UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
~~December~~March 31, ~~2019~~2020
or
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 001-38272

EVOQUA WATER TECHNOLOGIES CORP.

(Exact name of registrant as specified in its charter)



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

(724) 772-0044

(Registrant’s telephone number, including area code)

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



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	AQUA	New York Stock Exchange

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of

this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o	Accelerated filer ý	Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o Emerging growth company o

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

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

There were ~~115,833,974~~116,974,960 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of ~~January 31,~~April 30, 2020.

EVOQUA WATER TECHNOLOGIES CORP.

TABLE OF CONTENTS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward‑looking statements by our use of forward‑looking terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “projection,” “seek,” “should,” “will” or “would” or the negative thereof or other variations thereon or comparable terminology. In particular, statements about the markets in which we operate, including growth of our various markets, our expectations, beliefs, plans, strategies, objectives, prospects, assumptions, or future events or performance, ~~and~~ statements regarding our two-segment restructuring actions and expected restructuring charges and cost savings for fiscal 2020 and beyond, and statements related to the COVID-19 pandemic and its impact on our business contained in this ~~report~~Report are forward‑looking statements.

We have based these forward‑looking statements on our current expectations, assumptions, estimates and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward‑looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors, including those discussed in ~~“Item~~Part I, Item 1A. ~~Risk~~“Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the Securities and Exchange Commission (“SEC”) on November 25, 2019, ~~and “Item~~Part I, Item 2. ~~Management’s~~“Management’s Discussion and Analysis of Financial Condition and Results of Operation” of this ~~Quarterly~~ Report ~~(“Report”)~~and Part II, Item 1A. “Risk Factors” of this Report may cause our actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied by these forward‑looking statements, or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward‑looking statements include:

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

our ability to compete successfully in our markets;

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

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

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

our ability to achieve the expected benefits of our restructuring actions and restructuring our business into two segments;

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

our ability to execute projects in a timely manner, consistent with our customers’ demands;

our ability to accurately predict the timing of contract awards;

delays in enactment or repeals of environmental laws and regulations;

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

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

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

our ability to meet our customers’ safety standards or the potential for adverse publicity affecting our reputation as a result of incidents such as workplace accidents, mechanical failures, spills, uncontrolled discharges, damage to customer or third‑party property or the transmission of contaminants or diseases;

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

seasonality of sales and weather conditions;

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

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

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

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

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

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

risks related to our substantial indebtedness;

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

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

other risks and uncertainties, including those listed under ~~“Item~~Part I, Item 1A. ~~Risk~~“Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the SEC on November 25, 2019, Part II, Item 1A. “Risk Factors” of this Report, and in other filings we may make from time to time with the SEC.

Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward‑looking statements. The forward‑looking statements contained in this Report are not guarantees of future performance and our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate, may differ materially from the forward‑looking statements contained in this Report. In addition, even if our results of operations, financial condition and liquidity, and events in the industry in which we operate, are consistent with the forward‑looking statements contained in this Report, they may not be predictive of results or developments in future periods.

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

Part I - Financial Information

Item 1. Consolidated Financial Statements

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS



Evoqua Water Technologies Corp.
Unaudited Consolidated Financial Statements
Consolidated Balance Sheets as of ~~December~~March 31, ~~2019~~2020 (Unaudited) and September 30, 2019	4
Unaudited Consolidated Statements of Operations for the Three and Six Months Ended ~~December~~March 31, ~~2019~~2020 and ~~2018~~2019	5
Unaudited Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended ~~December~~March 31, ~~2019~~2020 and ~~2018~~2019	6
Unaudited Consolidated Statements of Changes in Equity for the Three and Six Months Ended ~~December~~March 31, ~~2019~~2020 and ~~2018~~2019	7
Unaudited Consolidated Statements of Changes in Cash Flow for the ~~Three~~Six Months Ended ~~December~~March 31, ~~2019~~2020 and ~~2018~~2019	89
Unaudited Supplemental Disclosure of Cash Flow Information for the ~~Three~~Six Months Ended ~~December~~March 31, ~~2019~~2020 and ~~2018~~2019	910
Notes to Unaudited Consolidated Financial Statements	1011

Evoqua Water Technologies Corp.

Consolidated Balance Sheets

(In thousands)


	(Unaudited)						(Unaudited)
	December 31, 2019			September 30, 2019			March 31, 2020			September 30, 2019
ASSETS
Current assets	$	682,218		$	637,293		$	609,831		$	637,293
Cash and cash equivalents	194,903			109,881			108,495			109,881
Receivables, net	242,036			257,585			243,418			257,585
Inventories, net	148,784			137,164			151,427			137,164
Contract assets	73,909			73,467			81,249			73,467
Prepaid and other current assets	22,586			21,940			25,242			21,940
Assets held for sale	—			37,256			—			37,256
Property, plant, and equipment, net	339,135			333,584			344,918			333,584
Goodwill	397,006			392,890			388,881			392,890
Intangible assets, net	319,665			314,767			323,740			314,767
Deferred income taxes, net of valuation allowance	3,548			2,790			3,845			2,790
Operating lease right-of-use assets, net	42,532			—			42,885			—
Other non‑current assets	26,198			25,715			25,793			25,715
Non-current assets held for sale	—			30,809			—			30,809
Total assets	$	1,810,302		$	1,737,848		$	1,739,893		$	1,737,848
LIABILITIES AND EQUITY
Current liabilities	$	405,516		$	322,221		$	322,490		$	322,221
Accounts payable	134,808			144,247			151,107			144,247
Current portion of debt	113,707			13,418			14,241			13,418
Contract liabilities	43,634			39,051			33,691			39,051
Product warranties	5,131			4,922			5,107			4,922
Accrued expenses and other liabilities	101,656			101,839			112,091			101,839
Income tax payable	6,580			4,536			6,253			4,536
Liabilities held for sale	—			14,208			—			14,208
Non‑current liabilities	989,656			1,049,805			994,900			1,049,805
Long‑term debt, net of deferred financing fees	851,570			951,599			854,981			951,599
Product warranties	1,471			2,332			1,161			2,332
Obligation under operating leases	32,871			—			34,033			—
Other non‑current liabilities	90,346			78,661			91,311			78,661
Deferred income taxes	13,398			13,548			13,414			13,548
Non-current liabilities held for sale	—			3,665			—			3,665
Total liabilities	1,395,172			1,372,026			1,317,390			1,372,026
Commitments and Contingent Liabilities (Note 20)
Shareholders’ equity
Common stock, par value $0.01: authorized 1,000,000 shares; issued 117,653 shares, outstanding 115,570 at December 31, 2019; issued 116,008, outstanding 114,344 shares at September 30, 2019	1,170			1,154
Treasury stock: 2,083 shares at December 31, 2019 and 1,664 shares at September 30, 2019	(2,837		)	(2,837		)
Common stock, par value $0.01: authorized 1,000,000 shares; issued 119,070 shares, outstanding 116,876 at March 31, 2020; issued 116,008, outstanding 114,344 shares at September 30, 2019							1,185			1,154
Treasury stock: 2,194 shares at March 31, 2020 and 1,664 shares at September 30, 2019							(2,837		)	(2,837		)
Additional paid‑in capital	560,132			552,422			573,745			552,422
Retained deficit	(123,854		)	(174,976		)	(115,356		)	(174,976		)
Accumulated other comprehensive loss, net of tax	(21,655		)	(13,004		)	(36,306		)	(13,004		)
Total Evoqua Water Technologies Corp. equity	412,956			362,759			420,431			362,759
Non‑controlling interest	2,174			3,063			2,072			3,063
Total shareholders’ equity	415,130			365,822			422,503			365,822
Total liabilities and shareholders’ equity	$	1,810,302		$	1,737,848		$	1,739,893		$	1,737,848

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Operations

(In thousands except per share data)


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Revenue from product sales	$	196,560		$	180,088		$	205,969		$	206,868		$	402,529		$	386,956
Revenue from services	149,545			142,914			145,694			141,760			295,239			284,674
Revenue from product sales and services	346,105			323,002			351,663			348,628			697,768			671,630
Cost of product sales	(140,456		)	(136,595		)	(144,156		)	(153,857		)	(284,612		)	(290,452		)
Cost of services	(99,934		)	(97,677		)	(96,301		)	(99,160		)	(196,235		)	(196,837		)
Cost of product sales and services	(240,390		)	(234,272		)	(240,457		)	(253,017		)	(480,847		)	(487,289		)
Gross profit	105,715			88,730			111,206			95,611			216,921			184,341
General and administrative expense	(45,770		)	(54,831		)	(62,130		)	(48,215		)	(107,900		)	(103,046		)
Sales and marketing expense	(38,014		)	(36,152		)	(33,976		)	(35,435		)	(71,990		)	(71,587		)
Research and development expense	(3,684		)	(4,146		)	(3,189		)	(3,957		)	(6,873		)	(8,103		)
Total operating expenses	(87,468		)	(95,129		)	(99,295		)	(87,607		)	(186,763		)	(182,736		)
Other operating income	51,720			228			9,518			3,651			61,238			3,879
Other operating expense	(275		)	(188		)	(274		)	(187		)	(549		)	(375		)
Income (loss) before interest expense and income taxes	69,692			(6,359		)
Income before interest expense and income taxes							21,155			11,468			90,847			5,109
Interest expense	(13,583		)	(14,443		)	(13,252		)	(14,474		)	(26,835		)	(28,917		)
Income (loss) before income taxes	56,109			(20,802		)	7,903			(3,006		)	64,012			(23,808		)
Income tax (expense) benefit	(2,603		)	4,514
Income tax benefit (expense)							7			4,579			(2,596		)	9,093
Net income (loss)	53,506			(16,288		)	7,910			1,573			61,416			(14,715		)
Net income attributable to non‑controlling interest	361			442			98			189			459			631
Net income (loss) attributable to Evoqua Water Technologies Corp.	$	53,145		$	(16,730	)	$	7,812		$	1,384		$	60,957		$	(15,346	)
Basic income (loss) per common share	$	0.46		$	(0.15	)	$	0.07		$	0.01		$	0.52		$	(0.13	)
Diluted income (loss) per common share	$	0.44		$	(0.15	)	$	0.06		$	0.01		$	0.50		$	(0.13	)

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Comprehensive Income (Loss)

(In thousands)


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Net income (loss)	$	53,506		$	(16,288	)	$	7,910		$	1,573		$	61,416		$	(14,715	)
Other comprehensive (loss) income
Foreign currency translation adjustments	(8,838		)	(1,554		)	(14,724		)	2,817			(23,562		)	1,263
Unrealized derivative (loss) gain on cash flow hedges, net of tax	(49		)	557
Unrealized derivative loss on cash flow hedges, net of tax							(162		)	(611		)	(211		)	(54		)
Change in pension liability, net of tax	236			96			235			97			471			193
Total other comprehensive loss	(8,651		)	(901		)
Total other comprehensive (loss) income							(14,651		)	2,303			(23,302		)	1,402
Less: Comprehensive income attributable to non‑controlling interest	(361		)	(442		)	(98		)	(189		)	(459		)	(631		)
Comprehensive income (loss) attributable to Evoqua Water Technologies Corp.	$	44,494		$	(17,631	)
Comprehensive (loss) income attributable to Evoqua Water Technologies Corp.							$	(6,839	)	$	3,687		$	37,655		$	(13,944	)

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Equity

(In thousands)


	Three Months Ended December 31, 2019																								Three Months Ended March 31, 2020
	Common Stock			Treasury Stock				Additional Paid‑in Capital			Retained Deficit				Accumulated Other Comprehensive Loss			Non‑controlling Interest				Total			Common Stock				Treasury Stock				Additional Paid‑in Capital		Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
	Shares	Cost		Shares	Cost						Retained Deficit			Shares				Non‑controlling Interest			Cost					Shares		Cost					Additional Paid‑in Capital		Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
Balance at September 30, 2019	116,008	$	1,154	1,664	$	(2,837	)	Additional Paid‑in Capital		$	552,422			$	Accumulated Other Comprehensive Loss	(174,976	)	$	(13,004	)		Total		$	3,063		$	365,822
Balance at December 31, 2019																									117,653		$	1,170	2,083	$	(2,837	)	$	560,132	$	(123,854	)	$	(21,655	)	$	2,174		$	415,130
Cumulative effect of adoption of new accounting standards	—	—		—	—			—			(2,023		)		—			—				(2,023		)	—		—		—	—			—		686			—			—			686
Equity based compensation expense	—	—		—	—			3,680			—				—			—				3,680			—		—		—	—			2,304		—			—			—			2,304
Issuance of common stock	120	16		—	—			4,030			—				—			—				4,046			30		15		—	—			11,309		—			—			—			11,324
Shares withheld related to net share settlement (including tax withholdings)	1,525	—		419	—			—			—				—			—				—			1,387		—		111	—			—		—			—			—			—
Stock repurchases	—	—		—	—			—			—				—			—				—
Dividends paid to non-controlling interest	—	—		—	—			—			—				—			(1,250		)		(1,250		)	—		—		—	—			—		—			—			(200		)	(200		)
Net income	—	—		—	—			—			53,145				—			361				53,506			—		—		—	—			—		7,812			—			98			7,910
Other comprehensive loss	—	—		—	—			—			—				(8,651		)	—				(8,651		)	—		—		—	—			—		—			(14,651		)	—			(14,651		)
Balance at December 31, 2019	117,653	$	1,170	2,083	$	(2,837	)	$	560,132		$	(123,854	)		$	(21,655	)	$	2,174			$	415,130
Balance at March 31, 2020																									119,070		$	1,185	2,194	$	(2,837	)	$	573,745	$	(115,356	)	$	(36,306	)	$	2,072		$	422,503

Three Months Ended December 31, 2018
Common Stock Treasury Stock Additional
Paid‑in
Capital Retained
Deficit Accumulated
Other Comprehensive Loss Non‑controlling
Interest Total
Shares Cost Shares Cost
Balance at September 30, 2018 115,016
$ 1,145
1,087
$ (2,837 ) $ 533,435
$ (163,871 ) $ (9,017 ) $ 3,161
$ 362,016
Cumulative effect of adoption of new accounting standards —
—
—
—
—
(1,401 ) —
—
(1,401 )
Equity based compensation expense —
—
—
—
4,525
—
—
—
4,525
Issuance of common stock 11
—
—
—
68
—
—
—
68
Shares withheld related to net share settlement (including tax withholdings) 21
—
18
—
(15 ) —
—
—
(15 )
Dividends paid to non-controlling interest —
—
—
—
—
—
—
(600 ) (600 )
Net (loss) income —
—
—
—
—
(16,730 ) —
442
(16,288 )
Other comprehensive loss —
—
—
—
—
—
(901 ) —
(901 )
Balance at December 31, 2018 115,048
$ 1,145
1,105
$ (2,837 ) $ 538,013
$ (182,002 ) $ (9,918 ) $ 3,003
$ 347,404



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



	Six Months Ended March 31, 2020
	Common Stock			Treasury Stock				Additional Paid‑in Capital		Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
	Shares	Cost		Shares	Cost			Additional Paid‑in Capital		Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
Balance at September 30, 2019	116,008	$	1,154	1,664	$	(2,837	)	$	552,422	$	(174,976	)	$	(13,004	)	$	3,063		$	365,822
Cumulative effect of adoption of new accounting standards	—	—		—	—			—		(1,337		)	—			—			(1,337		)
Equity based compensation expense	—	—		—	—			5,984		—			—			—			5,984
Issuance of common stock	150	31		—	—			15,339		—			—			—			15,370
Shares withheld related to net share settlement (including tax withholdings)	2,912	—		530	—			—		—			—			—			—
Dividends paid to non-controlling interest	—	—		—	—			—		—			—			(1,450		)	(1,450		)
Net income	—	—		—	—			—		60,957			—			459			61,416
Other comprehensive loss	—	—		—	—			—		—			(23,302		)	—			(23,302		)
Balance at March 31, 2020	119,070	$	1,185	2,194	$	(2,837	)	$	573,745	$	(115,356	)	$	(36,306	)	$	2,072		$	422,503



	Six Months Ended March 31, 2019
	Common Stock			Treasury Stock				Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
	Shares	Cost		Shares	Cost			Additional Paid‑in Capital			Retained Deficit			Accumulated Other Comprehensive Loss			Non‑controlling Interest			Total
Balance at September 30, 2018	115,016	$	1,145	1,087	$	(2,837	)	$	533,435		$	(163,871	)	$	(9,017	)	$	3,161		$	362,016
Cumulative effect of adoption of new accounting standards	—	—		—	—			—			(1,401		)	—			—			(1,401		)
Equity based compensation expense	—	—		—	—			9,270			—			—			—			9,270
Issuance of common stock	62	—		—	—			341			—			—			—			341
Shares withheld related to net share settlement (including tax withholdings)	613	6		431	—			(942		)	—			—			—			(936		)
Dividends paid to non-controlling interest	—	—		—	—			—			—			—			(600		)	(600		)
Net (loss) income	—	—		—	—			—			(15,346		)	—			631			(14,715		)
Other comprehensive income	—	—		—	—			—			—			1,402			—			1,402
Balance at March 31, 2019	115,691	$	1,151	1,518	$	(2,837	)	$	542,104		$	(180,618	)	$	(7,615	)	$	3,192		$	355,377

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Consolidated Statements of Changes in Cash Flows

(In thousands)


	Three Months Ended December 31,						Six Months Ended March 31,
	2019			2018			2020			2019
Operating activities
Net income (loss)	$	53,506		$	(16,288	)	$	61,416		$	(14,715	)
Reconciliation of net income (loss) to cash flows provided by operating activities:
Depreciation and amortization	25,143			23,090			52,514			47,252
Amortization of debt related costs	701			556
Amortization of debt related costs (includes $1,795 and $0 write off of deferred financing fees)							3,103			1,231
Deferred income taxes	(679		)	(766		)	(1,209		)	(11,411		)
Share-based compensation	3,680			4,525			5,984			9,270
Loss (gain) on sale of property, plant and equipment	173			(100		)	170			(122		)
Gain on sale of business	(58,279		)	—			(68,051		)	—
Foreign currency exchange (gains) losses on intercompany loans and other non-cash items	(6,086		)	4,661
Foreign currency exchange losses on intercompany loans and other non-cash items							1,514			5,228
Changes in assets and liabilities
Accounts receivable	11,087			12,995			7,256			20,600
Inventories	(14,613		)	(20,502		)	(17,800		)	(14,175		)
Contract assets	3,042			7,220			(5,377		)	(8,159		)
Prepaids and other current assets	(631		)	5,988			(3,715		)	7,487
Accounts payable	(11,056		)	(9,143		)	6,004			(8,875		)
Accrued expenses and other liabilities	(9,378		)	(15,394		)	(16,794		)	(11,178		)
Contract liabilities	4,651			12,012			(4,920		)	5,774
Income taxes	1,388			(4,503		)	2,140			(1,742		)
Other non‑current assets and liabilities	2,083			(217		)	(252		)	879
Net cash provided by operating activities	4,732			4,134			21,983			27,344
Investing activities
Purchase of property, plant and equipment	(17,572		)	(17,569		)	(38,759		)	(40,682		)
Purchase of intangibles	(210		)	(341		)	(622		)	(2,898		)
Proceeds from sale of property, plant and equipment	251			237			271			2,875
Proceeds from sale of business, net of cash of $12,117	108,921			—			118,894			—
Acquisitions, net of $0 cash received	(11,160		)	—			(11,164		)	2,048
Net cash provided by (used in) investing activities	80,230			(17,673		)	68,620			(38,657		)
Financing activities
Issuance of debt, net of deferred issuance costs	3,532			4,022			8,212			10,663
Borrowings under credit facility	13			15,000			2,597			115,000
Repayment of debt	(3,793		)	(17,891		)	(109,333		)	(120,856		)
Repayment of capital lease obligation	(4,162		)	(3,285		)	(6,694		)	(4,925		)
Payment of earn-out related to previous acquisitions	(175		)	—			(175		)	(461		)
Proceeds from issuance of common stock	4,046			68			15,370			341
Taxes paid related to net share settlements of share-based compensation awards	—			(15		)	—			(936		)
Cash paid for interest rate cap	—			(2,235		)	—			(2,235		)
Distribution to non‑controlling interest	(1,250		)	(600		)	(1,450		)	(600		)
Net cash used in financing activities	(1,789		)	(4,936		)	(91,473		)	(4,009		)
Effect of exchange rate changes on cash	1,849			(724		)	(516		)	(293		)
Change in cash and cash equivalents	85,022			(19,199		)	(1,386		)	(15,615		)
Cash and cash equivalents
Beginning of period	109,881			82,365			109,881			82,365
End of period	$	194,903		$	63,166		$	108,495		$	66,750

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Unaudited Supplemental Disclosure of Cash Flow Information

(In thousands)


	Three Months Ended December 31,				Six Months Ended March 31,
	2019		2018		2020		2019
Supplemental disclosure of cash flow information
Cash paid for taxes	$	1,382	$	1,037	$	2,133	$	4,585
Cash paid for interest	$	12,268	$	13,323	$	22,953	$	26,180
Non‑cash investing and financing activities
Finance lease transactions	$	1,782	$	2,584	$	4,308	$	8,296
Operating lease transactions	4,734		—		10,076		—
Option and Purchase Right	7,673		—		7,167		—

See accompanying notes to these Unaudited Consolidated Financial Statements

Evoqua Water Technologies Corp.

Notes to Unaudited Consolidated Financial Statements

(In thousands)

1. Description of the Company and Basis of Presentation

Background

Evoqua Water Technologies Corp. (referred to herein as the “Company” or “EWT”) was incorporated on October 7, 2013. On January 15, 2014, Evoqua Water Technologies Corp., acquired through its wholly owned entities, EWT Holdings II Corp. and EWT Holdings III Corp. (a/k/a Evoqua Water Technologies), all of the outstanding shares of Siemens Water Technologies, a group of legal entity businesses formerly owned by Siemens AG (“Siemens”). The stock purchase closed on January 15, 2014 and was effective January 16, 2014 (the “Acquisition”). The stock purchase price, net of cash received, was approximately $730,577. On November 6, 2017, the Company completed its initial public offering (“IPO”), pursuant to which an aggregate of 27,777 shares of common stock were sold, of which 8,333 were sold by the Company and 19,444 were sold by the selling shareholders, with a par value of $0.01 per share. After underwriting discounts and commissions and other expenses, the Company received net proceeds from the IPO of approximately $137,605. The Company used a portion of these proceeds to repay $104,936 of indebtedness (including accrued and unpaid interest) under EWT III’s senior secured first lien term loan facility and the remainder for general corporate purposes. The Company did not receive any proceeds from the sale of shares by the selling shareholders. On November 7, 2017, the selling shareholders sold an additional 4,167 shares of common stock as a result of the exercise in full by the underwriters of an option to purchase additional shares.

On March 19, 2018, the Company completed a secondary public offering, pursuant to which 17,500 shares of common stock were sold by certain selling shareholders. On March 21, 2018, the selling shareholders sold an additional 2,625 shares of common stock as a result of the exercise in full by the underwriters of an option to purchase additional shares. On March 10, 2020, the Company completed an additional secondary public offering, pursuant to which 13,000 shares of common stock were sold by certain selling shareholders. The Company did not receive any proceeds from the sale of shares by the selling ~~shareholders.~~shareholders in either of these secondary public offerings.

The Business

EWT provides a wide range of product brands and advanced water and wastewater treatment systems and technologies, as well as mobile and emergency water supply solutions and service contract options through its branch network. Headquartered in Pittsburgh, Pennsylvania, EWT is a multi‑national corporation with operations in the United States (“U.S.”), Canada, the United Kingdom (“UK”), the Netherlands, Germany, Australia, the People’s Republic of China, Singapore, the Republic of Korea and India.

The Company is organizationally structured into two reportable operating segments for the purpose of making operational decisions and assessing financial performance: (i) Integrated Solutions and Services and (ii) Applied Product Technologies.

Basis of Presentation

The accompanying Unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”). All intercompany transactions have been eliminated. Unless otherwise specified, all dollar amounts in these notes are referred to in thousands.

The interim Unaudited Consolidated Financial Statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such SEC rules. We believe that the disclosures made are adequate to make the information presented not misleading. We consistently applied the accounting policies described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the SEC on November 25, 2019 and as amended on December 4, 2019 (“2019 Annual Report”), in preparing these Unaudited Consolidated Financial Statements, with the exception of accounting standard updates described in Note 2, “Summary of Significant Accounting Policies.” These Unaudited Consolidated Financial Statements should be read in

conjunction with the audited financial statements and the notes included in our 2019 Annual Report. Certain prior period amounts have been reclassified to conform to the current period presentation.

2. Summary of Significant Accounting Policies

Fiscal Year

The Company’s fiscal year ends on September 30.

Use of Estimates

The Unaudited Consolidated Financial Statements have been prepared in conformity with GAAP and require management to make estimates and assumptions. These assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Unaudited Consolidated Financial Statements and the reported amounts of revenue and expenses during the reporting period. Estimates are revised as additional information becomes available. Actual results could differ from these estimates.

Cash and Cash Equivalents

Cash and cash equivalents are liquid investments with an original maturity of three or fewer months when purchased.

Accounts Receivable

Receivables are primarily comprised of uncollected amounts owed to us from transactions with customers and are presented net of allowances for doubtful accounts. Allowances are estimated based on historical write‑offs and the economic status of customers. The Company considers a receivable delinquent if it is unpaid after the term of the related invoice has expired. Write‑offs are recorded at the time all collection efforts have been exhausted.

Inventories

Inventories are stated at the lower of cost or market, where cost is generally determined on the basis of an average or first‑in, first‑out (“FIFO”) method. Production costs comprise direct material and labor and applicable manufacturing overheads, including depreciation charges. The Company regularly reviews inventory quantities on hand and writes off excess or obsolete inventory based on estimated forecasts of product demand and production requirements. Manufacturing operations recognize cost of product sales using standard costing rates with overhead absorption which generally approximates actual cost.

Property, Plant, and Equipment

Property, plant, and equipment is valued at cost less accumulated depreciation. Depreciation expense is recognized using the straight‑line method. Useful lives are reviewed annually and, if expectations differ from previous estimates, adjusted accordingly. Estimated useful lives for major classes of depreciable assets are as follows:



Asset Class	Estimated Useful Life
Machinery and equipment	3 to 20 years
Buildings and improvements	10 to 40 years

Leasehold improvements are depreciated over the shorter of their estimated useful life or the term of the lease. Costs related to maintenance and repairs that do not extend the assets’ useful life are expensed as incurred.

Acquisitions

Acquisitions are recorded using the purchase method of accounting. The purchase price of acquisitions is allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. The excess of the acquisition price over those estimated fair values is recorded as goodwill. Changes to the acquisition date preliminary fair values prior to the expiration of the measurement period, a period not to exceed 12 months from date of acquisition, are recorded as an adjustment to the associated goodwill. Contingent consideration resulting from acquisitions is recorded at its estimated fair value on the acquisition date. These obligations are revalued during each subsequent reporting period and changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Unaudited Consolidated Statements of Operations. Acquisition-related expenses and restructuring costs, if any, are recognized separately from the business combination and are expensed as incurred.

Goodwill and Other Intangible Assets

Goodwill represents purchase consideration paid in a business combination that exceeds the value assigned to the net assets of acquired businesses. Other intangible assets consist of customer‑related intangibles, proprietary technology, software, trademarks and other intangible assets. The Company amortizes intangible assets with definite useful lives on a straight‑line basis over their respective estimated economic lives which range from 1 to 26 years.

The Company reviews goodwill to determine potential impairment annually during the fourth quarter of the fiscal year, or more frequently if events and circumstances indicate that the asset might be impaired. Impairment testing for goodwill is performed at a reporting unit level. The quantitative impairment testing utilizes both a market (guideline public company) and income (discounted cash flows) method for determining fair value. In estimating the fair value of the reporting unit, the Company utilized a discounted cash flow (“DCF”) valuation technique, which incorporates judgments and estimates of future cash flows, future revenue and gross profit growth rates, terminal value amount, capital expenditures and applicable weighted‑average cost of capital used to discount these estimated cash flows. The estimates and projections used in the estimate of fair value are consistent with our current budget and long‑range plans, including anticipated change in market conditions, industry trend, growth rates and planned capital expenditures, among other considerations.

Impairment of Long‑Lived Assets

Long‑lived assets, such as property, plant, and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of the asset or asset group is measured by comparison of its carrying amount to undiscounted future net cash flows the asset or asset group is expected to generate. If the carrying amount of an asset or asset group is not recoverable, the Company recognizes an impairment loss based on the excess of the carrying amount of the asset or asset group over its respective fair value which is generally determined as the present value of estimated future cash flows or as the appraised value.

Assets Held for Sale

Assets and liabilities (the “disposal group”) are classified as held for sale when all of the following criteria are met: (i) the Company commits to a plan to sell the disposal group; (ii) it is unlikely the disposal plan will be significantly modified or discontinued; (iii) the disposal group is available for immediate sale in its present condition; (iv) actions required to complete the sale of the disposal group have been initiated; (v) the sale of the asset is probable and the completed sale is expected to occur within one year; and (vi) the disposal group is actively being marketed for sale at a price that is reasonable given its current market value. Upon classification as held for sale, such assets are no longer depreciated or depleted, and a measurement for impairment is performed to determine if there is any excess of carrying value over fair value less costs to sell. Subsequent changes to estimated fair value less the cost to sell will impact the measurement of assets held for sale if the fair value is determined to be less than the carrying value of the assets.

Debt Issuance Costs and Debt Discounts

Debt issuance costs are capitalized and amortized over the contractual term of the underlying debt using the straight line method which approximates the effective interest method. Debt discounts and lender arrangement fees deducted from the proceeds have been included as a component of the carrying value of debt and are being amortized to interest expense using the effective interest method.

Beginning in the first quarter of 2019, the Company entered into an interest rate cap to mitigate risks associated with the Company’s variable rate debt. See Note 11, “Derivative Financial Instruments” for further details. The Company paid $2,235 as a premium for the interest rate cap, which is being amortized to interest expense over its three-year term. The Company recorded $186 and ~~$62~~$186 of premium amortization to interest expense during the three months ended ~~December~~March 31, 2020 and 2019, respectively and ~~2018,~~$372 and $248 during the six months ended March 31, 2020 and 2019, respectively.

In January 2020, the Company utilized $100,000 of the proceeds from the sale of the Memcor product line to repay a portion of the Company’s First Lien Term Loans. As a result of the prepayment, the Company wrote off $1,795 of deferred financing fees during the three months ended March 31, 2020.

In February 2020, the Company entered into Amendment No. 7 to the Credit Agreement, and as a result incurred $760 of fees which were recorded as deferred financing fees on the Consolidated Balance Sheets.

Amortization of debt issuance costs and discounts included in interest expense were ~~$515~~$421 and ~~$494~~$489 for the three months ended ~~December~~March 31, 2020 and 2019, respectively and ~~2018,~~$936 and $983 for the six months ended March 31, 2020 and 2019, respectively.

Revenue Recognition

The Company adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) on October 1, 2018, and recognizes sales of products and services based on the five-step analysis of transactions as provided in Topic 606 which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for such goods or services.

For sales of aftermarket parts or products with a low level of customization and engineering time, the Company recognizes revenues at the time risks and rewards of ownership pass, which is generally when products are shipped or delivered to the customer as the Company has no obligation for installation. Sales of short‑term service arrangements are recognized as the services are performed, and sales of long‑term service arrangements are typically recognized on a straight‑line basis over the life of the agreement.

For certain arrangements where there is significant customization to the product, the Company recognizes revenue either over time or at a point in time. These products include large capital water treatment projects, systems and solutions for municipal and industrial applications. The nature of the contracts is generally fixed price with milestone billings. The Company recognizes revenue over time if the product has no alternative use and the Company has an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. If these two criteria are not met, revenues from these contracts will not be recognized until construction is complete. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and the cumulative effect of such adjustments are recognized in current operations. The amount of such adjustments have not been material. See Note 4, “Revenue” for further details.

Product Warranties

Accruals for estimated expenses related to warranties are made at the time products are sold and are recorded as a component of Cost of product sales in the Unaudited Consolidated Statements of Operations. The estimated warranty obligation is based on product warranty terms offered to customers, ongoing product failure rates, material usage and service delivery costs expected to be incurred in correcting a product failure, as well as specific obligations for known failures and other currently available evidence. The Company assesses the adequacy of the recorded warranty liabilities on a regular basis and adjusts amounts as necessary.

Leases

The Company accounts for leases in accordance with ASC Topic No. 842, Leases, adopted as of October 1, 2019 (Topic 842). Please see the “Accounting Pronouncements Recently Adopted” section below for information regarding this adoption. See Note 19, “Leases” for further details.

Lessee Accounting

The Company leases office space, buildings, vehicles, forklifts, computers, copiers and other assets under non-cancelable operating and finance leases. The Company determines whether an arrangement is or contains a lease at the inception of the arrangement based on the terms and conditions in the contract. A contract contains a lease if there is an identified asset and the Company has the right to control the asset. If the arrangement contains a lease, the Company recognizes a right-of-use (“ROU”) asset and an operating lease liability as of the lease commencement date. Operating lease assets and finance lease assets are included in Operating lease right-of-use assets, net and Property, plant, and equipment, net, respectively, on the Consolidated Balance Sheets. The corresponding operating lease liabilities are included in Accrued expenses and other liabilities and Obligation under operating leases on the Consolidated Balance Sheets. The corresponding finance lease liabilities are included in Accrued expenses and other liabilities and Other non‑current liabilities on the Consolidated Balance Sheets.

Lessor Accounting

The Company generates revenue through the lease of its water treatment equipment and systems to customers. In certain instances, the Company enters into a contract with a customer but must construct the underlying asset prior to its lease. At the time of contract inception, the Company determines if an arrangement is or contains a lease. ~~Customer~~These contracts ~~that~~generally contain ~~a lease are generally classified as operating leases and can contain~~both lease and non-lease components, including

installation, maintenance and monitoring services of the ~~Company-owned equipment. As part~~Company owned equipment, in addition to sale of certain constructed assets. In situations where arrangements contain multiple elements, contract consideration is allocated based on relative standalone selling price. Lease components associated to underlying assets that have an alternative use are classified as operating leases with revenue recognized over time throughout the lease term, whereas lease components associated to underlying assets that have no alternative use are classified as sales-type leases, with point in time revenue recognition at the on-set of the ~~Company’s adoption~~lease. In order for a component to be separate, the Customer would be able to benefit from the right of ~~Topic 842,~~use of the ~~Company has elected~~component separately or with other resources readily available to the ~~practical expedient for all classes~~Customer and the right of the use is not highly dependent or highly interrelated with the other rights to use the other underlying assets ~~to not separate the lease and non-lease components if certain conditions are met, including the lease qualifying as an operating lease and revenue being recognized in the same pattern for both~~or components. If these conditions are met, the Company will account for the contract with a customer as a combined component under the respective authoritative guidance for the predominant component in the contract.

Shipping and Handling Cost

Shipping and handling costs are included as a component of Cost of product sales.

Derivative Financial Instruments

The Company’s risk-management strategy uses derivative financial instruments to manage interest rate risk and foreign currency exchange rate risk. The Company’s objective in using interest rate derivatives is to add stability to interest expense and manage its exposure to interest rate movements. To accomplish this objective, in November 2018, the Company entered into an interest rate cap which has been designated as a cash flow hedge. The Company uses foreign currency derivative contracts in order to manage the effect of exchange rate fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges. The Company does not enter into derivatives for trading or speculative purposes. The Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, Derivatives and Hedging (ASC 815). The Company recognizes all derivatives on the balance sheet at fair value. Changes in the fair values of derivatives that are not designated as hedges are recognized in earnings. If the derivative is designated and qualifies as a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives are either offset against the change in the hedged assets or liabilities through earnings or recognized in Accumulated other comprehensive income (loss), net of tax (“AOCI”) until the hedged item is recognized in earnings.

Income Taxes

The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that included the enactment date. Valuation allowances are provided against deferred tax assets when it is deemed more likely than not that some portion or all of the deferred tax asset will not be realized within a reasonable time period. We assess tax positions using a two‑step process. A tax position is recognized

if it meets a more‑likely‑than‑not threshold, and is measured at the largest amount of benefit that is greater than 50% percent of being realized. Uncertain tax positions are reviewed each balance sheet date.

Foreign Currency Translation and Transactions

The functional currency for the international subsidiaries is the local currency. Assets and liabilities are translated into U.S. dollars using current rates of exchange, with the resulting translation adjustments recorded in AOCI within shareholders’ equity. Revenues and expenses are translated at the weighted‑average exchange rate for the period, with the resulting translation adjustments recorded in the Unaudited Consolidated Statements of Operations.

Foreign currency translation (gains) losses, mainly related to intercompany loans, which aggregated ~~$(6,443)~~$7,614 and ~~$4,815~~$593 for the three months ended ~~December~~March 31, 2020 and 2019, respectively and ~~2018,~~$1,171 and $5,408 for the six months ended March 31, 2020 and 2019, respectively, are primarily included in General and administrative expenses in the Unaudited Consolidated Statements of Operations.

Research and Development Costs

Research and development costs are expensed as incurred. The Company recorded ~~$3,684~~$3,189 and ~~$4,146~~$3,957 for the three months ended ~~December~~March 31, 2020 and 2019, respectively and ~~2018,~~$6,873 and $8,103 for the six months ended March 31, 2020 and 2019, respectively.

Equity‑based Compensation

The Company measures the cost of awards of equity instruments to employees based on the grant‑date fair value of the award. The grant‑date fair value of a non-qualified stock option is determined using the Black‑Scholes model. The

fair value of restricted stock unit awards is determined using the closing price of ~~our~~the Company’s common stock on the date of grant. Compensation costs resulting from equity-based payment transactions are recognized primarily within General and administrative expenses, at fair value over the requisite vesting period on a straight-line basis.

Earnings (Loss) Per Share

Basic earnings (loss) per common share is computed based on the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed based on the weighted average number of shares of common stock, plus the effect of diluted common shares outstanding during the period using the treasury stock method. Diluted potential common shares include outstanding stock options.

Retirement Benefits

The Company applies ASC Topic No. 715, Compensation—Retirement Benefits, which requires the recognition in pension obligations and AOCI of actuarial gains or losses, prior service costs or credits and transition assets or obligations that have previously been deferred. The determination of retirement benefit pension obligations and associated costs requires the use of actuarial computations to estimate participant plan benefits to which the employees will be entitled. The significant assumptions primarily relate to discount rates, expected long‑term rates of return on plan assets, rate of future compensation increases, mortality, years of service, and other factors. The Company develops each assumption using relevant experience in conjunction with market‑related data for each individual country in which such plans exist. All actuarial assumptions are reviewed annually with third‑party consultants and adjusted as necessary. For the recognition of net periodic postretirement cost, the calculation of the expected return on plan assets is generally derived by applying the expected long‑term rate of return on the market‑related value of plan assets. The fair value of plan assets is determined based on actual market prices or estimated fair value at the measurement date.

~~Treated Water Outsourcing~~Variable Interest Entities

Treated Water Outsourcing (“TWO”) is a joint venture between the Company and Nalco Water, an Ecolab company, in which the Company holds a 50% partnership interest. The Company is obligated to absorb all risk of loss up to 100% of the joint venture partner’s equity. As such, the Company fully consolidates TWO as a variable interest entity (“VIE”) under ASC Topic No. 810, ~~Consolidation.~~Consolidation. The Company has not provided additional financial support to this entity which it is not contractually required to provide, and the Company does not have the ability to use the assets of TWO to settle obligations of the Company’s other subsidiaries.

The following provides a summary of TWO’s balance sheet as of ~~December~~March 31, 2020 and September 30, 2019, and summarized financial information for the three and six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018.~~2019.


	December 31, 2019			September 30, 2019			March 31, 2020			September 30, 2019
Current assets (includes cash of $2,739 and $3,903)	$	5,256		$	6,324
Current assets (includes cash of $2,569 and $3,903)							$	4,567		$	6,324
Property, plant and equipment	1,442			2,186			1,212			2,186
Goodwill	2,206			2,206			2,206			2,206
Other non-current assets	3			3			3			3
Total liabilities	(2,353		)	(2,388		)	(1,639		)	(2,388		)


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Total revenues	$	2,642		$	3,156		$	1,210		$	3,222		$	3,852		$	6,378
Total operating expenses	(1,958		)	(2,230		)	(1,086		)	(2,806		)	(3,044		)	(5,036		)
Income from operations	$	684		$	926		$	124		$	416		$	808		$	1,342

On October 1, 2019, the Company acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”). The Frontier acquisition is a VIE because it has insufficient equity to finance its activities due to key assets being assigned to the Company upon acquisition. The Company, is the primary beneficiary of Frontier because the Company has the power to direct the activities that most significantly affect the Frontier’s economic performance. As the agreement to purchase the remaining interest was determined to be financing due to the mandatory Purchase Right, as per ASC Topic 480, Distinguishing Liabilities From Equity, the Company recognized a liability for the remaining 40% interest. Additionally, the Company fully consolidates Frontier as a VIE under ASC Topic No. 810, Consolidation. See Note 3, “Acquisitions and Divestitures” for further discussion of the Frontier acquisition.

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



	March 31, 2020
Current assets (includes cash of $3,721)	$	4,465
Property, plant and equipment	3,283
Goodwill	—
Other non-current assets	—
Total liabilities	(3,685		)



	Three Months Ended March 31,			Six Months Ended March 31,
	2020			2020
Total revenues	$	1,078		$	2,723
Total operating expenses	(1,612		)	(3,549		)
Loss from operations	$	(534	)	$	(826	)

Recent Accounting Pronouncements

In ~~November 2018,~~March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting which provides optional expedients and exceptions for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. ASU 2020-04 is effective immediately

and expires on December 21, 2022. The ASU allows eligible contracts that are modified to be accounted for as a continuation of those contracts, permits companies to preserve their hedging accounting during the transition period and enables companies to make a one-time election to transfer or sell held-to-maturity debt securities that are affected by rate reform. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which includes several amendments to clarify, conform or improve the Codification and make it easier to apply by eliminating inconsistencies and providing clarifications. The ASU includes seven different issues that describe the areas of improvement and the related amendments, which have various effective dates. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments—Credit Losses which clarifies that receivables from operating leases are accounted for using the lease guidance and not as financial instruments. ASU 2018-19 will be effective for the Company for the quarter ending December 31, 2020, with early adoptions permitted. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements.

In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) Clarifying the Interaction between Topic 808 and Topic 606, which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer in the context of a unit of account. In addition, unit-of-account guidance in Topic 808 was aligned with the guidance in Topic 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of Topic 606. ASU 2018-18 should be applied retrospectively to the date of initial adoption of Topic 606 and is effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Subtopic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. ASU 2018-14 will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company is currently assessing the impact of adoption on the Company’s disclosures.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, amended in November 2019 (ASU 2019-11 and 2019-10), which requires entities to use a new forward-looking “expected loss” model that reflects expected credit losses, including credit losses related to trade receivables, and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates which generally will result in the earlier recognition of allowances for losses. ASU 2016-13 will be effective for the Company for the quarter ending December 31, 2020, with early adoption permitted. The Company ~~does not expect~~is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial ~~Statements to be material.~~Statements.

Accounting Pronouncements Recently Adopted

The Company adopted ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, as of October 1, 2019, which simplifies the accounting for income taxes by removing certain exceptions and by clarifying and amending existing guidance in order to improve consistent application of and simplify GAAP for other areas of Topic 740. This adoption did not have an impact on the Company’s Unaudited Consolidated Financial Statements.

The Company adopted ASU 2018‑07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, as of October 1, 2019. ASU 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. This adoption did not have an impact on the Company’s Unaudited Consolidated Financial Statements.

The Company adopted ASU 2017‑12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, as of October 1, 2019. ASU 2017-12 expands and refines hedge accounting for both nonfinancial and financial risk components and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements and also made certain targeted improvements to simplify the application of hedge accounting guidance and ease the administrative burden of hedge documentation requirements and assessing hedge effectiveness. This adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements.

The Company adopted ASU 2016-02, Leases (Topic 842), including associated ASUs related to Topic 842, as of October 1, 2019. ASU No. 2016-02 requires recognition of operating leases as lease assets and liabilities on the balance sheet, and disclosure of key information about leasing arrangements. Amendments to the standard were issued by the FASB in January, July and December 2018, and March 2019 including certain practical expedients, an amendment that provides an additional and optional transition method to adopt the standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption and certain narrow-scope improvements

for lessors. The Company adopted this standard using a modified retrospective approach, applying the new standard to all leases existing at the date of initial adoption and the Company elected to apply the transition requirements at the October 1, 2019 effective date rather than the beginning of the earliest comparative period presented. As a result, the Company recorded a cumulative effect adjustment in the period of adoption, and prior periods were not restated and continue to be reported in accordance with historic accounting under ASC Topic No. 840. In addition, the Company has elected the package of practical expedients permitted under the transition guidance which does not require reassessment of prior conclusions related to contracts containing a lease, lease classification and initial direct lease costs. As an accounting policy election, the Company elected to exclude short-term leases (term of 12 months or less) from the balance sheet and accounts for non-lease and lease components separately for all asset classes. The following table summarizes the impact of adoption to the Consolidated Balance Sheet as of October 1, 2019:


	As Reported September 30, 2019			Impact of Adoption of ASU 2016-02			Updated October 1, 2019			As Reported September 30, 2019			Impact of Adoption of ASU 2016-02			Updated October 1, 2019
Assets
Prepaid and other current assets	$	21,940		$	(73	)	$	21,867		$	21,940		$	(73	)	$	21,867
Total current assets	637,293			(73		)	637,220			637,293			(73		)	637,220
Property, plant and equipment, net	333,584			2,126			335,710			333,584			2,812			336,396
Operating lease right-of-use assets, net	—			42,073			42,073			—			42,073			42,073
Total Assets	1,737,848			44,126			1,781,974			1,737,848			44,812			1,782,660
Liabilities
Accrued expenses and other liabilities	101,839			13,596			115,435			101,839			13,596			115,435
Total current liabilities	322,221			13,596			335,817			322,221			13,596			335,817
Obligation under operating leases	—			29,308			29,308			—			29,308			29,308
Other non-current liabilities	78,661			3,245			81,906			78,661			3,245			81,906
Total non-current liabilities	1,049,805			32,553			1,082,358			1,049,805			32,553			1,082,358
Total liabilities	1,372,026			46,149			1,418,175			1,372,026			46,149			1,418,175
Shareholders' equity
Retained deficit	(174,976		)	(2,023		)	(176,999		)	(174,976		)	(1,337		)	(176,313		)
Total Evoqua Water Technologies Corp. equity	362,759			(2,023		)	360,736			362,759			(1,337		)	361,422
Total shareholder's equity	365,822			(2,023		)	363,799			365,822			(1,337		)	364,485
Total liabilities and shareholders' equity	$	1,737,848		$	44,126		$	1,781,974		$	1,737,848		$	44,812		$	1,782,660

3. Acquisitions and Divestitures

Acquisitions

Acquisitions support the Company’s strategy of delivering a broad solutions portfolio with robust technology across multiple geographies and end markets. The Company continues to evaluate potential strategic acquisitions of businesses, assets and product lines and believes that capex-like, tuck-in acquisitions present a key opportunity within its overall growth strategy.

On October 1, 2019, the Company acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”) for $11,160 cash paid at closing. Frontier is a pioneer in the development of patented, engineered equipment packages for high-rate treatment and removal of selenium, nitrate and other metals from complex water systems. During the ~~three~~six months ended ~~December~~March 31, ~~2019,~~2020, the Company incurred approximately ~~$326~~$402 in acquisition costs, which are included in General and administrative expenses. Frontier is part of the Integrated Solutions and Services segment.

The Company has entered into an agreement to purchase the remaining 40% interest in Frontier on or prior to March 30, 2024. This agreement (a) gives 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 may be exercised by the Minority Owners between January 1, 2021 and February 28, 2021 (the “Option”), and (b) obligates 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 Purchase Right may be exercised early by the Minority Owners. The agreement to purchase the remaining interest was determined to be financing due to the mandatory Purchase Right, as per ASC Topic 480, Distinguishing Liabilities From Equity, and as such, the Company will recognize a liability for the remaining 40% interest.

The value of the Option was determined to be $506 using a Black Scholes ~~Merton~~ model, and is included within Accrued expenses and other liabilities on the Consolidated Balance Sheets.

The value of the Purchase Right was determined to be ~~$7,167,~~$6,661, and is included within Other non‑current liabilities on the Consolidated Balance Sheets,, based upon the enterprise value of Frontier upon the acquisition date as per ASC Topic 480, Distinguishing Liabilities From Equity. Pursuant to ASC Topic 480, the Company determined that this should be recorded as a liability and should be recognized at the fair value at the time of inception, adjusted for any consideration or unstated rights or privileges. The liability will be subsequently measured at an amount that would be paid on the reporting date with any change in value from the previous reporting date recognized as interest cost.

The accounting for the acquisition has not yet been completed because the Company has not finalized the valuations of the acquired assets, assumed liabilities and identifiable intangible assets, including goodwill. The preliminary opening balance sheet for Frontier is summarized as follows:


Current assets	$	3,084		$	3,186
Property, plant and equipment	3,824			3,570
Goodwill	1,403			1,466
Intangible assets	11,516			11,571
Total assets acquired	19,827			19,793
Liabilities related to Option and Purchase Right	(7,673		)	(7,167		)
Other liabilities assumed	(994		)	(1,466		)
Net assets acquired	$	11,160		$	11,160

Divestitures

On December 31, 2019, the Company completed the previously-announced sale of the Memcor product line to DuPont de Nemours, Inc. (“DuPont”). The aggregate purchase price paid by DuPont in the Transaction was ~~$110.0 million~~$110,000 in cash, subject to certain adjustments. Following adjustments for cash and net working capital, gross proceeds paid by DuPont were ~~$121.3 million.~~$131,011. The Company recognized a ~~$49.0 million~~$49,000 net pre-tax benefit on the sale of the Memcor product line, net of ~~$8.3 million~~$8,300 of discretionary compensation payments to employees in connection with the transaction and ~~$1.0 million~~$1,000 in transaction costs incurred in the three months ended December 31, 2019. As a result of net working capital adjustments, the Company

recognized an additional $9,000 net pre-tax benefit in the three months ended March 31, 2020. The Company utilized ~~$100 million~~$100,000 of the proceeds from the transaction to repay a portion of the Company’s First Lien Term Loans in January 2020.

4. Revenue

Revenue Recognition

The Company recognizes sales of products and services based on the five-step analysis of transactions as provided in Topic 606. For all contracts with customers, the Company first identifies the contract which usually is established when the customer’s purchase order is accepted or acknowledged. Next the Company identifies the performance obligations in the contract. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer. The Company then determines the transaction price in the arrangement and allocates the transaction price to each performance obligation identified in the contract. The Company’s allocation of the transaction price to the performance obligations are based on the relative standalone selling prices for the goods and services contained in a particular performance obligation. The transaction price is adjusted for the Company’s estimate of variable consideration which may include discounts if the Company would fail to meet certain performance requirements, volume discounts or early payment discounts. To estimate variable consideration, the Company utilizes historical experience and known terms. Variable consideration in contracts for the three and six months ended ~~December~~March 31, ~~2019~~2020 was insignificant.

For sales of aftermarket parts or products with a low level of customization and engineering time, the Company recognizes revenues at the time risks and rewards of ownership pass, which is generally when products are shipped or delivered to the customer as the Company has no obligation for installation. The Company considers shipping and handling services to be fulfillment activities and as such they do not represent separate performance obligations for revenue recognition. Sales of service arrangements are recognized as the services are performed.

For certain arrangements where there is significant customization to the product and for long-term construction-type sales contracts, revenue may be recognized over time. In these instances, revenue is recognized using a measure of progress that applies an input method based on costs incurred in relation to total estimated costs. These arrangements include large capital water treatment projects, systems and solutions for municipal and industrial applications. The nature of the contracts is generally fixed price with milestone billings. In order for revenue to be recognized over a period of time, the product must have no alternative use and the Company must have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. If these two criteria are not met, revenues from these contracts will not be recognized until construction is complete. Instead, revenues from these contracts will be recognized when construction is complete. Contract revenues and cost estimates are reviewed and revised quarterly at a minimum and the cumulative effect of such adjustments are recognized in current operations. The amount of such adjustments have not been material.

The Company has made accounting policy elections to exclude all taxes by governmental authorities from the measurement of the transaction price and that long-term construction-type sales contracts, or those contracts for products with significant customization that the total contract price is less than $100 will be recorded at the point in time when the construction is complete.

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 of approximately ~~$176,693~~$174,824 at ~~December~~March 31, ~~2019.~~2020. This backlog represents the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that the majority of these performance obligations will be satisfied within the next twelve months.

The recording of assets recognized from the costs to obtain and fulfill customer contracts primarily relate to the deferral of sales commissions. The Company’s costs incurred to obtain or fulfill a contract with a customer are classified

as non-current assets and amortized to expense over the period of benefit of the related revenue. These costs are recorded within Cost of product sales and services. The amount of contract costs was insignificant at ~~December~~March 31, ~~2019.~~2020.

The Company offers standard warranties that generally do not represent a separate performance obligation. In certain instances, a warranty is obtained separately from the original equipment sale or the warranty provides incremental services and as such is treated as a separate performance obligation.

Disaggregation of Revenue

In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into source of revenue, reportable operating segment and geographical regions. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606 which is to depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors.

Information regarding the source of revenues:


	Three Months Ended December 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2020		2019		2020		2019
Revenue from contracts with customers recognized under Topic 606	$	308,602	$	293,004	$	314,994	$	316,098	$	623,596	$	609,102
Other (1)	37,503		29,998		36,669		32,530		74,172		62,528
Total	$	346,105	$	323,002	$	351,663	$	348,628	$	697,768	$	671,630


(1)	Other revenue relates to revenue recognized from Topic 842 (previously Topic 840), Leases, mainly attributable to long term rentals.

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


	Three Months Ended December 31,												Three Months Ended March 31,
	2019						2018						2020						2019
	Integrated Solutions and Services		Applied Product Technologies		Total		Integrated Solutions and Services		Applied Product Technologies		Total		Integrated Solutions and Services		Applied Product Technologies		Total		Integrated Solutions and Services		Applied Product Technologies		Total
Revenue from capital projects	$	54,620	$	74,926	$	129,546	$	43,009	$	71,226	$	114,235	$	66,092	$	75,214	$	141,306	$	57,631	$	76,271	$	133,902
Revenue from aftermarket	29,673		37,341		67,014		30,796		35,057		65,853		31,901		32,762		64,663		32,474		40,492		72,966
Revenue from service	143,845		5,700		149,545		136,693		6,221		142,914		139,892		5,802		145,694		136,759		5,001		141,760
Total	$	228,138	$	117,967	$	346,105	$	210,498	$	112,504	$	323,002	$	237,885	$	113,778	$	351,663	$	226,864	$	121,764	$	348,628



	Six Months Ended March 31,
	2020						2019
	Integrated Solutions and Services		Applied Product Technologies		Total		Integrated Solutions and Services		Applied Product Technologies		Total
Revenue from capital projects	$	120,712	$	150,140	$	270,852	$	100,640	$	147,497	$	248,137
Revenue from aftermarket	61,574		70,103		131,677		63,270		75,549		138,819
Revenue from service	283,737		11,502		295,239		273,452		11,222		284,674
Total	$	466,023	$	231,745	$	697,768	$	437,362	$	234,268	$	671,630

Information regarding revenues disaggregated by geographic area is as follows:


	Three Months Ended December 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2020		2019		2020		2019
United States	$	277,717	$	258,718	$	290,273	$	280,468	$	567,990	$	539,186
Europe	26,112		21,417		30,381		23,141		56,493		44,558
Canada					16,319		17,660		33,882		37,963
Asia	18,742		18,908		12,720		20,496		31,462		39,404
Canada	17,563		20,303
Australia	5,971		3,656		1,970		6,863		7,941		10,519
Total	$	346,105	$	323,002	$	351,663	$	348,628	$	697,768	$	671,630

Contract Balances

The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company receives payments from customers based on a billing schedule as established in its contracts.

Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contract assets and liabilities are due to ~~our~~the Company’s performance under the contract.

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


	Three Months Ended December 31,						Six Months Ended March 31,
Contract assets (a)	2019			2018			2020			2019
Balance at beginning of period	$	73,467		$	69,147		$	73,467		$	69,147
Cumulative effect of adoption of new accounting standards	—			(6,106		)	—			(6,106		)
Recognized in current period	84,596			51,567			172,228			148,103
Reclassified to accounts receivable	(87,046		)	(59,305		)	(166,535		)	(139,848		)
Amounts related to sale of the Memcor product line	2,710			—			2,710			—
Foreign currency	182			345			(621		)	14
Balance at end of period	$	73,909		$	55,648		$	81,249		$	71,310


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


	Three Months Ended December 31,						Six Months Ended March 31,
Contract Liabilities	2019			2018			2020			2019
Balance at beginning of period	$	39,051		$	17,652		$	39,051		$	17,652
Cumulative effect of adoption of new accounting standards	—			1,773			—			1,773
Recognized in current period	88,616			67,852			157,114			135,532
Amounts in beginning balance reclassified to revenue	(37,624		)	(15,825		)	(37,497		)	(21,161		)
Current period amounts reclassified to revenue	(46,083		)	(40,709		)	(124,194		)	(108,599		)
Amounts related to sale of the Memcor product line	(700		)	—			(700		)	—
Foreign currency	374			346			(83		)	(129		)
Balance at end of period	$	43,634		$	31,089		$	33,691		$	25,068

5. Fair Value Measurements

As of ~~December~~March 31, 2020 and September 30, 2019, the fair values of cash and cash equivalents, accounts receivable and accounts payable approximate carrying values due to the short maturity of these items.

The Company measures the fair value of pension plan assets and liabilities, deferred compensation plan assets and liabilities on a recurring basis pursuant to ASC Topic No. 820, Fair Value Measurement. ASC Topic No. 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Level 1: Quoted prices for identical instruments in active markets.

Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value driver is observable.

Level 3: Unobservable inputs in which little or no market data is available, therefore requiring an entity to develop its own assumptions.

The following table presents the Company’s financial assets and liabilities at fair value. The fair values related to the pension plan assets are determined using net asset value (“NAV”) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value. The reported carrying amounts of deferred compensation plan assets and liabilities and debt approximate their fair values. The Company uses interest rates and other

relevant information generated by market transactions involving similar instruments to fair value these assets and liabilities, therefore all are classified as Level 2 within the valuation hierarchy.


	Net Asset Value		Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)			Net Asset Value		Quoted Market Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
As of December 31, 2019
As of March 31, 2020
Assets:
Pension plan
Cash	$	—	$	15,054	$	—		$	—		$	—	$	13,902	$	—		$	—
Government Securities	2,034		—		—			—			2,305		—		—			—
Liability Driven Investment	5,379		—		—			—			5,232		—		—			—
Guernsey Unit Trust	1,072		—		—			—			1,003		—		—			—
Global Absolute Return	2,103		—		—			—			1,776		—		—			—
Deferred compensation plan assets
Trust Assets	—		90		—			—			—		6		—			—
Insurance	—		—		19,124			—			—		—		18,877			—
Interest rate cap	—		—		5			—			—		—		1			—
Foreign currency forward contracts	—		—		148			—			—		—		405			—
Liabilities:
Pension plan	—		—		(44,667		)	—			—		—		(43,224		)	—
Deferred compensation plan liabilities	—		—		(21,874		)	—			—		—		(19,928		)	—
Long‑term debt	—		—		(979,691		)	—			—		—		(811,286		)	—
Foreign currency forward contracts	—		—		(123		)	—			—		—		(420		)	—
Earn-outs related to acquisitions	—		—		—			(91		)	—		—		—			(91		)
Option and Purchase Right	—		—		—			(7,673		)	—		—		—			(7,167		)

As of September 30, 2019
Assets:
Pension plan
Cash	$	—	$	14,607	$	—		$	—		$	—	$	14,607	$	—		$	—
Government Securities	4,703		—		—			—			4,703		—		—			—
Liability Driven Investment	3,261		—		—			—			3,261		—		—			—
Guernsey Unit Trust	997		—		—			—			997		—		—			—
Global Absolute Return	1,957		—		—			—			1,957		—		—			—
Deferred compensation plan assets
Trust Assets	—		16		—			—			—		16		—			—
Insurance	—		—		18,684			—			—		—		18,684			—
Interest rate cap	—		—		19			—			—		—		19			—
Foreign currency forward contracts	—		—		278			—			—		—		278			—
Liabilities:
Pension plan	—		—		(42,948		)	—			—		—		(42,948		)	—
Deferred compensation plan liabilities	—		—		(21,318		)	—			—		—		(21,318		)	—
Long‑term debt	—		—		(979,357		)	—			—		—		(979,357		)	—
Foreign currency forward contracts	—		—		(154		)	—			—		—		(154		)	—
Earn-outs related to acquisitions	—		—		—			(1,545		)	—		—		—			(1,545		)

The pension plan assets and liabilities and deferred compensation plan assets and liabilities are included in ~~other non-current~~Other non‑current assets and ~~other non-current~~Other non‑current liabilities at ~~December~~March 31, 2020 and September 30, 2019.

The Company records contingent consideration arrangements at fair value on a recurring basis and the associated balances presented as of ~~December~~March 31, 2020 and September 30, 2019 are earn-outs related to acquisitions. The fair value of earn-outs related to acquisitions is based on significant unobservable inputs including the achievement of certain performance

metrics. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the earn-out each period until the related contingency has been resolved. Changes in the fair value of the contingent consideration obligations can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Unaudited Consolidated Statements of Operations.

A roll-forward of the activity in the Company’s fair value of earn-outs related to acquisitions is as follows:


	Current Portion (1)			Long-term Portion (2)			Total			Current Portion (1)			Long-term Portion (2)			Total
Balance at September 30, 2019	$	611		$	934		$	1,545		$	611		$	934		$	1,545
Payments	(187		)	—			(187		)	(187		)	—			(187		)
Fair value adjustment	(333		)	(934		)	(1,267		)	(333		)	(934		)	(1,267		)
Balance at December 31, 2019	$	91		$	—		$	91
Balance at March 31, 2020										$	91		$	—		$	91


(1)	Included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.


(2)	Included in Other non‑current liabilities on the Consolidated Balance Sheets.

Pursuant to the acquisition of Frontier, the Company recorded a liability for the Option and Purchase Right
to purchase the remaining 40% interest. The fair value of the options is based upon significant unobservable inputs including future earnings and other market factors. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the options each period until the purchase of the remaining 40% interest has occurred. Changes in the fair value can result from earnings achieved over the passage of time and will be recorded in Interest expense in the Unaudited Consolidated Statements of Operations. As of ~~December~~March 31, ~~2019,~~2020, $506 is included in Accrued expenses and other liabilities related to the Option and ~~$7,167~~$6,661 is included in Other non‑current liabilities related to the Purchase Right on the Consolidated Balance Sheets.

6. Accounts Receivable

Accounts receivable are summarized as follows:


	December 31, 2019			September 30, 2019			March 31, 2020			September 30, 2019
Accounts receivable	$	247,178		$	262,491		$	248,248		$	262,491
Allowance for doubtful accounts	(5,142		)	(4,906		)	(4,830		)	(4,906		)
Receivables, net	$	242,036		$	257,585		$	243,418		$	257,585

7. Inventories

The major classes of Inventories, net are as follows:


	December 31, 2019			September 30, 2019			March 31, 2020			September 30, 2019
Raw materials and supplies	$	78,127		$	75,223		$	78,434		$	75,223
Work in progress	16,712			14,741			18,115			14,741
Finished goods and products held for resale	64,184			58,223			63,699			58,223
Costs of unbilled projects	3,655			2,347			4,926			2,347
Reserves for excess and obsolete	(13,894		)	(13,370		)	(13,747		)	(13,370		)
Inventories, net	$	148,784		$	137,164		$	151,427		$	137,164

8. Property, Plant, and Equipment

Property, plant, and equipment consists of the following:


	December 31, 2019			September 30, 2019			March 31, 2020			September 30, 2019
Machinery and equipment	$	332,109		$	316,390		$	336,535		$	316,390
Rental equipment	178,069			172,534			188,054			172,534
Land and buildings	64,761			64,165			68,560			64,165
Construction in process	44,516			40,599			43,938			40,599
	619,455			593,688			637,087			593,688
Less: accumulated depreciation	(280,320		)	(260,104		)	(292,169		)	(260,104		)
	$	339,135		$	333,584		$	344,918		$	333,584

The Company entered into secured financing agreements that require providing a security interest in specified equipment. As of ~~December~~March 31, 2020 and September 30, 2019, the gross and net amounts of those assets are as follows:


	December 31, 2019				September 30, 2019				March 31, 2020				September 30, 2019
	Gross		Net		Gross		Net		Gross		Net		Gross		Net
Machinery and equipment	$	52,395	$	45,333	$	48,288	$	42,162	$	55,691	$	47,566	$	48,288	$	42,162
Construction in process	1,494		1,494		2,531		2,531		4,239		4,239		2,531		2,531
	$	53,889	$	46,827	$	50,819	$	44,693	$	59,930	$	51,805	$	50,819	$	44,693

Depreciation expense and maintenance and repairs expense for the three and six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018~~2019 were as follows:


	Three Months Ended December 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2020		2019		2020		2019
Depreciation expense	$	17,303	$	15,209	$	18,185	$	16,146	$	35,488	$	31,355
Maintenance and repair expense	6,065		6,157		5,249		5,891		11,314		12,048

9. Goodwill

Changes in the carrying amount of goodwill are as follows:


	Integrated Solutions and Services		Applied Product Technologies			Total		Integrated Solutions and Services			Applied Product Technologies			Total
Balance at September 30, 2019	$	222,013	$	170,877		$	392,890	$	222,013		$	170,877		$	392,890
Business combinations and divestitures	1,403		(237		)	1,166		1,466			(405		)	1,061
Measurement period adjustment	—		298			298		—			298			298
Foreign currency translation	863		1,789			2,652		(2,884		)	(2,484		)	(5,368		)
Balance at December 31, 2019	$	224,279	$	172,727		$	397,006
Balance at March 31, 2020								$	220,595		$	168,286		$	388,881

As of ~~December~~March 31, 2020 and September 30, 2019, ~~$152,099~~$151,958 and $151,880, respectively, of goodwill was deductible for tax purposes.

10. Debt

Long‑term debt consists of the following:


	December 31, 2019			September 30, 2019			March 31, 2020			September 30, 2019
First Lien Term Loan, due December 20, 2024	$	926,384		$	928,753		$	824,015		$	928,753
Revolving Credit Facility	—			—			—			—
Equipment Financing, due June 30, 2024 to July 5, 2029	48,096			45,960
Equipment Financing, due June 30, 2024 to July 5, 2029, interest rates ranging from 4.32% to 8.07%							53,192			45,960
Notes Payable, due July 31, 2023	759			807			711			807
Mortgage, due June 30, 2028	1,661			1,635			1,602			1,635
Total debt	976,900			977,155			879,520			977,155
Less unamortized discount and lender fees	(11,623		)	(12,138		)	(10,298		)	(12,138		)
Total net debt	965,277			965,017			869,222			965,017
Less current portion	(113,707		)	(13,418		)	(14,241		)	(13,418		)
Total long‑term debt	$	851,570		$	951,599		$	854,981		$	951,599

Term Facilities and Revolving Credit Facility

On January 15, 2014, EWT Holdings III Corp. (“EWT III”), an indirect wholly-owned subsidiary of the Company, entered into a First Lien Credit Agreement and Second Lien Credit Agreement (the “Credit Agreements” or, after the prepayment and termination of the Second Lien Credit Agreement, the “First Lien Credit Agreement” or “Credit Agreement”) among EWT III, EWT Holdings II Corp., the lenders party thereto and Credit Suisse AG as administrative agent and collateral agent. ~~The~~

In January 2020, the Company utilized $100,000 of the proceeds from the sale of the Memcor product line to repay a portion of the Company’s First Lien ~~Credit Agreement provided for~~Term Loans. As a ~~seven-year term loan facility, and the Second Lien Credit Agreement provided for an eight-year term loan facility. The term loan facilities originally consisted~~result of the ~~“First Lien Term Loan” and “Second Lien Term Loan” in aggregate principal amounts of $505,000 and $75,000, respectively. The First Lien Credit Agreement also made available to~~prepayment, the Company ~~a $75,000 revolving credit facility (the “Revolver”), which provided for a letter~~wrote off $1,795 of ~~credit sub-facility up to $35,000.~~

~~During fiscal years 2017 and 2018, certain subsidiaries of~~deferred financing fees during the ~~Company~~three months ended March 31, 2020. On February 18, 2020, EWT III entered into ~~amendments~~Amendment No. 7 (the “Amendment”), among EWT III, as the borrower, EWT Holdings II Corp, as parent guarantor, the subsidiary guarantors party thereto, the financial institutions party thereto, and Credit Suisse AG, as administrative agent and collateral agent, relating to the Credit Agreement. As a result of the Amendment, the Company incurred $760 of fees which were recorded as deferred financing fees on the Consolidated Balance Sheets. Prior to the Amendment, First Lien Term Loans in an aggregate principal amount of approximately $826,000 (the “Existing Term Loans”) were outstanding under the Credit Agreement. Pursuant to the Amendment, the Existing Term Loans were refinanced with the proceeds of the refinancing term loans. Additionally, the Amendment amended the Credit Agreement ~~which provided for,~~to, among other things, the refinancing of the term loans, extension of the maturity date to December 20, 2024, the reduction in the interest rate spreads to 3.00% and an additional $150,000 borrowed in incremental term loans. In addition, the revolving credit commitment and letters of credit sublimit was increased to $125,000 and $45,000, respectively. things:

(i)

reduce the interest rate spread applicable to term loans based on LIBOR from (A) 2.75% to 2.50% per annum during any period during which EWT III maintains a public corporate family rating better than or equal to B1 from Moody’s and B+ from SAP, in each case with a stable outlook (a “Ratings Condition Period”), and (B) 3.00% to 2.75% per annum for any period other than a Ratings Condition Period;


(ii)	reduce the interest rate spread applicable to term loans based on the Base Rate from (A) 1.75% to 1.50% per annum during any Ratings Condition Period and (B) 2.00% to 1.75% per annum during any period other than a Ratings Condition Period;


(iii)	remove the 1.00% floor for term loans based on LIBOR and the 2.00% floor for term loans based on the Base Rate;


(iv)	schedule existing indebtedness and investments, allowing EWT III and its subsidiaries to incur incremental indebtedness and make incremental investments under the applicable baskets;


(v)	increase the generally permitted investments basket; and


(vi)	extend the 1.00% prepayment premium for refinancing in connection with certain repricing transactions through August 18, 2020.

The Company makes quarterly principal payments of $2,369. At ~~December~~March 31, ~~2019,~~2020, the interest rate on borrowings was ~~4.70%~~4.35%, comprised of ~~1.70%~~1.60% LIBOR plus the ~~3.00%~~2.75% spread.

Total deferred fees related to the First Lien Term Loan were ~~$11,623~~$10,298 and $12,138, net of amortization, as of ~~December~~March 31, 2020 and September 30, 2019, respectively. These fees were included as a contra liability to debt on the Consolidated Balance Sheets.

The following summarizes the Company’s outstanding borrowings under the Revolver and outstanding letters of credit as of ~~December~~March 31, 2020 and September 30, 2019, respectively.


	December 31, 2019		September 30, 2019		March 31, 2020		September 30, 2019
Borrowing availability under the Revolver	$	125,000	$	125,000	$	125,000	$	125,000
Outstanding borrowings under the Revolver	—		—		—		—
Outstanding letters of credit under the Revolver	13,088		12,956		11,972		12,956
Unused amounts under the Revolver	$	111,912	$	112,044	$	113,028	$	112,044

Additional letters of credit under a separate arrangement	$	194	$	204	$	49	$	204

The First Lien Credit Agreement contains limitations on incremental borrowings, is subject to leverage ratios and allows for optional prepayments. Under certain circumstances, the Company may be required to remit excess cash flows as defined based upon exceeding certain leverage ratios. The Company did not exceed such ratios during the ~~three~~six months ended ~~December~~March 31, ~~2019,~~2020, does not anticipate exceeding such ratios during the year ending September 30, 2020, and therefore does not anticipate any additional repayments during the year ending September 30, 2020.

~~Equipment Financing~~

As of December 31, and September 30, 2019, the Company had equipment financings in an aggregate outstanding amount of $48,096 and $45,960, with interest rates ranging from 5.02% to 8.07%, and due dates ranging from June 30, 2024 to July 5, 2029.

~~Notes Payable~~

As of December 31, and September 30, 2019, the Company had notes payable in an aggregate outstanding amount of $759 and $807, with an interest rates of 6.53%, and a due date of July 31, 2023. These notes are related to certain equipment related contracts and are secured by the underlying equipment and assignment of the related contracts.

~~Mortgage~~

On June 29, 2018, the Company's subsidiary MAGNETO special anodes B.V. entered into a 10-year mortgage agreement for €1,600 ($1,796) to finance a facility in the Netherlands, subject to monthly principal payments of €7 ($7) at a blended interest rate of 2.4% with maturity in June 2028. The Company had $1,661 and $1,635 principal outstanding under this facility at December 31, and September 30, 2019, respectively.

Repayment Schedule

Aggregate maturities of all long‑term debt, including current portion of long‑term debt and excluding finance lease obligations as of ~~December~~March 31, ~~2019,~~2020, are presented below:


Fiscal Year
Remainder of 2020	$	110,264	$	7,101
2021	13,839		14,338
2022	14,057		14,579
2023	14,228		14,774
2024	14,114		14,685
Thereafter	810,398		814,043
Total	$	976,900	$	879,520

11. Derivative Financial Instruments

Interest Rate Risk Management

The Company is subject to market risk exposure arising from changes in interest rates on ~~our~~the senior secured credit facilities, which bear interest at rates that are indexed against LIBOR. The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to mitigate its exposure to rising interest rates. To accomplish these objectives, the Company entered into an interest rate cap, designated as a cash flow hedge, to mitigate risks associated with variable rate debt effective November 28, 2018. The LIBOR interest rate cap covers a notional amount of $600,000 of the Company’s senior secured debt, is effective for a period of three years and has a strike rate of 3.5%. Interest rate caps designated as cash flow hedges involve the receipt of stipulated amounts from a counterparty if interest rates rise above the strike rate defined in the contract. The premium paid for the interest rate cap was $2,235 and is being amortized to interest expense over its three-year term using the caplet method. At ~~December~~March 31, 2020 and September 30, 2019, the unamortized premium was ~~$1,428~~$1,242 and $1,614, respectively, of which ~~$683~~$497 and $869, respectively, is included in Other non‑current assets

and the remaining $745 is included in Prepaid and other current assets. The Company recorded $186 and ~~$62~~$186 of premium

amortization to interest expense during the three months ended ~~December~~March 31, 2020 and 2019, respectively and ~~2018,~~$372 and $248 of premium amortization to interest expense during the six months ended March 31, 2020 and 2019, respectively.

Foreign Currency Risk Management

The Company’s functional currency is the U.S. dollar. By operating internationally, the Company is subject to foreign currency risk from transactions denominated in currencies other than the U.S. dollar (“foreign currencies”). To mitigate cross-currency transaction risk, the Company analyzes significant exposures where it has receipts or payments in a currency other than the functional currency of its operations, and from time to time may strategically enter into short-term foreign currency forward contracts to lock in some or all of the cash flows associated with these transactions. The Company is also subject to currency translation risk associated with converting the foreign operations’ financial statements into U.S. dollars. The Company uses foreign currency derivative contracts in order to manage the effect of exchange fluctuations on forecasted sales and purchases that are denominated in foreign currencies. To mitigate the impact of foreign exchange rate risk, the Company entered into a series of forward contracts designated as cash flow hedges. As of ~~December~~March 31, ~~2019,~~2020, the notional amount of the forward contracts held to sell foreign currencies was ~~$9,516.~~$15,745.

Credit Risk Management

The counterparties to the Company’s derivative contracts are highly rated financial institutions. The Company regularly reviews the creditworthiness of its financial counterparties and ~~does not expect to incur a significant failure of any~~fully expects the counterparties to perform under ~~any~~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 Company accounts for derivatives and hedging activities in accordance with ASC Topic No. 815, “Derivatives and Hedging” (Topic No. 815). As required by Topic No. 815, the Company records all derivatives on the balance sheet at fair value and adjusts to market on a quarterly basis. The Company’s interest rate cap is valued based on readily observable market inputs, such as quotations on interest rates and LIBOR yield curves at the reporting date. The Company’s foreign currency forward contracts are valued based on quoted forward foreign exchange prices and spot rates at the reporting date. For a derivative that is designated as a cash flow hedge, changes in the fair value of the derivative are recognized in AOCI until the hedged item affects earnings. The Company does not use derivative financial instruments for trading or speculative purposes.

The following represents the fair value recorded for derivatives designated as cash flow hedges for the periods presented:


		Asset Derivatives					Asset Derivatives
	Balance Sheet Location	December 31, 2019		September 30, 2019		Balance Sheet Location	March 31, 2020		September 30, 2019
Interest rate cap	Prepaid and other current assets	$	5	$	19	Prepaid and other current assets	$	1	$	19
Foreign currency forward contracts	Prepaid and other current assets	148		269		Prepaid and other current assets	378		269

Liability Derivative
Balance Sheet Location December 31,
2019 September 30,
2019
Foreign currency forward contracts Accrued expenses and other current liabilities $ 68
$ 154



		Liability Derivative
	Balance Sheet Location	March 31, 2020		September 30, 2019
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	420	$	154

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


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Interest rate cap	$	(14	)	$	780		$	15		$	(646	)	$	1		$	134
Foreign currency forward contracts	19			(334		)	(179		)	20			(160		)	(314		)

The following represents the amount of (loss) gain on foreign currency forward contracts reclassified from AOCI into earnings during the periods presented:

Three Months Ended
December 31,
Location of (Loss) Gain 2019 2018
Foreign currency forward contracts Cost of product sales and services $ —
$ (126 )
Foreign currency forward contracts General and administrative expense 54
—
Foreign currency forward contracts Research and development expense —
15
$ 54
$ (111 )



	Three Months Ended March 31,						Six Months Ended March 31,
Location of (Loss) Gain	2020			2019			2020			2019
Cost of product sales and services	$	(6	)	$	—		$	(6	)	$	(126	)
General and administrative expense	(24		)	1			30			1
Selling and marketing expense	28			—			28			—
Research and development expense	—			(16		)	—			(1		)
	$	(2	)	$	(15	)	$	52		$	(126	)

Based on the fair value amounts of the Company’s cash flow hedges at ~~December~~March 31, ~~2019,~~2020, the Company expects that approximately ~~$97~~$96 of pre-tax net losses will be reclassified from AOCI into earnings during the next twelve months. The amount ultimately realized, however, will differ as exchange rates vary and the underlying contracts settle. In addition, $745 of caplet amortization will be amortized into interest expense during the next twelve months.

Derivatives Not Designated as Cash Flow Hedges

The following represents the fair value recorded for derivatives not designated as cash flow hedges for the periods presented:

Asset Derivative
Balance Sheet Location December 31,
2019 September 30,
2019
Foreign currency forward contracts Prepaid and other current assets $ —
$ 9

Liability Derivative
Balance Sheet Location December 31,
2019 September 30,
2019
Foreign currency forward contracts Accrued expenses and other current liabilities $ 55
$ —



		Asset Derivatives
	Balance Sheet Location	March 31, 2020		September 30, 2019
Foreign currency forward contracts	Prepaid and other current assets	$	27	$	9

12. Product Warranties

The Company accrues warranty obligations associated with certain products as revenue is recognized. Provisions for the warranty obligations are based upon historical experience of costs incurred for such obligations, adjusted for site‑specific risk factors, and, as necessary, for current conditions and factors. There are significant uncertainties and judgments involved in estimating warranty obligations, including changing product designs, differences in customer installation processes and future claims experience which may vary from historical claims experience.

A reconciliation of the activity related to the accrued warranty, including both the current and long‑term portions, is as follows:


	Current Product Warranties						Non-Current Product Warranties						Current Product Warranties						Non-Current Product Warranties
	Three Months Ended December 31,						Three Months Ended December 31,						Six Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2019			2018			2020			2019			2020			2019
Balance at beginning of the period	$	4,922		$	8,907		$	2,332		$	3,360		$	4,922		$	8,907		$	2,332		$	3,360
Warranty provision for sales	1,251			1,373			44			300			1,892			3,218			62			954
Settlement of warranty claims	(1,989		)	(1,428		)	(1,076		)	—			(2,567		)	(3,304		)	(1,248		)	(241		)
Amounts related to sale of the Memcor product line	795			—			135			—			795			—			135			—
Foreign currency translation and other	152			124			36			(4		)	65			(21		)	(120		)	(71		)
Balance at end of the period	$	5,131		$	8,976		$	1,471		$	3,656		$	5,107		$	8,800		$	1,161		$	4,002

13. Restructuring and Related Charges

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

On October 30, 2018, the Company announced a transition from a three-segment structure to a two-segment operating model designed to better serve the needs of customers worldwide. This new structure was effective October 1, 2018 and combined the Municipal services business with the former Industrial segment into a new segment, Integrated Solutions and Services, a group entirely focused on engaging directly with end users. The former Products segment and Municipal products businesses have been combined into a new segment, Applied Product Technologies, which is focused on developing product platforms to be sold primarily through third party channels. The Company expects to incur ~~approximately $3 million~~up to $2,000 of cash costs through the remainder of fiscal 2020 as a result of this transition related to other non-employee related business optimizations.

Beginning in the second quarter of fiscal 2020, the Company undertook activities to reduce the cost structure and rationalize location footprint following the sale of the Memcor product line. The Company currently expects to incur approximately $3,000 to $5,000 of costs through the remainder of fiscal 2020 related to these initiatives.

The table below sets forth the amounts accrued for the restructuring components and related activity:


	Three Months Ended December 31,					Six Months Ended March 31,
	2019			2018		2020			2019
Balance at beginning of the period	$	655		$	710	$	655		$	710
Restructuring charges following the sale of the Memcor product line						3,659			—
Restructuring charges related to two-segment realignment	675			1,945		1,233			7,046
Restructuring charges related to other initiatives	245			989		780			1,111
Write off charge and other non‑cash activity	(53		)	(5)		(62		)	(449)
Cash payments	(1,156)			(2,664)		(5,831)			(5,997)
Other adjustments	(1		)	(16)		—			(72)
Balance at end of the period	$	365		$	959	$	434		$	2,349

The balances for accrued restructuring liabilities at ~~December~~March 31, 2020 and September 30, 2019, are recorded in Accrued expenses and other liabilities on the Consolidated Balance Sheets. Restructuring charges primarily represent

severance ~~charges.~~charges, certain non-cash charges and consulting fees. The Company expects to pay the remaining amounts accrued as of ~~December~~March 31, ~~2019~~2020 during the ~~first half~~remainder of fiscal 2020.

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


	Three Months Ended December 31,				Six Months Ended March 31,
	2019		2018		2020		2019
Cost of product sales and services	$	384	$	698	$	3,765	$	3,316
General and administrative expense	480		2,028		1,760		3,634
Sales and marketing expense	3		203		62		648
Research and development expense					23		110
	$	867	$	2,929	$	5,610	$	7,708

The Company continues to evaluate restructuring activities that may result in additional charges in the future.

14. Employee Benefit Plans

The Company maintains multiple employee benefit plans.

Certain of the Company’s employees in the UK were participants in a Siemens defined benefit plan established for employees of a UK-based operation acquired by Siemens in 2004. The plan was frozen with respect to future service credits for active employees, however the benefit formula recognized future compensation increases. The Company agreed to establish a replacement defined benefit plan, with the assets of the Siemens scheme transferring to the new scheme on April 1, 2015.

The Company’s employees in Germany also participate in a defined benefit plan. Assets equaling the plan’s accumulated benefit obligation were transferred to a German defined benefit plan sponsored by the Company upon the acquisition of EWT from Siemens. The German entity also sponsors a defined benefit plan for a small group of employees located in France.

The components of net periodic benefit cost for the plans were as follows:


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Service cost	$	261		$	217		$	259		$	217		$	520		$	434
Interest cost	68			119			68			120			136			239
Expected return on plan assets	(30		)	(30		)	(29		)	(30		)	(59		)	(60		)
Amortization of actuarial losses	236			96			235			97			471			193
Pension expense for defined benefit plans	$	535		$	402		$	533		$	404		$	1,068		$	806

The components of pension expense, other than the service cost component which is included in General and administrative expense, are included in the line item Other operating expense in the Unaudited Consolidated Statements of Operations.

15. Income Taxes

The income tax provision for interim periods is comprised of tax on ordinary income (loss) provided at the most recent projected annual effective tax rate (“PAETR”), adjusted for the tax effect of discrete items. Management estimates the PAETR each quarter based on the forecasted annual pretax income or (loss). The Company is required to reduce deferred tax assets by a valuation allowance if, based on all available evidence, it is considered more likely than not that some portion

or all of the benefit of the deferred tax assets will not be realized in future periods. The Company also records the income tax impact of certain discrete, unusual or infrequently occurring items including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur.

When a company maintains a valuation allowance in a particular jurisdiction, no net deferred income tax expense or (benefit) will typically be provided. Jurisdictions with projected income that maintain a valuation allowance typically will form part of the PAETR calculation discussed above. However, jurisdictions with a projected loss for the year that maintain a valuation allowance are excluded from the PAETR calculation. Instead, the income tax for these jurisdictions is computed separately.

The actual year-to-date income tax expense (benefit) is the product of the most current PAETR and the actual year-to-date pretax income (loss) adjusted for any discrete tax items. The income tax expense (benefit) for a particular quarter, except for the first quarter, is the difference between the year-to-date calculation of income tax expense (benefit) and the year-to-date calculation for the prior quarter. Items unrelated to current period ordinary income or (loss) are recognized entirely in the period identified as a discrete item of tax. Discrete items generally relate to changes in tax laws, adjustments to prior period’s actual liability determined upon filing tax returns, and adjustments to previously recorded reserves for uncertain tax positions, initially recording or fully reversing valuation allowances. The inclusion of discrete items in a particular quarter can cause the actual effective rate for that quarter to vary significantly from the PAETR.

Therefore, the actual effective income tax rate for a particular quarter can vary significantly based upon the jurisdictional mix and timing of actual earnings compared to projected annual earnings, permanent items, earnings for those jurisdictions that maintain a valuation allowance, tax associated with jurisdictions excluded from the PAETR calculation and discrete items.

Annual Effective Tax Rate

The PAETR, which excludes the impact of discrete items, was ~~4.9%~~4.5% and ~~25.8%~~48.8% as of the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. For the ~~three~~six months ended ~~December~~March 31, ~~2019,~~2020, the PAETR of ~~4.9%~~4.5% was lower than the U.S federal statutory rate of 21.0% primarily due to the gain on the sale of the Memcor product line, the U.S. valuation allowance provided on U.S. deferred tax assets as well as the impact of deferred tax liabilities related to indefinite lived intangibles, a portion of which were reversed in relation to the sale of the Memcor product line.

The Company continues to maintain a full valuation on U.S. federal and state net deferred tax assets (excluding the tax effects of deferred tax liabilities associated with indefinite lived intangibles) for the year ending September 30, 2020 as a result of pretax losses incurred since the Company’s inception in early 2014. The Company reported positive pre-tax earnings for the first time in 2017 and is projecting positive pre-tax earnings in 2020, however, the Company generated pre-tax losses in all other years. ~~Management~~The Company believes it is prudent to retain a valuation allowance until a more consistent pattern of earnings is established and net operating loss carryforwards begin to be utilized.

Prior and Current Period Tax Expense

For the three months ended ~~December~~March 31, ~~2019,~~2020, the Company recognized an income tax ~~expense~~benefit of ~~$2,603~~$7 on pretax income of ~~$56,109.~~$7,903. The rate of ~~4.6%~~0.09% differed from the U.S. statutory rate of 21.0% principally due to the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of the U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles.

For the three months ended ~~December~~March 31, ~~2018,~~2019, the Company recognized an income tax benefit of ~~$4,514~~$4,579 on a pretax loss of ~~$20,802.~~$3,006. Discrete items for the quarter were not material.

~~At December~~For the six months ended March 31, 2020, the Company recognized income tax expense of $2,596 on pretax income of $64,012. The rate of 4.06% differed from the statutory rate of 21.0% principally due to the gain on the sale of the Memcor product line which did not generate significant tax expense due to the combination of the U.S. valuation allowance and favorable foreign tax regimes, as well as the favorable impact of the reversal of a portion of deferred tax liabilities related to indefinite lived intangibles.

For the six months ended March 31, 2019, the Company recognized an income tax benefit of $9,093 on a pretax loss of $23,808. The rate of 38.2% differed from the statutory rate of 21% principally due to higher forecasted earnings in certain non-U.S. jurisdictions that have a higher statutory tax rate than the U.S. as well as the impact of deferred tax liabilities related to indefinite lived intangibles.

At March 31, 2020, the Company had gross unrecognized tax benefits of ~~$1,289.~~$1,309.

On March 27, 2020, The Coronavirus Aid, Relief, and Economic Security (CARES) Act (the “CARES Act”) was passed in response to the COVID-19 pandemic. Provisions of the CARES Act adjust elements of the TCJA, including net operating loss (“NOL”) modifications, a relaxation of the limitation on interest deductions, and modification of the credits for prior year minimum tax liability.

The CARES Act accelerates the ability of companies to recover the alternative minimum tax (“AMT”) credits by permitting immediate refund claims.

The TCJA subjected net operating losses arising in tax years beginning after December 31, 2017 to a taxable income limitation and eliminated the ability to carry these net operating losses back to a prior tax year. The CARES Act modified these rules and provides that NOLs arising in a tax year beginning after December 31, 2017 and ending before January 1, 2021 can be carried back five years. Additionally, the taxable income limitation is temporarily suspended for tax years beginning before January 1, 2021.

The TCJA limited the business interest expense deduction to 30% of adjusted taxable income (“ATI”) starting with the 2018 tax years. The CARES Act modified the TCJA limitations for business interest expense for 2019 and 2020 by increasing the limitation to 50% of ATI. Further, for the tax year 2020, the Company may use either the 2019 or 2020 ATI for purposes of determining deductible business interest expense.

The CARES Act did not have an impact on the Company’s Unaudited Consolidated Financial Statements.

16. Share-Based Compensation

The Company designs equity compensation plans to attract and retain employees while also aligning employees’ interests with the interests of the Company’s shareholders. In addition, members of the Company’s Board of Directors (the “Board”) participate in equity compensation plans in connection with their service on the Company’s Board.

The Company established the Evoqua Water Technologies Corp. Stock Option Plan (the “Stock Option Plan”)

shortly after the acquisition date of January 16, 2014. The plan allows certain management employees and the Board to purchase shares in Evoqua Water Technologies Corp. Under the Stock Option Plan, the number of shares available for award was 11,083. As of ~~December~~March 31, ~~2019,~~2020, there were approximately 1,704 shares available for future grants, however, the Company does not currently intend to make additional grants under the Stock Option Plan.

In connection with the IPO, the Board adopted and the Company’s ~~stockholders~~shareholders approved the Evoqua Water Technologies Corp. 2017 Equity Incentive Plan (or the “Equity Incentive Plan”), under which equity ~~awards may be made in the respect of 5,100 shares of common stock of the Company. Under the Equity Incentive Plan,~~ awards may be granted in the form of options, restricted stock, restricted stock units, stock appreciation rights, dividend equivalent rights, share awards and performance-based awards (including performance share units and performance-based restricted stock). Upon adoption of the Equity Incentive Plan, 5,100 shares of common stock of the Company were reserved for issuance thereunder. On February 18, 2020, the Company’s shareholders approved the amendment and restatement of the Equity Incentive Plan in order to increase the number of shares of common stock reserved for issuance thereunder by 5,000 shares and incorporate other changes. As of ~~December~~March 31, ~~2019,~~2020, there were approximately ~~2,049~~5,931 shares available for grants under the Equity Incentive Plan.

In addition to the establishment of the Equity Incentive Plan, in connection with the IPO, the Company entered into restricted stock unit (“RSU”) agreements with each of the executive officers and certain other key members of management. Pursuant to the RSU agreements, 1,197 stock-settled RSUs were granted, the aggregate value of which equals $25,000. The RSUs vested and settled in full upon the second anniversary of the IPO on November 2, 2019, resulting in the issuance of 1,159 shares, 419 of which were deposited into treasury in satisfaction of withholding tax obligations resulting from the vesting of the RSUs.

Option awards are granted at various times during the year, vest ratably at 25% per year, and are exercisable at the time of vesting. The options granted have a ten-year contractual term.

A summary of the stock option activity as of ~~December~~March 31, ~~2019~~2020 is presented below:


(In thousands, except per share amounts)	Options		Weighted Average Exercise Price/Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value		Options		Weighted Average Exercise Price/Share		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at September 30, 2019	8,619		$	8.15	6.3 years	$	80,826	8,619		$	8.15	6.3 years	$	80,826
Granted	5		18.82					793		23.60
Exercised	(430	)	5.22					(1,461	)	5.70
Cancelled	(1	)	20.88					(2	)	20.88
Forfeited	(32	)	16.52					(64	)	15.4
Expired	—		—
Outstanding at December 31, 2019	8,161		$	8.28	6.0 years	$	89,300
Options exercisable at December 31, 2019	5,835		$	5.74	5.1 years	$	77,650
Options vested and expected to vest at December 31, 2019	8,142		$	8.27	6.0 years	$	89,196
Outstanding at March 31, 2020								7,885		$	10.1	6.3 years	$	30,330
Options exercisable at March 31, 2020								5,522		$	6.83	5.3 years	$	29,445
Options vested and expected to vest at March 31, 2020								7,790		$	9.96	6.3 years	$	30,324

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 ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 was ~~$6,011.~~$22,608.

A summary of the status of the Company's non-vested stock options as of and for the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 is presented below.


(In thousands, except per share amounts)	Shares		Weighted Average Grant Date Fair Value/Share		Shares		Weighted Average Grant Date Fair Value/Share
Nonvested at beginning of period	2,379		$	4.96	2,379		$	4.96
Granted	5		5.33		793		6.05
Vested	(25	)	2.27		(745	)	4.85
Forfeited	(32	)	5.78		(64	)	5.33
Nonvested at end of period	2,327		$	4.98	2,363		$	5.35

The total fair value of options vested during the ~~three~~six months ended ~~December~~March 31, ~~2019,~~2020, was ~~$57.~~$3,612.

Restricted Stock Units

The following is a summary of the RSU activity for the ~~three~~six months ended ~~December~~March 31, ~~2019.~~2020.


(In thousands, except per share amounts)	Shares		Weighted Average Grant Date Fair Value/Share		Shares		Weighted Average Grant Date Fair Value/Share
Outstanding at September 30, 2019	2,002		$	17.45	2,002		$	17.45
Granted	4		18.82		375		23.35
Vested	(1,159	)	20.88		(1,553	)	18.81
Forfeited	(17	)	12.67		(31	)	12.67
Outstanding at December 31, 2019	830		$	12.76
Vested and expected to vest at December 31, 2019	818		$	12.75
Outstanding at March 31, 2020					793		$	17.78
Vested and expected to vest at March 31, 2020					750		$	17.56

Expense Measurement and Recognition

Total share-based compensation expense was ~~$3,691~~$2,326 and ~~$4,559~~$4,764 during the three months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, of which ~~$3,680~~$2,304 and ~~$4,525~~$4,745 was non-cash, respectively. Total share-based compensation expense was $6,017 and $9,323 during the six months ended March 31, 2020 and 2019, respectively, of which $5,984 and $9,270 was non-cash, respectively. The unrecognized compensation expense related to stock options and restricted stock units was ~~$8,009~~$11,475 and ~~$6,141,~~$13,256, respectively at ~~December~~March 31, ~~2019,~~2020, and is expected to be recognized over a weighted average period of ~~2.2~~2.7 years and ~~2.1~~3.1 years, respectively. The Company received ~~$4,046~~$15,370 from the exercise of stock options during the ~~three~~six months ended ~~December~~March 31, ~~2019.~~2020. The remaining stock options exercised during the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 were effected via a cashless net exercise.

Employee Stock Purchase Plan

Effective October 1, 2018, the Company implemented an employee stock purchase plan (“ESPP”) which allows employees to purchase shares of the Company’s stock at 85% of the lower of the fair market value on the first day of the applicable offering period or on the last business day of a six-month purchase period within the offering period. These purchases were offered twice throughout fiscal 2019, and were paid by employees through payroll deductions over the respective six month purchase period, at which point the stock will be transferred to the employees. On December 21, 2018, the Company registered 11,297 shares of common stock, par value $0.01 per share, of which 5,000 are available for future issuance under the ESPP. During the three months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, the Company incurred compensation expense of ~~$39~~$35 and ~~$155,~~$138, respectively, in salaries and wages in respect of the ESPP, representing the fair value of the discounted price of the shares. During the six months ended March 31, 2020 and 2019, the Company incurred compensation expense of $74 and $293, respectively. These amounts are included in the total share-based compensation expense above. ~~During the three months ended December 31,~~On October 1, 2019 and April 1, 2020, 56 and 75 shares, respectively were issued under the ESPP plan.

17. Concentration of Credit Risk

The Company’s cash and cash equivalents and accounts receivable are potentially subject to concentration of credit risk. Cash and cash equivalents are placed with financial institutions that management believes are of high credit quality. Accounts receivable are derived from revenue earned from customers located in the U.S. and internationally and generally do not require collateral. The Company’s trade receivables do not represent a significant concentration of credit risk at ~~December~~March 31, 2020 and September 30, 2019 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 ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, no customer accounted for more than 10% of net sales or net accounts receivable.

The Company operates predominantly in ten countries worldwide and provides a wide range of proven product brands and advanced water and wastewater treatment technologies, mobile and emergency water supply solutions and service contract options through its Integrated Solutions and Services and Applied Product Technologies segments. The

Company is a multi-national business but its sales and operations are primarily in the U.S. Sales to unaffiliated customers are based on the Company locations that maintain the customer relationship and transacts the external sale.

18. Related‑Party Transactions

The Company reimbursed AEA Investors LP (“AEA”), the Company’s private equity sponsor, for normal and customary expenses incurred by AEA on behalf of the Company. The Company notes that these related-party transactions have not been significant in the three and six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018.~~2019.

19. Leases

Lessee Accounting

As discussed in Note 2, “Summary of Significant Accounting Policies” the Company adopted ASU 2016-02 on October 1, 2019. ASU 2016-02 requires a lessee to recognize assets and liabilities on the balance sheet for all leases, with the result being the recognition of a right-of-use (“ROU”) asset and a corresponding lease liability. The lease liability is equal to the present value of the minimum lease payments for the term of the lease using the discount rate determined at lease commencement and including any optional renewal periods that were determined to be reasonably certain to be exercised. The ROU asset is equal to the initial measurement of the lease liability plus any lease payments made to the lessor at or before the commencement date and any unamortized initial indirect costs incurred by the lessee, less any unamortized lease incentives received. ROU assets are periodically reviewed for impairment whenever events or changes in circumstances arise. During the ~~three~~six months ended ~~December~~March 31, ~~2019,~~2020, the Company incurred no impairment charges on ROU assets.

The discount rate utilized in calculating the lease liability is the rate implicit in the lease, if known, otherwise, the incremental borrowing rate (“IBR”) for the expected lease term is used. Generally, the Company cannot determine the interest rate implicit in the lease. The Company’s IBR approximates the rate the Company would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The Company occupies certain facilities and operates certain equipment and vehicles under non‑cancelable lease arrangements. Lease agreements may contain lease escalation clauses and purchase and renewal options. At the inception of a contract, the Company determines whether the arrangement is or contains a lease. A lease is determined to exist if there is an identified asset, the Company has the right to obtain substantially all of the economic benefits from the use of the identified asset and the right to direct the use of the asset. Once a lease is determined to exist, the Company determines the lease classification at lease commencement. Leases are classified as operating or finance leases based on specific criteria. Operating lease expense is recognized on a straight-line basis on the Unaudited Consolidated Statements of Operations. Finance lease expense have front-loaded expense recognition that is recognized as depreciation expense and interest expense on the Unaudited Consolidated Statements of Operations. On the Consolidated Statements of Changes in Cash Flows, payments for operating leases are included in operating activities and payments for finance leases are included in financing activity, with the interest component included in operating activities.

The Company’s real estate leases often include options to extend the lease term; however, the Company has not included the renewal options in the ROU asset and lease liability because the likelihood of renewal was not reasonably certain. In addition, the Company has leases that include variable lease payments, for items such as maintenance or other operating expenses, which are expensed as incurred as variable lease expense.

Adoption of ASU 2016-02, Leases (Topic 842)

The Company applied Topic 842 to all existing leases at October 1, 2019 using the modified retrospective approach. As a result, prior period amounts have not been adjusted and continue to be reported in accordance with the Company’s historical accounting under Topic 840. The Company has elected the following package of practical expedients which exempts the Company from having to reassess: (i) whether expired or existing contracts contain a lease, (ii) the lease classification for expired or existing leases, and (iii) initial direct costs for existing leases. In addition, the Company elected to separate lease and non-lease components for all asset classes, did not elect to use hindsight to determine the lease term and made an accounting policy election for short-term leases which does not require the capitalization of leases with terms of 12 months or less.

As a result of adoption of Topic 842 on October 1, 2019, the Company recognized $42,073 of ROU assets related to operating leases in Operating lease right-of-use assets, net and $42,904 of corresponding lease liabilities, of which $13,596 is included in Accrued expenses and other liabilities and $29,308 is included in Obligation under operating leases on the Consolidated Balance Sheets. The difference is attributable to deferred rent balance as of September 30, 2019 that reduced the ROU asset balance on October 1, 2019, of which $73 was removed from Prepaid and other current assets and the remainder was recognized in Retained deficit on the Consolidated Balance Sheets. In addition, the Company recorded an ROU asset related to finance leases in Property, plant, and equipment, net of ~~$2,126~~$2,812 and $3,245 in corresponding lease liabilities included in Other non‑current liabilities on the Consolidated Balance Sheets, with the difference recognized in Retained deficit. See Note 2, “Summary of Significant Accounting Policies” for further information on the impact of adoption.

The following represents the components of lease cost for the three and six months ended March 31, 2020 and other information for both operating and finance leases for the ~~three~~six months ended ~~December~~March 31, ~~2019:~~2020:



	Three Months Ended March 31, 2020			Six Months Ended March 31, 2020
Lease cost
Finance lease cost:
Amortization of ROU assets	$	3,411		$	6,831
Interest on lease liabilities	493			1,011
Operating lease cost	3,916			8,131
Short-term lease cost	1,079			1,916
Variable lease cost	—			—
Sublease income	(14		)	(28		)
Total lease cost	$	8,885		$	17,861


Lease cost
Finance lease cost:
Amortization of ROU assets	$	3,420
Interest on lease liabilities	518
Operating lease cost	4,215
Short-term lease cost	837
Variable lease cost	—
Sublease income	(14		)
Total lease cost	$	8,976

Other information
(Gains)/losses on sale and leaseback transactions, net				$	—
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from finance leases	$	520		$	1,015
Operating cash flows from operating leases	4,154			7,991
Financing cash flows from finance leases	3,346			6,703
ROU assets obtained in exchange for new finance lease liabilities	1,782			4,185
ROU assets obtained in exchange for new operating lease liabilities				6,321
ROU asset remeasurement				(651		)
Weighted average remaining lease term - finance leases	3.9 years			3.9 years
Weighted average remaining lease term - operating leases	4.9 years			5.0 years
Weighted average discount rate - finance leases	5.00		%	4.8		%
Weighted average discount rate - operating leases	4.53		%	4.5		%

The following table reconciles future minimum undiscounted rental commitments for operating leases to operating lease liabilities record on the Consolidated Balance Sheet as of ~~December~~March 31, ~~2019:~~2020:


Fiscal Year
Remainder of 2020	$	12,269		$	7,917
2021	13,304			13,313
2022	8,704			9,617
2023	6,266			7,340
2024	4,178			5,143
Thereafter	8,277			9,523
Total undiscounted lease payments	$	52,998		$	52,853
Present value adjustment	(5,952		)	(5,346		)
Operating lease liabilities	47,046			47,507
Less current installments of obligations under operating leases	14,175			13,474
Obligations under operating leases, excluding current installments	$	32,871		$	34,033

The gross and net carrying values of the equipment under finance leases as of ~~December~~March 31, 2020 and September 30, 2019 was as follows:


	December 31, 2019		September 30, 2019		March 31, 2020		September 30, 2019
Gross carrying amount	$	80,458	$	69,760	$	81,221	$	69,760
Net carrying amount	36,871		36,337		35,655		36,337

The following table reconciles future minimum undiscounted rental commitments for finance leases to the finance lease liabilities recorded on the Consolidated Balance Sheet as of ~~December~~March 31, ~~2019:~~2020:


Fiscal Year
Remainder of 2020	$	10,643		$	7,005
2021	11,043			11,446
2022	8,416			8,907
2023	5,910			6,361
2024	3,716			4,125
Thereafter	2,443			2,761
Total undiscounted lease payments	42,171			40,605
Present value adjustment	(4,221		)	(3,910		)
Finance lease liabilities	37,950			36,695
Less current installments of obligations under finance leases	12,006			11,545
Obligations under finance leases, excluding current installments	$	25,944		$	25,150

The current installments of obligations under finance leases are included in Accrued expenses and other liabilities. Obligations under finance leases, excluding current installments, are included in Other non-current liabilities.

Lessor Accounting

The Company is a lessor to multiple parties. ~~The~~In certain instances, the Company ~~purchases equipment through internal funding~~enters into a contract with a customer but must construct the underlying asset prior to its lease. At the time of contract inception, the Company determines if an arrangement is or ~~bank debt equal to the fair market value of the equipment. The equipment is then leased to customers for periods ranging from five to twenty years.~~contains a lease. These contracts generally contain both lease and non-lease components, including installation, maintenance and ~~maintenance~~monitoring services of the Company owned ~~equipment. As part~~equipment, in addition to sale of ~~the Company’s adoption of Topic 842, for contracts entered into after October 1, 2019, the Company elected the practical expedient~~certain constructed assets. In situations where arrangements contain multiple elements, contract consideration is allocated based on relative standalone selling price. Lease components associated to ~~not separate lease and non-lease components when certain conditions~~underlying assets that have an alternative use are ~~met, including~~classified as

operating leases with revenue recognized over time throughout the lease ~~qualifying as an operating lease and the same revenue~~

recognition pattern for the lease and non-lease components. The Company accounts for these contacts with the customer as a combined component under the respective authoritative guidance for the predominant component in the contract, the lease or non-lease component. Lease income is included interm, within Revenue from services on the Unaudited Consolidated Statements of Operations. Lease components associated to underlying assets that have no alternative use are classified as sales-type leases, with point in time revenue recognition at the on-set of the lease. In order for a component to be separate, the Customer would be able to benefit from the right of use of the component separately or with other resources readily available to the Customer and the right of the use is not highly dependent or highly interrelated with the other rights to use the other underlying assets or components.

As of ~~December~~March 31, ~~2019,~~2020, future minimum lease payments receivable under operating leases are as follows:


Fiscal year
Remainder of 2020	$	75,905	$	61,220
2021	51,107		66,671
2022	34,977		40,955
2023	24,564		30,637
2024	13,329		20,613
Thereafter	92,565		92,388
Future minimum lease payments	$	292,447	$	312,484

20. 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 ~~December~~March 31, 2020 and September 30, 2019, respectively.


	December 31, 2019		September 30, 2019		March 31, 2020		September 30, 2019
Revolving credit capacity	$	45,000	$	45,000	$	45,000	$	45,000
Letters of credit outstanding	13,088		12,956		11,972		12,956
Remaining revolving credit capacity	$	31,912	$	32,044	$	33,028	$	32,044

Surety capacity	$	230,000	$	220,000	$	230,000	$	220,000
Surety issuances	154,094		144,717		146,371		144,717
Remaining surety available	$	75,906	$	75,283	$	83,629	$	75,283

The longest maturity date of letters of credit and surety bonds in effect as of ~~December~~March 31, ~~2019~~2020 was March ~~26, 2029.~~20, 2030.

Litigation

From time to time, the Company is subject to various claims, charges and litigation matters that arise in the ordinary course of business. The Company believes these actions are a normal incident of the nature and kind of business in which the Company is engaged. While it is not feasible to predict the outcome of these matters with certainty, the Company does

not believe that any asserted or unasserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its business, financial condition, results of operations or prospects.

21. Accrued Expenses and Other Liabilities

Accrued expenses and other liabilities consisted of the following:


	December 31, 2019		September 30, 2019		March 31, 2020		September 30, 2019
Salaries, wages and other benefits	$	29,613	$	35,206	$	39,273	$	35,206
Obligation under operating leases	14,175		—		13,474		—
Obligation under finance leases	12,006		17,859		11,545		17,859
Third party commissions	10,296		11,394		9,625		11,394
Insurance liabilities	6,264		4,895		6,973		4,895
Taxes, other than income	4,137		5,215		3,385		5,215
Provisions for litigation	1,605		1,533		1,943		1,533
Option and Purchase Right	506		—		506		—
Severance payments	365		655		434		655
Earn-outs related to acquisitions	91		611		91		611
Other	22,598		24,471		24,842		24,471
	$	101,656	$	101,839	$	112,091	$	101,839

22. 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, OEMs, engineering firms and integrators. Key offerings within this segment include filtration and separation, disinfection, wastewater solutions, anode and electrochlorination technology and aquatics technologies and solutions for the global recreational and commercial pool market.

The Company evaluates its business segments’ operating results based on earnings before interest, taxes, depreciation and amortization, and certain other charges that are specific to the activities of the respective segments. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and certain other charges. Certain other charges include restructuring and other business transformation charges that have been

undertaken to align and reposition the Company to the current reporting structure, acquisition related costs (including

transaction costs, certain integration costs and recognition of backlog intangible assets recorded in purchase accounting) and share-based compensation charges.

Since certain administrative and other operating expenses and other items have not been allocated to business segments, the results in the below table are not necessarily a measure computed in accordance with generally accepted accounting principles and may not be comparable to other companies.


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Total sales
Integrated Solutions and Services	$	231,800		$	212,277		$	240,824		$	228,939		$	472,624		$	441,216
Applied Product Technologies	138,529			130,534			129,424			148,136			267,953			278,670
Total sales	370,329			342,811			370,248			377,075			740,577			719,886
Intersegment sales
Integrated Solutions and Services	3,662			1,779			2,939			2,075			6,601			3,854
Applied Product Technologies	20,562			18,030			15,646			26,372			36,208			44,402
Total intersegment sales	24,224			19,809			18,585			28,447			42,809			48,256
Sales to external customers
Integrated Solutions and Services	228,138			210,498			237,885			226,864			466,023			437,362
Applied Product Technologies	117,967			112,504			113,778			121,764			231,745			234,268
Total sales	346,105			323,002			351,663			348,628			697,768			671,630
Earnings before interest, taxes, depreciation and amortization (EBITDA)
Integrated Solutions and Services	48,775			41,884
Applied Product Technologies	66,716			8,851
Corporate	(20,656		)	(34,004		)
Total EBITDA	94,835			16,731
Depreciation and amortization
Integrated Solutions and Services	15,621			13,958
Applied Product Technologies	3,574			4,334
Corporate	5,948			4,798
Total depreciation and amortization	25,143			23,090
Operating profit (loss)
Integrated Solutions and Services	33,154			27,926			36,695			37,011			69,849			64,937
Applied Product Technologies	63,142			4,517			23,750			11,321			86,892			15,838
Corporate	(26,604		)	(38,802		)	(39,290		)	(36,864		)	(65,894		)	(75,666		)
Total operating profit	69,692			(6,359		)	21,155			11,468			90,847			5,109
Interest expense	(13,583		)	(14,443		)	(13,252		)	(14,474		)	(26,835		)	(28,917		)
Income (loss) before income taxes	56,109			(20,802		)	7,903			(3,006		)	64,012			(23,808		)
Income tax (expense) benefit	(2,603		)	4,514
Income tax benefit (expense)							7			4,579			(2,596		)	9,093
Net income (loss)	$	53,506		$	(16,288	)	$	7,910		$	1,573		$	61,416		$	(14,715	)
Depreciation and amortization
Integrated Solutions and Services							$	17,336		$	14,314		$	32,957		$	28,272
Applied Product Technologies							3,543			4,458			7,117			8,792
Corporate							6,492			5,390			12,440			10,188
Total depreciation and amortization							$	27,371		$	24,162		$	52,514		$	47,252
Capital expenditures
Integrated Solutions and Services	$	14,187		$	13,685		$	18,997		$	19,972		$	33,184		$	33,657
Applied Product Technologies	2,283			2,208			1,084			2,060			3,367			4,268
Corporate	1,102			1,676			1,106			1,081			2,208			2,757
Total capital expenditures	$	17,572		$	17,569		$	21,187		$	23,113		$	38,759		$	40,682


	December 31, 2019		September 30, 2019		March 31, 2020		September 30, 2019
Assets
Integrated Solutions and Services	$	818,051	$	762,707	$	791,507	$	762,707
Applied Product Technologies	596,003		657,879		568,635		657,879
Corporate	396,248		317,262		379,751		317,262
Total assets	$	1,810,302	$	1,737,848	$	1,739,893	$	1,737,848
Goodwill
Integrated Solutions and Services	$	224,279	$	222,013	$	220,595	$	222,013
Applied Product Technologies	172,727		170,877		168,286		170,877
Total goodwill	$	397,006	$	392,890	$	388,881	$	392,890

23. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings (loss) from continuing operations per common share (in thousands, except per share amounts):


	Three Months Ended December 31,					Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018			2020		2019		2020		2019
Numerator:
Numerator for basic and diluted earnings (loss) per common share—Net income (loss) attributable to Evoqua Water Technologies Corp.	$	53,145	$	(16,730	)	$	7,812	$	1,384	$	60,957	$	(15,346	)
Denominator:
Denominator for basic net income (loss) per common share—weighted average shares	115,586		113,950			116,459		114,525		116,459		114,525
Effect of dilutive securities:
Share‑based compensation	5,443		—			4,391		4,188		4,892		—
Denominator for diluted net income (loss) per common share—adjusted weighted average shares	121,029		113,950			120,850		118,713		121,351		114,525
Basic earnings (loss) attributable to Evoqua Water Technologies Corp. per common share	$	0.46	$	(0.15	)	$	0.07	$	0.01	$	0.52	$	(0.13	)
Diluted earnings (loss) attributable to Evoqua Water Technologies Corp. per common share	$	0.44	$	(0.15	)	$	0.06	$	0.01	$	0.50	$	(0.13	)

Since the Company was in a net loss position for the ~~three~~six months ended ~~December~~March 31, ~~2018,~~2019, there was no difference between the number of shares used to calculate basic and diluted loss per share. Because of their anti-dilutive effect, ~~4,168~~4,185 common share equivalents, comprised of employee stock options, have been excluded from the diluted EPS calculation for the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019.

~~24. Subsequent Events~~

In January 2020, the Company utilized $100 million of the proceeds from the sale of the Memcor product line to repay a portion of the Company’s First Lien Term Loans. As a result of this payment, the Company moved $100 million from Long-term debt, net of deferred financing fees to Current portion of debt.

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, 2019, as filed with the SEC on November 25, 2019 and as amended on December 4, 2019 (the “2019 Annual Report”). You should review the disclosures ~~under the heading “Item~~in Part I, Item 1A. ~~Risk~~“Risk Factors” in the 2019 Annual Report, as well as any cautionary language in this report, including the disclosures in Part II, Item 1A. “Risk Factors” in this Report, for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Unless otherwise indicated or the context otherwise requires, all references to “the Company,” “Evoqua,” “Evoqua Water Technologies Corp.,” “EWT Holdings I Corp.,” “we,” “us,” “our” and similar terms refer to Evoqua Water Technologies Corp., together with its consolidated subsidiaries. Unless otherwise specified, all dollar amounts in this section are referred to in millions.

Overview and Background

We are a leading provider of mission critical water and wastewater treatment solutions, offering a broad portfolio of products, services and expertise to support industrial, municipal and recreational customers who value water. With over 200,000 installations worldwide, we hold leading positions in the industrial, commercial and municipal water treatment markets in North America. We offer a comprehensive portfolio of differentiated, proprietary technology solutions sold under a number of market‑leading and well‑established brands to our global customer base. We have worked to protect water, the environment and our employees for over 100 years. As a result, we have earned a reputation for quality, safety and reliability and are sought out by our customers to solve the full range of their water treatment needs, and maintaining our reputation is critical to the success of our business.

Our solutions are designed to ensure that our customers have the quantity and quality of water that meets their unique specifications. We enable our customers to achieve lower costs through greater uptime, throughput and efficiency in their operations and support their regulatory compliance and environmental sustainability. We deliver and maintain these mission critical solutions through the largest service network in North America, assuring our customers continuous uptime with 9796 branches as of ~~December~~March 31, ~~2019.~~2020. We have an extensive service and support network, and as a result, a certified Evoqua Service Technician is generally no more than a two‑hour drive from more than 90% of our North American customers’ sites.

Our vision “to be the world’s first choice for water solutions” and our values of “integrity, customers, performance and sustainable” foster a corporate culture that is focused on establishing a workforce that is enabled, empowered and accountable, which creates a highly entrepreneurial and dynamic work environment. Our purpose is “Transforming water. Enriching life.” We draw from a long legacy of water treatment innovations and industry firsts, supported by more than 1,100 granted or pending patents, which in aggregate are imperative to our business. Our core technologies are primarily focused on removing impurities from water, rather than neutralizing them through the addition of chemicals, and we are able to achieve purification levels which are 1,000 times greater than typical drinking water.

Business Segments

Our business is organized by customer base and offerings into two reportable operating segments that each draw from the same reservoir of leading technologies, shared manufacturing infrastructure, common business processes and corporate philosophies. Our reportable operating segments consist of: (i) our Integrated Solutions and Services segment

and (ii) our Applied Product Technologies segment. The key factors used to identify these reportable operating segments are the organization and alignment of our internal operations, the nature of the products and services and customer type.

Within the Integrated Solutions and Services segment, we primarily provide tailored solutions in collaboration with our customers backed by life‑cycle services including on‑demand water, outsourced water, recycle and reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance.

Within the Applied Product Technologies segment, we provide a highly differentiated and scalable range of products and technologies specified by global water treatment designers, OEMs, engineering firms and integrators.

We evaluate our business segments’ operating results based on income from operations and EBITDA or Adjusted EBITDA on a segment basis. EBITDA and Adjusted EBITDA are non-GAAP financial measures. For more information regarding EBITDA and Adjusted EBITDA, including a reconciliation to the most directly comparable GAAP financial measure, please see the section titled “How We Assess the Performance of Our Business”. Corporate activities include general corporate expenses, elimination of intersegment transactions, interest income and expense and certain other charges, which have not been allocated to business segments. As such, the segment results provided herein may not be comparable to other companies.

Organic Growth Drivers

Market Growth

We maintain a leading position among customers in growing industries that utilize water as a critical part of their operations or production processes, including pharmaceuticals and health sciences, microelectronics, food and beverage, hydrocarbon and chemical processing, power, general manufacturing, municipal drinking and wastewater, marine and aquatics. Water treatment is an essential, non‑discretionary market that is growing in importance as access to clean water has become an international priority. Underpinning this growth are a number of global, long‑term trends that have resulted in increasingly stringent effluent regulations, along with a growing demand for cleaner and sustainable waste streams for reuse. These trends include the growing global population, increasing levels of urbanization and continued global economic growth, and we have seen these trends manifest themselves within our various end markets creating multiple avenues of growth. For example, within the industrial market, water is an integral and meaningful component in the production of a wide‑range of goods spanning from consumer electronics to automobiles.

Our Existing Customer Base

We believe our strong brands, leading position in highly fragmented markets, scalable and global offerings, leading installed base and unique ability to provide complete treatment solutions will enable us to capture a larger share of our existing customers’ water treatment spend while expanding with existing and new customers into adjacent end‑markets and underpenetrated regions, including by investing in our sales force and cross‑selling to existing customers. We believe that we are uniquely positioned to further penetrate our core markets, with over 200,000 installations across over 38,000 global customers. We maintain a customer‑intimate business model with strong brand value and provide solutions‑focused offerings capable of serving a customer’s full lifecycle water treatment needs, both in current and new geographic regions.

Our Service Model

We selectively target high value projects with opportunities for recurring business through service, parts and other aftermarket opportunities over the lifecycle of the process or capital equipment. In particular, we have developed internet‑connected monitoring technologies through the deployment of our WaterOne® service platform, which enables customers to outsource their water treatment systems and focus on their core business, offering customers system optimization, predictive and proactive service, and simplified billing and pricing. Our WaterOne® platform also enables us to transition our customers to pricing models based on usage, which otherwise would not have been possible without technological advancement. Our technology solutions provide customers with increased stability and predictability in water‑related costs, while enabling us to optimize our service route network and on demand offerings through predictive analytics, which we believe will result in market share gains, improved service levels, increased barriers to entry and reduced costs.

Product and Technology Development

We develop our technologies through in‑house research, development and engineering and targeted tuck‑in, vertical market and geography‑expanding, technology-enhancing acquisitions. We have a reservoir of recently launched technologies and a strong pipeline of new offerings designed to provide customers with innovative, value‑enhancing solutions. Furthermore, since April 2016, we have successfully completed thirteen acquisitions and the acquisition of a 60% interest

in Frontier Water Systems LLC (“Frontier”), each of which expands our vertical markets and geographic reach and enhance our technologies, strengthening our existing capabilities and adding new capabilities and cross selling opportunities in areas such as mobile wastewater treatment, soil and air treatment, regenerative media filtration, anodes, UV and ozone disinfection, aerobic and anaerobic biological treatment technologies and electrochemical and electrochlorination cells. We are able to rapidly scale new technologies using our leading direct and third‑party sales channels and our relationships with key influencers, including municipal representatives, engineering firms, designers and other system specifiers. We believe our continued investment in driving penetration of our recently launched technologies, robust pipeline of new capabilities and best‑in‑class channels to market will allow us to continue to address our customer needs across the water lifecycle.

Operational Excellence

We believe that continuous improvement of our operations, processes and organizational structure is a key driver of our earnings growth. We have separately identified and are pursuing a number of discrete initiatives which, if successful, we expect could result in additional cost savings over the next two years. These initiatives include our supply chain improvement program to consolidate and manage global spending, our improved logistics and transportation management program, capturing benefits of our WaterOne® platform and further optimizing our engineering cost structure, our global shared services organization and our sales, inventory and operations planning. These improvements focus on creating value for customers through reduced lead times, improved quality and superior customer support, while also creating value for shareholders through enhanced earnings growth. Furthermore, as a result of significant investments we have made in our footprint and facilities, we believe we have capacity to support our planned growth without commensurate increase in fixed costs.

Acquisitions and Divestitures

We believe that capex-like, tuck‑in acquisitions present a key opportunity within our overall growth strategy, which we will continue to evaluate strategically. These strategic acquisitions are expected to enable us to accelerate our growth by extending our critical mass in existing markets, as well as expand in new geographies and new end market verticals. Our existing customer relationships, best‑in‑class channels to market and ability to rapidly commercialize technologies provide a strong platform to drive rapid growth in the businesses we acquire. To capitalize on these opportunities, we have built an experienced team dedicated to mergers and acquisitions that has, since April 2016, successfully completed thirteen acquisitions and the acquisition of a 60% interest in Frontier, ~~Water Systems LLC,~~ each of which expands our vertical markets and geographic reach and enhance our technologies, with purchase prices ranging from approximately ~~$2.0~~$2.6 million to approximately $283.7 million, and pre‑acquisition revenues ranging from approximately $3.1 million to approximately $55.7 million.

On December 31, 2019 we completed the sale of the Memcor product line to DuPont de Nemours, Inc. (DuPont). The aggregate purchase price paid by DuPont was $110.0 million in cash, subject to certain adjustments. Following adjustments for cash and net working capital, gross proceeds paid by DuPont were ~~$121.3~~$131.0 million. The Company recognized a $49.0 million net pre-tax benefit on the sale of the Memcor product line, ~~which is~~ net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred in the three months ended December 31, 2019. As a result of net working capital adjustments, the Company recognized an additional $9.0 million net pre-tax benefit in the three months ended March 31, 2020. The Company and DuPont have a history of collaboration, and following the sale, DuPont will continue to supply the Company with Memcor® products.

Key Factors and Trends Affecting Our Business and Financial Statements

Various trends and other factors affect or have affected our operating results, including:

Impact of the COVID-19 pandemic. As discussed further below, the COVID-19 pandemic did not have a material impact on our consolidated results of operations in the three months ended March 31, 2020. Our business has been considered essential under federal and local standards, and we have maintained business continuity at our critical service branches and manufacturing facilities. We have taken measures to protect our employees, including implementation of remote working practices where possible and managing our supply chain to ensure that necessary personal protective equipment is available

to our personnel. We have also taken initial cost reduction actions to preserve liquidity and reallocated resources to maintain productivity levels.

In general, we saw increased demand for services from customers in healthcare and pharmaceutical industries beginning in mid-to-late March as the impact of the pandemic broadened. However, we also began to see signs of uneven demand from customers in certain other industries during that period. We continue to evaluate the impact of the pandemic on our business, particularly how social distancing guidelines might affect our access to our customers’ sites and how the economic downturn resulting from the pandemic might affect our customers’ willingness to make capital expenditures and our ability to collect from our customers. Given the evolving nature of the unprecedented pandemic, the overall impact on our operations over the remainder of the fiscal year cannot be reasonably estimated at this time.

For more information regarding factors and events that may impact our business, results of operations and financial condition from the effects of the COVID-19 pandemic, see “Item 1A. Risk Factors” of this Report.

Overall economic trends. The overall economic environment and related changes in industrial, commercial and municipal spending impact our business. In general, positive conditions in the broader economy promote industrial, commercial and municipal customer spending, while economic weakness results in a reduction of new industrial, commercial and municipal project activity. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include population growth, total water consumption, municipal budgets, employment rates, business conditions, the availability of credit or capital, interest rates, tax rates, imposition of tariffs and regulatory changes. Since the businesses of our customers vary in cyclicality, periodic downturns in any specific sector typically have modest impacts on our overall business. For example, the current weakness in global oil markets has created, and we expect will continue to create, some weakness in demand from customers that we serve in the oil and gas industry. Additionally, the COVID-19 pandemic has increased economic uncertainty and has caused an economic slowdown that is likely to continue and may result in a sustained global recession.

Changes in costs and availability. We have significant exposures to certain commodities, including steel, caustic, carbon, calcium nitrate and iridium, and volatility in the market price and availability of these commodity input materials has a direct impact on our costs and our business. For example, restrictions on international trade, including tariffs imposed by the U.S. government and other governments, as well as supply chain disruptions caused by the COVID-19 pandemic, have recently imposed greater restrictions on international trade, including tariffs and/or other trade restraints on certain materials. These restrictions, particularly those related to China, have increasesincreased and could further increase the cost of ~~our products~~certain materials and have restricted and could further restrict availability of certain commodities, which may result in delays in our execution of projects. Although we have offset a portion of these cost increases through price increases, there can be no assurance that we will be able to continue to recuperate additional cost increases from our customers through product price increases. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross profit and gross margin. Further, additional potential acquisitions and international expansion will place increased demands on our operational, managerial, administrative and other resources. Managing our growth effectively will require us to continue to enhance our management systems, financial and management controls and information systems. We will also be required to hire, train and retain operational and sales personnel, which affects our operating margins.

Inflation and deflation trends. Our financial results can be expected to be directly impacted by substantial increases in costs due to commodity cost increases or general inflation which could lead to a reduction in our revenues as well as greater margin pressure as increased costs may not be able to be passed on to customers.

Fluctuation in quarterly results. Our quarterly results have historically varied depending upon a variety of factors, including funding, readiness of projects, regulatory approvals and significant weather events. In addition, our contracts for large capital water treatment projects, systems and solutions for industrial, commercial and municipal applications are generally fixed‑price contracts with milestone billings. As a result of these factors, our working capital requirements and demands on our distribution and delivery network may fluctuate during the year.

New products and technologies. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling array of products, services and solutions responsive to evolving customer innovations, preferences and specifications. We expect that increased use of water in industrial and commercial processes will drive increased customer demand in the future, and our ability to grow will depend in part on effectively responding to innovation in our customers’ processes and systems. Further, our ability to provide products that comply with evolving government regulations will also be a driver of the appeal of our products, services and solutions to industrial and commercial customers.

Government policies. Decaying water systems in the United States (“U.S.”) will require critical drinking water and wastewater repairs, often led by municipal governments. Further, as U.S. states increase regulation on existing and emerging contaminants, we expect that our customers will increasingly require sustainable solutions to their water‑related needs. In general, increased infrastructure investment and more stringent municipal, state and federal regulations promote increased spending on our products, services and solutions, while a slowdown in investment in public infrastructure or the elimination of key environmental regulations could result in lower industrial and municipal spending on water systems and products.

Availability of water. In general, we expect demand for our products and services to increase as the availability of clean water from public sources decreases. Secular trends that will drive demand for water across a multitude of industrial, commercial and municipal applications include global population growth, urbanization, industrialization and overall economic growth. In addition, the supply of clean water could be adversely impacted by factors including an aging water infrastructure within North America and increased levels of water stress from seasonal rainfall, inadequate water storage options or treatment technologies. Because water is a critical component and byproduct of many processes, including in

manufacturing and product development, we expect that, as global consumption patterns evolve and water shortages persist, demand for our equipment and services will continue to increase.

Operational investment. Our historical operating results reflect the impact of our ongoing investments to support our growth. We have made significant investments in our business that we believe have laid the foundation for continued profitable growth. Activities related to operational investments include employee training and development, integrating acquired businesses, implementing enhanced information systems, research, development and engineering investments and other activities to enable us to support our operating model.

Our ability to source and distribute products effectively. Our revenues are affected by our ability to purchase our inputs in sufficient quantities at competitive prices. While we believe our suppliers have adequate capacity to meet our current and anticipated demand, our level of revenues could be adversely affected in the event of constraints in our supply chain, including the inability of our suppliers to produce sufficient quantities of raw materials in a manner that is able to match demand from our customers.

Contractual relationships with customers. Due to our large installed base and the nature of our contractual relationships with our customers, we have high visibility into a large portion of our revenue. The one‑ to twenty‑year terms of many of our service contracts and the regular delivery and replacement of many of our products help to insulate us from the negative impact of any economic decline.

Exchange rates. The reporting currency for our Unaudited Consolidated Financial Statements is the U.S. dollar. We operate in numerous countries around the world and therefore, certain of our assets, liabilities, revenues and expenses are denominated in functional currencies other than the U.S. dollar, primarily in the euro, U.K. sterling, Chinese renminbi, Canadian dollar, Australian dollar and Singapore dollar. To prepare our Unaudited Consolidated Financial Statements we must translate those assets, liabilities, revenues and expenses into U.S. dollars at the applicable exchange rate. As a result, increases or decreases in the value of the U.S. dollar against these other currencies will affect the amount of these items recorded in our Unaudited Consolidated Financial Statements, even if their value has not changed in the functional currency. While we believe that we are not susceptible to any material impact on our results of operations caused by fluctuations in exchange rates because our operations are primarily conducted in the U.S., if we expand our foreign operations in the future, substantial increases or decreases in the value of the U.S. dollar relative to these other currencies could have a significant impact on our results of operations.

How We Assess the Performance of Our Business

In assessing the performance of our business, we consider a variety of performance and financial measures. The key indicators of the financial condition and operating performance of our business are revenue, gross profit, gross margin, operating expenses, net income (loss) and Adjusted ~~EBITDA.~~EBITDA (which is a non-GAAP financial measure).

Revenue

Our sales are a function of sales volumes and selling prices, each of which is a function of the mix of product and service sales, and consist primarily of:

sales of tailored light industry technologies, heavy industry technologies and environmental products, services and solutions in collaboration with our industrial customers, backed by lifecycle services including emergency response services and outsourced water alternatives, to a broad group of industrial customers in our U.S., Canada and Singapore markets;

sales of products, services and solutions to engineering firms and municipalities to purify drinking water and treat wastewater globally; and

sales of a wide variety of differentiated products and technologies, to an array of OEM, distributor, end‑user, engineering firm and integrator customers in all of our geographic markets and aftermarket channels.

Cost of Sales, Gross Profit and Gross Margin

Gross profit is determined by subtracting cost of product sales and cost of services from our product and services revenue. Gross margin measures gross profit as a percentage of our combined product and services revenue.

Cost of product sales consists of all manufacturing costs required to bring a product to a ready for sale condition, including direct and indirect materials, direct and indirect labor costs including benefits, freight, depreciation, information technology, rental and insurance, repair and maintenance, utilities, other manufacturing costs, warranties and third party commissions.

Cost of services primarily consists of the cost of personnel and travel for our field service, supply chain and technicians, depreciation of equipment and field service vehicles and freight costs.

Operating Expenses

Operating expenses consist primarily of general and administrative, sales and marketing and research and development expenses.

General and Administrative. General and administrative expenses (“G&A expense”) consist of fixed overhead personnel expenses associated with our corporate functions and our service organization (including district and branch managers, customer service, contract renewals and regeneration plant management). We expect our general and administrative expenses to increase due to the anticipated growth of our business and related infrastructure as well as due to the legal, accounting, insurance, investor relations and other costs associated with being a public company.

Sales and Marketing. Sales and marketing expenses (“S&M expense”) consist primarily of advertising and marketing promotions of our products, services and solutions and related personnel expenses (including all Evoqua sales and application employees’ base compensation and incentives), as well as sponsorship costs, consulting and contractor expenses, travel, display expenses and related amortization. We expect our sales and marketing expenses to increase as we continue to actively promote our products, services and solutions.

Research and Development. Research and development expenses (“R&D expense”) consist primarily of personnel expenses related to research and development, patents, sustaining engineering, consulting and contractor expenses, tooling and prototype materials and overhead costs allocated to such expenses. Substantially all of our research and development expenses are related to developing new products and services and improving our existing products and services. To date, research and development expenses have been expensed as incurred, because the period between achieving technological feasibility and the release of products and services for sale has been short and development costs qualifying for capitalization have been insignificant.

R&D expense can fluctuate depending on our determination to invest in developing new products, services and solutions and enhancing our existing products, services and solutions versus adding these capabilities through a mergers and acquisitions strategy.

Net Income (Loss)

Net income (loss) is determined by subtracting operating expenses and interest expense from, and adding other operating income (expense), equity income from our partnership interest in Treated Water Outsourcing and income tax benefit (expense) to, gross profit. For more information on how we determine gross profit, see “Gross Profit.”

Adjusted EBITDA

Adjusted EBITDA, which is a non-GAAP financial measure, is one of the primary metrics used by management to evaluate the financial performance of our business. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense) and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, purchase accounting adjustment costs, non-cash share-based compensation, ~~sponsor fees,~~ transaction costs and other gains, losses and expenses. We present Adjusted EBITDA ~~which is not a recognized financial measure under GAAP,~~ because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results and provides greater clarity to management and our investors regarding the operational impact of long term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. Management uses Adjusted EBITDA to supplement GAAP measures of performance as follows:

to assist investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance;

in our management incentive compensation which is based in part on components of Adjusted EBITDA;

in certain calculations under our senior secured credit facilities, which use components of Adjusted EBITDA;

to evaluate the effectiveness of our business strategies;

to make budgeting decisions; and

to compare our performance against that of other peer companies using similar measures.

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

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

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


	Three Months Ended December 31,						Three Months Ended March 31,						Six Months Ended March 31,
	2019			2018			2020			2019			2020			2019
Net income (loss)	$	53.5		$	(16.3	)	$	7.9		$	1.6		$	61.4		$	(14.7	)
Income tax expense (benefit)	2.6			(4.5		)	—			(4.6		)	2.6			(9.1		)
Interest expense	13.6			14.4			13.3			14.5			26.8			28.9
Operating profit (loss)	69.7			(6.4		)
Operating profit							21.2			11.5			90.8			5.1
Depreciation and amortization	25.1			23.1			27.3			24.2			52.5			47.3
EBITDA	94.8			16.7			48.5			35.7			143.3			52.4
Restructuring and related business transformation costs (a)	1.7			5.7			6.2			8.3			7.9			14.0
Share-based compensation (b)	3.7			4.6			2.3			4.7			6.0			9.3
Transaction costs (c)	0.2			2.1			0.5			2.4			0.7			4.5
Other (gains) losses and expenses (d)	(56.8		)	9.3			(0.8		)	5.6			(57.6		)	14.9
Adjusted EBITDA	$	43.6		$	38.4		$	56.7		$	56.7		$	100.3		$	95.1

(a) Restructuring and related business transformation costs

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


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


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


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


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


	Three Months Ended December 31,				Three Months Ended March 31,					Six Months Ended March 31,
	2019		2018		2020			2019		2020		2019
Two-segment restructuring⁽¹⁾	$	1.0	$	1.9
Post Memcor divestiture restructuring⁽¹⁾					$	3.7		$	—	$	3.7	$	—
Cost of product sales and services ("Cost of sales")					2.9			—		2.9		—
S&M expense					0.1			—		0.1		—
G&A expense					0.7			—		0.7		—
Two-segment restructuring⁽²⁾					$	0.3		$	5.1	$	1.3	$	7.0
Cost of sales	0.3		0.2		0.3			2.5		0.6		2.7
R&D expense					—			0.1		—		0.1
S&M expense	—		0.2		—			0.4		—		0.6
G&A expense	0.3		1.5		0.4			2.1		0.7		3.6
Other operating (income) expense	0.4		—		(0.4		)	—		—		—
Various other initiatives⁽²⁾	$	0.2	$	0.5
Cost of product sales and services ("Cost of sales")	0.1		0.3
Various other initiatives⁽³⁾					$	0.3		$	0.2	$	0.5	$	0.7
Cost of sales					0.3			0.2		0.4		0.5
G&A expense	0.1		0.2		—			—		0.1		0.2
Total	$	1.2	$	2.4	$	4.3		$	5.3	$	5.5	$	7.7


⁽¹⁾	all of which ~~$0.7 million and $1.9 million~~ is reflected in restructuring charges in Note 13, “Restructuring and Related Charges” in Part I, Item 1 of this Quarterly Report on Form 10-Q (the “Restructuring Footnote”) in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.


⁽²⁾	of which $1.2 million and $7.0 million is reflected in the Restructuring Footnote in the six months ended March 31, 2020 and 2019, respectively.


⁽³⁾	all of which is reflected in the Restructuring Footnote in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively.


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


	Three Months Ended December 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2020		2019		2020		2019
Cost of sales	$	0.1	$	0.1	$	0.1	$	—	$	0.2	$	0.1
G&A expense	—		0.3		0.2		0.2		0.2		0.5
Total	$	0.1	$	0.4	$	0.3	$	0.2	$	0.4	$	0.6


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


	Three Months Ended December 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2020		2019		2020		2019
Cost of sales	$	0.1	$	0.1	$	—	$	—	$	0.1	$	0.1
G&A expense	0.3		2.7		0.4		2.3		0.7		5.0
Total	$	0.4	$	2.8	$	0.4	$	2.3	$	0.8	$	5.1


(iv)	costs associated with ~~our IPO and~~the March 2020 secondary public offering of common stock held by certain shareholders of the Company, as well as costs incurred by us in connection with establishment of our public company compliance structure and processes, including consultant costs. This includes:


	Three Months Ended December 31,				Three Months Ended March 31,				Six Months Ended March 31,
	2019		2018		2020		2019		2020		2019
G&A expense	$	—	$	0.1	$	1.2	$	0.5	$	1.2	$	0.6
Total	$	—	$	0.1	$	1.2	$	0.5	$	1.2	$	0.6


(b)	Share-based compensation

Adjusted EBITDA is calculated prior to considering non‑cash share‑based compensation expenses related to equity awards. See Note 16, “Share-Based Compensation” in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail.


(c)	Transaction related costs

Adjusted EBITDA is calculated prior to considering transaction, integration and restructuring costs associated with business combinations because these costs are unique to each transaction and represent costs that were incurred as a result of the transaction decision. Such costs may include, without limitation, consulting and legal costs associated with due diligence and closing a transaction, restructuring and integration costs such as severance, facility consolidation costs, product rationalization or inventory obsolescence charges, system integration or conversion costs, fair value changes associated with contingent consideration, and costs associated with any litigation matters that arise subsequent to our acquisition of a business for which the matter in question preceded the transaction, but was not known, not probable or unresolved at the date of acquisition. We believe that viewing earnings prior to considering these charges provides investors with useful additional perspective because the significant costs incurred in connection with business combinations result primarily from the need to eliminate duplicate assets, activities or employees - a natural result of acquiring or disposing a fully integrated set of activities. Integration and restructuring costs associated with a business combination may occur over several years. This includes:


	Three Months Ended December 31,					Three Months Ended March 31,					Six Months Ended March 31,
	2019			2018		2020			2019		2020			2019
Cost of sales	$	0.1		$	0.2	$	(0.3	)	$	1.1	$	(0.2	)	$	1.3
G&A expense	0.4			1.9		0.5			1.3		0.9			3.2
Other operating (income) expense	(0.3		)	—		0.3			—		—			—
Total	$	0.2		$	2.1	$	0.5		$	2.4	$	0.7		$	4.5


(d)	Other (gains), losses and expenses

Adjusted EBITDA is calculated prior to considering certain other significant (gains), losses and expenses. Such significant items represent substantive and/or unusual items that are evaluated on an individual basis. Such evaluation considers both the quantitative and qualitative aspects of their nature and they may be highly variable and difficult to predict. Unusual items may represent items that are not part of our ongoing business, items that, either as a result of their nature or size, we would not expect to occur as part of our normal business on a regular basis, items that would be non-recurring, or items related to products we no longer sell. While not all-inclusive, examples of items that could be included as other (gains), losses and expenses would be amounts related to non-cash foreign currency exchange gains and losses on intercompany loans, significant warranty events, and certain disposals of businesses, products or facilities that do not qualify as discontinued operations under GAAP. For the periods presented such events include the following:


(i)	impact of foreign exchange gains and losses;


(ii)	foreign exchange impact related to headquarter allocations;


(iii)	expenses on disposal related to maintaining non‑operational business locations, net of gain on sale;


(iv)	expenses incurred by the Company related to the remediation of manufacturing defects caused by a third- party ~~vendor for which the Company is seeking restitution;~~vendor;


(v)	charges incurred by the Company related to product rationalization in its electro-chlorination business; ~~and~~


(vi)	net pre-tax benefit on the sale of the Memcor product line, which is net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred in the ~~three~~six months ended ~~December~~March 31, ~~2019.~~2020; and


(vii)	expenses incurred by the Company related to the write-off of inventory associated with product rationalization and facility consolidation.

Other ~~adjustments include the following~~ (gains), losses and expenses include the following for the periods presented below:


Three Months Ended December 31, 2019
Three Months Ended March 31, 2020																			Three Months Ended March 31, 2020
	Other Adjustments																		Other Adjustments
	(i)			(ii)		(iii)		(iv)			(v)		(vi)			Total			(i)		(ii)		(iii)		(iv)			(v)		(vi)			(vii)		Total
Cost of sales	$	(0.4	)	$	—	$	—	$	0.2		$	0.1	$	0.1		$	—		$	0.3	$	—	$	—	$	(0.1	)	$	0.2	$	0.1		$	—	$	0.5
G&A expense	(6.2		)	0.1		—		—			—		0.9			(5.2		)	7.8		—		—		—			—		(0.8		)	—		7.0
Other operating (income) expense	—			—		—		(1.6		)	—		(50.0		)	(51.6		)	—		—		—		—			—		(8.3		)	—		(8.3		)
Total	$	(6.6	)	$	0.1	$	—	$	(1.4	)	$	0.1	$	(49.0	)	$	(56.8	)	$	8.1	$	—	$	—	$	(0.1	)	$	0.2	$	(9.0	)	$	—	$	(0.8	)


Three Months Ended December 31, 2018
Three Months Ended March 31, 2019															Three Months Ended March 31, 2019
	Other Adjustments														Other Adjustments
	(i)		(ii)		(iii)		(iv)		(v)		(vi)		Total		(i)			(ii)		(iii)		(iv)		(v)			(vi)		(vii)		Total
Cost of sales	$	0.2	$	—	$	1.0	$	—	$	3.1	$	—	$	4.3	$	(0.2	)	$	—	$	—	$	0.3	$	(0.1	)	$	—	$	5.1	$	5.1
G&A expense	4.5		0.5		—		—		—		—		5.0		0.5			—		—		—		—			—		—		0.5
Total	$	4.7	$	0.5	$	1.0	$	—	$	3.1	$	—	$	9.3	$	0.3		$	—	$	—	$	0.3	$	(0.1	)	$	—	$	5.1	$	5.6



Six Months Ended March 31, 2020
	Other Adjustments
	(i)			(ii)		(iii)		(iv)			(v)		(vi)			(vii)		Total
Cost of sales	$	(0.1	)	$	—	$	—	$	0.1		$	0.3	$	0.2		$	—	$	0.5
G&A expense	1.6			0.1		—		—			—		0.1			—		1.8
Other operating (income) expense	—			—		—		(1.6		)	—		(58.3		)	—		(59.9		)
Total	$	1.5		$	0.1	$	—	$	(1.5	)	$	0.3	$	(58.0	)	$	—	$	(57.6	)



Six Months Ended March 31, 2019
	Other Adjustments
	(i)		(ii)		(iii)		(iv)		(v)		(vi)		(vii)		Total
Cost of sales	$	—	$	—	$	0.5	$	1.3	$	3.0	$	—	$	5.1	$	9.9
G&A expense	5.0		—		—		—		—		—		—		5.0
Total	$	5.0	$	—	$	0.5	$	1.3	$	3.0	$	—	$	5.1	$	14.9

Results of Operations

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


	Three Months Ended December 31,												Three Months Ended March 31,												Six Months Ended March 31,
	2019					2018							2020					2019							2020					2019
(In millions, except per share amounts)				% of Revenue					% of Revenue		% Variance					% of Revenue					% of Revenue		% Variance					% of Revenue					% of Revenue		% Variance
Revenue	$	346.1		100.0	%	$	323.0		100.0	%	7.2	%	$	351.7		100.0	%	$	348.6		100.0	%	0.9	%	$	697.8		100.0	%	$	671.6		100.0	%	3.9	%
Cost of product sales and services	(240.4		)	(69.5	)%	(234.3		)	(72.5	)%	2.6	%	(240.5		)	(68.4	)%	(253.0		)	(72.6	)%	(4.9	)%	(480.9		)	(68.9	)%	(487.3		)	(72.6	)%	(1.3	)%
Gross profit	105.7			30.5	%	88.7			27.5	%	19.2	%	111.2			31.6	%	95.6			27.4	%	16.3	%	216.9			31.1	%	184.3			27.4	%	17.7	%
General and administrative expense	(45.8		)	(13.2	)%	(54.8		)	(17.0	)%	(16.4	)%	(62.1		)	(17.7	)%	(48.2		)	(13.8	)%	28.8	%	(107.9		)	(15.5	)%	(103.0		)	(15.3	)%	4.8	%
Sales and marketing expense	(38.0		)	(11.0	)%	(36.2		)	(11.2	)%	5.0	%	(34.0		)	(9.7	)%	(35.4		)	(10.2	)%	(4.0	)%	(72.0		)	(10.3	)%	(71.6		)	(10.7	)%	0.6	%
Research and development expense	(3.7		)	(1.1	)%	(4.1		)	(1.3	)%	(9.8	)%	(3.2		)	(0.9	)%	(4.0		)	(1.1	)%	(20.0	)%	(6.9		)	(1.0	)%	(8.1		)	(1.2	)%	(14.8	)%
Other operating income (expense), net	51.5			14.9	%	—			—	%	100.0	%	9.3			2.6	%	3.5			1.0	%	165.7	%	60.7			8.7	%	3.5			0.5	%	1,634.3	%
Interest expense	(13.6		)	(3.9	)%	(14.4		)	(4.5	)%	(5.6	)%	(13.3		)	(3.8	)%	(14.5		)	(4.2	)%	(8.3	)%	(26.8		)	(3.8	)%	(28.9		)	(4.3	)%	(7.3	)%
Income (loss) before income taxes	56.1			16.2	%	(20.8		)	(6.4	)%	(369.7	)%	7.9			2.2	%	(3.0		)	(0.9	)%	363.3	%	64.0			9.2	%	(23.8		)	(3.5	)%	368.9	%
Income tax (expense) benefit	(2.6		)	(0.8	)%	4.5			1.4	%	(157.8	)%
Income tax benefit (expense)													0.0			—	%	4.6			1.3	%	100.0	%	(2.6		)	(0.4	)%	9.1			1.4	%	(128.6	)%
Net income (loss)	53.5			15.5	%	(16.3		)	(5.0	)%	(428.2	)%	7.9			2.2	%	1.6			0.5	%	393.8	%	61.4			8.8	%	(14.7		)	(2.2	)%	517.7	%
Net income attributable to non‑controlling interest	0.4			0.1	%	0.4			0.1	%	—	%	0.1			—	%	0.2			0.1	%	(50.0	)%	0.4			0.1	%	0.6			0.1	%	(33.3	)%
Net income (loss) attributable to Evoqua Water Technologies Corp.	$	53.1		15.3	%	$	(16.7	)	(5.2	)%	(418.0	)%	$	7.8		2.2	%	$	1.4		0.4	%	457.1	%	$	61.0		8.7	%	$	(15.3	)	(2.3	)%	498.7	%

Weighted average shares outstanding
Basic	115.6					114.0							116.5					114.5							116.5					114.5
Diluted	121.0					114.0							120.9					118.7							121.4					114.5
Earnings (loss) per share
Basic	$	0.46				$	(0.15	)					$	0.07				$	0.01						$	0.52				$	(0.13	)
Diluted	$	0.44				$	(0.15	)					$	0.06				$	0.01						$	0.50				$	(0.13	)

Other financial data:
Adjusted EBITDA(1)	$	43.6		12.6	%	$	38.4		11.9	%	13.5	%	$	56.7		16.1	%	$	56.7		16.3	%	—	%	$	100.3		14.4	%	$	95.1		14.2	%	5.5	%


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

Consolidated Results

Revenues-Revenues increased ~~$23.1~~$3.1 million, or ~~7.2%~~0.9%, to ~~$346.1~~$351.7 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$323.0~~$348.6 million in the three months ended ~~December~~March 31, ~~2018.~~2019. Revenues increased $26.2 million, or 3.9%, to $697.8 million in the six months ended March 31, 2020 from $671.6 million in the six months ended March 31, 2019.

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


	Three Months Ended December 31,										Three Months Ended March 31,										Six Months Ended March 31,
	2019				2018				% Variance		2020				2019				% Variance		2020				2019				% Variance
			% of Revenue				% of Revenue						% of Revenue				% of Revenue						% of Revenue				% of Revenue
Revenue from product sales	$	196.6	56.8	%	$	180.1	55.8	%	9.2	%	$	206.0	58.6	%	$	206.8	59.3	%	(0.4	)%	$	402.6	57.7	%	$	386.9	57.6	%	4.1	%
Revenue from services	149.5		43.2	%	142.9		44.2	%	4.6	%	145.7		41.4	%	141.8		40.7	%	2.8	%	295.2		42.3	%	284.7		42.4	%	3.7	%
	$	346.1	100.0	%	$	323.0	100.0	%	7.2	%	$	351.7	100.0	%	$	348.6	100.0	%	0.9	%	$	697.8	100.0	%	$	671.6	100.0	%	3.9	%

Revenues from product sales decreased $0.8 million, or 0.4%, to $206.0 million in the three months ended March 31, 2020 from $206.8 million in the three months ended March 31, 2019. The decrease was primarily driven by a decrease in aftermarket revenues of $8.3 million, primarily driven by the divestiture of the Memcor product line, partially offset by increased capital revenues of $7.4 million.

Revenues from product sales increased ~~$16.5~~$15.7 million, or ~~9.2%~~4.1%, to ~~$196.6~~$402.6 million in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 from ~~$180.1~~$386.9 million in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. The increase was primarily driven by increased capital revenues of ~~$15.3~~$22.7 million, of which $4.9 million was related to the acquisitions of ATG UV and Frontier,

~~Water Systems LLC, in addition to an increase~~ partially offset by a decrease in aftermarket revenues of ~~$1.2~~$7.1 million, ~~which was also partially~~primarily driven by ~~acquisitions.~~the divestiture of the Memcor product line.

Revenues from services increased ~~$6.6~~$3.9 million, or ~~4.6%~~2.8%, to ~~$149.5~~$145.7 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$142.9~~$141.8 million in the three months ended ~~December~~March 31, ~~2018.~~2019. This increase was driven by stronger organic service growth, which was augmented by price realization.

Revenues from services increased $10.5 million, or 3.7%, to $295.2 million in the six months ended March 31, 2020 from $284.7 million in the six months ended March 31, 2019. This increase was driven by stronger organic service growth, which was augmented by price realization.

Cost of Sales and Gross Margin-Total gross margin increased to ~~30.5%~~31.6% in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~27.5%~~27.4% in the three months ended ~~December~~March 31, ~~2018.~~2019. Total gross margin increased to 31.1% in the six months ended March 31, 2020 from 27.4% in the six months ended March 31, 2019.

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


	Three Months Ended December 31,										Three Months Ended March 31,										Six Months Ended March 31,
	2019					2018					2020					2019					2020					2019
				Gross Margin %					Gross Margin %					Gross Margin %					Gross Margin %					Gross Margin %					Gross Margin %
Cost of product sales	$	(140.5	)	28.5	%	$	(136.6	)	24.2	%	$	(144.2	)	30.0	%	$	(153.9	)	25.6	%	$	(284.6	)	29.3	%	$	(290.5	)	24.9	%
Cost of services	(99.9		)	33.2	%	(97.7		)	31.6	%	(96.3		)	33.9	%	(99.1		)	30.1	%	(196.2		)	33.5	%	(196.8		)	30.9	%
	$	(240.4	)	30.5	%	$	(234.3	)	27.5	%	$	(240.5	)	31.6	%	$	(253.0	)	27.4	%	$	(480.8	)	31.1	%	$	(487.3	)	27.4	%

Gross margin from product sales increased by ~~4.3%~~4.4% to ~~28.5%~~30.0% in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~24.2%~~25.6% in the three months ended ~~December~~March 31, ~~2018.~~2019. The increase in gross margin was primarily driven by costs incurred in

the prior year of $5.1 million, mainly due to product rationalization, that did not reoccur in the current year. The remaining change is related to change in product mix and price realization.

Gross margin from product sales increased by 4.4% to 29.3% in the six months ended March 31, 2020 from 24.9% in the six months ended March 31, 2019. The increase in gross margin was primarily driven by costs incurred in the prior year of ~~$4.3~~$9.9 million, mainly due to product rationalization, that did not reoccur in the current year. ~~Remaining~~The remaining change is related to change in product mix and price realization.

Gross margin from services increased by approximately ~~1.6%~~3.8% to ~~33.2%~~33.9% in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~31.6%~~30.1% in the three months ended ~~December~~March 31, ~~2018.~~2019. Gross margin from services also increased approximately 2.6% to 33.5% in the six months ended March 31, 2020 from 30.9% in the six months ended March 31, 2019. These increases are mainly driven by price ~~realization.~~realization recognized in revenue as well as better leverage of fixed costs as revenue volumes increase.

Operating Expenses-Operating expenses ~~decreased $7.6~~increased $11.7 million, or ~~8.0%~~13.4%, to ~~$87.5~~$99.3 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$95.1~~$87.6 million in the three months ended ~~December~~March 31, ~~2018. Included~~2019. The change in ~~the three months ended December 31, 2019 was a gain from~~ foreign currency translation, ~~of $6.4 million, whereas included in the three months ended December 31, 2018 amount was a loss from unfavorable foreign currency translation of $4.8 million,~~ most of which is related to intercompany ~~loans. This change in foreign currency~~loans, resulted in a net ~~decrease~~increase in operating expenses of ~~$11.3~~$7.0 million period over period. Additionally, changes in the estimates of certain acquisitions achieving their earn-out targets resulted in another $2.5 million net reduction in operating expenses. These decreases were partially offset byOther increases in operating expenses ofinclude $2.5 million associated with the acquisitions of ATG UV and Frontier, transaction costs related to the sale of the Memcor product line of $1.0 million and additional employee related expenses of ~~$1.5~~$1.2 million.

Operating expenses increased $4.1 million, or 2.2%, to $186.8 million in the six months ended March 31, 2020 from $182.7 million in the six months ended March 31, 2019. This increase is mainly due to the following:

increased employee related expenses of $3.3 million;

increased costs of $2.3 million related to the ATG UV and Frontier acquisitions, mainly due to amortization expense on purchased intangibles;

costs of $1.2 million incurred in connection with the secondary public offering of shares of common stock held by certain shareholders of the Company; and

transaction costs related to the sale of the Memcor product line of $1.0 million.

The above increases were partially offset by favorable change in foreign currency translation on the intercompany loans of $3.7 million.

A discussion of operating expenses by category is as follows:

Research and Development Expense - Research and development expenses decreased ~~$0.4~~$0.8 million during the three months ended ~~December~~March 31, ~~2019~~2020 as compared to ~~December~~March 31, ~~2018~~2019, and decreased $1.2 million during the six months ended of the same periods due to the Company’s continued efforts to reduce spending, offset partially by increased expenses due to the Frontier acquisition.

Sales and Marketing Expense - Sales and marketing expenses had ~~an increase~~a decrease of ~~$1.8~~$1.4 million during the three months ended ~~December~~March 31, ~~2019 as compared~~2020 due to ~~December 31, 2018,~~a reduction in employee related expenses, and an increase of $0.4 million in the six months ended mainly due to the Frontier acquisition offset by the reduction in ~~addition to increased~~ employee related expenses.

General and Administrative Expense - General and administrative expenses ~~decreased $9.0~~increased $13.9 million, or ~~16.4%~~28.8%, to ~~$45.8~~$62.1 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$54.8~~$48.2 million in the three months ended ~~December~~March 31, ~~2018.~~2019. This ~~decrease~~increase in general and administrative expenses was primarily due to the ~~favorable~~unfavorable change in foreign currency translation on the intercompany loans, ~~of $10.7 million,~~ as described above, ~~in addition to the decrease~~of $7.0 million. We also saw increased depreciation and amortization of $2.5 million, ~~of costs incurred in the prior year~~mainly related to ~~changes~~the acquisitions of ATG UV and Frontier. These acquisitions resulted in further increases within general and administrative expenses of $0.5 million. Costs incurred related to the ~~estimate~~secondary public offering of shares of common stock held by certain ~~acquisitions achieving their earn-out targets. These decreases~~shareholders of the Company were ~~partially offset~~$1.2 million, and employee related expenses increased by ~~an increase of transaction~~$1.1 million.

General and administrative expenses increased $4.9 million, or 4.8%, to $107.9 million in the six months ended March 31, 2020 from $103.0 million in the six months ended March 31, 2019. The increase is due to:

depreciation and amortization of $2.7 million, mainly related to the ATG UV and Frontier acquisitions;

increased employee related expenses of $2.4 million;

increased costs of $1.3 million related to the Frontier and ATG UV acquisitions;

costs incurred related to the secondary public offering of shares of common stock held by certain shareholder of the Company of $1.2 million; and

transaction costs related to the sale of the Memcor product line of $1.0 ~~million, additional employee related expenses~~million.

The above increases were partially offset by unfavorable change in foreign currency translation on the intercompany loans of ~~$1.1 million, and $0.9 million in expenses from the ATG UV and Frontier acquisitions.~~$3.7 million.

Other operating income (expense)-Other operating income (expense) increased ~~$51.5~~$5.8 million, to income of ~~51.5~~$9.3 million in the three months ended ~~December~~March 31, ~~2019~~2020 from income of ~~$40.0 thousand~~$3.5 million in the three months ended ~~December~~March 31, ~~2018.~~2019. The current year amount is primarily related to the gain on sale of the Memcor product line, while the amount in the prior year was primarily due to release of an acquisition related contingency due to the passage of time.

Other operating income (expense) increased $57.2 million to income of $60.7 million in the six months ended March 31, 2020 from income of $3.5 million in the six months ended March 31, 2019. The increase is mainly due to the net pre-tax benefit on sale of the Memcor product line of ~~$49.0~~$58.0 million, which is net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs incurred in the ~~three months ended December 31, 2019.~~first quarter of 2020.

Interest Expense-Interest expense decreased ~~$0.8~~$1.2 million, or ~~5.6%~~8.3%, to ~~$13.6~~$13.3 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$14.4~~$14.5 million in the three months ended ~~December~~March 31, ~~2018.~~2019. Interest expense decreased $2.1 million, or 7.3%, to $26.8 million in the six months ended March 31, 2020 from $28.9 million in the six months ended March 31, 2019. The decrease in interest expense was primarily driven by a reduction in LIBOR year over year in addition to a $100 million pay down of debt in the three months ended March 31, 2019, partially offset by a write-off of deferred financing fees related to the debt paydown and interest expense associated with additional ~~borrowings.~~equipment financings.

Income tax benefit (expense) ~~benefit~~-An income tax ~~expense~~benefit of ~~$2.6 million~~$7 and an income tax benefit of ~~$4.5~~$4.6 million ~~was~~were recorded for the three months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. The ~~increase~~decrease in tax ~~expense~~benefit from the prior year was principally due to the significant income earned in the current year, primarily from the sale of the Memcor product line, as compared to a significant loss in the prior year.

Income tax expense of $2.6 million and an income tax benefit of $9.1 million was recorded for the six months ended March 31, 2020 and 2019, respectively. The decrease in tax benefit from the prior year was principally due to the significant income earned in the current year, primarily from the sale of the Memcor product line, as compared to a significant loss in the prior year.

Net Income-Net income increased by ~~$69.8~~$6.3 million, or ~~428.2%~~393.8%, to ~~$53.5~~$7.9 million for the three months ended ~~December~~March 31, ~~2019,~~2020, from a net ~~loss~~income of ~~$16.3~~$1.6 million in the three months ended ~~December~~March 31, ~~2018.~~2019. The main driver of this increase is the sale of the Memcor product line, which resulted in a ~~gain~~net pre-tax benefit on sale of ~~$58.3~~$9.0 million ~~less amounts paid for discretionary bonuses of $8.3 million and transaction costs of $1.0 million incurred~~ in the three months ended ~~December~~March 31, ~~2019. The resulting net pre-tax benefit was $49.0 million.~~2020. In addition to the net benefit of the sale, we saw overall contributions of revenue volume and mix of ~~$17~~$11.9 million. ~~Net income for the quarter also includes $6.4~~These increases were offset by $7.6 million of foreign currency ~~gain,~~loss, mainly due to intercompany loans, versus a prior year period foreign currency loss of ~~$4.8~~$0.6 million, resulting in a net loss of $7 million. ~~These~~Additionally, income increases were offset by a ~~$7.1~~$4.6 million net increase in income tax expense in the current year period based on the projected effective tax rate for the fiscal year.

Net income increased by $76.1 million, or 517.7%, to net income of $61.4 million for the six months ended March 31, 2020 from a net loss of $14.7 million in the six months ended March 31, 2019. The main driver of this increase is the sale of the Memcor product line, which resulted in a gain on sale of $67.3 million, less amounts paid for discretionary bonuses of $8.3 million and transaction costs of $1.0 million incurred in the six months ended March 31, 2020. The resulting

net pre-tax benefit was $58.0 million. In addition to the net benefit of the sale, we saw overall contributions of revenue volume and mix of $19.6 million.

Adjusted EBITDA~~-Adjusted~~- Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA for the three months ended March 31, 2020 was $56.7 million, which is consistent with the three months ended March 31, 2019. Adjusted EBITDA for the quarter as compared to the prior year period was driven by increased revenue volume, price realization, and favorable changes in mix, offset by the changes as compared to the prior year period in non-recurring expenses and benefits.

Adjusted EBITDA increased $5.2 million, or ~~13.5%~~5.5%, to ~~$43.6~~$100.3 million for the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 from ~~$38.4~~$95.1 million for the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. The increase in Adjusted EBITDA ~~for the quarter~~ as compared to the prior year period was primarily driven by the increased revenue volume, augmented by price realization and the favorable change in mix driven by higher service volumes.

Segment Results


	Three Months Ended December 31,												Three Months Ended March 31,												Six Months Ended March 31,
	2019					2018					% Variance		2020					2019					% Variance		2020					2019					% Variance
				% of Revenue					% of Revenue							% of Revenue					% of Revenue							% of Revenue					% of Revenue
Revenues
Integrated Solutions and Services	$	228.1		65.9	%	$	210.5		65.2	%	8.4	%	$	237.9		67.6	%	$	226.8		65.1	%	4.9	%	$	466.0		66.8	%	$	437.3		65.1	%	6.6	%
Applied Product Technologies	118.0			34.1	%	112.5			34.8	%	4.9	%	113.8			32.4	%	121.8			34.9	%	(6.6	)%	231.8			33.2	%	234.3			34.9	%	(1.1	)%
Total Consolidated	346.1			100.0	%	323.0			100.0	%	7.2	%	351.7			100.0	%	348.6			100.0	%	0.9	%	697.8			100.0	%	671.6			100.0	%	3.9	%
Operating profit (loss)
Integrated Solutions and Services	33.2			9.6	%	27.9			8.6	%	19.0	%	36.7			10.4	%	37.0			10.6	%	(0.8	)%	69.8			10.0	%	64.9			9.7	%	7.6	%
Applied Product Technologies	63.1			18.2	%	4.5			1.4	%	1,302.2	%	23.8			6.8	%	11.3			3.2	%	110.6	%	86.9			12.5	%	15.8			2.4	%	450.0	%
Corporate	(26.6		)	(7.7	)%	(38.8		)	(12.0	)%	(31.4	)%	(39.3		)	(11.2	)%	(36.8		)	(10.6	)%	6.8	%	(65.9		)	(9.4	)%	(75.6		)	(11.3	)%	(12.8	)%
Total Consolidated	69.7			20.1	%	(6.4		)	(2.0	)%	(1,189.1	)%	21.2			6.0	%	11.5			3.3	%	84.3	%	90.8			13.0	%	5.1			0.8	%	1,680.4	%
EBITDA
Integrated Solutions and Services	48.8			14.1	%	41.9			13.0	%	16.5	%	54.0			15.4	%	51.3			14.7	%	5.3	%	102.8			14.7	%	93.2			13.9	%	10.3	%
Applied Product Technologies	66.7			19.3	%	8.9			2.8	%	649.4	%	27.3			7.8	%	15.8			4.5	%	72.8	%	94.0			13.5	%	24.6			3.7	%	282.1	%
Corporate and unallocated costs	(20.7		)	(6.0	)%	(34.1		)	(10.6	)%	(39.3	)%	(32.8		)	(9.3	)%	(31.4		)	(9.0	)%	4.5	%	(53.5		)	(7.7	)%	(65.4		)	(9.7	)%	(18.2	)%
Total Consolidated	$	94.8		27.4	%	$	16.7		5.2	%	467.7	%	$	48.5		13.8	%	$	35.7		10.2	%	35.9	%	$	143.3		20.5	%	$	52.4		7.8	%	173.5	%

Adjusted EBITDA is a non-GAAP financial measure. Adjusted EBITDA on a segment basis is defined as earnings before interest expense, income tax expense (benefit) and depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. The following is a reconciliation of our segment Adjusted EBITDA to operating profit, ~~to Adjusted EBITDA:~~its most directly comparable financial measure presented in accordance with GAAP:


	Three Months Ended December 31,									Three Months Ended March 31,									Six Months Ended March 31,
	2019					2018				2020					2019				2020					2019
	Integrated Solutions and Services		Applied Product Technologies			Integrated Solutions and Services		Applied Product Technologies		Integrated Solutions and Services		Applied Product Technologies			Integrated Solutions and Services		Applied Product Technologies		Integrated Solutions and Services		Applied Product Technologies			Integrated Solutions and Services		Applied Product Technologies
Operating Profit	$	33.2	$	63.1		$	27.9	$	4.5	$	36.7	$	23.8		$	37.0	$	11.3	$	69.8	$	86.9		$	64.9	$	15.8
Depreciation and amortization	15.6		3.6			14.0		4.4		17.3		3.5			14.3		4.5		33.0		7.1			28.3		8.8
EBITDA	$	48.8	$	66.7		$	41.9	$	8.9	$	54.0	$	27.3		$	51.3	$	15.8	$	102.8	$	94.0		$	93.2	$	24.6
Restructuring and related business transformation costs (a)	—		0.7			0.3		0.3		0.1		3.3			0.1		0.2		0.1		4.0			0.4		0.5
Transaction costs (b)	—		(1.3		)	0.5		0.7		—		—			—		—		—		(1.3		)	0.5		0.7
Other losses (gains) and expenses (c)	—		(50.3		)	0.2		4.1		—		(8.9		)	—		5.2		—		(59.2		)	0.2		9.3
Adjusted EBITDA (d)	$	48.8	$	15.8		$	42.9	$	14.0	$	54.1	$	21.7		$	51.4	$	21.2	$	102.9	$	37.5		$	94.3	$	35.1


(a)	Represents costs and expenses in connection with restructuring initiatives distinct to our Integrated Solutions and Services and Applied Product Technologies segments in the three and six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively. Such expenses are primarily composed of severance and relocation costs.

(b)

Represents costs associated with a change in the current estimate of certain acquisitions achieving their earn-out targets, which resulted in a (decrease) increase to the fair valued amount of the earn-out recorded upon acquisition, in the three and six months ended ~~December~~March 31, ~~2019~~2020 and ~~2018,~~2019, respectively, distinct to our Integrated Solutions and Services and Applied Product Technologies segments.


(c)	Other losses, (gains) and expenses as discussed above in “How We Assess the Performance of Our Business-Adjusted EBITDA” distinct to our Integrated Solutions and Services (“ISS”) and Applied Product Technologies (“APT”) segments include the following:


	Three Months Ended December 31,									Three Months Ended March 31,										Six Months Ended March 31,
	2019					2018				2020					2019					2020					2019
(In millions)	Integrated Solutions and Services		Applied Product Technologies			Integrated Solutions and Services		Applied Product Technologies		ISS		APT			ISS		APT			ISS		APT			ISS		APT
Net pre-tax benefit on sale of the Memcor product line	$	—	$	(49.0	)	$	—	$	—	$	—	$	(9.0	)	$	—	$	—		$	—	$	(58.0	)	$	—	$	—
Remediation of manufacturing defects	—		(1.4		)	—		1.0		—		(0.1		)	—		0.3			—		(1.5		)	—		1.3
Product rationalization in electro-chlorination business	—		0.1			—		3.1		—		0.2			—		(0.1		)	—		0.3			—		3.0
Expenses related to maintaining non-operational business locations	—		—			0.2		—		—		—			—		—			—		—			0.2		—
Write-off of inventory										—		—			—		5.1			—		—			—		5.1
Foreign exchange impact related to headquarter allocations										—		—			—		(0.1		)	—		—			—		(0.1		)
Total	$	—	$	(50.3	)	$	0.2	$	4.1	$	—	$	(8.9	)	$	—	$	5.2		$	—	$	(59.2	)	$	0.2	$	9.3


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

Integrated Solutions and Services

Revenues in the Integrated Solutions and Services segment increased ~~$17.6~~$11.1 million, or ~~8.4%~~4.9%, to ~~$228.1~~$237.9 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$210.5~~$226.8 million in the three months ended ~~December~~March 31, ~~2018.~~2019. The increase in revenue was mainly driven by growth in capital revenue of $7.7 million in addition to increased service revenue of $2.8 million, exclusive of acquisitions, which continued to be augmented by price realization. Our recent investment in Frontier resulted in an additional increase of $1.1 million of revenue. These increases were offset by a slight decline in aftermarket revenue of $0.5 million. The segment saw stable but uneven demand as a result of the COVID-19 pandemic during the latter half of March. The segment saw increases in volume in healthcare related end markets, partly offset by declines in the refining and oil and gas end markets. Demand in the power, microelectronics, food & beverage and municipal end markets remained stable through the period.

Revenues in the Integrated Solutions and Services segment increased $28.7 million, or 6.6%, to $466.0 million in the six months ended March 31, 2020 from $437.3 million in the six months ended March 31, 2019. The increase in revenue was driven by stronger capital growth of ~~$9.7~~$18.6 million, exclusive of acquisitions, ~~and~~in addition to service growth of ~~$6.8~~$9.6 million, which was augmented by price realization. Our recent investment in Frontier ~~Water Systems LLC~~ resulted in ~~another~~an additional increase of ~~$1.3~~$2.3 million of revenue. These increases were offset by a reduction in aftermarket revenue of $1.8 million.

Operating profit in the Integrated Solutions and Services segment decreased $0.3 million, or 0.8%, to $36.7 million in the three months ended March 31, 2020 from $37.0 million in the three months ended March 31, 2019. Segment profitability improved $6.5 million in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing, and favorable change in product mix driven by the higher service volumes. Negative

drivers to profitability were increased employee related expenses of $3.8 million and higher depreciation and amortization expense of $3.0 million.

Operating profit in the Integrated Solutions and Services segment increased ~~$5.3~~$4.9 million, or ~~19.0%~~7.6%, to ~~$33.2~~$69.8 million in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 from ~~$27.9~~$64.9 million in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. Segment profitability improved ~~$7.3~~$13.8 million in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing, and favorable change in product mix driven by the higher service volumes. Profitability in the current year was also favorably impacted by the non-recurrence of $0.5 million of charges related to the achievement of earn-out targets associated with the Pure Water acquisition, in addition to the non-recurrence of other charges noted in the prior year of approximately $0.5 million related to restructuring and inactive sites. Negative drivers to profitability were increased employee related expenses of ~~$1.4~~$5.2 million and higher depreciation and amortization expense of ~~$1.6~~$4.7 million.

EBITDA in the Integrated Solutions and Services segment increased ~~$6.9~~$2.7 million, or ~~16.5%~~5.3%, to ~~$48.8~~$54.0 million in the three months ended ~~December~~March 31, ~~2019,~~2020, compared to ~~$41.9~~$51.3 million in the three months ended ~~December~~March 31, ~~2018.~~2019 and increased $9.6 million, or 10.3%, to $102.8 million in the six months ended March 31, 2020, compared to $93.2 million in the six months ended March 31, 2019.

Applied Product Technologies

Revenues in the Applied Product Technologies segment ~~increased $5.5~~decreased $8.0 million, or ~~4.9%~~6.6%, to ~~$118.0~~$113.8 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$112.5~~$121.8 million in the three months ended ~~December~~March 31, ~~2018. Revenues grew $2.3 million due to increased aftermarket revenue~~2019. The impact from the divestiture of the Memcor product line and ~~price realization. The~~the acquisition of ATG UV ~~contributed an increase~~resulted in a net reduction in revenue of ~~$3.9~~$8.1 million. ~~These increases were partially offset~~Additionally, APT saw an unfavorable foreign currency translation impact of ~~$0.7~~$1.4 million. These decreases were partially

offset by organic revenue growth in both EMEA of $5.4 million, driven by volume in Aquatics & Electrochlorination product lines, and in the Americas region of $1.8 million across multiple product lines, partially offset by a decline in Asia Pacific of $5.7 million, mainly due to COVID-19 related slow down and delays.

Revenues in the Applied Product Technologies segment decreased $2.5 million to $231.8 million in the six months ended March 31, 2020 from $234.3 million in the six months ended March 31, 2019. The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction in revenue of $4.1 million. Organic revenue grew in EMEA by $6.6 million driven by capital volume in Aquatics & Electrochlorination product lines and in the Americas region by $0.3 million, partially offset by a decline in Asia Pacific of $3.2 million predominantly due to COVID-19 slow down and delays. These increases were partially offset by an unfavorable foreign currency translation impact of $2.1 million.

Operating profit in the Applied Product Technologies segment increased ~~$58.6~~$12.5 million, or ~~1,302.2%~~110.6%, to ~~$63.1~~$23.8 million in the three months ended ~~December~~March 31, ~~2019~~2020 from ~~$4.5~~$11.3 million in the three months ended ~~December~~March 31, ~~2018.~~2019. The increase is mainly due to the the additional funds received as a result of the net working capital settlement related to the net pre-tax benefit on sale of the Memcor product line of $9.0 million. Increased profit was also driven by volume and mix performance, augmented by improved pricing, of $6.4 million, in addition to lower depreciation of $1.0 million and $0.5 million of net benefit from the divestiture of the Memcor product line and the acquisition of ATG UV. These increases were offset by operational variances of $2.6 million, increased employee related expenses of $0.8 million, and $0.3 million of unfavorable foreign currency.

Further operating profit decreases were due to costs of $0.7 million related to:

An increase in restructuring charges of $3.1 million primarily due to costs incurred following the sale of the Memcor product line;

An increase in costs related to charges incurred by the Company related to product rationalization in its electro-chlorination business of $0.3 million; and

Release of an acquisition related contingency due to the passage of time in the prior year for $2.8 million.

These increases were partially offset by:

Reduction in costs incurred by the Company related to the write–off of inventory in the prior year of $5.1 million associated with product rationalization and facility consolidation; and

A reduction in costs incurred by the Company from a settlement with a third-party vendor associated with remediation of manufacturing defects caused by the vendor of $0.4 million.

Operating profit in the Applied Product Technologies segment increased $71.1 million, or 450.0%, to $86.9 million in the six months ended March 31, 2020 from $15.8 million in the six months ended March 31, 2019. The increase is mainly due to the net pre-tax benefit on sale of the Memcor product line of ~~$49.0~~$58.0 million, which is net of $8.3 million of discretionary compensation payments to employees in connection with the transaction and $1.0 million in transaction costs ~~incurred in the three months ended December 31, 2019.~~incurred. Increased profit was also driven by volume and mix performance, augmented by improved pricing, of ~~$1.8~~$8.1 million, in addition to ~~lower depreciation~~a $1.1 million net benefit from the divestiture of ~~$0.8 million~~the Memcor product line and ~~$0.6 million from~~ the acquisition of ATG ~~UV.~~UV and lower depreciation of $1.7 million. Further increases were due to ~~one time~~net reductions in nonrecurring costs of ~~$7.0~~$6.3 million related to:

Reduction in costs incurred by the Company related to the write–off of inventory in the prior year of $5.1 million associated with product rationalization and facility consolidation;

A reduction in costs incurred by the Company from a settlement with a third-party vendor associated with remediation of manufacturing defects caused by the vendor of $2.8 million;

Reductions in costs related to the achievement of earn-out targets associated with certain acquisitions of $2.0 million;

Reductions in costs related to charges incurred by the Company related to product rationalization in its electro-chlorination business of $2.7 million;

Increases in restructuring charges of $3.5 million primarily due to costs incurred following the sale of the Memcor product line; and

Release of an acquisition related contingency due to the passage of time in the prior year for $2.8 million.


◦	A net recovery of costs incurred by the Company from a settlement with a third-party vendor associated with remediation of manufacturing defects caused by the vendor of $1.4 million as compared to prior year expense of $1.0 million


◦	~~Reductions in costs related to the achievement of earn-out targets associated with certain acquisitions of $1.3 million as compared to prior year expense of $0.7 million~~


◦	~~Reductions in other non-recurring costs by $2.6 million~~

Operating profit was reduced by ~~$0.6~~operational variances of $2.9 million, ~~net as compared to the prior period as the~~employee related costs increased ~~benefits from the two segment realignment resulting in cost savings~~$0.8 million, and foreign currency of ~~$1.4 million as compared to the same period in the prior year were offset by increased employment costs related to inflation and incentive of $2.0~~$0.4 million.

EBITDA in the Applied Product Technologies segment increased ~~$57.8~~$11.5 million, or ~~649.4%~~72.8%, to ~~$66.7~~$27.3 million in the three months ended ~~December~~March 31, ~~2019,~~2020, compared to ~~$8.9~~$15.8 million in the three months ended ~~December~~March 31, ~~2018.~~2019. EBITDA in the Applied Product Technologies segment increased $69.4 million, or 282.1%, to $94.0 million in the six months ended March 31, 2020, compared to $24.6 million in the six months ended March 31, 2019.

Liquidity and Capital Resources

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

Our principal sources of liquidity are our cash generated by operating activities and borrowings under our Revolving Credit Facility. Historically, we have financed our operations primarily from cash generated from operations and periodic borrowings under our $125.0 million Revolving Credit Facility. Our primary cash needs are for day to day operations, to pay interest and principal on our indebtedness, to fund working capital requirements and to make capital expenditures.

As part of our ongoing efforts to improve our cash flow and related liquidity, we work with suppliers to optimize our terms and conditions, including some times extending payment terms. We also facilitate a voluntary supply chain finance program (the “program”) to provide certain of our suppliers with the opportunity to sell receivables due from us to participating financial institutions at the sole discretion of both the suppliers and the financial institutions. A third party administers the program; our responsibility is limited to making payment on the terms originally negotiated with our supplier, regardless of whether the supplier sells its receivable to a financial institution. We do not enter into agreements with any of the participating financial institutions in connection with the program. The range of payment terms we negotiate with our suppliers is consistent, irrespective of whether a supplier participates in the program. The March 31 year to date amounts settled through the program and paid to participating financial institutions were $15.7 million, and $0 million in fiscal 2020, and fiscal 2019, respectively. A downgrade in our credit rating or changes in the financial markets could limit the financial institutions’ willingness to commit to participation in the program.

We expect to continue to finance our liquidity requirements through internally generated funds, borrowings under our Revolving Credit Facility and equipment financing arrangements. We believe that our projected cash flows generated from operations, together with borrowings under our Revolving Credit Facility and other financing arrangements are sufficient to fund our principal debt payments, interest expense, our working capital needs and our expected capital

expenditures for the next twelve months. Our capital expenditures for the ~~three~~six months ended ~~December~~March 31, 2020 and 2019 ~~and 2018~~ were ~~$17.6~~$38.8 million and ~~$17.6~~$40.7 million, respectively. However, our budgeted capital expenditures can vary from period to period based on the nature of capital intensive project awards. From time to time, we may enter into financing arrangements related to capital expenditures for equipment used to provide services to our customers. In addition, we may draw on our Revolving Credit Facility from time to time to fund or partially fund an acquisition.

As of ~~December~~March 31, ~~2019,~~2020, we had total indebtedness of ~~$976.9~~$879.5 million, including ~~$926.4~~$824.0 million of borrowings under the First Lien Term Loan Facility, no borrowings under our Revolving Credit Facility, ~~$48.1~~$53.2 million in borrowings related to equipment financing, ~~$0.8~~$0.7 million of notes payable related to certain equipment related contracts and ~~$1.7~~$1.6 million related to a mortgage. We also had ~~$13.1~~$12.0 million of letters of credit issued under our $125.0 million Revolving Credit Facility and an additional ~~$0.2 million~~$49 thousand of letters of credit issued under a separate uncommitted facility as of ~~December~~March 31, ~~2019.~~2020.

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

incur or guarantee additional indebtedness;

make certain investments;

pay dividends or make distributions on our capital stock;

sell assets, including capital stock of restricted subsidiaries;

agree to payment restrictions affecting our restricted subsidiaries;

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

enter into transactions with our affiliates;

incur liens; or

designate any of our subsidiaries as unrestricted subsidiaries.

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

In addition, our Revolving Credit Facility, but not the First Lien Term Loan Facility, contains a financial covenant which requires us to comply with the maximum first lien net leverage ratio of 5.55 to 1.00 as of the last day of any quarter

on which the aggregate amount of revolving loans and letters of credit outstanding under the Revolving Credit Facility (net of cash collateralized letters of credit and undrawn outstanding letters of credit in an amount of up to 50% of the Revolving Credit Facility) exceeds 25% of the total commitments thereunder.

As of ~~December~~March 31, 2020 and September 30, 2019, we were in compliance with the covenants contained in the senior secured credit facilities.

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

Cash Flows

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


	Three Months Ended December 31,						Six Months Ended March 31,
(In millions)	2019			2018			2020			2019
Statement of Cash Flows Data
Net cash provided by operating activities	$	4.7		$	4.1		$	22.0		$	27.3
Net cash provided by (used in) investing activities	80.2			(17.7		)	68.6			(38.6		)
Net cash used in financing activities	(1.8		)	(4.9		)	(91.5		)	(4.0		)
Effect of exchange rate changes on cash	1.9			(0.7		)	(0.5		)	(0.3		)
Change in cash and cash equivalents	$	85.0		$	(19.2	)	$	(1.4	)	$	(15.6	)

Operating Activities

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

Net cash provided by operating activities ~~increased~~decreased to a source of ~~$4.7~~$22.0 million in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 from a source of ~~$4.1~~$27.3 million in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019.

Operating cash flows in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 reflect an increase in net earnings of ~~$69.8~~$76.1 million as compared to the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019, primarily driven by the sale of the Memcor product line.

Non‑cash items reduced operating cash flows by ~~$35.3~~$6.0 million in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 as compared to an increase to operating cash flows of ~~$32.0~~$51.4 million in the ~~three~~six months ended ~~December~~March 31, ~~2018,~~2019, resulting anin an overall reduction of ~~$67.3~~$57.4 million. This reduction was primarily driven by the adjustment for gain on sale of business, offset by an increase in depreciation and amortization expense. Non-cash changes also include the foreign currency translation ~~gain.~~gain or loss.

The aggregate of receivables, inventories, contract assets and liabilities and accounts payable used ~~$6.9~~$14.8 million in operating cash flows in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 compared to a use of ~~$2.6~~$4.8 million in operating cash flows in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. The amount of cash flow generated from or used by the above mentioned accounts depends upon how effectively we manage our cash conversion cycle, which is a representation of the number of days that elapse from the date of purchase of raw materials and components to the collection of cash from customers. Our cash conversion cycle can be significantly impacted by the timing of collections and payments in a period.

The aggregate of prepaid expense and other current assets, income taxes and other non current assets and liabilities provided ~~$2.8~~$1.8 million in operating cash flows in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 compared to ~~$1.3~~$6.6 million provided in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. This is mainly due to timing of payments.

Accrued expenses and other liabilities used ~~$9.4~~$16.8 million in operating cash flows in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 compared to a use of ~~$15.4~~$11.2 million in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019, mainly due to timing of payments.

Investing Activities

Net cash provided by investing activities increased ~~$97.9~~$107.3 million to ~~$80.2~~$68.6 million in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 from a use of ~~$17.7~~$38.7 million in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. This increase was largely driven by proceeds from the sale of the Memcor product line during the ~~three~~six months ended ~~December~~March 31, ~~2019,~~2020, partially offset by lower cash outflow associated with the Frontier acquisition in the current year period. Other activity related to purchase of capital or intangible assets remained relatively consistent with the prior period.

Financing Activities

Net cash used in financing activities decreased ~~$3.1~~$87.5 million to a use of ~~$1.8~~$91.5 million in the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 from a use of ~~$4.9~~$4.0 million in the ~~three~~six months ended ~~December~~March 31, ~~2018.~~2019. This lower amount of cash used in financing activities for the ~~three~~six months ended ~~December~~March 31, ~~2019~~2020 was primarily due to the ~~cash received from common stock activity which was offset by~~$100 million debt payment and and increased distribution of dividends to non-controlling ~~interest.~~interest, offset by cash received from common stock.

Seasonality

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

Seasonal trends historically displayed by our business could be impacted by the COVID-19 pandemic, and past performance should not be considered indicative of future results. For example, decreased customer demand resulting from the economic slowdown caused by the pandemic and the measures taken to control its spread could negate the seasonal factors that have historically resulted in improved performance in the second half of our fiscal year.

Off‑Balance Sheet Arrangements

As of ~~December~~March 31, 2020 and September 30, 2019, we had letters of credit totaling ~~$13.3~~$12.0 million and ~~$13.0~~$13.2 million, respectively, and surety bonds totaling ~~$154.1~~$146.4 million and $144.7 million, respectively, outstanding under our credit arrangements. The longest maturity date of the letters of credit and surety bonds in effect as of ~~December~~March 31, ~~2019~~2020 was March ~~26, 2029.~~20, 2030.

Critical Accounting Policies and Estimates

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Based on our overall interest rate exposure to variable rate debt outstanding of $824.0 million as of ~~December~~March 31, ~~2019,~~2020, a 1% increase or decrease in interest rates would decrease or increase income (loss) before income taxes by approximately ~~$9.3~~$8.3 million. By comparison, based on our overall interest rate exposure to variable rate debt outstanding of $933.5 million as of ~~December~~March 31, ~~2018,~~2019, a 1% increase or decrease in interest rates would have decreased or increased income (loss) before income taxes by approximately $9.4 million.

For a discussion of the Company’s exposure to market risk related to inflation, tariffs and foreign currency exchange rates, please refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the SEC on November 25, 2019. There have been no material changes to the Company’s exposure to these market risks during the first ~~quarter~~half of fiscal 2020.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

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

Changes to Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarterly period ended ~~December~~March 31, ~~2019~~2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II - Other Information

Item 1. Legal Proceedings

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

On or around November 6, 2018, a purported shareholder of the Company filed a class action lawsuit in the U.S. District Court for the Southern District of New York, captioned McWilliams v. Evoqua Water Technologies Corp., et al., Case No. 1:18-CV-10320, alleging that the Company and senior management violated federal securities laws. On January 31, 2019, the court appointed lead plaintiffs and lead counsel in connection with the action and captioned the action “In re Evoqua Water Technologies Corp. Securities Litigation,” Master File No. 1:18-CV-10320. On March 28, 2019, lead plaintiffs filed an amended complaint, which asserts claims pursuant to the Securities Exchange Act of 1934 (the “Exchange Act”) and the Securities Act of 1933 (the “Securities Act”) against the Company, members of the Company’s Board of Directors, senior management, other executives and/or employees, AEA Investors LP and a number of its affiliated entities, and the underwriters of the Company’s initial public offering and secondary public offering. The amended complaint alleges that the defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures concerning the Company’s integration of acquired companies, the Company’s reduction-in-force, and the Company’s accounting practices. The lawsuit seeks compensatory damages in an unspecified amount to be proved at trial, an award of reasonable costs and expenses to the plaintiff and class counsel, and such other relief as the court may deem just and proper. On June 26, 2019, the defendants filed motions to dismiss the amended complaint. Briefing in connection with the motions to dismiss was completed on October 4, 2019. On March 30, 2020, the Court granted the motions to dismiss the Exchange Act claims and denied the motions to dismiss the Securities Act claims. The Company believes that this lawsuit is without merit and intends to vigorously defend itself against the allegations.

On or around April 10, 2019, a purported shareholder of the Company filed a shareholder derivative lawsuit ostensibly on behalf of the Company in the U.S. District Court for the Western District of Pennsylvania, captioned Dallas Torgersen, derivatively on behalf of Evoqua Water Technologies Corp. v. Ronald C. Keating, et al., Case No. 2:19-CV-410. The complaint names as defendants the Company’s CEO, the Company’s CFO, and members of the Company’s Board of Directors, and it names the Company as a nominal defendant. The complaint alleges, among other things, that the individual defendants violated federal securities laws by issuing false, misleading, and/or omissive disclosures in the period leading up to the Company’s October 30, 2018 disclosure and that they breached their fiduciary duties to the Company. The lawsuit seeks compensatory damages in an unspecified amount to be proved at trial, an award of reasonable costs and expenses, restitution from the individual defendants, an order directing the Company and the individual defendants to take all necessary actions to reform and improve the Company’s corporate governance and internal procedures to comply with the law and to prevent the events alleged from reoccurring, including by putting forth for shareholder vote certain resolutions for amendments to the Company’s charter or bylaws, and such other relief as the court may deem just and proper. On June 14, 2019, the Court entered an order staying the lawsuit pending resolution of the In re Evoqua Water Technologies Corp. Securities Litigation lawsuit described above. The Company believes that this lawsuit is without merit and intends to vigorously defend itself against the allegations.

Item 1A. Risk Factors

~~There~~The following additional risk factors should be read in conjunction with the risk factors previously disclosed in Part I, Item1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the SEC on November 25, 2019, and the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC. Any one or more of such factors could directly or indirectly cause our actual results of operations and financial condition to vary materially from past or anticipated future results of operations and financial condition. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, results of operations or prospects. Aside from the risk factors described below, as of the date hereof, we do not

believe there there have been no material changes to the information concerning risk factors as stated in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019, as filed with the SEC on November 25, 2019.

The COVID-19 pandemic and other future public health crises or pandemics could materially and adversely affect our business, results of operations and financial condition.

The COVID-19 pandemic has caused a global economic slowdown, as efforts to control the spread of the virus have resulted in mandatory closures of certain businesses, “shelter in place” and “stay at home” orders forcing employees to work remotely, significant travel restrictions and global supply chain disruptions. Given the evolving nature of this unprecedented pandemic, the ultimate impact on our operations cannot be reasonably estimated at this time. The pandemic and the measures implemented to control its spread have impacted and will likely continue to impact certain of our customers’ and suppliers’ operations, some of whom may face extended financial hardships. Depending on the extent of the impact, this could decrease customer demand for our products and services, limit our access to our customers’ sites and put at risk our ability to collect from customers amounts due for products and services provided to them. Similarly, it could limit our suppliers’ ability to provide the materials that we need to manufacture and deliver certain products to our customers, in which case we may need to seek alternate suppliers, which could result in cost increases and delays in shipments. These impacts on our customers and suppliers could negatively affect our liquidity, sales and profitability and have a material adverse effect on our overall business and financial condition.

The COVID-19 pandemic has also heightened risks associated with our internal operations. Our service technicians enter high-risk areas such as hospitals and testing laboratories. Although we are closely monitoring and following guidance from public health officials related to personal safety, preventative measures and personal protective equipment, these service technicians are at greater risk of exposure to the virus. An outbreak among our service technician population or an outbreak among employees at any of our manufacturing facilities, which may require us to suspend or reduce operations at that facility, could have a material adverse effect on our overall business and financial condition. We may also experience decreased productivity due to fear among our employees to return to work at our service branches, manufacturing facilities and office locations as a result of the pandemic. Additionally, a large number of our employees are working remotely as a result of restrictions imposed to control the spread of the virus. This could result in decreased employee efficiency and increased cyber-security risk, each of which could have a material adverse effect on our overall business and financial condition.

The equity markets in the United States are experiencing volatility due to the COVID-19 pandemic and as a result, the market price of our common stock may decline. Additionally, any increased uncertainty may result in a sustained global recession and may impact our ability to access the capital markets and our usual sources of liquidity on reasonable terms, or at all.

Although the COVID-19 pandemic did not have a material impact on our consolidated results of operations in the three months ended March 31, 2020, the future impact of this outbreak is highly uncertain and cannot be predicted. If COVID-19 continues to spread, or if the duration of the disruption is prolonged, our business, financial condition, results of operations or prospects could be materially adversely affected. Even after the COVID-19 outbreak has subsided, we may continue to experience impacts to our business and our financial results in subsequent quarters due to the pandemic’s impact on the global economy and on certain markets that we serve. Because this pandemic is unprecedented and continuously evolving, COVID-19 may also affect our operating and financial results in a manner that is not presently known to us or not presently considered to be a significant risk to our operations.

Our operations in China expose us to risks inherent in doing business there.

We currently have operations and source and manufacture certain of our materials and products for global distribution from third-party suppliers and manufacturers in China. Operating in China exposes us to certain political, legal and economic risks, including risks resulting from disease or public health crises. For example, in December 2019, a strain of coronavirus (COVID-19) was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. Although we do not believe that the COVID-19 outbreak of the coronavirus within China has had a material adverse impact on our operations to date, the future impact of this pandemic is highly uncertain and cannot be predicted but our sales to and operations in China may be impacted. For additional risks relating to the outbreak of COVID-19, please see the risk factor titled “The COVID-19 pandemic and other future

public health crises or pandemics could materially and adversely affect our business, results of operations and financial condition.”

Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, network security, employee benefits and other matters, and we may not obtain or retain the requisite legal permits to continue to operate in China or we may become subject to costs or operational limitations imposed in connection with obtaining and complying with such permits. We may experience difficulty in establishing management, legal and financial controls, collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. and international standards. We may also experience difficulty in managing relations with our employees, distributors, suppliers or customers, with whom disagreements or conflicts of interest could materially adversely affect our operations or our ability to source and manufacture certain of our materials and products in China. Further, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. Any of these factors could have a material adverse effect on our business, financial condition, results of operations or prospects.

Additionally, the rapid development of the Chinese economy has led to increased labor costs, and the cost of labor in China may continue to increase in the future. Our results of operations will be materially and adversely affected if our labor costs, or the labor costs of our suppliers and manufacturers, increase significantly. We and our manufacturers and suppliers may be unable to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. These labor laws and related regulations impose liabilities on employers and may significantly increase the costs of workforce reductions. If we decide to change or reduce our workforce, these labor laws could limit or restrict our ability to make such changes in a timely, favorable and effective manner. Any of these events could have a material adverse effect our business, financial condition, results of operations or prospects.

Disruptions in the global oil markets could have a material adverse effect on demand for our products and services from customers in the oil and gas industry.

Global oil markets have recently experienced significant volatility and dramatic decreases in spot prices due to decreased demand resulting from the COVID-19 pandemic and increased supply resulting from aggressive increases in production of oil by Saudi Arabia and Russia. As a result of this volatility in global oil markets, we have seen some delays on orders and some decreased demand for our products and services from customers in the oil and gas industry. Although these delays and decreases in demand did not have a material effect on our results of operations in the three months ended March 31, 2020, if the volatility continues, it could have a material adverse effect on our business, results of operations and financial condition.

The phase-out, replacement or unavailability of the London Interbank Offered Rate (LIBOR) could affect interest rates under our existing credit facility agreements, as well as our ability to seek future debt financing.

LIBOR is the basic rate of interest used in lending between banks on the London interbank market and is widely used as a reference for setting the interest rates on loans globally. We use LIBOR as a reference rate to calculate interest rates under our revolving credit facility and our term loan facility, which are scheduled to mature in December 2022 and December 2024, respectively. In 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. It is unclear if LIBOR will cease to exist at that time or if new methods of calculating LIBOR will be established such that it continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S. financial institutions, is considering replacing U.S. dollar LIBOR with a new index, the Secured Overnight Financing Rate (SOFR), calculated using short-term repurchase agreements backed by Treasury securities. Our senior secured credit facilities do not include specific references to SOFR as a replacement for LIBOR, and whether or not SOFR or another alternative reference rate attains market traction as a LIBOR replacement tool remains in question. Additionally, it is uncertain if LIBOR will cease to exist after calendar year 2021, or whether additional reforms to LIBOR may be enacted, or whether alternative reference rates will gain market acceptance as a replacement for LIBOR. If LIBOR ceases to exist, we will need to agree upon a replacement index with banks under our senior secured credit facilities, and certain of the interest rates

under such agreements may change. The new rates may not be as favorable to us as those in effect prior to any LIBOR phase-out.

In addition, the transition process may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on LIBOR. The transition may also result in reductions in the value of certain instruments or the effectiveness of related transactions such as hedges, increased borrowing costs, uncertainty under applicable documentation, or difficult and costly consent processes. Any such effects of the transition away from LIBOR, as well as other unforeseen effects, may result in expenses, difficulties, complications or delays in connection with future financing efforts, which could have a material adverse impact on our business, financial condition and results of operations.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

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



Exhibit No.	Exhibit Description
~~2.1~~	10.1 †*	~~Purchase~~Form of Amended and ~~Sale Agreement by and among~~Restated Evoqua Water Technologies ~~LLC, WTG~~Corp. 2017 Equity Incentive Plan.
10.2	Amendment No. 7, among EWT Holdings ~~Cooperatief U.A.~~III Corp., ~~Evoqua Water Technologies Limited, Evoqua Water Technologies Pte. Ltd.~~as borrower, EWT Holdings II Corp., ~~Evoqua Water Technologies Ltd., Evoqua Water Technologies (Shanghai) Co. Ltd., WTG Holdco Australia (Memcor) Pty. Ltd., Evoqua Water Technologies Membrane Systems Pty. Ltd.~~as parent guarantor, the subsidiary guarantors party thereto, the financial institutions party thereto, as lenders, and ~~DuPont de Nemours, Inc.,~~Credit Suisse AG, as administrative agent and collateral agent, dated ~~October 1, 2019~~February 18, 2020 (incorporated by reference to Exhibit ~~2.1~~10.1 to the Registrant’s Form 8-K filed on ~~October 3, 2019~~February 24, 2020 (File No. 001-38272)).
~~2.2~~		Amendment to Purchase and Sale Agreement, by and among Evoqua Water Technologies LLC, WTG Holdings Cooperatief U.A., Evoqua Water Technologies Limited, Evoqua Water Technologies Pte. Ltd., Evoqua Water Technologies Ltd., Evoqua Water Technologies (Shanghai) Co. Ltd., WTG Holdco Australia (Memcor) Pty. Ltd., Evoqua Water Technologies Membrane Systems Pty. Ltd. and DuPont de Nemours, Inc., dated December 18, 2019 (incorporated by reference to Exhibit 2.1 to the Registrant’s Form 8-K filed on December 20, 2019 (File No. 001-38272)).
~~10.1~~		Amendment No. 1 to the Second Amended and Restated Registration Rights Agreement, among Evoqua Water Technologies Corp., AEA Investors Fund V LP, AEA Investors Fund V-A LP, AEA Investors Fund V-B LP, AEA Investors Participant Fund V LP, AEA Investors QP Participant Fund V LP and the additional investors party thereto, dated November 22, 2019 (incorporated by reference to Exhibit 10.10 to the Registrant’s Form 10-K filed on November 25, 2019 (File No. 001-38272)).
~~10.2~~		Amended & Restated Employment Agreement, by and between Ronald Keating and the Company, dated November 25, 2019 (incorporated by reference to Exhibit 10.14 to the Registrant’s Form 10-K filed on November 25, 2019 (File No. 001-38272)).
~~10.3~~		Amended & Restated Employment Agreement, by and between Benedict J. Stas and the Company, dated November 25, 2019 (incorporated by reference to Exhibit 10.17 to the Registrant’s Form 10-K filed on November 25, 2019 (File No. 001-38272)).
31.1*		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
31.2*		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
32.1*		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*		XBRL Instance Document.
101.SCH*		XBRL Taxonomy Extension Schema Document.
101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*		XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document.

† Indicates a management contract or compensatory plan or arrangement.


*	Filed herewith.

SIGNATURES

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



	EVOQUA WATER TECHNOLOGIES CORP.





~~February 4,~~May 6, 2020	/s/ RONALD C. KEATING
	By:	Ronald C. Keating
		Chief Executive Officer (Principal Executive Officer)





~~February 4,~~May 6, 2020	/s/ BENEDICT J. STAS
	By:	Benedict J. Stas
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

6476




		Page
PART I - FINANCIAL INFORMATION
Item 1	Consolidated Financial Statements		3
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operation		4145
Item 3	Quantitative and Qualitative Disclosures About Market Risk		6070
Item 4	Controls and Procedures		6070
PART II - OTHER INFORMATION
Item 1	Legal Proceedings		6171
Item 1A	Risk Factors		6171
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		6174
Item 3	Defaults Upon Senior Securities		6174
Item 4	Mine Safety Disclosures		6274
Item 5	Other Information		6274
Item 6	Exhibits		6375



		Asset Derivative
	Balance Sheet Location	December 31, 2019		September 30, 2019
Foreign currency forward contracts	Prepaid and other current assets	$	—	$	9