Evoqua Water Technologies Reports Third Quarter 2021 Results

Third Quarter 2021 Financial Highlights:

• Revenue of $369.7 million, increased 6.3% compared to the prior year period
• Net income of $13.2 million, declined 39.4% compared to the prior year period
• Adjusted EBITDA of $66.2 million, increased 3.8% compared to the prior year period
• Operating cash flow of $102.9 million year to date, increased $2.2 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 third quarter ended June 30, 2021.

Revenue for the third quarter of fiscal 2021 was $369.7 million, compared to $347.8 million in the prior year period, an increase of 6.3%, or $21.9 million. Organic revenue grew 3.2%, or $11.1 million, as compared to the prior year period, driven by increased pricing across all offerings and higher service sales volume. In addition, foreign currency translation was favorable by 2.1%, or $7.5 million. Net income for the quarter was $13.2 million, resulting in diluted earnings per share (“EPS”) of $0.11, as compared to net income of $21.8 million and diluted EPS of $0.18 in the prior year period. The decline in net income of 39.4% as compared to the prior year period was primarily related to increased operating expenses, including $2.8 million of non-cash change in foreign exchange on intercompany loans, higher tax expense of $3.1 million, and increased interest expense. The increase in interest expense was driven by $4.4 million of fees incurred in connection with, and the write off of deferred financing fees associated with, the Company’s debt refinancing in April 2021. Adjusted EBITDA for the quarter was $66.2 million, as compared to $63.8 million in the prior year period, an increase of 3.8%. See the “Use of Non-GAAP Measures” section below for additional information regarding adjusted EBITDA and organic revenue.

“We are pleased with our third quarter results, which were driven by solid performances across both segments. The business has performed well over the past year under challenging market dynamics, and I am very proud of the team’s efforts,” said Mr. Ron Keating, Evoqua’s CEO.

Mr. Keating continued, “Our third quarter growth rate rebounded to the highest level since the start of the pandemic, with year-over-year growth across service, aftermarket, and capital revenues. We are closely managing supply chain challenges, human resources availability, and our pricing policies. I am very pleased with the organization’s response as we address inflationary pressures, material availability, and the battle for skilled talent.”

Mr. Keating stated, “We are seeing improving demand across most of our end markets, as evidenced by our book-to-bill ratio that is greater than 1.1, and our robust opportunity pipeline. Our market demand is strong, but macro supply chain challenges and customer site access could impact backlog conversion timing. Long-term market and regulatory trends are favorable, our financial performance and balance sheet are strong, and we have a global commitment to delivering our sustainable solutions as a sustainable company. We are pleased to reaffirm our previously communicated full year guidance with revenues expected to be $1.43 to $1.47 billion and adjusted EBITDA expected to be in the range of $240 to $255 million.”

Third Quarter Segment Results

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

Integrated Solutions and Services

Segment revenue increased by $11.0 million, or 4.8%, to $239.7 million in the third quarter of fiscal 2021, as compared to $228.7 million in the prior year period.

• Service and aftermarket revenue increased by $9.6 million and $2.8 million, respectively, enhanced by favorable pricing.
• Capital revenue declined by $1.4 million as compared to the prior year period, primarily related to the timing of projects in the microelectronics end market, which was mostly offset by new projects primarily in the chemical processing end market and favorable foreign currency translation.

Operating profit increased by $5.2 million, or 16.0%, to $37.8 million in the third quarter of fiscal 2021, as compared to $32.6 million in the prior year period.

• Segment profitability increased by $7.9 million as compared to the prior year period due to higher sales volume, favorable price/cost and productivity improvements.
• Higher employee related expenses reduced segment profitability by $2.2 million as compared to the prior year period, driven primarily by increased compensation and travel spending, partially offset by favorable settlement of insurance claims.
• Depreciation and amortization expense was $0.4 million higher as compared to the prior year period.
• Restructuring and other non-recurring expense increased by $0.1 million as compared to the prior year period.

Segment adjusted EBITDA increased by $5.7 million, or 11.3%, to $56.3 million in the third quarter of fiscal 2021, as compared to $50.6 million in the prior year period. The increase 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 segment adjusted EBITDA to segment operating profit.

Applied Product Technologies

Segment revenue increased by $10.9 million, or 9.2%, to $130.0 million in the third quarter of fiscal 2021, as compared to $119.1 million in the prior year period.

• Overall revenue increased as compared to the prior year period primarily due to price realization. Sales volume increases in the Asia Pacific and EMEA regions resulting from growth across multiple product lines were offset by sales volume declines in the Americas region, mainly due to continued customer site access challenges and delays.
• Foreign currency translation favorably impacted revenue by $6.0 million.

Operating profit decreased by $0.9 million, or 3.8%, to $22.7 million for the third quarter of fiscal 2021, as compared to $23.6 million in the prior year period.

• Segment profitability decreased by $1.6 million as compared to the prior year period due to unfavorable operational variances, including additional warranty reserves and production variances, offsetting favorable price/cost and product mix.
• Higher employee related expenses reduced segment profitability by $0.5 million as compared to the prior year period, driven by increased compensation and travel spending.
• Higher restructuring and other non-recurring costs reduced operating profit by $0.4 million as compared to the prior year period. The change in depreciation and amortization expense as compared to the prior year was immaterial.
• Foreign currency translation favorably impacted segment profitability by $1.6 million.

Segment adjusted EBITDA decreased by $0.5 million, or 1.7%, to $28.4 million in the third quarter of fiscal 2021, as compared to $28.9 million in 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. See the “Use of Non-GAAP Measures” section below for a reconciliation of segment adjusted EBITDA to segment operating profit.

Third Quarter Earnings Call and Webcast

The Company will hold its third quarter fiscal 2021 earnings conference call Tuesday, August 3, 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: 4272208

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 August 3 until 11:59 p.m. on August 17, 2021

Conference ID: 4272208

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.

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”). 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 supply chains; 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, and to attract key talent in increasingly competitive labor markets; 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 Securities and Exchange Commission (“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 full fiscal year 2021, expectations related to market demand, our opportunity pipeline, inflation, macro-economic conditions, and regulatory trends, and statements related to the ongoing impact of the COVID-19 pandemic. 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 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, 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 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.

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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