Evoqua Water Technologies Reports Second Quarter 2021 Results

Second Quarter 2021 Financial Highlights:

• Revenue of $346.6 million, declined 1.5% compared to the prior year period
• Net income of $5.1 million, declined 35.4% compared to the prior year period; diluted earnings per share of $0.04
• Adjusted EBITDA of $58.0 million, increased 2.3% compared to the prior year period
• Operating cash flow of $63.1 million year to date, increased $24.2 million 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, 2021.

Revenue for the second quarter of fiscal 2021 was $346.6 million, compared to $351.7 million in the prior year period, a decrease of 1.5%, or $5.1 million. Organic revenue declined 3.5%, or $12.3 million, as compared to the prior year period, mostly related to the pandemic’s continued impact on volume, as well as the timing of completion of certain large projects in the prior year, partially offset by an increase in revenue from acquisitions of 0.6%, or $2.0 million. The decline in revenue was also partially offset by a favorable change in foreign currency translation of 1.5% or $5.2 million. Net income for the quarter was $5.1 million, resulting in diluted earnings per share (“EPS”) of $0.04, as compared to net income of $7.9 million and diluted EPS of $0.06 in the prior year period. The decline in net income of 35.4% as compared to the prior year period was primarily related to an increase in tax expense of $2.7 million. Adjusted EBITDA for the quarter was $58.0 million as compared to $56.7 million in the prior year period, an increase of 2.3%. See the “Use of Non-GAAP Measures” section below for additional information regarding adjusted EBITDA and organic revenue.

“I am pleased with the overall results delivered in the quarter. Our team has performed very well operationally and financially over the past year, highlighting the resiliency of our business and the essential nature of the work we perform. Near term visibility continues to remain uncertain due to COVID-19, but we feel very well positioned for profitable growth,” said Mr. Ron Keating, Evoqua’s CEO.

Mr. Keating stated, “We have been driving our sales efforts to cultivate our large and growing opportunity pipeline while also focusing on operational execution, and this quarter we reported year-over-year increases in many key financial metrics. We recently completed our third acquisition in the last eight months, acquiring Water Consulting Specialists, and we welcome them to the Evoqua family. We also completed a debt refinancing that reduced our weighted average cost of debt, increased our borrowing capacity, and extended our maturities. Through this transaction we used $100 million of cash to reduce our term loan, representing another strategic action taken to strengthen our balance sheet.”

“Market segments remain mixed in capital and maintenance spending as near-term demand remains uncertain. With a growing backlog, we are focused on converting our robust opportunity pipeline and our existing order book as customers are willing to reopen or invest. With our current visibility, we are projecting a full-year outlook for revenue to be in the range of $1.43 billion to $1.47 billion and adjusted EBITDA to be in the range of $240 million to $255 million. Additionally, for the third quarter, we expect revenues to be between $350 million and $365 million and adjusted EBITDA to be in the range of $60 million to $64 million,” commented Mr. Keating.

Second Quarter Segment Results

Evoqua has two reportable operating segments – Integrated Solutions and Services and Applied Product Technologies. The results of our segments for the second quarter are as follows:

Integrated Solutions and Services

Segment revenue decreased by $13.7 million, or 5.8%, to $224.2 million in the second quarter of fiscal 2021 as compared to the prior year period.

• Capital revenue declined $14.0 million as compared to the prior year period, primarily related to the timing of projects in the microelectronics end market, which was partially offset by new projects across a variety of end markets.
• Service and aftermarket revenue increased $0.3 million, including contributions from recent acquisitions.

Operating profit decreased by $5.9 million, or 16.1%, to $30.8 million in the second quarter of fiscal 2021 as compared to $36.7 million in the prior year period.

• Segment profitability decreased by $7.5 million as compared to the prior year period due to lower revenue volume and less favorable mix driven primarily by reductions and delays in customer capital spending and lower productivity related to enhanced safety protocols as a result of the COVID-19 pandemic, as well as increased allocation of corporate expenses. These declines were partially offset by additional price realization in the current period.
• Decreases in travel and discretionary spending of $3.1 million positively impacted segment profitability, partially offset by $0.4 million of higher employee expenses.
• Higher restructuring and other non-recurring costs reduced operating profit by $1.2 million.
• Depreciation expense was $0.1 million lower as compared to the prior year period.

Segment adjusted EBITDA decreased by $4.8 million, or 8.9%, to $49.3 million in the second quarter of fiscal 2021 as compared to the prior year period. The decline in segment adjusted EBITDA resulted from the same factors that impacted operating profit, other than the change in depreciation and amortization, and also excludes restructuring and other non-recurring activity recognized in the period. See the “Use of Non-GAAP Measures” section below for a reconciliation of adjusted EBITDA to segment operating profit, its most directly comparable financial measure presented in accordance with GAAP.

Applied Product Technologies

Segment revenue increased by $8.6 million, or 7.6%, to $122.4 million in the second quarter of fiscal 2021 as compared to the prior year period.

• Revenue increased by $10.0 million in the Asia Pacific region as compared to the prior year period, resulting from growth across multiple product lines. This volume increase was partially offset by revenue declines across multiple product lines in both the Americas and EMEA regions of $5.0 million and $1.1 million, respectively, mainly due to continued customer site access challenges and delays.
• Foreign currency translation increased revenue by $4.7 million as compared to the prior year period.

Operating profit decreased by $5.7 million, or 23.9%, to $18.1 million for the second quarter of fiscal 2021 as compared to $23.8 million in the prior year period.

• The decline in segment profitability was primarily driven by other income of $9.0 million in the prior year period related to the net working capital settlement on the sale of the Memcor product line.
• Organic revenue volume, favorable product mix and price which offset inflation, as well as improvement in operational efficiencies and cost containment measures, increased operating profit by a total of $3.0 million as compared to the prior year period.
• Favorable foreign currency translation increased operating profit by $1.0 million as compared to the prior year period.
• Higher restructuring and other non-recurring costs and employee related expenses reduced operating profit by $0.7 million as compared to the prior year period. The change in depreciation expense as compared to the prior year was immaterial.

Segment adjusted EBITDA increased by $3.6 million, or 16.6%, to $25.3 million in the second quarter of fiscal 2021 as compared to the prior year period. The change in segment adjusted EBITDA was driven by the same factors that impacted segment operating profit, other than the change in depreciation and amortization, and also excludes restructuring and other non-recurring activity, including the $9.0 million gain recognized in the prior year period related to the divestiture of the Memcor product line. See the “Use of Non-GAAP Measures” section below for a reconciliation of adjusted EBITDA to segment operating profit, its most directly comparable financial measure presented in accordance with GAAP.

Second Quarter Earnings Call and Webcast

The Company will hold its second quarter fiscal 2021 earnings conference call Wednesday, May 5, 2021, 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/.

Conference telephone number:

US Participant Dial-in: (866) 690-2108

International Participant Dial-in: (918) 398-8081

Conference ID: 5539696

The link to the webcast replay as well as the presentation slides will also be posted on Evoqua’s Investor Relations website.

US Replay: (855) 859-2056

International Replay: (404) 537-3406

Replay available: Beginning 1:00 p.m. E.T. on May 5 until 11:59 p.m. on May 19, 2021

Conference ID: 5539696

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 160 locations across ten countries. Serving more than 38,000 customers and 200,000 installations worldwide, our employees are united by a common purpose: Transforming Water. Enriching Life.

Use of Non-GAAP Financial Measures

This press release contains non-GAAP financial measures, which are adjusted financial measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States, or “GAAP.” These non-GAAP adjusted financial measures are provided as additional information for investors. We believe these non-GAAP adjusted financial measures, which include organic revenue and adjusted EBITDA, are helpful to management and investors in highlighting trends in our operating results and provide greater clarity and comparability period over period to management and our investors regarding the operational impact of long-term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. 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.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. 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 disruptions in global oil markets; our ability to compete successfully in our markets; 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 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; 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; material and other cost inflation and our ability to mitigate the impact of inflation by increasing selling prices and/or improving our productivity efficiencies; 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; our ability to retain our senior management and other key personnel; our increasing dependence on the continuous and reliable operation of our information technology systems; risks associated with product defects and unanticipated or improper use of our products; 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 the People’s Republic of China; our ability to adequately protect our intellectual property from third-party infringement; risks related to our substantial indebtedness; our need for a significant amount of cash, which depends on many factors beyond our control; 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, 2020, as filed with the SEC on November 20, 2020, 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 the third quarter and full fiscal year 2021 and statements related to the COVID-19 pandemic, the impact of which remains inherently uncertain. Additionally, any forward-looking statements made in this press release speak only as of the date of this release. We undertake no 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. 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.

Use of Non-GAAP Measures

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (“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 “adjusted EBITDA” and “organic revenue” in evaluating the strength and financial performance of our core business.

Adjusted EBITDA

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, non-cash 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 regarding capital structure, the tax jurisdictions in which we operate and capital investments. In addition, adjusted EBITDA highlights true business performance by removing the impact of certain items that management believes do not directly reflect our underlying operations and provides investors with greater visibility into the ongoing 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 per

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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