Shares of Aegion Corporation (AEGN) dipped 2.6% after the company reported third-quarter 2014 results on Oct 29, wherein adjusted earnings from continuing operations came in at 43 cents per share, a 2% year-over-year decline. Earnings, however, came in line with the Zacks Consensus Estimate. Strong revenue growth in the Water and Wastewater segment, and improvement in profit in Commercial and Structural segment due to the efforts undertaken to improve business performance in 2014 were offset by challenges related to project delays and a higher mix of lower margin activities in the Energy and Mining segment.
Including restructuring, impairment and acquisition related items; Aegion reported a loss per share of 45 cents per share in the quarter contrary to earnings per share of 37 cents in the prior-year quarter.
Operational Update
Total revenue was $350 million in the quarter, which improved 14% year over year and also beat the Zacks Consensus Estimate of $348 million. Brinderson’s contribution resulted in an increase of $29.4 million in revenues during the quarter.
Adjusted cost of sales increased 14% to $271 million from $238 million in the year-ago quarter. Adjusted gross profit rose 14% year over year to $79 million. Gross margin contracted 10 basis points (bps) year over year to 22.5%.
Adjusted operating expenses went up 10% year over year to $52.9 million. Adjusted operating income was $26 million, up 21% year over year. Operating margin in the quarter was 7.4%, expanding 40 bps from the year-ago quarter. Including one-time items, Aegion reported an operating loss of $13.9 million as against an operating profit of $24.3 million in the year-ago quarter.
Segmental Performance
Revenues from the Energy and Mining segment grew 17% year over year to $197.5 million. The segment’s operating income went down 18% year over year to $12.5 million. Weak market conditions in several of United Pipeline System’s international markets, delayed work releases in the United States, completion of the large Morocco project in 2013 with no comparable contribution during the third quarter of 2014, lower gross margins at Corrpro due to higher proportion of construction-related cathodic protection installation activities and slow pace of production on the CRTS/Wasit project led to the decline. However, these were marginally offset by operating income growth from Brinderson and a small profit from Bayou’s operations in Canada and Louisiana.
The Water and Wastewater segment’s revenues increased 11% to $135.6 million from $122 million in the prior-year quarter. The segment’s operating income rose 22% year over year to $12.3 million. The growth was driven by increased workable backlog, improved gross margins and project cost estimating, improved bidding discipline and continued focus on overall project management.
Revenues in the Commercial and Structural segment increased 1% year over year to $17 million. The segment reported operating income of $1.3 million in contrast to loss of $0.9 million in the year-ago quarter. Strong project execution in the North American and Asian businesses and a small decrease in operating expense led to the improvement.
Backlog
Consolidated backlog in the third quarter went up 5% year over year to $752 million (including Brinderson backlog of $248.1 million). Contract backlog in the Water and Wastewater segment was $292 million in the quarter, up 3% from the year-ago quarter. Energy and Mining backlog grew almost 9% year over year to $420 million. Backlog in the Global Commercial and Structural segment declined 17% on a year over year basis to $40 million.
Financial Update
Aegion ended the third quarter with cash and cash equivalents of $116 million, down from $158 million as of 2013-end. Cash flow from operating activities for the period of nine months ended Sep 30, 2014 was $8.7 million compared with $41.6 million in the year-ago period.
Long-term debt was $357.8 million as of Sep 30, 2014, compared with $366.6 million as of Dec 31, 2013. Debt-to-capitalization ratio was 35.7% as of Sep 30, 2014 compared with 34.8% as of Dec 31, 2013.
Realignment and Restructuring Plan
On Oct 6, 2014, Aegion announced a strategic Realignment and Restructuring Plan. As per the plan, Aegion will realign the reporting segments by combining Commercial and Structural and Water and Wastewater to form the Infrastructure Solution segment; form the Energy Services segment consisting of Brinderson; and create the Corrosion Protection segment with the remaining Energy and Mining businesses, beginning in the fourth quarter of 2014.
Aegion will exit Insituform’s contracting operations in France, Switzerland, India, Hong Kong, Malaysia and Singapore and optimize Bayou’s coating facilities in Louisiana, including the shutdown of under-utilized coating plants, to improve operating efficiencies and reduce costs.
Aegion estimates cash charges of $15 million to $18 million to be incurred from the fourth quarter of 2014 through the third quarter of 2015 for employee severance, extension of benefits, employment assistance programs and other costs associated with the restructuring. The plan is expected to generate annual savings of $8 to $11 million (15 cents to 20 cents per diluted share). In Q4, the company expects a savings of 3 cents per share to 4 cents per share.
Guidance
Aegion maintained its earnings per share guidance in the range of $1.27 to $1.37 for 2014. Aegion believes, given the Q3 performance and the backlog, the company is on track to meet the guidance.
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. The company expects the demand for the maintenance services offered by Corrpro, United Pipeline Systems and Brinderson for midstream pipeline infrastructure and downstream refineries to remain favorable. Moreover, Aegion is currently engaged in a comprehensive planning process for 2015 that is focused on assessing all of its end markets and further improving its project execution capabilities.
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 #5 (Strong Sell). A better-ranked stock in the sector include Trex Co. Inc. (TREX) with a Zacks Rank #2 (Buy).
Peer Performance
Trex’s third-quarter earnings of 28 cents per share reversed the prior-year quarter loss of 45 cents per share and also outpaced the Zacks Consensus Estimate of 24 cents.
Continental Building Products, Inc. (CBPX) reported adjusted earnings per share of 22 cents, a 120% improvement from 10 cents per share in the prior-year quarter, Earnings also outpaced the Zacks Consensus Estimate of 18 cents.
Gibraltar Industries, Inc. (ROCK) reported adjusted earnings of 30 cents per share in the third quarter of 2014, slightly down compared with 31 cents earned in the year-ago quarter. However, the bottom line surpassed the Zacks Consensus Estimate of 23 cents.
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