Evoqua Water Technologies Reports Second Quarter 2022 Results

Second Quarter 2022 Financial Highlights:

• Revenue of $426.7 million, an increase of 23.1% compared to the prior year period; organic revenue growth of 10.6%
• Net income of $7.4 million, an increase of 45.1% compared to the prior year period
• Adjusted EBITDA of $73.2 million, an increase of 26.2% compared to the prior year period

PITTSBURGH–(BUSINESS WIRE)–Evoqua Water Technologies (NYSE:AQUA), an industry leader in mission-critical water treatment solutions, today reported results for its second quarter ended March 31, 2022.

Revenue for the second quarter of fiscal year 2022 was $426.7 million, compared to $346.6 million in the prior year period, an increase of 23.1%, or $80.1 million. Organic revenue grew 10.6%, or $36.7 million, driven by higher volume for products and services across most product lines and regions, augmented by favorable price realization. Inorganic revenue contributed $45.4 million, primarily related to our acquisition of the Mar Cor business on January 3, 2022. Revenue was unfavorably impacted $1.7 million related to foreign currency translation. Net income for the quarter was $7.4 million, resulting in diluted earnings per share (“EPS”) of $0.06, as compared to net income of $5.1 million and diluted EPS of $0.04 in the prior year period. The increase in net income of 45.1%, or $2.3 million, was driven by higher revenue volume and related gross profit, partially offset by increased expenses primarily related to recent acquisitions and employment costs. Adjusted EBITDA for the quarter was $73.2 million, as compared to $58.0 million in the prior year period, an increase of 26.2%, or $15.2 million. See the “Use of Non-GAAP Measures” section below for additional information regarding adjusted EBITDA and organic revenue.

“We are pleased to report solid second quarter results driven by strong market demand across multiple regions, product lines and end markets. Our book to bill ratio was again above 1.0, and disciplined pricing execution resulted in price realization outpacing cost inflation in the quarter. Managing material and skilled labor availability remains a daily priority across our business segments,” said Mr. Ron Keating, Evoqua’s CEO.

Mr. Keating continued, “Revenue grew 23% in the quarter, with organic revenue up almost 11% over the prior year. These increases were driven by double digit growth across capital, service and, particularly, aftermarket. Our Mar Cor integration is progressing nicely and is on track to achieve the expected synergies communicated last quarter. On April 1, we purchased the remaining equity position of Frontier Water Systems, following our acquisition of a majority position in the company in October 2019.”

Mr. Keating stated, “With a strong first half of 2022 behind us, we maintain a balanced approach to our outlook. For the second half, we expect strong market demand to continue with our book to bill ratio remaining above 1.0, pricing initiatives to continue producing a positive price/cost, and adjusted free cash flow conversion to be above 100% of adjusted net income. However, supply chain challenges continue to limit visibility of order conversion timing and inflationary pressures are temporarily limiting margin expansion. For our fiscal 2022, we are raising the low end of our revenue and adjusted EBITDA outlook ranges by $20.0 million and $5.0 million, respectively. Our full-year revenue outlook range is now $1.64 to $1.70 billion, while our adjusted EBITDA range is $285 to $300 million.”

A discussion of segment results can be found in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations” within our Quarterly Report on Form 10-Q for the three months ended March 31, 2022.

Second Quarter Earnings Call and Webcast

The Company will hold its second quarter fiscal 2022 earnings conference call Tuesday, May 3, 2022, at 10:00 a.m. E.T. The live audio webcast and presentation slides for the call will be accessible via Evoqua’s Investor Relations website, http://aqua.evoqua.com/.

Participant Details
Dial-In Numbers:
	Toll Free US: 800-909-7113
	International: +1 785-424-1677
Conference ID: AQUAQ2
The link to the webcast replay as well as the presentation slides will also be posted on Evoqua’s Investor Relations website.
Replay details:
Dial-In-Numbers:
	US Toll Free Phone #: 800-839-2383
	International Phone #: 402 220 7202
	(Conference ID is not needed to access replay)
Replay available: Beginning 1:00 p.m. E.T. on May 3 until 11:59 p.m. ET on May 17, 2022

Webcast Audience URL:

https://event.on24.com/wcc/r/3713261/824F073ED003DF7224C95E3E1ED871BA

Dissemination of Company Information

The Company intends to make future announcements regarding developments and financial performance through the Investor Relations section of its website, http://aqua.evoqua.com, as well as through press releases, filings with the Securities and Exchange Commission (the “SEC”), conference calls and webcasts. The Company does not incorporate the information contained on, or accessible through, its corporate website into this press release.

About Evoqua Water Technologies

Evoqua Water Technologies is 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. Evoqua has worked to protect water, the environment and its employees for more than 100 years, earning a reputation for quality, safety and reliability around the world. Headquartered in Pittsburgh, Pennsylvania, the company operates in more than 150 locations across nine countries. Serving more than 38,000 customers and 200,000 installations worldwide, our employees are united by a common purpose: Transforming Water. Enriching Life.

Non-GAAP Financial Measures

This press release contains financial measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States (“GAAP”), including adjusted EBITDA and organic revenue. These non-GAAP financial measures are provided as additional information for investors. The presentation of this additional information is not meant to be considered in isolation or as a substitute for GAAP measures. For definitions of the non-GAAP financial measures used in this press release and reconciliations to the most directly comparable respective GAAP measures, see the “Use of Non-GAAP Measures” section below.

With respect to forward-looking guidance provided in this press release, we have not presented a quantitative reconciliation of the forward-looking non-GAAP financial measures adjusted EBITDA and adjusted free cash flow conversion as a percentage of adjusted net income to their most directly comparable GAAP financial measures, net income and operating cash flow as a percentage of net income, respectively, because it is impractical to forecast certain items without unreasonable efforts due to the uncertainty and inherent difficulty of predicting the occurrence and financial impact of, and the periods in which, such items, including foreign exchange impact and certain expenses for which we adjust, may be recognized. For the same reasons, we are unable to address the probable significance of the unavailable information, which could be material to future results.

Forward-Looking Statements

This press release 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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, general global economic and business conditions, including the impacts of the COVID-19 pandemic and geopolitical conflicts, such as the conflict between Russia and Ukraine; our ability to execute projects on budget and on schedule; material, freight, and labor inflation, commodity and component availability constraints, and disruptions in global supply chains and transportation services; 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; 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; 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 (“ESG”) 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, 2021, as filed with the SEC on November 17, 2021, 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 press release are forward-looking statements, including, but not limited to, expectations for fiscal year 2022, expectations related to customer demand, our book to bill ratio, price/cost, adjusted free cash flow conversion, supply chain challenges, order conversion, inflation, material and labor availability, and general macroeconomic conditions, and expectations with respect to the integration and performance of the recently acquired Mar Cor business, including the realization of expected synergies associated with that business. Any forward-looking statements made in this press release speak only as of the date of this release. 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 release. 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 release.

EVOQUA WATER TECHNOLOGIES CORP. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (In thousands, except per share amounts)
	Three Months Ended March 31,								Six Months Ended March 31,
		2022				2021				2022				2021
Revenue from product sales and services	$	426,728			$	346,564			$	792,996			$	668,757
Cost of product sales and services		(297,842	)			(240,645	)			(553,602	)			(467,493	)
Gross profit	$	128,886			$	105,919			$	239,394			$	201,264
General and administrative expense		(66,976	)			(52,928	)			(124,805	)			(95,211	)
Sales and marketing expense		(39,859	)			(33,830	)			(76,308	)			(67,758	)
Research and development expense		(3,751	)			(3,393	)			(7,203	)			(6,516	)
Total operating expenses	$	(110,586	)		$	(90,151	)		$	(208,316	)		$	(169,485	)
Other operating income, net		1,272				410				2,782				633
Income before interest expense and income taxes	$	19,572			$	16,178			$	33,860			$	32,412
Interest expense		(9,950	)			(8,395	)			(16,529	)			(17,068	)
Income before income taxes	$	9,622			$	7,783			$	17,331			$	15,344
Income tax expense		(2,248	)			(2,701	)			(3,869	)			(3,785	)
Net income	$	7,374			$	5,082			$	13,462			$	11,559
Net income attributable to non‑controlling interest		44				46				145				90
Net income attributable to Evoqua Water Technologies Corp.	$	7,330			$	5,036			$	13,317			$	11,469
Basic income per common share	$	0.06			$	0.04			$	0.11			$	0.10
Diluted income per common share	$	0.06			$	0.04			$	0.11			$	0.09

EVOQUA WATER TECHNOLOGIES CORP. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except per share amounts)
	(Unaudited)
	March 31, 2022				September 30, 2021
ASSETS
Current assets	$	777,532			$	678,458
Cash and cash equivalents		129,500				146,244
Receivables, net		283,092				277,995
Inventories, net		216,933				158,503
Contract assets		99,502				72,746
Other current assets		48,505				22,970
Property, plant, and equipment, net		395,290				374,988
Goodwill		476,259				407,376
Intangible assets, net		328,024				290,075
Operating lease right-of-use assets, net		49,395				45,521
Other non-current assets		106,061				72,473
Total assets	$	2,132,561			$	1,868,891
LIABILITIES AND EQUITY
Current liabilities	$	430,839			$	405,989
Accounts payable		191,122				164,535
Current portion of debt, net of deferred financing fees and discounts		14,219				12,775
Contract liabilities		55,593				55,883
Accrued expenses and other liabilities		158,510				160,367
Other current liabilities		11,395				12,429
Non-current liabilities		1,063,651				880,683
Long-term debt, net of deferred financing fees and discounts		920,343				730,430
Obligation under operating leases		39,995				37,935
Other non-current liabilities		103,313				112,318
Total liabilities	$	1,494,490			$	1,286,672
Shareholders’ equity
Common stock, par value $0.01: authorized 1,000,000 shares; issued 122,766 shares, outstanding 121,102 at March 31, 2022; issued 122,173 shares, outstanding 120,509 at September 30, 2021	$	1,229			$	1,223
Treasury stock: 1,664 shares at March 31, 2022 and 1,664 shares at September 30, 2021		(2,837	)			(2,837	)
Additional paid-in capital		592,105				582,052
Retained earnings (deficit)		2,135				(11,182	)
Accumulated other comprehensive income, net of tax		43,846				11,415
Total Evoqua Water Technologies Corp. equity	$	636,478			$	580,671
Non-controlling interest		1,593				1,548
Total shareholders’ equity	$	638,071			$	582,219
Total liabilities and shareholders’ equity	$	2,132,561			$	1,868,891

EVOQUA WATER TECHNOLOGIES CORP. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (Unaudited) (In thousands)
	Six Months Ended March 31,
		2022				2021
Operating activities
Net income	$	13,462			$	11,559
Reconciliation of net income to cash flows provided by operating activities:
Depreciation and amortization		61,156				54,607
Amortization of deferred financing fees (includes $0 and $0 write off of deferred financing fees)		926				1,044
Deferred income taxes		592				476
Share-based compensation		10,589				6,233
(Gain) loss on sale of property, plant and equipment		(61	)			807
(Gain) loss on sale of business		(193	)			191
Foreign currency exchange losses (gains) on intercompany loans and other non-cash items		3,728				(3,659	)
Changes in assets and liabilities		(61,051	)			(8,200	)
Net cash provided by operating activities		29,148				63,058
Investing activities
Purchase of property, plant, and equipment		(36,320	)			(36,297	)
Purchase of intangibles		(1,582	)			(539	)
Proceeds from sale of property, plant, and equipment		1,940				640
Proceeds from sale of business, net of cash of $0 and $0		356				897
Acquisitions, net of cash received $0 and $0		(194,976	)			(8,743	)
Net cash used in investing activities		(230,582	)			(44,042	)
Financing activities
Issuance of debt, net of deferred issuance costs		223,793				13,993
Repayment of debt		(33,362	)			(10,036	)
Repayment of finance lease obligation		(6,571	)			(6,901	)
Proceeds from issuance of common stock		5,274				13,430
Taxes paid related to net share settlements of share-based compensation awards		(5,144	)			(1,863	)
Distribution to non‑controlling interest		(100	)			(350	)
Net cash provided by financing activities		183,890				8,273
Effect of exchange rate changes on cash		800				2,428
Change in cash and cash equivalents		(16,744	)			29,717
Cash and cash equivalents
Beginning of period		146,244				193,001
End of period	$	129,500			$	222,718

Use of Non-GAAP Measures

The Company reports its financial results in accordance with GAAP. However, management believes that certain non-GAAP financial measures provide users of the Company’s financial information with additional useful information in evaluating operating performance. We use the non-GAAP financial measures EBITDA, adjusted EBITDA, and organic revenue in evaluating the strength and financial performance of our core business.

EBITDA and Adjusted EBITDA

EBITDA, which is a non-GAAP financial measure, is defined as net income (loss) before interest expense, income tax benefit (expense), and depreciation and amortization. Adjusted EBITDA is defined as net income (loss) before interest expense, income tax benefit (expense), and depreciation and amortization, adjusted for the impact of certain other items, including restructuring and related business transformation costs, share-based compensation, transaction costs, and other gains, losses and expenses that we believe do not directly reflect our underlying business operations.

Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business. We present adjusted EBITDA because we believe it is frequently used by analysts, investors and other interested parties to evaluate and compare operating performance and value companies within our industry. Further, we believe it is helpful in highlighting trends in our operating results and provides greater clarity and comparability period over period to management and our investors regarding the operational impact of long-term strategic decisions relating to capital structure, the tax jurisdictions in which we operate and capital investments. In addition, adjusted EBITDA highlights true business performance by removing the impact of certain items that management believes do not directly reflect our underlying operations and provides investors with greater visibility into the ongoing organic drivers of our business performance.

Management uses adjusted EBITDA to supplement GAAP measures of performance as follows:

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

• in our management incentive compensation, which is based in part on components of adjusted EBITDA;

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

• to evaluate the effectiveness of our business strategies;

• to make budgeting decisions; and

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

In addition to the above, our chief operating decision maker uses adjusted EBITDA of each reportable operating segment to evaluate the operating performance of such segments. Adjusted EBITDA on a segment basis is defined as earnings before depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. Adjusted EBITDA of the reportable operating segments do not include certain charges that are presented within corporate activities. These charges include certain restructuring and other business transformation charges that have been incurred to align and reposition the Company to the current reporting structure, acquisition related costs (including transaction costs and integration costs) and share-based compensation charges.

EBITDA and Adjusted EBITDA should not be considered a substitute for, or superior to, financial measures prepared in accordance with GAAP. The financial results prepared in accordance with GAAP and the reconciliations from these results included below should be carefully evaluated. 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 to EBITDA and adjusted EBITDA (unaudited):

	Three Months Ended March 31,									Six Months Ended March 31,
(In millions)	2022			2021			% Variance			2022			2021			% Variance
Net income	$	7.4		$	5.1		45.1	%		$	13.5		$	11.6		16.4	%
Income tax expense		2.2			2.7		(18.5	) %			3.9			3.7		5.4	%
Interest expense		10.0			8.4		19.0	%			16.5			17.1		(3.5	) %
Operating profit	$	19.6		$	16.2		21.0	%		$	33.9		$	32.4		4.6	%
Depreciation and amortization		32.6			27.1		20.3	%			61.2			54.6		12.1	%
EBITDA	$	52.2		$	43.3		20.6	%		$	95.1		$	87.0		9.3	%
Restructuring and related business transformation costs(a)		1.8			5.4		(66.7	) %			3.2			7.2		(55.6	) %
Purchase accounting adjustment costs(b)		2.6			—		n/a				2.6			—		n/a
Share-based compensation(c)		6.1			3.2		90.6	%			11.4			6.3		81.0	%
Transaction costs(d)		4.0			0.7		471.4	%			4.9			1.3		276.9	%
Other losses (gains) and expenses(e)		6.5			5.4		20.4	%			10.3			1.0		930.0	%
Adjusted EBITDA	$	73.2		$	58.0		26.2	%		$	127.5		$	102.8		24.0	%

Contacts

Investors

Dan Brailer

Vice President, Investor Relations

Evoqua Water Technologies

Telephone: 724-720-1605

Email: dan.brailer@evoqua.com

Media

Sarah Brown

Director of Corporate Communications

Evoqua Water Technologies

Telephone: 506-454-5495

Email: sarah.brown@evoqua.com

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