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Evoqua Water Technologies Reports Fourth Quarter and Full Year 2018 Results

November 27, 2018

PITTSBURGH--(BUSINESS WIRE)--Nov 27, 2018--Evoqua Water Technologies Corp. (NYSE:AQUA) today reported results for its fourth quarter and fiscal year ended September 30, 2018.

Revenues for the fourth quarter of fiscal 2018 were $366.3 million, an increase of $9.8 million or 2.7% from $356.5 million in the prior year period. For the full year fiscal 2018, revenues were $1.34 billion compared to $1.25 billion, an increase of $92.1 million or 7.4%. Revenue growth for the fourth quarter and full year was led by an increase in the Industrial segment related to capital projects in the power market, remediation projects and service revenues from recently acquired businesses.

Net loss for the fourth quarter of fiscal 2018 was $3.1 million, a decline of $(16.1) million from the prior year period, resulting in diluted (loss) earnings per share (“EPS”) of $(0.03) compared to $0.10 in the prior year period. For the full year fiscal 2018, net income was $7.9 million, an increase of $1.5 million year-over-year, resulting in diluted EPS of $0.05 compared to $0.02 in fiscal 2017. Net loss for the fourth quarter includes $0.8 million of non-cash foreign currency loss from intra-company loans, versus a prior year fourth quarter non-cash foreign currency gain of $5.7 million. Net income for the full year fiscal 2018 includes $5.9 million of non-cash foreign currency loss from intra-company loans versus a prior year non-cash foreign currency gain of $7.8 million.

Adjusted EBITDA was $61.2 million in the fourth quarter of fiscal 2018, a decrease of $(10.2) million or 14.3% from the prior year period. For the full year fiscal 2018, Adjusted EBITDA was $216.9 million, an increase of $9.2 million or 4.4% from the prior year. The improvement in Adjusted EBITDA for the fiscal year was driven by the overall increase in revenues and related profit.

“We experienced challenges primarily in the Product Segment’s Aquatics business and Municipal Segment, offsetting continued strength in the Industrial Segment,” said Ron Keating, Evoqua’s CEO. “The overall results, while clearly disappointing, were primarily impacted by isolated items related to an acquisition ERP system integration, supply chain disruptions influenced by tariffs, and an extended delay on a large aquatics project. We continue to have strong confidence in the business and we look to continue to build on our market leading position. We are taking the appropriate actions to improve our performance and we are pleased that Neptune Benson was migrated onto our ERP system in November.”

Ron Keating continued, “We will continue to execute our strategy into fiscal 2019, but with an increased focus on profitable growth, operational excellence, cost management and free cash flow generation. Our efforts to improve cash flow are expected to come from working capital management, managing growth capital expenditures to the highest return investments, and focusing M&A activity on smaller tuck in transactions. We were pleased to see strong cash flow in the fourth quarter. Additionally, we have incorporated a free cash flow metric into management’s 2019 incentive compensation program. To mitigate the risk of rising interest rates, in November we entered into an interest rate hedge arrangement representing approximately $600 million of our total outstanding debt.

“Our planned two-segment restructuring is progressing, and allows divisions with similar business models to be aligned and in some instances combined. By aligning the complementary go-to-market strategies, we expect to improve technology deployment and provide more comprehensive customer solutions while lowering our cost structure. We expect to incur $17 million to $22 million of restructuring charges over the next two fiscal years and expect to benefit from cost savings of $15 million to $20 million on an annualized basis upon the conclusion of the restructuring actions.”

Fourth Quarter Segment Results

For fiscal 2018, the Company had three reportable segments - Industrial, Municipal and Products. The results of our segments for the fourth quarter are as follows:

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 $16.8 million, or 9.2%, to $199.3 million in the fourth quarter of fiscal 2018 as compared to $182.5 million in the same period in the prior year -

Capital revenues increased $7.3 million, primarily in the power market and with remediation projects. Service revenues increased $9.5 million, largely due to the revenues contributed from the acquisition of ProAct.

Operating profit in the Industrial segment was flat at $35.5 million in the fourth quarter of fiscal 2018 as compared to the same period of the prior year -

Revenue volume drove a $7.4 million increase in profit, net of product mix, as well as price realization and contributions from acquisitions. Higher commodity, freight and other operating costs reduced profitability by $(6.2) million. Profitability was also offset by $(1.1) million related to higher depreciation and amortization, primarily driven by acquisitions.

Adjusted EBITDA increased $1.1 million, or 2.3%, to $48.5 million in the fourth quarter of fiscal 2018 as compared to $47.4 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.

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 decreased by $(2.2) million, or 2.8%, to $77.5 million in the fourth quarter of fiscal 2018, as compared to $79.7 million for the comparable period in the prior year -

Project revenues decreased $(4.5) million and aftermarket revenues remained flat period over period. Service revenue grew by $2.3 million.

Operating profit in the Municipal segment decreased $(4.5) million, or 34.4%, to $8.6 million for the fourth quarter of fiscal 2018 from $13.1 million for the same period in the prior year -

Improvements in profitability related to revenue mix and price actions of $1.5 million partially offset the negative impacts of higher commodity, freight and other operating costs of $(5.6) million. Other impacts to profitability included additional $0.2 million costs associated with the sale of land at our Windsor, Australia location as well as a charge of $0.2 million for restructuring and realignment costs incurred during the period that were discrete to the Municipal segment.

Adjusted EBITDA decreased $(2.4) million, or 15.9%, to $12.7 million in the fourth quarter of fiscal 2018 as compared to $15.1 million in the same prior year period. Adjusted EBITDA performance was driven by the same factors which impacted operating profit, other than the change from depreciation and amortization, and also excludes $1.9 million of costs related to the settlement of a legacy warranty claim, $0.2 million of expenses associated with the sale of land at our Windsor, Australia location as well as a charge of $0.2 million for restructuring and realignment costs incurred during the period that was discrete to the Municipal segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Municipal segment.

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 commercial 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 decreased $(4.8) million, or 5.1%, to $89.5 million in the fourth quarter of fiscal 2018 from $94.3 million in the comparable period of the prior year -

Sales growth of $1.7 million in all other Products segment businesses was offset by the negative impacts of decreased volume of $(6.2) million associated with the aquatics and disinfection business. The foreign currency impact was negative $(0.3) million, primarily related to transactions denominated in euro and pound sterling.

Operating profit in the Products segment decreased $(13.6) million, or 65.7%, to $7.1 million in the fourth quarter of fiscal 2018 as compared to $20.7 million in the same prior year period -

Profitability was impacted by $(9.4) million related to supply chain disruptions and system integration issues in the aquatics business, including $2.6 million of expense related to disposal of inventory as part of the migration of an operational business unit to a new enterprise resource planning (“ERP”) system. Overall, the decreased aquatics volume and cost impacts offset operating profit improvements related to the other Products segment businesses. Other charges in the period included $2.3 million related to warranty provision for the remediation of a manufacturing defect caused by a third party vendor, $0.4 million related to costs associated with a terminated business venture, and $0.2 million for restructuring and realignment costs incurred during the period that are discrete to the Products segment. Profitability was also impacted by $1.3 million of increased depreciation and amortization, mainly related to increased amortization associated with acquisitions.

Adjusted EBITDA decreased $(7.4) million, or 31.1%, to $16.4 million in the fourth quarter of fiscal 2018 as compared to $23.8 million in the same prior year period. The decrease in Adjusted EBITDA resulted from the same factors which impacted operating profit, other than the change in depreciation and amortization, and also excludes $2.6 million of expense incurred related to disposal of inventory as part of the migration of an operational business unit to a new ERP system, a $2.3 million charge related to remediation of a manufacturing defect caused by a third party vendor, $0.4 million related to costs associated with a terminated business venture, as well as a charge of $0.2 million for restructuring and realignment costs incurred during the period that was discrete to the Products segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Products segment.

Full Year 2018 Segment Results

The results of our segments for the fiscal year ended September 30, 2018 are as follows:

Industrial

Revenues in the Industrial Segment increased $84.7 million, or 13.2%, to $728.1 million in the fiscal year ended September 30, 2018 from $643.4 million in the prior year -

Capital revenues increased $37.9 million, excluding acquisitions, primarily in the power market and with remediation projects. Service revenues increased $8.5 million, excluding acquisitions. Revenues were primarily in the power, hydrocarbon processing and chemical processing markets. Acquisitions contributed $38.3 million of revenue from the additions of Pure Water, Noble, ADI, ProAct and Isotope.

Operating profit in the Industrial Segment increased $10.9 million, or 9.9%, to $120.9 million in the fiscal year ended September 30, 2018 from $110.0 million in the prior year -

Revenue volume and price realization drove a $6.2 million increase in profit, net of product mix and inflation. Overall lower employment costs, including variable compensation, favorably impacted operating profit by $3.6 million. Acquisitions contributed $5.6 million of operating profit. Based on the positive performance of the Noble and ADI acquisitions, the Company recognized an additional charge of $2.6 million related to the full achievement of earn-out targets established during the respective acquisitions. Profitability was also offset by $1.9 million related to higher depreciation and amortization driven by capital investment in service assets and the acquisitions mentioned above.

Adjusted EBITDA increased $19.3 million, or 12.9%, to $168.7 million in the fiscal year ended September 30, 2018 as compared to $149.4 million 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 also excludes the charge of $2.6 million related to the achievement of earn-out targets associated with the Noble and ADI acquisitions that was discrete to the Industrial segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Industrial segment.

Municipal

Revenues in the Municipal Segment decreased $(6.4) million, or 2.3%, to $272.2 million in the fiscal year ended September 30, 2018 from $278.6 million in the prior year -

Project revenues decreased $(4.9) million and aftermarket revenues declined by $(5.0) million as compared to the prior year. Service revenue grew by $4.4 million. The disposition of our Italian operations in April 2018 contributed to lower revenue of $(1.0) million.

Operating profit in the Municipal Segment decreased $(2.5) million, or 6.8%, to $34.1 million in the fiscal year ended September 30, 2018 from $36.6 million in the prior year -

Operating profit increased by $3.1 million as a result of lower employment costs and operational efficiencies and lower depreciation expense of $1.1 million The sale of land at our Windsor, Australia location provided a gain of $6.8 million. Favorable profitability was offset by $(11.7) million of negative impact related to the mix of capital and service revenues as compared to higher margin aftermarket revenues, as well as the impact of higher commodity, freight and other operating costs. The settlement of a legacy legal matter also required additional warranty cost of $(1.9) million.

Adjusted EBITDA decreased $(7.5) million, or 16.7%, to $37.3 million in the fiscal year ended September 30, 2018 as compared to $44.8 million in the prior year. Adjusted EBITDA performance was driven by the same factors which impacted operating profit, other than the change from depreciation and amortization, and also excludes the $6.8 million gain on sale of land at our Windsor, Australia location, $1.9 million of warranty cost related to the settlement of a legacy legal matter as well as a charge of $1.1 million for restructuring and realignment costs incurred during the period that was discrete to the Municipal segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Municipal segment.

Products

Revenues in the Products Segment increased $13.8 million, or 4.2%, to $339.2 million in the fiscal year ended September 30, 2018 from $325.4 million in the prior year -

Growth of $24.5 million in revenues across the segment, comprised of contributions from four of the five divisions in the Products Segment. Acquisitions contributed $5.8 million from the additions of Olson and Pacific Ozone. The positive impact of foreign currency was $5.1 million, primarily related to transactions denominated in euro and pound sterling. These positive revenue factors were offset by a decline in revenues in the aquatics and disinfection business of $20.0 million, partially due to delays in large aquatic projects, supply chain disruption influenced by tariffs, and the impact of an acquisition ERP system integration, as well as $1.6 million due to a business line divested in the prior year.

Operating profit in the Products Segment decreased $(10.5) million or 15.9%, to $55.4 million in the fiscal year ended September 30, 2018 from $65.9 million in the prior year -

Overall volume and mix of product offerings accounted for $11.3 million of the decline year over year, primarily in the aquatics and disinfection business. Other charges in the year included $2.6 million of expenses incurred related to disposal of inventory as part of the migration of an operational business unit to a new ERP system, $3.9 million related to warranty provision and other costs associated with the remediation of a manufacturing defect caused by a third party vendor, $0.4 million related to costs associated with a terminated business venture, and $0.5 million for restructuring and realignment costs incurred during the period that are discrete to the Products segment. The decline in profitability was partly offset by $2.2 million of lower employment costs, including variable compensation, $5.4 million from other operational efficiencies, and $0.4 million of favorable impact of foreign currency exchange. Acquisitions contributed $0.5 million of profit, offset by $0.3 million of increased depreciation and amortization.

Adjusted EBITDA decreased $1.5 million, or 1.9%, to $75.9 million in the fiscal year ended September 30, 2018 as compared to $77.4 million in the prior year. The decrease in Adjusted EBITDA resulted from the same factors which impacted operating profit, other than the change in depreciation and amortization, and also excludes $2.6 million of expenses incurred related to disposal of inventory as part of the migration of an operational business unit to a new ERP system, $3.9 million related to warranty provision and other costs associated with the remediation of a manufacturing defect caused by a third party vendor, $0.4 million related to costs associated with a terminated business venture, and $0.5 million for restructuring and realignment costs incurred during the period that are discrete to the Products segment. There were no comparable charges incurred in the same period of the prior year that would impact Adjusted EBITDA for the Products segment.

Fourth Quarter and Full Year 2018 Earnings Call and Webcast

The Company will hold its fourth quarter full year 2018 earnings conference call Tuesday, November 27, 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 167 locations in nine 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.

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