Aegion Reports 2015 Second Quarter Financial Results

Source Press Release
Company Aegion Corporation 
Tags Financial & Operating Data
Date July 29, 2015

Aegion Corporation (Nasdaq Global Select Market: AEGN) today reported GAAP earnings from continuing operations of $8.7 million, or $0.24 per diluted share, compared to $12.8 million, or $0.33 per diluted share, in the second quarter of 2014. On a non-GAAP basis, earnings from continuing operations, excluding restructuring and acquisition-related expenses, were $13.1 million, or $0.35 per diluted share, compared to $13.1 million, or $0.34 per diluted share, in the prior year quarter.

For the first six months of 2015, reported GAAP earnings from continuing operations were $10.0 million, or $0.27 per diluted share, compared to $17.3 million, or $0.45 per diluted share, in the prior year period. On a non-GAAP basis, earnings from continuing operations for the first six months of 2015, excluding restructuring and acquisition-related expenses, were $17.9 million, or $0.48 per diluted share, compared to $17.9 million, or $0.47 per diluted share, for the first six months of 2014.

Charles R. Gordon, Aegion’s President and Chief Executive Officer, commented, “Our second quarter 2015 financial results demonstrate Aegion’s diversified businesses can generate strong results even when our upstream energy business is under pressure this year from lower oil prices. Infrastructure Solutions and the downstream portion of Energy Services delivered strong results in the quarter. Our financial position remains healthy, with strong first half operating cash flow, and near record cash balances at the end of June. We estimate the negative impact on second quarter earnings from certain of our businesses with the most exposure to the upstream energy sector, was approximately $0.09 per diluted share, as compared to the prior year.

Our 2014 restructuring efforts remain on track to be substantially complete by the end of the third quarter of 2015 with approximately $2 million remaining in trailing cash costs. We recognized $0.17 per diluted share of savings from the start of the initiative through June 30, 2015. We remain on track to recognize annualized savings of approximately $11 million, or $0.20 per diluted share, at the high-end of our original expectation.

It is becoming more apparent that the low price range for oil and gas may continue for some time. As a result, we are evaluating how we may adapt our upstream technologies and services to better meet this evolving new reality.

Looking at the balance of the year, which is the seasonally strongest for a majority of our businesses, we expect the areas of strength that carried us in the first half of the year will do so again in the second half. Infrastructure Solutions is on track for record revenues and profits in 2015 from strong execution and backlog, which is at an historic high level because of favorable end markets. We also are benefiting from robust activity in Energy Services’ downstream refining market due to an increase in refinery maintenance billable hours and the scheduled execution of previously delayed turnaround projects. There were positive developments in the last 90 days for Corrosion Protection’s midstream market, including the award of several large projects. In particular, Corrpro’s orders have increased significantly, which is a positive indicator for an expected strong second half of the year. For the full year, we believe the positive factors driving performance in 2015 can largely offset the financial impact from the challenges in the upstream energy market.”

2015 Outlook

Infrastructure Solutions

The Infrastructure Solutions platform is benefiting from increased expenditures for municipal wastewater pipeline rehabilitation in the United States, revenue and profit growth from Fyfe/Fibrwrap, the 2014 restructuring and realignment of the international segment and improved project execution across the platform. Backlog at June 30, 2015 was $362.9 million, a slight decrease over the prior year period, including the negative effect of currency translation. However, excluding backlog for the restructured international markets where Insituform is exiting contract installation operations, backlog increased 1.9 percent compared to June 30, 2014. Municipal expenditures for wastewater pipeline rehabilitation remain at attractive levels led by improved financial health and several large EPA consent decree enforcement actions in the United States. Contract backlog for Insituform North America was at a record level with solid orders during the second quarter. Opportunities in the North American fiber-reinforced polymer market remain favorable, reinforcing the outlook for growth in Fyfe/Fibrwrap for 2015. Restructuring efforts in the six affected international markets continue to proceed ahead of plan and position the Europe and Asia-Pacific operations for significant profit growth in 2015. Long-term product supply agreements have been secured in France, Switzerland, Hong Kong and Singapore. While Infrastructure Solutions expects only modest revenue growth, taking into account the revenue decline due to exiting several international markets, operating income is expected to be at a record level in 2015 due to gross margin expansion, both domestically and internationally.

Corrosion Protection

While the mix of revenues and profits for Corrosion Protection favor the midstream segment, the expected reduction in capital and maintenance spending within the upstream market has had a significant impact on platform financial results, which will likely continue in the second half of 2015. Backlog at June 30, 2015, which was $173.4 million, represented a 19.5 percent decline compared to June 30, 2014. Excluding the third quarter 2014 cancellation of a $34.0 million onshore pipe coating project in the United States, June 30, 2015 backlog declined 4.7 percent compared to June 30, 2014, which includes the negative effect of currency translation. Pipe orders for the upcoming Canadian construction season were down significantly indicating a sharp contraction in the upstream market after record activity in the 2014/2015 construction season. Market conditions for the upstream pipe linings business remain under pressure as customers reduce expenditures and competition has intensified for available projects. The North American midstream market remains favorable as new orders for the cathodic protection business increased sharply in June and July. Corrosion Protection backlog includes $32.0 million of recently announced new awards for midstream pipe coating projects in the United States Gulf Coast and the Caspian Sea region, although the timing for project activity in the Middle East remains a concern due to the impact from lower oil prices. Not included in reported June 30, 2015 backlog is a large midstream Canadian project, signed in July 2015, valued at over $10.0 million for alternating electrical current pipe corrosion mitigation. The reported backlog and recent awards in the midstream market support a favorable outlook for the seasonally strong second half of the year. While 2015 should end with a modest increase in revenues for Corrosion Protection, a contraction in gross margins will likely result in lower operating income compared to what was achieved in 2014.

Energy Services

The West Coast downstream refining market continues to be largely unaffected by the decline in oil prices as demand remains high for refined petroleum products. This market represents approximately 60 percent of Energy Services’ revenues, mostly for recurring time and material maintenance activities, and the outlook for the second half of the year remains favorable. However, the refinery shutdown turnaround market has been more volatile than expected this year as several, but not all, planned refinery shutdowns for Energy Services have been postponed until 2016 to maximize capacity given strong market conditions.

Energy Services’ first half upstream results in the Central California region declined due to customer-driven cost reductions as a result of reduced maintenance and capital spending, which will likely continue for the remainder of the year. Energy Services operations in the Permian Basin are expected to break-even over the remainder of 2015 as a result of securing additional small capital construction projects and operating expense management compared to operating losses during the first half of the year. As a result of these conflicting market dynamics, backlog for Energy Services declined 9.7 percent to $224.0 million as of June 30, 2015 compared to June 30, 2014. Energy Services is expected to end 2015 with modest revenue growth due to the strength of the downstream segment; however, because of lower gross margins during the first half of the year and less work in the higher margin upstream market, there will likely be a decline in operating income compared to 2014. Current planned scheduled maintenance hours, turnaround activity, small capital construction projects and other services in the second half of 2015 offer the opportunity for gross margin improvement more in line with the 15% run rate achieved in 2014.

(Unaudited, in millions) 
The following table sets forth our consolidated backlog by segment (in millions): 
    June 30,    March 31,    December 31,    June 30, 
    2015    2015    2014    2014 
Infrastructure Solutions (1)    362.9      354.2      337.5      365.7 
Corrosion Protection (2)    173.4      159.3      176.0      215.4 
Energy Services (3)    224.0      238.2      244.5      248.1 
Total backlog    760.3      751.7      758.0      829.2 
(1) June 30, 2015, March 31, 2015, December 31, 2014 and June 30, 2014 included backlog from restructured entities of $3.3 million, $7.9 million, $3.7 million and $12.2 million, respectively 
(2) June 30, 2014 included $34.0 million related to an onshore pipe coating project that was canceled in the third quarter of 2014. 
(3) Represents expected unrecognized revenues to be realized under long-term Master Service Agreements and other signed contracts.  If the remaining term of these arrangements exceeds 12 months, the unrecognized revenues attributable to such arrangements included in backlog are limited to only the next 12 months of expected revenues. 

Realignment and Restructuring Plan

On October 6, 2014, Aegion announced a restructuring plan (“2014 Restructuring”) to exit low-return CIPP contracting businesses and reduce the size and cost of the Company’s overhead structure to improve gross margins and profitability over the long term.

In 2014, pre-tax charges were $49.5 million ($36.2 million after-tax, or $0.95 per diluted share). During the first quarter of 2015, the Company recorded pre-tax charges of $3.5 million ($3.3 million after-tax), or $0.09 per diluted share, related to the loss on the sale of Insituform’s contracting business in France, severance, retention and other cash items related to the remaining affected contracting markets and the combination of Fyfe/Fibrwrap with Insituform.

A pre-tax charge of $5.7 million ($4.4 million after-tax), or $0.11 per diluted share, was recorded in the second quarter of 2015 to substantially complete the shutdown of contracting operations in Hong Kong, Singapore and Malaysia. Non-cash charges totaling $2.6 million were primarily associated with allowances for the risk of uncollectible receivables. Cash charges totaling $3.1 million consisted of employee severance, extension of benefits, employment assistance programs and other employment-related costs, as well as other restructuring costs.

The 2014 Restructuring was substantially completed in the second quarter of 2015, with approximately $2.0 million in trailing cash costs expected in the third quarter of 2015, which will result in total cash charges for the 2014 Restructuring at approximately $14.0 million, within our previously announced range.

The 2014 Restructuring is expected to generate annualized savings of approximately $11.0 million, or $0.20 per diluted share, on a GAAP basis. Pre-tax restructuring savings in the second quarter of 2015 were $2.5 million, or $0.05 per diluted share. For the six months ended June 30, 2015, pre-tax savings were $5.0 million, or $0.10 per diluted share, on track to achieve the high-end of the expected annual savings run rate.

Consolidated Highlights

Second Quarter 2015 versus Second Quarter 2014
(Non-GAAP; excludes pre-tax charges for restructuring and acquisition-related expenses)

Consolidated revenues increased 4.4 percent to $337.1 million due to revenue growth in all three platforms. Infrastructure Solutions increased revenues by 1.2 percent to $149.1 million. Revenues for the North America water and wastewater business grew low single digits, while revenues for the international water and wastewater segment declined more than 20 percent, primarily as a result of exiting several international contracting markets. The Fyfe/Fibrwrap business increased revenues by 30 percent, primarily due to a large industrial project in North America and growth in Asia. Revenues for Corrosion Protection were $106.0 million, a 3.0 percent increase, as opportunities in the midstream market were partially offset by revenue declines in the upstream segment, especially in Canada for pipeline linings and coatings. Energy Services grew revenues 12.8 percent to $81.9 million on the strength of the West Coast refining downstream segment, which offset a revenue decline in the Central California upstream market, which was directly impacted by lower oil prices. Adverse foreign currency translation rates accounted for a $10.7 million decrease in consolidated revenues, which affected Infrastructure Solutions and Corrosion Protection, primarily in Canada and Europe.

Consolidated gross profit increased 1.5 percent to $73.0 million. Gross margins at Infrastructure Solutions expanded by 240 basis points to 26.8 percent due to strong execution in the water and wastewater business and Fyfe/Fibrwrap businesses in North America. Gross profit for Infrastructure Solutions increased 11.3 percent to $40.0 million. Corrosion Protection gross margins contracted by 370 basis points to 20.6 percent, resulting in a 12.6 percent decline in gross profit to $21.9 million. Three factors accounted for the decline in gross profit. First, the impact to revenues and margins from the dramatic drop in oil prices. Second, the absence of the large and high-margin Saudi Aramco Wasit project, completed in 2014. Third, lower than expected labor utilization rates for the cathodic protection business from a slower ramp-up of project activity in the quarter. The impact of low oil prices on the North America upstream segment accounted for the 140 basis point reduction in gross margins to 13.6 percent for Energy Services. Foreign currency translation adversely impacted Corrosion Protection and Infrastructure Solutions resulting in a $2.1 million decrease in consolidated gross profit.

Consolidated operating expense increased $2.1 million, or 4.1 percent, to $52.8 million. As a percent of revenues, the consolidated operating expense ratio was 15.7 percent, the same as in the second quarter of 2014. There are a number of factors driving the increase from the prior year. First, long-term equity compensation expense increased by $1.2 million primarily due to the reversal of compensation costs in the prior year quarter related to management changes. Second, an allowance for doubtful accounts of $0.6 million was recorded in the second quarter of 2015 related to certain long dated receivable in dispute with a customer in the Corrosion Protection segment. A favorable legal judgment was secured against the creditor but its financial ability to pay the full judgment amount is now in question. Third, severance-related costs of $0.7 million were incurred for recent organizational leadership changes in the Energy Services segment. Excluding the items above, consolidated operating expense decreased by $0.4 million, or 1.0 percent. This decrease was primarily driven by savings from the 2014 Restructuring, totaling $1.9 million, as certain under-performing European and Asia-Pacific locations were exited and overhead was decreased from integrating the North American Fyfe/Fibrwrap operations with the Insituform operations within the Infrastructure Solutions segment. Partially offsetting the decreases were increased sales expenses and administrative costs to support growth in certain operations within the Corrosion Protection and Energy Services segments and increased corporate related costs including information technology investments to better integrate the platforms.

Consolidated operating income declined 4.6 percent to $20.2 million as strong performance in the Infrastructure Solutions platform was offset by declines in Corrosion Protection and Energy Services. Operating income for Infrastructure Solutions grew 38.1 percent to $17.8 million. Again, strong performance for the North America water and wastewater business, a $3.9 million increase in operating income from Fyfe/Fibrwrap, benefits from the 2014 Restructuring and ongoing cost containment efforts accounted the favorable result. The challenges in the upstream segment were the primary factor for the reduction in operating income for Corrosion Protection and Energy Services. Operating income declined $4.5 million to $0.9 million for Corrosion Protection and declined $1.3 million to $1.5 million for Energy Services. Foreign currency translation reduced operating income by $0.8 million affecting Corrosion Protection and Infrastructure Solutions.

Cash Flow

Net cash flow provided by continuing operations was $58.4 million in the first six months of 2015 compared to $19.0 million provided in prior year period. Net changes in working capital was a $19.5 million source of cash compared to a $26.6 million use of cash in the prior year period. There was an increase in future vendor payments from strong business volume, while receivables were down significantly as a result of a concerted effort to increase cash collections. Days sales outstanding on receivables decreased by more than 15 days from the prior year. Additionally, during the first half of 2015, we received several large deposits on pipe coating projects, which accounted for a portion of the decrease in days sales outstanding.

Net cash flow used by investing activities was $19.4 million in the first six months of 2015, compared to $5.6 million used in the same period in 2014. The Company used $6.9 million, net of cash acquired, for the acquisition of Schultz Mechanical Contractors, Inc. earlier this year. Capital expenditures were $12.1 million in the first six months of 2015 compared to $13.8 million in the prior year period. In the first quarter of 2014, the Company received proceeds of $9.1 million for the sale of the Company’s 49% ownership interest in Bayou Coating, L.L.C. following the majority partner’s exercise of its buy-out right.

Net cash flows from financing activities used $34.6 million in the first six months of 2015 compared to $25.2 million used in the prior year period. During the first half of 2015, the Company used $21.9 million to repurchase approximately 1.1 million shares of common stock through open market purchases and to repurchase shares in connection with the Company’s equity compensation programs. The Company also made $13.1 million in scheduled principal payments on its long-term debt during the first six months of 2015.

Net cash flow for the first six months of 2015 was an outflow of $1.9 million, which included a $6.4 million negative impact from currency exchange rate changes. This compares to an outflow of $11.9 million in the first half of 2014.

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