Evoqua Water Technologies Reports Second Quarter 2019 Results

PITTSBURGH--(BUSINESS WIRE)--Evoqua Water Technologies Corp. (NYSE:AQUA) today reported results for its second quarter of fiscal 2019.

Revenues for the second quarter of fiscal 2019 were $348.6 million, an increase of $14.9 million, or 4.5%, from $333.7 million in the prior year period. Revenue growth for the second quarter was primarily led by increased volume in service revenues from organic and recently acquired businesses, as well as continued strong performance in aftermarket revenue channels.

Net income for the second quarter of fiscal 2019 was $1.6 million, compared to net income of $13.0 million in the prior year period, resulting in diluted earnings per share (“EPS”) of $0.01 compared to $0.10 in the prior year period. Net income for the quarter includes $0.3 million of non-cash foreign currency loss from intercompany loans, versus a prior year period non-cash foreign currency gain of $2.1 million. Additional contributing factors to the period over period change include other non-cash charges of $9.2 million, including product rationalization and facility consolidation charges associated with the two-segment realignment, higher depreciation costs associated with capital investment and acquisitions, as well as higher share-based compensation charges.

Adjusted EBITDA was $56.7 million in the second quarter of fiscal 2019, a decrease of $1.0 million, or 1.7%, from the prior year period. The reduction in Adjusted EBITDA for the second quarter of fiscal 2019 as compared to the prior year period was driven by factors in our Applied Product Technologies segment, including product mix in the quarter as well as the impact of benefits recognized in the prior year period related to warranty reductions based on improved warranty experience.

“Strong sales growth from Integrated Solutions and Services and double-digit overall year-to-date order growth highlighted the quarter’s results, which were in-line with our expectations,” said Ron Keating, Evoqua’s CEO. “Integrated Solutions and Services second quarter sales grew 10.9%, and 5.9% organically, over the prior year. Applied Product Technologies sales were down 5.7% versus last year with growth in aftermarket offset by a decline in higher margin capital sales. We are pleased with the strong order book, which reflects continued strength in our end markets, and we expect it to provide sales growth opportunities in the latter part of this year and into 2020.”

Mr. Keating stated, “We began our two-segment realignment in October with the objective of optimizing our ability to quickly serve customers and channel partners with our broad portfolio of solutions. The realignment is on-track, and we are seeing the expected benefits of the two-segment structure in our order rates.”

Mr. Keating continued, “For fiscal 2019, we reaffirm our expected revenues to be in the range of $1.38 billion to $1.44 billion and Adjusted EBITDA to be in the range of $220 million to $240 million. We expect to see improved results in the second half driven by higher volumes, cost benefits associated with our two-segment realignment and the impact of favorable pricing actions. While we have visibility on an annual basis given the recurring nature of much of the business, the Company is subject to quarterly variability that may result from product mix and customer schedules changing between periods. As a result, we expect third quarter Adjusted EBITDA to be approximately flat to up 8% sequentially over the second quarter 2019 Adjusted EBITDA."

Mr. Keating commented, “Overall demand trends continue to be favorable as customers recognize the increasing complexities in managing their water requirements. We believe Evoqua’s broad portfolio of technologies, integrated solutions and services positions us for continued growth.”

Second Quarter Segment Results

For fiscal 2019, Evoqua has two reportable 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

The Integrated Solutions and Services segment provides tailored services and solutions in collaboration with our customers backed by life-cycle services including on-demand water, outsourced water, recycle / reuse and emergency response service alternatives to improve operational reliability, performance and environmental compliance. Key offerings within this segment also include equipment systems for industrial needs (influent water, boiler feed water, ultrahigh purity, process water, wastewater treatment and recycle / reuse), municipal services, including odor and corrosion control services, and full-scale outsourcing of operations and maintenance.

Segment revenues increased $22.3 million, or 10.9%, to $226.8 million in the second quarter of fiscal 2019 as compared to $204.5 million in the same period in the prior year. Organic revenues increased approximately 5.9% as compared to the same period in the prior year -

• Service revenue growth of $3.8 million, exclusive of acquisitions.
• Capital and aftermarket revenue grew by $7.6 million, exclusive of acquisitions, primarily in the microelectronics and food and beverage markets.
• Recently acquired businesses of Pure Water, ProAct and Isotope contributed $10.9 million of revenue compared to the same period in the prior year.

Operating profit increased $2.4 million, or 6.9%, to $37.0 million in the second quarter of fiscal 2019 as compared to $34.6 million the same period of the prior year -

• Segment profitability improved $5.7 million driven by increased organic and acquisition related revenue volume as well as improved pricing across the business.
• Higher segment operating costs reduced profitability by $0.5 million, partially derived from higher employment costs.
• Segment profitability was also impacted by $2.8 million of higher depreciation and amortization, primarily driven by acquisitions and capital investment in service assets.

Segment Adjusted EBITDA increased $5.3 million, or 11.5%, to $51.4 million in the second quarter of fiscal 2019 as compared to $46.1 million in the same period in the prior year. The increase in Adjusted EBITDA resulted from the same factors which impacted operating profit, other than the change in depreciation and amortization, and for this segment also excludes $0.1 million of restructuring and realignment costs incurred, all of which were discrete to the Integrated Solutions and Services segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Integrated Solutions and Services segment.

Applied Product Technologies

The Applied Product Technologies segment provides a range of highly differentiated and scalable products and technologies specified by global water treatment designers, OEMs, engineering firms and integrators. Key offerings within this segment include filtration and separation, disinfection, wastewater solutions, anode and electrochlorination technology and aquatics technologies and solutions for the global recreational and commercial pool market.

Revenues decreased by $7.4 million, or 5.7%, to $121.8 million in the second quarter of fiscal 2019, as compared to $129.2 million for the comparable period in the prior year -

• Aftermarket revenue grew by $9.9 million, derived from multiple product lines.
• Capital products revenues declined by $14.5 million, primarily in higher margin product lines.
• Recently acquired business Pacific Ozone contributed $0.9 million of increased revenue.
• Revenue was also impacted by unfavorable foreign currency translation of $3.7 million.

Operating profit decreased $12.8 million, or 53.1%, to $11.3 million for the second quarter of fiscal 2019 from $24.1 million for the same period in the prior year -

• Improvements in profitability included operational leverage of $2.5 million, as well as lower employment costs of $2.7 million as compared to the prior year period.
• These improvements in profitability were offset by $7.1 million related to the decline in revenue volume and the underlying product mix, as well as the impact of benefits recognized in the prior year period of $3.6 million related to warranty reductions, net of losses from our Italian operations, which did not reoccur in the current year.
• Operating profit was also impacted by unfavorable foreign currency translation of $1.4 million.
• Other offsets to segment operating profit include impacts from product rationalization and facility consolidation, restructuring and costs associated with the remediation of a manufacturing defect caused by a third-party vendor in an aggregate amount of $5.4 million, along with $0.5 million of higher depreciation expense.

Segment Adjusted EBITDA decreased $6.9 million, or 24.6%, to $21.2 million in the second quarter of fiscal 2019 as compared to $28.1 million in the same prior year period. The decline in segment Adjusted EBITDA was driven by the same factors which impacted segment operating profit, other than the change from depreciation and amortization, and also excludes the impacts from product rationalization and facility consolidation, restructuring and costs associated with the remediation of a manufacturing defect caused by a third party vendor in an aggregate amount of $5.4 million incurred during the period that was discrete to the Applied Product Technologies segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Applied Product Technologies segment.

Second Quarter Earnings Call and Webcast

The Company will hold its second quarter earnings conference call Friday, May 10, 2019, 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/ . The link to the webcast replay as well as the presentation slides will also be posted on Evoqua’s Investor Relations website.

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 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.

Use of Non-GAAP Measures

Adjusted EBITDA

We use the non-GAAP financial measure “Adjusted EBITDA” in evaluating our past performance and future prospects. 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, purchase accounting adjustment costs, non-cash share-based compensation, sponsor fees, transaction costs and other gains, losses and expenses.

Adjusted EBITDA is one of the primary metrics used by management to evaluate the financial performance of our business. We present Adjusted EBITDA, which is not a recognized financial measure under GAAP, because we believe it is frequently used by analysts, investors and other interested parties to evaluate companies in our industry. Further, we believe it is helpful in highlighting trends in our operating results, because it excludes, among other things, certain results of decisions that are outside the control of management, while other measures can differ significantly depending on long term strategic decisions regarding capital structure, the tax jurisdictions in which we operate and capital investments. 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 EBITDA and Adjusted EBITDA of each reportable segment to evaluate the operating performance of such segments. EBITDA and Adjusted EBITDA of the reportable segments does 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, integration costs and recognition of backlog intangible assets recorded in purchase accounting) and share-based compensation charges.

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 (loss) to Adjusted EBITDA (unaudited):

Adjusted EBITDA on a segment basis is defined as earnings before interest expense, income tax benefit (expense) and depreciation and amortization, adjusted for the impact of certain other items that have been reflected at the segment level. The following is a reconciliation of our segment operating profit to Adjusted EBITDA:

Net Sales Growth by Driver

The following is a reconciliation of net sales growth by driver for the three months ended March 31, 2019. Organic revenue growth is defined as the year-over-year rate of change in revenues excluding the impact of foreign exchange, acquisitions and divestitures.

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; our ability to execute projects in a timely manner; our ability to accurately predict the timing of contract awards; material and other cost inflation and our ability to mitigate the impact of inflation by increasing selling prices and improving our productivity efficiencies; our ability to achieve the expected benefits of our restructuring actions and restructuring of our business into two segments; our ability to compete successfully in our markets; 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; 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; risks associated with product defects and unanticipated or improper use of our products; 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; 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 China; our ability to adequately protect our intellectual property from third-party infringement; our increasing dependence on the continuous and reliable operation of our information technology systems; risks related to our substantial indebtedness; our need for a significant amount of cash, which depends on many factors beyond our control; AEA’s influence over us; and other factors described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 and in other periodic reports we file 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 quarter ending June 30, 2019 and fiscal 2019, statements regarding our two-segment restructuring actions, and expected restructuring charges and cost savings for fiscal 2019 and beyond. 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.