Evoqua Water Technologies Reports Second Quarter 2018 Results

PITTSBURGH--Evoqua Water Technologies Corp. (NYSE:AQUA) today reported results for its second quarter of fiscal 2018.

Revenues for the second quarter of fiscal 2018 were $333.7 million, an increase of $33.8 million or 11.3% as compared to the second quarter of the prior year. Revenue growth was led by increases in the Industrial segment related to capital projects in the power market, remediation projects and revenues from recently acquired businesses. Additionally, the Products segment contributed to year-over-year growth through volume increases across multiple divisions.

Net income for the quarter was $13.0 million, an improvement of $8.1 million or 165.2% year-over-year. Diluted EPS for the quarter was $0.10 per share on 119.2 million weighted average shares outstanding.

Adjusted EBITDA was $57.7 million in the second quarter of fiscal 2018, an increase of $13.8 million or 31.3% year-over-year. The improvement in Adjusted EBITDA was driven by the increase in revenues and related profit as well as a decrease in operating expenses year-over-year.

“Our businesses performed well in the second quarter, particularly within our Industrial and Products segments,” said Ron Keating, Evoqua CEO. “For the quarter, we reported strong Industrial segment capital sales and broad-based growth across much of the Products business. Solid cost controls along with volume leverage and margin improvement drove overall EBITDA expansion and improved cash flow. We are very pleased to have closed on the Pure Water Solutions and Pacific Ozone acquisitions during the quarter to supplement organic growth.”

Mr. Keating continued, “Our value proposition uniquely positions Evoqua to be the solutions provider of choice for capital, service and aftermarket opportunities. Key vertical markets continue to be trending positively and we are seeing more customers looking to outsource their water treatment systems to companies like Evoqua, providing additional growth opportunities.”

Second Quarter Segment Results

The Company has three reportable segments - Industrial, Municipal and Products.

Industrial

The Industrial segment combines equipment and services to improve operational reliability and environmental compliance for heavy and light industry, commercial and institutional markets. Their customers span industries including hydrocarbon processing, chemical processing, power, food and beverage, life sciences, health services and microelectronics.

Revenues in the Industrial segment increased $20.8 million, or 13.0%, to $181.3 million in the second quarter of fiscal 2018 as compared to $160.5 million in the same period in the prior year -

• Capital revenues increased $10.7 million, primarily in the power market and with remediation projects.
• Service revenues increased $0.6 million related to power, hydrocarbon processing and chemical processing.
• Acquisitions contributed $9.5 million of revenue from the additions of ADI, Noble and Pure Water.

Operating profit in the Industrial segment increased $5.2 million, or 20.0%, to $31.0 million in the second quarter of fiscal 2018 from $25.8 million in the same period of the prior year -

• $3.5 million of benefits were experienced as a result of lower employment costs driven by restructuring and cost improvement initiatives implemented in the current and prior fiscal year.
• $2.3 million of profit was provided from the ADI, Noble and Pure Water acquisitions.
• Excluding the impact of acquisitions, Industrial segment profitability was tempered by the product mix of higher capital projects revenue growth as compared to higher margin services revenue growth.
• Additionally, profitability improvements were partially offset by $1.2 million related to higher depreciation and amortization driven by capital investment in service assets and the acquisitions mentioned above.

EBITDA in the Industrial segment increased $6.3 million, or 17.9%, to $41.7 million in the three months ended March 31, 2018 from $35.4 million in the three months ended March 31, 2017. The increase in EBITDA resulted from the same factors which impacted operating profit, less the change in depreciation and amortization.

Municipal

The Municipal segment helps engineers and municipalities meet new demands for plant performance through market-leading equipment, solutions and services backed by trusted brands and over 100 years of applications experience. The segment’s customers include waste water and drinking water collection and distribution systems and utility operators. The segment’s services include odor and corrosion control services.

Municipal revenues increased slightly by $0.7 million, or 1.1%, to $64.3 million for the second quarter of fiscal 2018, as compared to $63.6 million for the comparable period in the prior year -

• Large projects saw an increase of $2.9 million due to growth within MEMCOR.
• Service revenue experienced growth of $0.2 million.
• Growth was partially offset by a decrease in revenue of $1.7 million related to timing of aftermarket product sales as compared to the same period of the prior year, and $0.6 million of lower revenue from our Italian operations as this portion of our business approached final wind down.

Operating profit in the Municipal segment increased $1.5 million, or 23.2%, to $8.0 million for the second quarter of fiscal 2018 from $6.5 million for the same period in the prior year -

• $1.2 million improvement related primarily to lower employment expenses resulting from the shift to a customer focused organizational structure from administrative and back-office functions.
• $1.7 million associated with a reduction in warranty costs due to improved product quality and better project execution.
• Lower depreciation expense of $0.3 million.
• Operating profit decreased by $1.7 million as a result of the mix shift to higher capital projects revenue growth as compared to higher margin aftermarket revenue.

EBITDA in the Municipal segment increased $1.3 million, or 14.4%, to $9.8 million in the three months ended March 31, 2018 from $8.5 million in the three months ended March 31, 2017. EBITDA performance was driven by the same factors which impacted operating profit, less the change from depreciation and amortization.

Products

The Products segment has distinct business operating units, each built on well-known brands and technologies that are sold globally through multiple sales and aftermarket channels. Additionally, the Products segment also offers industrial, municipal and recreational users improved operational reliability and environmental compliance. The segment’s customers include original equipment manufacturers, regional and global distributors, engineering, procurement and contracting customers, and end users in the industrial, municipal and commercial industries.

Products revenues increased $12.2 million, or 16.2%, to $88.1 million in the second quarter of fiscal 2018 from $75.9 million in the comparable period of the prior year -

• Growth of $7.2 million in revenues across the segment, comprised of contributions from four of the five divisions.
• Acquisitions contributed $1.3 million from the additions of Olson and Pacific Ozone.
• The positive impact of foreign currency was $3.8 million, primarily related to transactions denominated in euro and pound sterling.

Operating profit in the Products segment increased $6.0 million, or 43.6%, to $19.9 million for the second quarter of fiscal 2018 as compared to $13.9 million in the prior year period -

• Overall increased volume and mix of product offerings as well as operational efficiency delivered $2.8 million of operating profit.
• $2.5 million of benefits were experienced as a result of lower employment costs driven by restructuring and cost improvement initiatives implemented in the current and prior fiscal year as well as lower depreciation and amortization.
• The positive impact of foreign currency was $0.5 million; and
• The Olson and Pacific Ozone acquisitions contributed $0.2 million year over year.

EBITDA in the Products segment increased $6.0 million, or 35.5%, to $23.0 million in the three months ended March 31, 2018 from $17.0 million in the three months ended March 31, 2017. The increase in EBITDA resulted from the same factors which impacted operating profit, less the change in depreciation and amortization.

Second Quarter 2018 Earnings Call and Webcast

The Company will hold its second quarter earnings conference call Tuesday, May 8 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 treatment solutions, offering services, systems and technologies to support its customers’ full water lifecycle needs. Evoqua Water Technologies 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, Evoqua operates 160 locations in eight countries and, with over 200,000 installations and 87 service branches, holds leading positions in the North American industrial, commercial and municipal water treatment markets, serving more than 38,000 customers worldwide.

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 expense (benefit) 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 stock 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 of each reportable segment to evaluate the operating performance of such segments. EBITDA of the reportable segments does not include certain unallocated charges that are presented within Corporate activities. These unallocated 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 stock-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, amounts in thousands):

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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 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 of 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 to be described in the “Risk Factors” section in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017, as filed with the SEC December 4, 2017, and in other periodic reports we file with the SEC. 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.