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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended
December 31, 2022
Or
☐
 Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____ to _____
Commission File Number: 001-38272
EVOQUA WATER TECHNOLOGIES CORP.
(Exact name of registrant as specified in its charter)
 
Delaware46-4132761
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
210 Sixth Avenue15222
Pittsburgh, Pennsylvania
(Address of principal executive offices) (Zip Code)
(724) 772-0044
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $0.01 per shareAQUANew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒    No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒ Accelerated filer☐
Non-accelerated filer
☐Smaller reporting company☐
Emerging growth company☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐    No ☒
There were 122,186,155 shares of the registrant’s common stock, par value $0.01 per share, outstanding as of January 26, 2023.


EVOQUA WATER TECHNOLOGIES CORP.
TABLE OF CONTENTS





CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Report”) contains forward‑looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). You can generally identify forward‑looking statements by our use of forward‑looking terminology such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “estimate,” “expect,” “goal,” “intend,” “may,” “might,” “plan,” “progress,” “potential,” “predict,” “projection,” “seek,” “should,” “will,” or “would,” or the negative thereof, or other variations thereon or comparable terminology.
All of these forward‑looking statements are based on our current expectations, assumptions, estimates, and projections. While we believe these expectations, assumptions, estimates and projections are reasonable, such forward‑looking statements are only predictions and involve known and unknown risks and uncertainties, many of which are beyond our control. These and other important factors may cause our actual results, performance, or achievements to differ materially from any future results, performance, or achievements expressed or implied by these forward‑looking statements or could affect our share price. Some of the factors that could cause actual results to differ materially from those expressed or implied by the forward‑looking statements include, among other things:
•the failure to complete the proposed transaction with Xylem Inc. (“Xylem”) (the “Merger”) on the anticipated terms and timing, or at all;
•the failure to obtain stockholder approvals or to satisfy any of the other conditions to the Merger on a timely basis or at all, or other delays in completing the Merger;
•the failure to obtain necessary regulatory approvals (and the risk that such approvals may result in the imposition of conditions that could adversely affect the combined company or the expected benefits of the Merger);
•the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the parties to terminate the Company’s merger agreement with Xylem;
•the possibility that the Merger may be less accretive than expected, or may be dilutive;
•the possibility that the anticipated benefits of the Merger will not be realized when expected or at all, including as a result of the impact of, or problems arising from, the integration of the two companies or as a result of the strength of the economy and competitive factors in the areas where the Company and Xylem do business;
•the possibility that the Merger may be more expensive to complete than anticipated, including as a result of unexpected factors or events;
•diversion of management’s attention from ongoing business operations and opportunities, as a result of the Merger; the risk that stockholder litigation in connection with the Merger may affect the timing or occurrence of the Merger or result in significant costs of defense, indemnification and liability;
•the effect of the announcement of the Merger on our ability to maintain relationships with customers, suppliers, and other third parties; uncertainty as to the long-term value of Xylem common stock;
•material, freight, and labor inflation, commodity and component availability constraints, and disruptions in global supply chains and transportation services;
•general global economic and business conditions, including the impacts of rising interest rates, recessionary conditions, geopolitical conflicts, such as the conflict between Russia and Ukraine and tensions between China and the U.S., and the COVID-19 pandemic;
•our ability to execute projects on budget and on schedule;
•the potential for us to incur liabilities to customers as a result of warranty claims or failure to meet performance guarantees;
•our ability to meet our own and our customers’ safety standards;
•failure to effectively treat emerging contaminants;
1

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

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

Part I - Financial Information

Item 1. Financial Statements

INDEX TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

3

Evoqua Water Technologies Corp.
Consolidated Balance Sheets
(In thousands)
(Unaudited)
December 31,
2022		September 30,
2022
ASSETS
Current assets
$848,320 $831,389 
Cash and cash equivalents
104,703 134,005 
Receivables, net
301,128 305,712 
Inventories, net
258,264 229,351 
Contract assets118,466 102,123 
Prepaid and other current assets
65,324 59,971 
Income tax receivable
435 227 
Property, plant, and equipment, net
409,992 405,289 
Goodwill
476,213 473,572 
Intangible assets, net
307,747 317,733 
Deferred income taxes, net of valuation allowance
4,200 5,841 
Operating lease right-of-use assets, net57,624 53,540 
Other non‑current assets
103,261 103,499 
Total assets
$2,207,357 $2,190,863 
LIABILITIES AND EQUITY
Current liabilities
$486,837 $483,716 
Accounts payable
219,886 213,518 
Current portion of debt, net of deferred financing fees and discounts19,322 17,266 
Contract liabilities77,589 62,439 
Product warranties
6,881 6,740 
Accrued expenses and other liabilities
156,846 178,272 
Income tax payable
6,313 5,481 
Non‑current liabilities
$990,788 $997,054 
Long-term debt, net of deferred financing fees and discounts852,469 863,534 
Product warranties
3,346 3,465 
Obligation under operating leases47,399 43,961 
Other non‑current liabilities
71,892 69,889 
Deferred income taxes
15,682 16,205 
Total liabilities
$1,477,625 $1,480,770 
Commitments and Contingent Liabilities (Note 19)
Shareholders’ equity
Common stock, par value $0.01: authorized 1,000,000 shares; issued 123,567 shares, outstanding 121,903 at December 31, 2022; issued 123,411 shares, outstanding 121,747 at September 30, 2022
$1,237 $1,235 
Treasury stock: 1,664 shares at December 31, 2022 and 1,664 shares at September 30, 2022
(2,837)(2,837)
Additional paid-in capital616,354 607,748 
Retained earnings70,284 61,016 
Accumulated other comprehensive income, net of tax44,694 42,931 
Total shareholders’ equity$729,732 $710,093 
Total liabilities and shareholders’ equity$2,207,357 $2,190,863 
See accompanying notes to these Unaudited Consolidated Financial Statements
4

Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Operations
(In thousands, except per share data)
Three Months Ended
December 31,
20222021
Revenue from product sales$260,391 $212,568 
Revenue from services175,455 153,700 
Revenue from product sales and services$435,846 $366,268 
Cost of product sales(185,040)(153,795)
Cost of services(120,497)(101,965)
Cost of product sales and services$(305,537)$(255,760)
Gross profit$130,309 $110,508 
General and administrative expense(64,076)(57,829)
Sales and marketing expense(40,386)(36,449)
Research and development expense(3,835)(3,452)
Total operating expenses$(108,297)$(97,730)
Other operating income1,297 1,657 
Other operating expense(77)(147)
Income before interest expense and income taxes$23,232 $14,288 
Interest expense
(10,074)(6,579)
Income before income taxes$13,158 $7,709 
Income tax expense(3,890)(1,621)
Net income$9,268 $6,088 
Net income attributable to non‑controlling interest— 101 
Net income attributable to Evoqua Water Technologies Corp.$9,268 $5,987 
Basic income per common share$0.08 $0.05 
Diluted income per common share$0.07 $0.05 
See accompanying notes to these Unaudited Consolidated Financial Statements

5

Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(In thousands)
Three Months Ended
December 31,
20222021
Net income$9,268 $6,088 
Other comprehensive income (loss)
Foreign currency translation adjustments3,562 1,609 
Unrealized derivative (loss) gain on cash flow hedges, net of tax(1,786)6,581 
Change in pension liability, net of tax(13)169 
Total other comprehensive income$1,763 $8,359 
Less: Comprehensive income attributable to non‑controlling interest— (101)
Comprehensive income attributable to Evoqua Water Technologies Corp.$11,031 $14,346 
See accompanying notes to these Unaudited Consolidated Financial Statements

6

Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Changes in Equity
(In thousands)
Common Stock
Treasury Stock
Additional
Paid‑in
Capital
Retained
Earnings
Accumulated
Other Comprehensive Income
Non‑controlling
Interest
Total
Shares
Cost
Shares
Cost
Balance at September 30, 2022123,411 $1,235 1,664 $(2,837)$607,748 $61,016 $42,931 $— $710,093 
Equity based compensation expense— — — — 6,196 — — — $6,196 
Issuance of common stock, net156 2 — — 2,410 — — — $2,412 
Net income— — — — — 9,268 — — $9,268 
Other comprehensive income— — — — — — 1,763 — $1,763 
Balance at December 31, 2022123,567 $1,237 1,664 $(2,837)$616,354 $70,284 $44,694 $— $729,732 
Common Stock
Treasury Stock
Additional
Paid‑in
Capital
Retained
Deficit
Accumulated
Other Comprehensive Income
Non‑controlling
Interest
Total
Shares
Cost
Shares
Cost
Balance at September 30, 2021122,173 $1,223 1,664 $(2,837)$582,052 $(11,182)$11,415 $1,548 $582,219 
Equity based compensation expense— — — — 5,203 — — — $5,203 
Issuance of common stock, net199 2 — — 822 — — — $824 
Dividends paid to non-controlling interest— — — — — — — (100)$(100)
Net income— — — — — 5,987 — 101 $6,088 
Other comprehensive income— — — — — — 8,359 — $8,359 
Balance at December 31, 2021122,372 $1,225 1,664 $(2,837)$588,077 $(5,195)$19,774 $1,549 $602,593 
See accompanying notes to these Unaudited Consolidated Financial Statements
7

Evoqua Water Technologies Corp.
Unaudited Consolidated Statements of Cash Flows
(In thousands)
Three Months Ended
December 31,
20222021
Operating activities
Net income$9,268 $6,088 
Reconciliation of net income to cash flows (used in) provided by operating activities:
Depreciation and amortization33,248 28,640 
Amortization of deferred financing fees476 467 
Deferred income taxes1,852 251 
Share-based compensation6,196 5,203 
Gain on sale of property, plant, and equipment(836)(4)
Foreign currency exchange (gains) losses on intercompany loans and other non-cash items(8,184)1,502 
Changes in assets and liabilities
Accounts receivable6,839 41,309 
Inventories(26,082)(16,021)
Contract assets(15,790)(12,189)
Prepaids and other current assets(2,326)(3,797)
Accounts payable5,290 11,241 
Accrued expenses and other liabilities(24,916)(16,953)
Contract liabilities14,711 (2,887)
Income taxes416 (338)
Other non‑current assets and liabilities(1,435)(6,132)
Net cash (used in) provided by operating activities$(1,273)$36,380 
Investing activities
Purchase of property, plant, and equipment$(22,742)$(15,540)
Purchase of intangibles(1,120)(664)
Proceeds from sale of property, plant, and equipment1,674 1,370 
Acquisitions 1,716 — 
Net cash used in investing activities$(20,472)$(14,834)
Financing activities
Borrowing of debt$23,700 $5,949 
Repayment of debt(33,185)(19,378)
Repayment of finance lease obligation(3,905)(3,174)
Proceeds from issuance of common stock2,868 2,085 
Taxes paid related to net share settlements of share-based compensation awards(390)(1,261)
Distribution to non‑controlling interest— (100)
Net cash used in financing activities$(10,912)$(15,879)
Effect of exchange rate changes on cash 3,355 614 
Change in cash and cash equivalents (29,302)6,281 
Cash and cash equivalents
Beginning of period$134,005 $146,244 
End of period$104,703 $152,525 
See accompanying notes to these Unaudited Consolidated Financial Statements
8

Evoqua Water Technologies Corp.
Unaudited Supplemental Disclosure of Cash Flow Information
(In thousands)
Three Months Ended
December 31,
20222021
Supplemental disclosure of cash flow information
Cash paid for taxes$1,989 $1,654 
Cash paid for interest$8,990 $5,706 
Non‑cash investing and financing activities
Finance lease transactions$3,311 $2,700 
Operating lease transactions$6,863 $1,152 
See accompanying notes to these Unaudited Consolidated Financial Statements
9

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

Upon the closing of the Merger, legacy Company stockholders will own approximately 25% and legacy Xylem shareholders will own approximately 75% of the combined company.
The consummation of the Merger is subject to the satisfaction or waiver of certain customary mutual conditions, including (a) the receipt of the required approvals from the Company’s stockholders and Xylem’s shareholders, (b) receipt of required regulatory approvals under antitrust and foreign investment laws in applicable jurisdictions, including the expiration or termination of the waiting period under the Hart-Scott-Rodino Act (collectively, “Regulatory Clearances”), (c) the absence of any temporary or permanent order, injunction, law or other legal restraint prohibiting or making illegal the consummation of the Merger, (d) the Xylem Shares issuable to the stockholders of the Company in connection with the Merger having been approved for listing on the New York Stock Exchange, subject to official notice of issuance, and (e) Xylem’s registration statement on Form S-4 having been declared effective under the Securities Act of 1933. The obligation of each party to consummate the Merger is also conditioned upon (a) the accuracy of the representations and warranties of the other party as of the date of the Merger Agreement and as of the closing (subject to customary materiality qualifiers) and (b) compliance by the other party in all material respects with its respective pre-closing obligations under the Merger Agreement.
The Merger Agreement contains certain termination rights that may be exercised by either the Company or Xylem. In certain of those cases, we may be required to pay Xylem a termination fee of $225,000.
In connection with the Merger, we recognized costs of $200 for the three months ended December 31, 2022, in General and administrative expenses in the Unaudited Consolidated Statements of Operations.
For further information on the Merger Agreement, refer to the Merger Agreement, a copy of which was filed as Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on January 23, 2023.
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2. Recent Accounting Pronouncements
Accounting Pronouncements Not Yet Adopted
In September 2022, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2022-04, Liabilities—Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, which enhances transparency about an entity’s use of supplier finance programs by requiring quarterly and annual disclosures about the key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts annually, and a description of where in the financial statements outstanding amounts are presented. The guidance is effective for fiscal years beginning after December 15, 2022. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, which amends Accounting Standards Codification (“ASC”) 805 to require an acquirer to, at the date of acquisition, recognize and measure contract assets and contract liabilities acquired in accordance with ASU 2014-9, Revenue from Contracts with Customers (Topic 606) (“Topic 606”), as if the entity had originated the contracts, rather than adjust them to fair value at the acquisition date. The guidance is effective for fiscal years beginning after December 15, 2022 and is to be applied prospectively to business combinations occurring on or after the effective date of the amendments. The Company is currently assessing the impact of adoption on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
Accounting Pronouncements Recently Adopted
In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848. This ASU is one of the subsequent amendments to ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Revenue Rate Reform on Financial Reporting, which provides optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. The objective of the guidance in Topic 848 is to provide temporary relief during the transition period. Because the current relief in Topic 848 may not cover a period of time during which a significant number of modifications may take place, ASU 2022-06 was issued to defer the sunset date of Topic 848 from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company adopted ASU 2022-06 during the three months ended December 31, 2022 and the adoption did not have a material impact on the Company’s Unaudited Consolidated Financial Statements and related disclosures.
3. Variable Interest Entities
Treated Water Outsourcing (“TWO”) was a joint venture between the Company and Nalco Water, an Ecolab company (“Nalco”), in which the Company held a 50% partnership interest. The Company acquired the remaining partnership interest in TWO from Nalco on April 1, 2022. Prior to acquisition, the Company was obligated to absorb all risk of loss up to 100% of the joint venture partner’s equity. As such, the Company fully consolidated TWO as a variable interest entity (“VIE”) under ASC Topic No. 810, Consolidation.
The following provides TWO’s summarized financial information for the three months ended December 31, 2021. As a result of the acquisition of the remaining partnership interest in TWO on April 1, 2022, there is no summarized financial information for the three months ended December 31, 2022.
Three Months Ended
December 31, 2021
Total revenue$845 
Total operating expenses(737)
Income from operations$108 
On October 1, 2019, the Company acquired a 60% investment position in San Diego-based Frontier Water Systems, LLC (“Frontier”). The Frontier acquisition was a VIE because it had insufficient equity to finance its activities due to key
12

assets being assigned to the Company upon acquisition.  The Company was the primary beneficiary of Frontier because the Company had the power to direct the activities that most significantly affect Frontier’s economic performance.
In addition, the Company entered into an agreement to purchase the remaining 40% interest in Frontier on or prior to March 30, 2024. This agreement (a) gave holders of the remaining 40% interest in Frontier (the “Minority Owners”) the right to sell to Evoqua up to approximately 10% of the outstanding equity in Frontier at a predetermined price, which right was exercisable by the Minority Owners between January 1, 2021 and February 28, 2021 (the “Option”), and (b) obligated the Company to purchase and the Minority Owners to sell all of the Minority Owners’ remaining interest in Frontier at the fair market value at the time of sale on or prior to March 30, 2024 (the “Purchase Right”). The Company acquired an additional 8% equity interest in Frontier in April 2021. On April 1, 2022, the Company purchased the remaining 32% outstanding equity in Frontier.
The following provides Frontier’s summarized financial information for the three months ended December 31, 2021. As a result of the acquisition of the remaining equity interest in Frontier on April 1, 2022, there is no summarized financial information for the three months ended December 31, 2022.
Three Months Ended
December 31, 2021
Total revenue$6,949 
Total operating expenses(5,986)
Income from operations$963 
4. Acquisitions and Divestitures
Acquisitions support the Company’s strategy of delivering a broad solutions portfolio with robust technology across multiple geographies and end markets. The Company continues to evaluate potential strategic acquisitions of businesses, assets and product lines and believes that capex-like, tuck-in acquisitions present a key opportunity within its overall growth strategy.
On July 15, 2022, the Company completed the acquisition of Epicor, Inc. (“Epicor”) for $4,339 cash paid at closing. During the three months ended December 31, 2022, the Company paid cash of $38 to the seller as a result of net working capital adjustments. Epicor has supplied specialty resins for power steam system treatment for fifty years. The resins provide a cost-effective and efficient method for creating and maintaining a continual supply of ultra-pure water for power plants. Epicor is included within the Integrated Solutions and Services segment.

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

The acquisition of Smith Engineering has been accounted for using the acquisition method of accounting which requires the assets acquired and liabilities assumed be recognized at their respective fair values as of the acquisition date. Due to the nature of the net assets acquired, at December 31, 2022, the valuation process to determine fair values is not complete and further adjustments are expected in the remainder of fiscal year 2023. As the Company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition.

13

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

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

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

The Purchase Price includes a $12,300 earn out, which is being held in escrow and will be paid, pro rata, to the Sellers if the Mar Cor Business meets certain sales performance goals through December 31, 2022 (the “Earn Out”). Determination of the level of achievement of the performance goals is subject to certification by the Sellers. Any portion of the Earn Out not paid to the Sellers during the first year following closing of the Transaction will be returned to the Buyer. A Monte Carlo simulation was performed to determine the fair value of an Earn Out asset for the amount expected to be received back from escrow based on the forecasted achievement of the sales performance goals associated with the Earn Out as of the acquisition date. See Note 6, Fair Value Measurements, for further discussion. In addition to the amount held in escrow for the earn out, approximately $12,965 of the Purchase Price was placed into an escrow account, of which $9,815 is to secure general indemnification claims against the Sellers and $3,150 is for net working capital adjustments.

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

14

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

Receivables, net$21,275 
Inventories, net32,350 
Earn Out asset7,824 
Other current assets1,844 
Property, plant, and equipment, net19,150 
Goodwill67,000 
Intangible assets, net57,094 
Other non-current assets7,694 
Total assets acquired$214,231 
Current liabilities(15,467)
Non-current liabilities(5,542)
Total liabilities assumed$(21,009)
Net assets acquired$193,222 
5. Revenue
Performance Obligations
The Company elects to apply the practical expedient to exclude from this disclosure revenue related to performance obligations if the product has an alternative use and the Company does not have an enforceable right to payment for the performance completed to date, including a normal profit margin, in the event of termination for convenience. The Company maintains a backlog of confirmed orders, which totaled approximately $398,960 at December 31, 2022. This backlog represents the aggregate amount of the transaction price allocated to performance obligations that were unsatisfied or partially unsatisfied as of the end of the reporting period. The Company estimates that the majority of these performance obligations will be satisfied within the next twelve to twenty-four months.
Disaggregation of Revenue
In accordance with Topic 606, the Company disaggregates revenue from contracts with customers into source of revenue, reportable operating segment, and geographical regions. The Company determined that disaggregating revenue into these categories meets the disclosure objective in Topic 606, which is to depict how the nature, amount, timing, and uncertainty of revenue and cash flows are affected by economic factors.
Information regarding the source of revenue:
Three Months Ended
December 31,
20222021
Revenue from contracts with customers recognized under Topic 606
$391,431 $317,771 
Other(1)
44,415 48,497 
Total$435,846 $366,268 
(1)     Other revenue relates to revenue recognized pursuant to ASU 2016-02, Leases (Topic 842), primarily attributable to long term rentals.
15

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

Three Months Ended
December 31,
20222021
Integrated Solutions and Services
Capital$77,646 $67,102 
Aftermarket57,440 29,298 
Service170,340 148,646 
Total$305,426 $245,046 
Applied Product Technologies
Capital$88,065 $83,884 
Aftermarket37,240 32,284 
Service5,115 5,054 
Total$130,420 $121,222 
Total Revenue
Capital$165,711 $150,986 
Aftermarket94,680 61,582 
Service175,455 153,700 
Total$435,846 $366,268 

Information regarding revenue disaggregated by geographic area is as follows:
Three Months Ended
December 31,
20222021
United States$361,222 $294,708 
Asia34,521 30,905 
Europe24,487 25,629 
Canada13,174 12,661 
Australia2,442 2,365 
Total$435,846 $366,268 
Contract Balances
The Company performs its obligations under a contract with a customer by transferring products and/or services in exchange for consideration from the customer. The Company receives payments from customers based on a billing schedule as established in its contracts.
Contract assets relate to costs incurred to perform in advance of scheduled billings. Contract liabilities relate to payments received in advance of performance under the contracts. Change in contract assets and liabilities are due to the Company’s performance under the contract.
16

The tables below provide a roll-forward of contract assets and contract liabilities balances for the periods presented:
Three Months Ended
December 31,
Contract assets(a)
20222021
Balance at beginning of period$102,123 $72,746 
Recognized in current period91,519 120,387 
Reclassified to accounts receivable(74,004)(108,684)
Foreign currency(1,172)533 
Balance at end of period$118,466 $84,982 
(a)     Excludes receivable balances which are disclosed on the Consolidated Balance Sheets.
Three Months Ended
December 31,
Contract Liabilities 20222021
Balance at beginning of period$62,439 $55,883 
Recognized in current period82,819 100,017 
Amounts in beginning balance reclassified to revenue(49,264)(43,266)
Current period amounts reclassified to revenue(20,530)(59,653)
Foreign currency2,125 41 
Balance at end of period$77,589 $53,022 
6. Fair Value Measurements
As of December 31, 2022 and September 30, 2022, the fair values of cash and cash equivalents, accounts receivable, and accounts payable approximated carrying values due to the short maturity of these items.
The Company measures the fair value of pension plan assets and liabilities, deferred compensation plan assets and liabilities on a recurring basis pursuant to ASC Topic No. 820, Fair Value Measurement. ASC Topic No. 820 establishes a three‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model‑derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs in which little or no market data is available, therefore requiring an entity to develop its own assumptions.
The following table presents the Company’s financial assets and liabilities at fair value. The fair values related to the pension plan assets are determined using net asset value (“NAV”) as a practical expedient, or by information categorized in the fair value hierarchy level based on the inputs used to determine fair value. The reported carrying amounts of deferred compensation plan assets and liabilities and debt approximate their fair values. The Company uses interest rates and other relevant information generated by market transactions involving similar instruments to measure the fair value of these assets and liabilities, therefore all are classified as Level 2 within the valuation hierarchy.

17

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, 2022
Assets:
Pension plan
Cash $— $950 $— $— 
Global Multi-Asset Fund12,764 — — — 
Government Securities 1,639 — — — 
Liability Driven Investment 1,624 — — — 
Guernsey Unit Trust 2,216 — — — 
Global Absolute Return 1,423 — — — 
Deferred compensation plan assets
Cash— 1,017 — — 
Mutual Funds— 14,376 — — 
Earn-out assets related to acquisitions— — — 12,300 
Interest rate swaps— — 47,402 — 
Foreign currency forward contracts— — 156 — 
Commodity swaps— — 1 — 
Liabilities:
Pension plan — — (28,971)— 
Deferred compensation plan liabilities — — (21,594)— 
Total return swaps—deferred compensation— — (153)— 
Long‑term debt — — (877,898)— 
Foreign currency forward contracts— — (414)— 
18

Net Asset ValueQuoted Market
Prices in Active
Markets (Level 1)		Significant Other
Observable Inputs
(Level 2)		Significant
Unobservable Inputs
(Level 3)
As of September 30, 2022
Assets:
Pension plan
Cash$— $40 $— $— 
Global Multi-Asset Fund11,632 — — — 
Government Securities3,343 — — — 
Liability Driven Investment928 — — — 
Guernsey Unit Trust2,048 — — — 
Global Absolute Return1,299 — — — 
Deferred compensation plan assets
Cash— 902 — — 
Mutual Funds— 12,330 — — 
Earn-out assets related to acquisitions— — — 11,597 
Interest rate swaps— — 49,952 — 
Foreign currency forward contracts— — 507 — 
Liabilities:
Pension plan— — (26,654)— 
Deferred compensation plan liabilities— — (20,081)— 
Total return swaps—deferred compensation— — (632)— 
Long‑term debt— — (884,517)— 
Foreign currency forward contracts— — (872)— 
Commodity swaps— — (7)— 
The pension plan assets and liabilities and deferred compensation plan assets and liabilities are included in Other non‑current assets and Other non‑current liabilities at December 31, 2022 and September 30, 2022. The unrealized loss on mutual funds was $2,226 at December 31, 2022.
The Company records contingent consideration arrangements at fair value on a recurring basis, and the associated balances presented as of December 31, 2022 and September 30, 2022 are earn-outs related to acquisitions. The fair value of earn-outs related to acquisitions is based on significant unobservable inputs including the achievement of certain performance metrics. Significant changes in these inputs would result in corresponding increases or decreases in the fair value of the earn-out each period until the related contingency has been resolved. Changes in the fair value of the contingent consideration obligations and assets can result from adjustments in the probability of achieving future development steps, sales targets and profitability and are recorded in General and administrative expenses in the Unaudited Consolidated Statements of Operations. As a result of the Mar Cor Business acquisition on January 3, 2022, the Company recorded an Earn Out asset for $7,824 which represented the fair value of amounts expected to be received back from escrow based on the forecasted achievement of certain sales performance goals at the acquisition date. During the year ended September 30, 2022, the Company recorded an increase in the fair value of the Earn Out asset of $3,773 based on updated forecast information. During the three months ended December 31, 2022, the Company recorded an increase in the fair value of the Earn Out asset of $703 based on results of sales performance goals. As of December 31, 2022 and September 30, 2022, the Earn Out asset related to the Mar Cor Business acquisition totaled $12,300 and $11,597, respectively, and is included in Prepaid and other current assets on the Consolidated Balance Sheets.
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7. Accounts Receivable
Accounts receivable are summarized as follows:
December 31,
2022		September 30,
2022
Accounts receivable$308,024 $312,600 
Allowance for credit losses
(6,896)(6,888)
Receivables, net
$301,128 $305,712 
The movement in the allowance for credit losses was as follows for the three months ended December 31, 2022:
Balance at September 30, 2022$(6,888)
Charged to costs and expenses
(266)
Write-offs
298 
Foreign currency and other
(40)
Balance at December 31, 2022$(6,896)
8. Inventories
The major classes of Inventories, net are as follows:
December 31,
2022		September 30,
2022
Raw materials and supplies$140,368 $120,532 
Work in progress38,589 36,499 
Finished goods and products held for resale87,361 80,811