Evoqua Water Technologies Reports Third Quarter 2019 Results

PITTSBURGH--(BUSINESS WIRE)--Evoqua Water Technologies Corp. (NYSE:AQUA), an industry leader in mission-critical water treatment solutions, today reported results for its third quarter of fiscal 2019.

Revenues for the third quarter of fiscal 2019 were $360.3 million, an increase of $17.8 million, or 5.2%, from $342.5 million in the prior year period. Revenue growth for the quarter was primarily attributable to an increase in service and aftermarket revenues from organic and recently acquired businesses, partially offset by lower capital revenues in the period and the negative impact of foreign currency exchange rates.

Net income for the third quarter of fiscal 2019 was $4.3 million, an increase of $3.3 million, from net income of $1.0 million in the prior year period, resulting in diluted earnings per share (“EPS”) of $0.03 compared to $0.01 in the prior year period. Net income for the quarter includes increased income tax expense of $6.5 million over the prior year period based on the projected effective tax rate for the fiscal year.

Adjusted EBITDA was $60.6 million in the third quarter of fiscal 2019, an increase of $2.6 million, or 4.5%, from $58.0 million in the prior year period. The increase in Adjusted EBITDA for the third quarter of fiscal 2019 as compared to the prior year period was driven by increased revenues, favorable price/cost and mix driven by higher service volumes.

“We are pleased to report results in-line with expectations driven by strong service and aftermarket sales growth,” said Ron Keating, Evoqua’s CEO. “Overall, third quarter sales were up 5.2% mostly due to service revenue growth of 14.5%. Integrated Solutions and Services sales grew 7.7% and Applied Product Technologies sales were up 1.3% for the quarter. Our order book continues to accelerate, growing faster than revenue, and we continue to see a robust pipeline of opportunities. The two-segment realignment benefits are materializing as expected resulting in enterprise selling of our broad portfolio of technologies and services. On a year-to-date basis, our order book is up low double digits.”

Mr. Keating continued, “We are reaffirming our 2019 guidance with 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. As global concerns arise around economic and environment challenges, we are seeing growing demand for our robust portfolio of sustainable solutions that leverages our vast service network, technologies and digital platform.”

Third Quarter Segment Results

For fiscal 2019, 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

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), full-scale outsourcing of operations and maintenance, and municipal services, including odor and corrosion control services.

Segment revenues increased $16.1 million, or 7.7%, to $225.4 million in the third quarter of fiscal 2019 as compared to $209.3 million in the same period in the prior year. Organic revenues increased approximately 1.5% as compared to the same period in the prior year -

• Service revenues grew $5.8 million, exclusive of acquisitions.
• Aftermarket revenues increased, but were offset by reductions in capital revenues, leading to an overall decline of $2.9 million in product revenues, exclusive of acquisitions, primarily due to the timing of large capital projects in the power generation market.
• Recently acquired businesses of ProAct and Isotope contributed $13.3 million of revenue compared to the same period in the prior year.

Operating profit increased $8.2 million, or 28.1%, to $37.4 million in the third quarter of fiscal 2019 as compared to $29.2 million in the same period of the prior year -

• Segment profitability improved $8.8 million in the period driven by increased organic and acquisition related revenue volume, augmented by improved pricing, and favorable change in mix driven by the higher service volumes.
• Profitability in the current year was also favorably impacted by the non-recurrence of $2.6 million of charges related to the achievement of earn-out targets associated with the Noble and ADI acquisitions that were reflected in the prior year results.
• Negative drivers to segment profitability included $1.7 million of higher depreciation and amortization expense, primarily related to acquisitions and capital investment in service assets, as well as $1.5 million of additional operating expenses, partially derived from higher employment costs.

Segment Adjusted EBITDA increased $7.3 million, or 16.6%, to $51.4 million in the third quarter of fiscal 2019 as compared to $44.1 million in the same period in the prior year. The increase in segment 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 -

• Charges in the prior year of $2.6 million related to the achievement of earn-out targets associated with the Noble and ADI acquisitions. There were no comparable charges incurred in the same period of the current year.

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 increased by $1.7 million, or 1.3%, to $134.9 million in the third quarter of fiscal 2019, as compared to $133.2 million for the comparable period in the prior year -

• Overall revenues increased $3.4 million in the period driven by aftermarket revenue growth, partially offset by declines in higher margin capital volume across multiple product lines.
• The impact of foreign currency translation was a reduction to revenue of $3.1 million.
• Recently acquired business ATG UV Technology Limited contributed $1.4 million of increased revenue.

Operating profit decreased $5.6 million, or 19.9%, to $22.5 million for the third quarter of fiscal 2019 from $28.1 million for the same period in the prior year -

• The decrease in profitability was mainly due to a gain on the sale of land for $7.0 million which was recognized in the prior year period, whereas the segment only recognized a gain on the sale of property of $0.4 million in the current year period.
• Other drivers of reduction in segment operating profit include the negative impact of foreign currency translation of $0.7 million and $0.3 million of higher depreciation expense.
• Current year profitability was favorably impacted by $2.0 million related to the benefits of lower employment cost, higher volumes, favorable price/cost, and other lower costs considered in Adjusted EBITDA that are specific to the segment.

Segment Adjusted EBITDA decreased $0.6 million, or 2.2%, to $27.3 million in the third quarter of fiscal 2019 as compared to $27.9 million in the same period in the prior year. 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 for this segment also excludes -

• The impacts from product rationalization and facility consolidation, restructuring, costs associated with the remediation of a manufacturing defect caused by a third party vendor, and gain on sale of property in an aggregate amount of $0.4 million incurred during the period.
• Similar activity incurred in the same period of the prior year that impacted Adjusted EBITDA for this segment included $1.1 million of restructuring and realignment costs, $1.6 million of costs associated with the manufacturing defect caused by a third party vendor, and a gain of $7.0 million on sale of land at our Windsor, Australia location.

Third Quarter Earnings Call and Webcast

The Company will hold its third quarter earnings conference call Tuesday, August 6, 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 operating segment to evaluate the operating performance of such segments. EBITDA and Adjusted EBITDA of the reportable operating 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 June 30, 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 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.