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Evoqua Water Technologies Reports Fourth Quarter and Full Year 2018 Results

Fourth Quarter 2018 Financial Highlights Versus Prior Year Period:

  • Consolidated revenues of $366.3 million, up 2.7%
  • Net loss of $3.1 million, down 123.8%
  • Adjusted EBITDA of $61.2 million, down 14.3%

Full Year 2018 Financial Highlights Year-Over-Year:

  • Consolidated revenues of $1.34 billion, up 7.4%
  • Net income of $7.9 million, up 23.4%
  • Adjusted EBITDA of $216.9 million, up 4.4%

PITTSBURGH–(BUSINESS WIRE)–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.

EVOQUA WATER TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

Three Months Ended
September 30,

Year Ended
September 30,

2018 2017 2018 2017
Revenue from product sales and services $ 366,326 $ 356,508 $ 1,339,541 $ 1,247,424
Cost of product sales and services (259,976 ) (233,585 ) (934,808 ) (847,673 )
Gross Profit 106,350 122,923 404,733 399,751
General and administrative expense (53,049 ) (49,083 ) (193,816 ) (169,617 )
Sales and marketing expense (33,550 ) (33,712 ) (136,009 ) (142,441 )
Research and development expense (3,521 ) (4,306 ) (15,877 ) (19,990 )
Total operating expenses (90,120 ) (87,101 ) (345,702 ) (332,048 )
Other operating income (expense), net 141 520 7,815 1,501
Interest expense (17,157 ) (16,260 ) (57,580 ) (55,377 )
(Loss) income before income taxes (786 ) 20,082 9,266 13,827
Income tax (expense) benefit (2,342 ) (7,122 ) (1,382 ) (7,417 )
Net (loss) income (3,128 ) 12,960 7,884 6,410
Net income attributable to non-controlling interest 322 1,899 1,749 4,247
Net (loss) income attributable to Evoqua Water Technologies Corp. $ (3,450 ) $ 11,061 $ 6,135 $ 2,163
Basic (loss) earnings per common share $ (0.03 ) $ 0.11 $ 0.05 $ 0.02
Diluted (loss) earnings per common share $ (0.03 ) $ 0.10 $ 0.05 $ 0.02

EVOQUA WATER TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

September 30, 2018 September 30, 2017
ASSETS
Current assets $ 565,560 $ 512,240
Cash and cash equivalents 82,365 59,254
Receivables, net 254,756 245,248
Inventories, net 134,988 120,047
Cost and earnings in excess of billings on uncompleted contracts 69,147 66,814
Other current assets 24,304 20,877
Property, plant, and equipment, net 320,023 280,043
Goodwill 411,346 321,913
Intangible assets, net 340,408 333,746
Other non-current assets 26,280 25,367
Total assets $ 1,663,617 $ 1,473,309
LIABILITIES AND EQUITY
Current liabilities $ 284,719 $ 291,899
Accounts payable 141,140 114,932
Current portion of debt 11,555 11,325
Billings in excess of costs incurred 17,652 27,124
Accrued expenses and other liabilities 97,672 121,923
Other current liabilities 16,700 16,595
Non-current liabilities 1,016,882 964,835
Long-term debt 928,075 878,524
Other non-current liabilities 88,807 86,311
Total liabilities 1,301,601 1,256,734
Shareholders’ equity

Common stock, par value $0.01: authorized 1,000,000 shares; issued
115,016
shares, outstanding 114,006 shares at September 30, 2018;
issued
105,359 shares, outstanding 104,949 shares at September 30,
2017

1,145 1,054

Treasury stock: 1,010 shares at September 30, 2018 and 410 shares
at
September 30, 2017

(2,837 ) (2,607 )
Additional paid-in capital 533,435 388,986
Retained deficit (163,871 ) (170,006 )
Accumulated other comprehensive loss, net of tax (9,017 ) (5,989 )
Total Evoqua Water Technologies Corp. equity 358,855 211,438
Non-controlling interest 3,161 5,137
Total shareholders’ equity 362,016 216,575
Total liabilities and shareholders’ equity $ 1,663,617 $ 1,473,309

EVOQUA WATER TECHNOLOGIES CORP.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS

(In thousands)

Year Ended September 30,
2018 2017
Operating activities
Net income $ 7,884 $ 6,410
Reconciliation of net income to cash flows from operating activities:
Depreciation and amortization 85,860 77,886
Amortization of deferred financing costs (includes $5,575 and $3,094
write off of deferred financing fees)
8,073 8,511
Deferred income taxes (6,232 ) 1,273
Share-based compensation 15,742 2,251
(Gain) loss on sale of property, plant and equipment (6,750 ) 1,230
Foreign currency losses (gains) on intracompany loans 5,766 (5,625 )
Changes in assets and liabilities
Accounts receivable (3,139 ) (44,047 )
Inventories (12,051 ) (5,948 )
Cost and earnings in excess of billings on uncompleted contracts (3,544 ) (17,296 )
Prepaids and other current assets (3,773 ) (2,971 )
Accounts payable 24,945 4,707
Accrued expenses and other liabilities (22,851 ) (2,243 )
Billings in excess of costs incurred (9,254 ) 1,301
Income taxes 2,777 6,656
Other non-current assets and liabilities (2,436 ) (3,593 )
Net cash provided by operating activities 81,017 28,502
Investing activities
Purchase of property, plant and equipment (80,713 ) (57,775 )
Purchase of intangibles (1,950 ) (4,914 )
Proceeds from sale of property, plant and equipment 21,641 5,422
Proceeds from sale of business 430
Acquisitions, net of cash received of $27 and $209 (146,443 ) (77,628 )
Net cash used in investing activities (207,035 ) (134,895 )
Financing activities
Issuance of debt, net of deferred issuance costs 155,270 415,602
Borrowings under credit facility 129,000 131,000
Repayment of debt (242,470 ) (423,418 )
Repayment of capital lease obligation (10,474 ) (7,962 )
Payment of earn-out related to previous acquisitions (5,528 )
Proceeds from issuance of common stock 137,605 5,521
Taxes paid related to net share settlements of share-based
compensation awards
(8,807 )
Stock repurchases (230 ) (1,474 )
Distribution to non-controlling interest (3,725 ) (4,750 )
Net cash provided by financing activities 150,641 114,519
Effect of exchange rate changes on cash (1,512 ) 766
Change in cash and cash equivalents 23,111 8,892
Cash and cash equivalents
Beginning of period 59,254 50,362
End of period $ 82,365 $ 59,254

Contacts

Evoqua Water Technologies Corp.
Investors
Dan Brailer,
724-720-1605 (office)
412-977-2605 (mobile)
[email protected]
or
Media
Lisa
Marchewka, 978-614-7219 (office)
[email protected]

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