Evoqua Water Technologies has reported results for its third quarter ended June 30, 2020.
Revenues for the third quarter of fiscal 2020 were $347.8 million, a decrease of 3.5% as compared to the prior year period. The change in revenue was driven primarily by the net impact of acquisitions and the divestiture of the Memcor product line, which resulted in a net decrease in revenue of 2.7% or $9.7 million, in addition to a small decline from negative currency translation. Organic revenues were generally consistent with the prior year period, declining by 0.3%. Net income for the quarter was $21.8 million, resulting in diluted earnings per share (“EPS”) of $0.18 as compared to $0.03 in the prior year period.
Net income was favourably impacted year over year by $7.1 million of lower tax expense, $4.4 million of lower interest expense and $3.0 million of non-cash foreign currency translation gains. Adjusted EBITDA for the quarter was $63.8 million as compared to $60.6 million in the prior year period. Adjusted EPS was $0.20 for the quarter as compared to $0.09 in the prior year period. See the “Use of Non-GAAP Measures” section below for additional information regarding Adjusted EBITDA and Adjusted EPS.
“I am pleased with our execution and overall results for the quarter. Our employees have remained focused on safety first while adapting to overcome the challenges presented by COVID-19 at our customers’ locations. During the quarter, all of our facilities remained operational, and we effectively responded to our customers’ needs. Protecting the safety of our employees and stakeholders, ensuring the resiliency of our business and managing the business for liquidity are our key priorities in the current environment,” said Mr. Ron Keating, Evoqua’s CEO.
Mr. Keating continued, “Our third quarter organic revenues, primarily adjusting for the Memcor divestiture, remained consistent with the prior year period. Capital revenues for the quarter were driven by strong microelectronics demand, while service revenues had a slight decline as we experienced COVID-19 related customer shutdowns and lower demand for event driven services. Overall Adjusted EBITDA for the quarter was strong as margins improved over the prior year. Free cash flow conversion was strong, liquidity increased sequentially, and overall leverage improved sequentially during the quarter.”
Mr. Keating stated, “Our pipeline remains robust, and we are engaged with customers on a broad range of outsourced water opportunities. We will continue to protect our employees, capitalise on current market opportunities, remain operationally nimble and enhance our balance sheet flexibility while we prepare for an eventual market recovery. We are closely monitoring customer demand trends as COVID-19 continues to provide challenges to overall market visibility and order conversion timing.”
Third Quarter Segment Results
Evoqua has two reportable operating segments – Integrated Solutions and Services and Applied Product Technologies. The results of our segments for the third quarter are as follows:
Integrated Solutions and Services
Segment revenues increased $3.3 million, or 1.5%, to $228.7 million in the third quarter of fiscal 2020 as compared to the prior year period.
Capital revenue increased by $11.7 million, exclusive of acquisitions, as compared to the prior year period. The increase was primarily driven by continued strong demand for water solutions and systems in the microelectronics end market.
Service revenue decreased by $8.8 million as compared to the prior year period. The decline was evenly driven by the timing of completion of certain large projects in the prior year as well as the impact of COVID-19 shut-downs and delays, primarily in the refining and oil and gas end markets, partly offset by price realisation related to established service contracts.
Aftermarket revenue declined by $1.0 million, while the recent investment in Frontier Water Systems, LLC contributed $1.4 million of revenue in the period.
Operating profit decreased by $4.8 million, or 12.8%, to $32.6 million in the third quarter of fiscal 2020 as compared to the prior year period.
Increased volume and price realisation drove a $2.6 million increase in segment profitability as compared to the prior year period. Additionally, cost containment measures implemented in response to the uncertainties of COVID-19 accounted for an additional $2.1 million increase in segment profitability.
Profitability was negatively impacted by $2.8 million of operational variances related to lower service volumes and service related productivity due to customer shutdowns and enhanced safety protocols in response to COVID-19, as well as $2.9 million related to increased employee related expenses.
Depreciation and amortisation expense increased by $3.8 million compared to the prior year as the segment continues to invest in revenue generating assets.
Segment Adjusted EBITDA decreased $0.8 million, or 1.6%, to $50.6 million in the third quarter of fiscal 2020 as compared to the prior year period. The decline in segment Adjusted EBITDA generally resulted from the same factors which impacted operating profit, other than the change in depreciation and amortisation, and also excludes restructuring charges recognised in the period.
Applied Product Technologies
Segment revenues decreased by $15.8 million, or 11.7%, to $119.1 million in the third quarter of fiscal 2020 as compared to the same period in the prior year.
The divestiture of the Memcor product line and the acquisition of ATG UV resulted in a net reduction in revenue of $11.1 million.
An additional $1.4 million reduction in revenue resulted from unfavourable foreign currency translation.
Revenue declined across multiple product lines in the Americas and EMEA by $3.6 million and $1.7 million, respectively, mainly due to COVID-19 related customer site closures and delays. These decreases were partially offset by organic revenue growth in Asia Pacific of $2.0 million, driven by volume in the Anodes & Aquatics product lines, as demand improved in the region as it recovers from COVID-19.
Operating profit increased $1.1 million to $23.6 million for the third quarter of fiscal 2020 as compared to the prior year period.
Increased operating profit was driven by mix and price performance improvements of $3.2 million and operational performance improvements of $2.7 million related to the cost reduction initiatives associated with two-segment realignment.
These increases were offset by the impact of decreased volume by $2.9 million, $0.9 million in materials inflation and employee expenses, $0.2 million due to the divestiture of the Memcor product line net of the acquisition of ATG UV Technology, and $0.2 million of unfavourable foreign currency translation.
Segment operating profit also includes the positive impact of $0.9 million of lower depreciation expense.
Further net operating profit decrease of $1.4 million was attributable to the change in other non-recurring charges or benefits as compared to the prior year period.
Segment Adjusted EBITDA increased $1.6 million, or 5.9%, to $28.9 million in the third quarter of fiscal 2020 as compared to $27.3 million in the same period of the prior year. The increase in segment Adjusted EBITDA was driven by the same factors which impacted segment operating profit, other than the change from depreciation and amortisation, and for this segment also excludes restructuring and other activity incurred in the current year that increased Adjusted EBITDA by $1.4 million as compared to the prior year period.