Evoqua Water Technologies (AQUA), a provider of water and wastewater treatment systems, acknowledges it knowingly inflates its Adjusted EBITDA calculation by adding back certain purchase accounting adjustments related to a major acquisition.

In 2021, the company acquired a group of companies including Mar Cor Purifications Inc. for $196.3 million. The asset purchase requires a step-up in the value of Mar Cor’s inventory, which Evoqua calculates as $4.2 million.

In its largest annual report, Evoqua inserted new language warning its preferred profit metric excludes the purchasing accounting adjustment:

“Adjusted EBITDA is calculated prior to considering adjustments for the effect of the purchase accounting step-up in the value of inventory to fair value recognized in cost of goods sold as a result of the acquisition of the Mar Cor Business.”

The $4.2 million in purchase accounting adjustment costs understates Evoqua’s COGS and is the equivalent of 1.62% of Adjusted EBITDA.

Not surprisingly, Adjusted EBITDA is a key component in calculating Evoqua’s executive bonuses. The Adjusted EBITDA metric accounts for 60% of three of the five named executive officers short term bonus calculation.

The SEC recently sent Evoqua a letter expressing concern over the company’s calculation and presentation of non-GAAP accounting metrics, including EBITDA.