Evoqua Water Technologies (AQUA), a provider of water and wastewater treatment systems, has received a Wells Notice from the SEC following a two year investigation examining whether the improperly recognized revenue. The Wells Notice indicates staff recommends the SEC file a civil enforcement action alleging the company violated securities laws by misstating its financials in fiscal years 2016-2018.

Specifically, the allegations arise from revenue recognition practices of the Neptune-Benson business that Evoqua acquired in FY16.

Evoqua has recorded a charge of $8.5 million in anticipation of settling the matter.

In November 2022, we highlighted how Evoqua intentionally inflates Adjusted EBITDA margin by excluding purchase accounting step-up adjustments to inventory following acquisitions. 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.