Commitments and Contingencies

6 Months Ended

Mar. 31, 2023

Commitments and Contingencies Disclosure [Abstract]

Guarantees

From time to time, the Company is required to provide letters of credit, bank guarantees, or surety bonds in support of its commitments and as part of the terms and conditions on water treatment projects. In addition, the Company is required to provide letters of credit or surety bonds to the Department of Environmental Protection or equivalent in some states in order to maintain its licenses to handle toxic substances at certain of its water treatment facilities.

These financial instruments typically expire after all Company commitments have been met, a period typically ranging from twelve months to ten years, or more in some circumstances. The letters of credit, bank guarantees, or surety bonds are arranged through major banks or insurance companies. In the case of surety bonds, the Company generally indemnifies the issuer for all costs incurred if a claim is made against the bond.

The following summarizes the Company’s outstanding letters of credit and surety bonds as of March 31, 2023 and September 30, 2022, respectively.


	March 31, 2023		September 30, 2022
Revolving credit capacity	$	60,000	$	60,000
Letters of credit outstanding	7,416		9,317
Remaining revolving credit capacity	$	52,584	$	50,683

Surety capacity	$	287,173	$	261,959
Surety issuances	179,187		134,037
Remaining surety available	$	107,986	$	127,922

The longest maturity date of letters of credit and surety bonds in effect as of March 31, 2023 was March 20, 2030.

Litigation

From time to time, as a normal incident of the nature and kind of business in which the Company is engaged, various claims or charges are asserted and litigation is commenced against it arising from or related to: product liability; personal injury; trademarks, trade secrets, or other intellectual property; shareholder disputes; labor and employee disputes; commercial or contractual disputes; breach of warranty; or environmental matters. Claimed amounts may be substantial but may not bear any reasonable relationship to the merits of the claim or the extent of any real risk of court or arbitral awards. While it is not feasible to predict the outcome of these matters with certainty, and some lawsuits, claims, or

proceedings may be disposed or decided unfavorably, the Company does not expect that any asserted or un-asserted legal claims or proceedings, individually or in the aggregate, will have a material adverse effect on its results of operations, or financial condition.

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

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