Shares of Aegion Corporation AEGN gained around 5.5% since the company reported its fourth-quarter and 2014 results on Feb 25. Aegion’s adjusted earnings from continuing operations came in at 48 cents per share, improving 20% year over year. Earnings also surpassed the Zacks Consensus Estimate of 40 cents.
Including restructuring, impairment and acquisition related items; Aegion reported a loss per share of 90 cents in the quarter contrary to earnings per share of 37 cents in the prior-year quarter.
Operational Update
Total revenue was $352 million in the quarter, which improved 11.6% year over year and also beat the Zacks Consensus Estimate of $334 million.
Adjusted cost of sales increased 9.6% to $268.4 million from $244.8 million in the year-ago quarter. Adjusted gross profit rose 18% year over year to $83.8 million. Gross margin expanded 130 basis points (bps) year over year to 23.8%.
Adjusted operating expenses went up 13.8% year over year to $55 million. Adjusted operating income was $28.8 million, up 20.6% year over year. Operating margin in the quarter was 8.2%, expanding 60 bps from the year-ago quarter. Including one-time items, Aegion reported an operating loss of $34 million as against an operating profit of $23.9 million in the year-ago quarter.
Segmental Performance
Revenues from the Infrastructure Solutions segment grew 3.9% year over year to $145 million. The segment’s operating income surged around 91% year over year to $15.8 million driven by revenue growth and margin expansion. Insituform’s North American operations delivered revenue growth and improved profitability for the year. Fyfe/Fibrwrap generated a profit for 2014 on strong recovery in North America in the second half as well as growth in Asia.
The Corrosion Protection segment’s revenues increased 9.9% to $127 million from $115.8 million in the prior-year quarter on the strength of the Canadian market in 2014 as well as a reduction in the operating loss at the coating facility in Louisiana, partially offset by a decrease in revenues in the energy pipe lining business in North America and the Middle East. The segment’s operating income decreased 7.6% to $10.1 million as a result of an increase in operating expense from investments to enhance growth opportunities and the fact that fourth-quarter 2013 results included a $1.0 million earn-out reversal.
Revenues in the Energy Services segment increased 32.5% year over year to $79.9 million. Strong billable hours were recorded in both the downstream refining and the upstream exploration and extraction markets, partially offset by several upstream project shut down days in December as a result of unusual weather in the Central California region. The segment reported operating income of $2.9 million, declining 38% from the year-ago quarter because of the decrease in gross margin rates and additional operating expense investments.
Backlog
Consolidated backlog in the fourth quarter remained flat year over year at $758 million. Contract backlog in Infrastructure Solutions were $337.5 million in 2014, up 2.3% from 2013-end. Corrosion Protection backlog grew almost 9.5% year over year to $176 million. Backlog in the Energy Services segment declined 8.8% on a year-over-year basis to $244.5 million.
Financial Update
Aegion had cash and cash equivalents of $175 million at the end of 2014 compared with $158 million as of 2013-end. The company generated cash flow from operations of $85 million in 2014, flat with 2013-end.
Long-term debt, excluding the current portion, was $351 million as of Dec 31, 2014, compared with $367 million as of Dec 31, 2013. Debt-to-capitalization ratio was 36.9% as of Dec 31, 2014 compared with 34.8% as of Dec 31, 2013.
Goodwill Impairment
The annual impairment assessment for goodwill resulted in an impairment charge to recorded goodwill of $51.5 million in the fourth quarter of 2014. Approximately $35 million of the impairment reflects the current uncertainty in the upstream oil markets, primarily affecting the pipe coating business in North America and the coating services business in the more profitable international offshore pipeline market.
The company also recorded a $7.5 million reserve related to long-dated receivables in the fourth quarter, which increased fourth-quarter operating expense for Infrastructure Solutions. The company reached a settlement with the sellers of Brinderson during the fourth quarter related to escrow claims. The $4.5 million settlement was recorded as a reduction in operating expense in the Energy Services segment.
2014 Performance
Aegion posted adjusted earnings of $1.37 per share for 2014, which increased 8% year over year. Earnings came ahead of the Zacks Consensus Estimate of $1.30 and came in line with the upper end of the company’s guidance range of $1.27 to $1.37.
Including special items, Aegion reported a loss of 88 cents per share for the year versus a profit of $1.30 in 2013.
Revenues for the full year increased 22% to $1.33 billion from $1.09 billion in 2013 led by strong demand for its products and services. Revenues beat the Zacks Consensus Estimate of $1.31 billion.
Update on Realignment and Restructuring Plan
On Oct 6, 2014, Aegion announced a strategic Realignment and Restructuring Plan. As per the plan, Aegion has realigned its reporting segments. The restructuring efforts are proceeding ahead of plan, which is reflected in the increased savings realized during the fourth quarter of 2014. The 2014 Restructuring Plan is expected to generate annual savings of $8 to $11 million (15 cents to 20 cents per diluted share). There is strong interest in CIPP products in the restructured international markets. Restructuring is also complete at the Louisiana coating facility. The combination of Fyfe/Fibrwrap and Insituform is also proceeding as planned.
Guidance
Although Aegion has not provided any specific guidance for 2015, the company is well positioned to benefit from stability and growth within the municipal water and wastewater, commercial infrastructure and the U.S. midstream pipeline, and downstream refining end markets. In 2015, the company expects the Infrastructure Solutions platform to gain from operating income growth, particularly in North America, based on its continued focus on delivering superior customer solutions, rigorous cost management and improved market intelligence.
Aegion remains optimistic about the long-term opportunities for its technologies and services to protect, rehabilitate and strengthen urban and energy infrastructure, primarily pipelines, based on demands for aging infrastructure and the expansion of non-conventional oil and gas recovery in North America and other regions.
Aegion’s realignment efforts will help the company to better serve its clients through a more integrated sales strategy, realize significant cost savings and allow management to focus more on areas with opportunities for sustainable growth.
However, Aegion will be affected by sharp decline in crude oil prices as 15% to 20% of total revenues are contributed to the upstream energy market and there may be some exposure to the midstream market in Canada. The anticipated earnings contribution from Infrastructure Solutions and the estimated annual savings from the realignment and restructuring plan will offset, to a large extent, the likely impact that can be observe in 2015.
Chesterfield, MO-based Aegion is a diversified building and construction company which provides infrastructure protection, proprietary technologies and facilities. It also offers services related to the rehabilitation and improvement of sewer, water, energy and mining piping systems.
Aegion currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include Trex Co. Inc. TREX, Graña y Montero SAA GRAM and Quanex Building Products Corporation NX. While Trex and Graña y Montero carry a Zacks Rank #1 (Strong Buy), Quanex Building holds a Zacks Rank #2 (Buy).
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