14,932 
Obligation under finance leases13,502 12,875 
Provisions for litigation12,875 2,375 
Third party commissions10,001 10,341 
Deferred revenue9,287 9,692 
Taxes, other than income6,631 5,594 
Insurance liabilities3,192 3,456 
Severance payments963 658 
Fair value of liability derivatives681 1,511 
Other30,990 33,220 
$153,110 $178,272 
21. Business Segments
The Company’s reportable operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker, or decision making group, in deciding how to allocate resources to an individual segment and in assessing performance. The key factors used to identify these reportable operating segments are the organization and alignment of the Company’s internal operations, the nature of the products and services, and customer type.
The Company has two reportable operating segments, Integrated Solutions and Services and Applied Product Technologies. The business segments are described as follows: Integrated Solutions and Services is a group entirely focused on engaging directly with end users through direct sales with a market vertical focus. Integrated Solutions and Services provides tailored services and solutions in collaboration with the customers backed by life‑cycle services including on‑demand water, outsourced water, recycle / reuse, and emergency response service alternatives to improve operational reliability, performance, and environmental compliance. Key offerings within this segment also include equipment systems for industrial needs (influent water, boiler feed water, ultrahigh purity, process water, wastewater treatment, and recycle / reuse), full-scale outsourcing of operations and maintenance, and municipal services, including odor and corrosion control services. 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, original equipment manufacturers (“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.
Corporate activities include general corporate expenses, elimination of inter-segment transactions, interest income and expense, and certain other charges. Certain other charges may 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 and certain integration costs), 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.
35


Reportable operating segment revenue and operating profit for the three and six months ended March 31, 2023 and 2022 were as follows:
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Total revenue
Integrated Solutions and Services$334,838 $304,499 $646,102 $558,075 
Applied Product Technologies174,833 154,861 325,171 297,358 
Total revenue
509,671 459,360 971,273 855,433 
Intersegment revenue
Integrated Solutions and Services5,939 9,659 11,777 18,189 
Applied Product Technologies25,935 22,973 45,853 44,248 
Total intersegment revenue
31,874 32,632 57,630 62,437 
Revenue to external customers
Integrated Solutions and Services328,899 294,840 634,325 539,886 
Applied Product Technologies148,898 131,888 279,318 253,110 
Total revenue
$477,797 $426,728 $913,643 $792,996 
Operating profit (loss)
Integrated Solutions and Services$43,127 $38,105 $85,835 $73,405 
Applied Product Technologies28,564 22,993 49,579 40,820 
Corporate
(48,234)(41,526)(88,725)(80,365)
Total operating profit23,457 19,572 46,689 33,860 
Interest expense
(10,303)(9,950)(20,377)(16,529)
Income before income taxes13,154 9,622 26,312 17,331 
Income tax expense(2,522)(2,248)(6,412)(3,869)
Net income$10,632 $7,374 $19,900 $13,462 
March 31,
2023
September 30,
2022
Assets
Integrated Solutions and Services$1,088,689 $1,123,166 
Applied Product Technologies669,179 653,244 
Corporate
451,702 414,453 
Total assets
$2,209,570 $2,190,863 
36


22. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings from continuing operations per common share (in thousands, except per share amounts):
Three Months Ended
March 31,
Six Months Ended
March 31,
2023202220232022
Numerator:
Numerator for basic and diluted earnings per common share—Net income attributable to Evoqua Water Technologies Corp.
$10,632 $7,330 $19,900 $13,317 
Denominator:
Denominator for basic net income per common share—weighted average shares
122,212120,942122,028120,785
Effect of dilutive securities:
Share‑based compensation
3,583 4,012 3,479 4,145 
Denominator for diluted net income per common share—adjusted weighted average shares
125,795 124,954 125,507 124,930 
Basic earnings attributable to Evoqua Water Technologies Corp. per common share
$0.09 $0.06 $0.16 $0.11 
Diluted earnings attributable to Evoqua Water Technologies Corp. per common share
$0.08 $0.06 $0.16 $0.11 
Because of their anti-dilutive effect, 272 and 606 common share equivalents, comprised of employee stock options, have been excluded from the diluted EPS calculation for the three months ended March 31, 2023 and 2022, respectively, and 493 and 465 for the six months ended March 31, 2023 and 2022, respectively.
23. Subsequent Events
In connection with the pending Merger with Xylem, the Company shortened the duration of the ESPP offering period that commenced on April 1, 2023. The Company accelerated the end date of that offering period from September 30, 2023 to May 1, 2023.
37


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 Part I, 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, 2022, as filed with the SEC on November 16, 2022 (the “2022 Annual Report”). You should review the disclosures in Part I, Item 1A, “Risk Factors” in the 2022 Annual Report, Part II, Item 1A, “Risk Factors” in this Report, and 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.,” “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
We are a leading provider of mission-critical water and wastewater treatment solutions, offering a broad portfolio of products, services, and expertise to support customers across various end markets. We are headquartered in Pittsburgh, Pennsylvania, with locations across nine countries. We have a comprehensive portfolio of differentiated, proprietary technologies offered under market‑leading and well‑established brands. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals.
Our solutions are designed to provide our customers with the quantity and quality of water necessary to meet their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations while supporting their regulatory compliance and environmental requirements. We deliver and maintain these mission critical solutions through our extensive North American service network, and we sell our products and technologies internationally through direct and indirect sales channels. We have worked to protect water, the environment, and our employees for more than 100 years. As a result, we have earned a reputation for quality, safety, and reliability around the world. Our employees are united by a common purpose: Transforming Water. Enriching Life.®
Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers, sustainable, and performance” foster a culture that is focused on establishing a workforce that is enabled, empowered, and accountable, creating a highly dynamic work environment.
We serve our customers through the following two reportable segments:
Integrated Solutions and Services segment, which provides application-specific solutions and full lifecycle services for critical water and wastewater applications across numerous end markets, including outsourced water service contracts, capital systems, and related recurring aftermarket services, parts and consumables, and emergency services to enable recycle and reuse, improve operational reliability and performance, and promote environmental compliance; and

Applied Product Technologies segment, which provides highly differentiated and scalable water and wastewater products and technologies as stand-alone offerings or components in integrated solutions to a diverse set of system integrators and end-users globally.
Our segments draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes, and corporate philosophies. The key factors used to identify these reportable operating segments are the organization and alignment of our internal operations, the nature of the products and services and customer type.
Proposed Merger with Xylem Inc.
On January 22, 2023, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Xylem Inc., an Indiana corporation (“Xylem”), and Fore Merger Sub, Inc., a Delaware corporation and a direct, wholly
38


owned subsidiary of Xylem (“Merger Sub”), pursuant to which Merger Sub will merge with and into the Company, with the Company continuing as the surviving corporation and as a direct, wholly owned subsidiary of Xylem (the “Merger”).

At the effective time of the Merger (the “Effective Time”) and upon consummation of the Merger, subject to the terms and conditions set forth in the Merger Agreement, each share of the common stock, par value $0.01 per share, of the Company issued and outstanding immediately prior to the Effective Time (other than treasury shares held by the Company and shares of the Company’s common stock owned, directly or indirectly, by Xylem or Merger Sub) will be converted into and become exchangeable for 0.48 shares of common stock, par value $0.01 per share, of Xylem (the “Xylem Shares”) to be issued by Xylem as consideration for the Merger. Cash will be issued in lieu of fractional shares. Upon the closing of the Merger, legacy Company stockholders will own approximately 25% and legacy Xylem shareholders will own approximately 75% of the combined company.

The consummation of the Merger is subject to the satisfaction or waiver of certain customary mutual conditions, including (a) the receipt of the required approvals from the Company’s stockholders and Xylem’s shareholders at meetings currently scheduled for May 11, 2023, (b) receipt of required regulatory approvals under antitrust and foreign investment laws in applicable jurisdictions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act (collectively, “Regulatory Clearances”) (at 11:59 p.m. Eastern Time on March 6, 2023, the 30-day Hart-Scott-Rodino waiting period expired without issuance of a Request for Additional Information and Documentary Material), (c) the absence of any temporary or permanent order, injunction, law or other legal restraint prohibiting or making illegal the consummation of the Merger, (d) the Xylem Shares issuable to the stockholders of the Company in connection with the Merger having been approved for listing on the New York Stock Exchange, subject to official notice of issuance, and (e) Xylem’s registration statement on Form S-4 having been declared effective under the Securities Act of 1933 (the registration statement was declared effective by the SEC on April 6, 2023). The obligation of each party to consummate the Merger is also conditioned upon (a) the accuracy of the representations and warranties of the other party as of the date of the Merger Agreement and as of the closing (subject to customary materiality qualifiers) and (b) compliance by the other party in all material respects with its respective pre-closing obligations under the Merger Agreement. Subject to the satisfaction or waiver of the conditions to the closing, the Merger is expected to close in mid-2023.

The Merger Agreement contains certain termination rights that may be exercised by either the Company or Xylem. In certain of those cases, we may be required to pay Xylem a termination fee of $225.0 million.

In connection with the Merger, the Company recognized costs of $10.0 million and $10.2 million for the three and six months ended March 31, 2023, respectively, included in General and administrative expenses in the Unaudited Consolidated Statements of Operations. These costs primarily relate to legal and consulting fees incurred in connection with the Merger.

For further information on the Merger Agreement, refer to the Merger Agreement, a copy of which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on January 23, 2023.
Other Recent Developments, Key Factors and Trends Affecting Our Business and Financial Statements
Our 2022 Annual Report includes a discussion of various key factors and trends that we believe have affected or may affect our operating results. The following discussion highlights recent developments, as well as significant changes in these key factors and trends.
Macroeconomic conditions. Material, freight, and labor inflation resulted in increased costs in the second quarter of fiscal 2023. Although we have offset a portion of these increased costs through price increases and operational efficiencies to date, there can be no assurance that we will be able to offset all or any portion of these increased costs in future periods. 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 in future periods. Additionally, supply chain disruptions and labor shortages have restricted and could further restrict availability of certain commodities and materials, which may result in delays in our execution of projects in fiscal 2023 and negatively impact revenues. We have increased inventory levels to meet current order demand. Tight labor markets have resulted in longer times to fill open positions and labor inflation. Continued delays in filling open positions, particularly among our service technician population, could impact our ability to provide timely service to our
39


customers. Although these factors did not have a material adverse effect on our results of operations for the six months ended March 31, 2023, if sustained, they could have a material adverse effect on our results of operations going forward.

In an effort to combat inflation, central banks began raising interest rates in the latter half of fiscal 2022, and interest rates are expected to continue to increase throughout the remainder of fiscal 2023. We do not believe that our exposure to rising interest rates in the near term will have a material impact on our business, financial condition, results of operations, or prospects, but if sustained over longer periods, this could have a material adverse effect on our results of operations. We plan to continue to evaluate aspects of our spending, including capital expenditures, discretionary spending, and strategic investments in the remainder of fiscal 2023.
Russia-Ukraine war. We have no operations in Russia or Ukraine, and our sales into these regions are minimal. However, the conflict in Ukraine has exacerbated the material inflation and availability challenges described above, particularly with respect to the impact it has had on energy and fuel prices and the price of steel and other precious metals that we procure in our supply chain. Although these factors did not have a material adverse effect on our results of operations for the six months ended March 31, 2023, we expect the inflationary impact on energy, fuel and steel prices to continue throughout the remainder of fiscal 2023. If these factors are sustained, or if the duration of the conflict is extended or the conflict spreads into a larger geographic portion of Europe, our results of operations in future periods could be materially and adversely impacted.
Acquisitions and divestitures. During the six months ended March 31, 2023, we paid cash of $38 thousand as a result of net working capital adjustments related to the acquisition of Epicor, Inc. that we completed in fiscal 2022, and we received cash of $1.8 million as a result of net working capital adjustments related to the acquisition of the Mar Cor Business that we completed in fiscal 2022, and $12.3 million of cash was released from escrow to the Company related to the Earn Out asset.

On March 31, 2023, the Company completed its divestiture of its blood filter and water filter product lines that are sold into renal and other medical applications (the “Filtration Business”) to Medica USA Inc., a subsidiary of Medica S.p.A. (“Medica”), for $67 thousand in cash at closing, resulting in a loss on sale of $2.9 million, which is included in Other operating expense on the Consolidated Statements of Operations. The Filtration Business was included in the Integrated Solutions and Services segment and was determined by management not to be core to the Company’s long-term business strategy or operations. The Company entered into a supply agreement with Medica under which the Company will purchase water filters used by its customers in the Company’s dialysis water systems.

On February 28, 2023, the Company completed its acquisition of the Texas-based industrial water service business accounts and deionization and carbon tank assets of Kemco Systems (“Kemco”) for $900 thousand in cash at closing. This acquisition expands the Company’s service and aftermarket business in the Texas market while strengthening the Company’s ability to better support and service its industrial customers in the region. The acquired business is included within the Integrated Solutions and Services segment.

On February 14, 2023, the Company entered into a definitive agreement to divest its carbon reactivation and slurry operations (the “Carbon Business”) to Desotec US LLC, a subsidiary of Desotec N.V. As of March 31, 2023, the transaction had not closed and is expected to close in the third quarter of fiscal 2023. Gross proceeds upon closing of the transaction are anticipated to be $100.0 million and the Company expects to record a gain on sale. The assets and liabilities of the Carbon Business met the accounting criteria to be classified as held for sale on the Consolidated Balance Sheets at March 31, 2023. The sale of the Carbon Business will allow the Company to focus on its core service business, which includes carbon services and the sale of high-quality activated carbon. At the closing of the transaction, the Company will enter into a supply agreement with Desotec under which the Company will purchase reactivated carbon to continue to service its customers. The Carbon Business is included in the Integrated Solutions and Services segment.
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 consolidated business are revenue, gross profit, gross margin, and net income (loss). Management utilizes these financial measures prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) when reviewing the Company’s performance and making financial, operational, and strategic decisions, and believes they are useful metrics for investors that help with performance comparability period over period. In addition, we consider certain non-GAAP financial measures such as EBITDA and adjusted EBITDA, as described more fully below. We evaluate our business segments’ operating results based on revenue, income from operations (“operating profit”), and adjusted EBITDA on a segment basis. We believe
40


these financial measures are helpful in understanding and evaluating the segments’ core operating results and facilitates comparison of our performance on a consistent basis period over period.

Revenue
Our revenue is a function of sales volumes and selling prices. We report revenue by segment and by source which includes revenue from product sales (capital and aftermarket) and revenue from service. Revenue is used by management to evaluate the performance of our business. Revenue growth is primarily related to organic and inorganic factors. Organic revenue growth, as a component of revenue growth, is defined as period over period revenue growth without (i) the impact from acquisitions and divestitures during the first 12 months following the closing of the acquisition or divestiture, which we refer to as inorganic impact, and (ii) the impact of foreign currency translation. Divestitures include sales of insignificant portions of our business that did not meet the criteria for classification as a discontinued operation. We disregard the effect of foreign currency translation from organic revenue growth because foreign currency translation is not under management’s control, is subject to volatility and can obscure underlying business trends. The effect of acquisitions and divestitures during the first 12 months following the closing of the acquisition or divestiture are disregarded because they can obscure underlying business trends and make comparisons of long-term performance difficult between the Company and its peers due to the varying nature, size, and number of transactions from period to period.
EBITDA and Adjusted EBITDA
EBITDA, which is a non-GAAP financial measure, is defined as net income (loss) before interest expense, income tax benefit (expense), and depreciation and amortization. Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary metrics used by management to evaluate the strength and financial performance of our core 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, share-based compensation, transaction costs, and other gains, losses, and expenses that we believe do not directly reflect our underlying business operations. We present adjusted EBITDA because we believe it is frequently used by analysts, investors, and other interested parties to evaluate and compare operating performance and value companies within our industry. Further, we believe it is helpful in highlighting trends in our operating results and provides greater clarity and comparability period over period to management and our investors regarding the operational impact of long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate, and capital investments. In addition, adjusted EBITDA highlights true business performance by removing the impact of certain items that management believes do not directly reflect our underlying operations and provides investors with greater visibility into the ongoing drivers of our business performance.
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 adjusted EBITDA of each reportable operating segment as a supplement to segment operating profit and segment revenue to evaluate the operating performance of such segments. Adjusted EBITDA on a segment basis is defined as earnings before depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. Adjusted EBITDA of the reportable operating segments do not include certain charges that are presented within corporate activities. These charges include certain restructuring and other business transformation charges that have been incurred to align and reposition the
41


Company to the current reporting structure, acquisition related costs (including transaction costs and integration costs) and share-based compensation charges.
EBITDA and adjusted EBITDA should not be considered substitutes for, or superior to, financial measures prepared in accordance with GAAP. The financial results prepared in accordance with GAAP and the reconciliations from these results should be carefully evaluated. See “Non-GAAP Reconciliations” in this Item 2 for a reconciliation of EBITDA and adjusted EBITDA to net income. 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, other companies in our industry or across different industries may calculate adjusted EBITDA differently.
42


Results of Operations
The following table summarizes key components of our results of operations for the periods indicated:
Three Months Ended March 31,
20232022
(In millions, except per share amounts)% of Revenue% of Revenue% Variance
Revenue from product sales and services$477.8 100.0 %$426.7 100.0 %12.0 %
Gross profit$151.9 31.8 %$128.9 30.2 %17.8 %
Total operating expenses$(125.6)(26.3)%$(110.6)(25.9)%13.6 %
Other operating (expense) income, net$(2.9)(0.6)%$1.3 0.3 %(323.1)%
Interest expense$(10.3)(2.2)%$(10.0)(2.3)%3.0 %
Income before income taxes$13.1 2.7 %$9.6 2.2 %36.5 %
Income tax expense$(2.5)(0.5)%$(2.2)(0.5)%13.6 %
Net income$10.6 2.2 %$7.4 1.7 %43.2 %
Net income attributable to non‑controlling interest$— — %$0.1 — %$— 
Net income attributable to Evoqua Water Technologies Corp.$10.6 2.2 %$7.3 1.7 %45.2 %
Weighted average shares outstanding
Basic122.2 120.9 
Diluted125.8 125.0 
Earnings per share
Basic$0.09 $0.06 
Diluted$0.08 $0.06 
Other financial data:
Adjusted EBITDA(1)
$88.5 18.5 %$73.2 17.2 %20.9 %
Six Months Ended March 31,
20232022
(In millions, except per share amounts)% of Revenue% of Revenue% Variance
Revenue from product sales and services$913.6 100.0 %$793.0 100.0 %15.2 %
Gross profit$282.2 30.9 %$239.4 30.2 %17.9 %
Total operating expenses$(233.9)(25.6)%$(208.3)(26.3)%12.3 %
Other operating (expense) income, net$(1.6)(0.2)%$2.8 0.4 %(157.1)%
Interest expense$(20.4)(2.2)%$(16.5)(2.1)%23.6 %
Income before income taxes$26.3 2.9 %$17.4 2.2 %51.1 %
Income tax expense$(6.4)(0.7)%$(3.9)(0.5)%64.1 %
Net income$19.9 2.2 %$13.5 1.7 %47.4 %
Net income attributable to non‑controlling interest$— — %$0.2 — %(100.0)%
Net income attributable to Evoqua Water Technologies Corp.$19.9 2.2 %$13.3 1.7 %49.6 %
Weighted average shares outstanding
Basic122.0 120.8 
Diluted125.5 124.9 
Earnings per share
Basic$0.16 $0.11 
Diluted$0.16 $0.11 
Other financial data:
Adjusted EBITDA(1)
$161.2 17.6 %$127.5 16.1 %26.4 %

43


(1)Adjusted EBITDA is a non-GAAP financial measure. For a reconciliation to net income, its most directly comparable financial measure presented in accordance with GAAP, see “Non-GAAP Reconciliations” in Item 2 of this Report.
Consolidated Results for the Three Months Ended March 31, 2023 and 2022
Revenue-Revenue increased $51.1 million, or 12.0%, to $477.8 million in the three months ended March 31, 2023, from $426.7 million in the three months ended March 31, 2022. Revenue from product sales increased $32.9 million, or 12.7%, to $292.7 million in the three months ended March 31, 2023, from $259.8 million in the three months ended March 31, 2022. Revenue from services increased $18.2 million, or 10.9%, to $185.1 million in the three months ended March 31, 2023, from $166.9 million in the three months ended March 31, 2022.
The following tables provide the change in revenue by offering and by the components that contributed to revenue growth during the three months ended March 31, 2023 and 2022:
Three Months Ended March 31,
20232022$ Variance% Variance
(In millions)
% of
Revenue
% of
Revenue
Revenue from product sales:$292.7 61.3 %$259.8 60.9 %$32.9 12.7 %
Capital187.2 39.2 %162.5 38.1 %24.7 15.2 %
Aftermarket105.5 22.1 %97.3 22.8 %8.2 8.4 %
Revenue from services185.1 38.7 %166.9 39.1 %18.2 10.9 %
$477.8 100.0 %$426.7 100.0 %$51.1 12.0 %
(In millions)$ Change% Change
Three months ended March 31, 2022 total revenue
$426.7 n/a
Organic49.6 11.6 %
Inorganic5.3 1.2 %
Foreign currency translation(3.8)(0.8)%
Three months ended March 31, 2023 total revenue