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Aegion's (AEGN) Q3 Earnings Meet Estimates, Revenue Miss

Zacks Equity Research

Aegion Corporation AEGN reported mixed third-quarter 2019 results, wherein earnings met the Zacks Consensus Estimate, while revenues missed the same due to lower revenues across segments and margin pressure. Notably, the company lowered Infrastructure Solutions and Corrosion Protection’s revenue projection.

Adjusted earnings per share (EPS) of 40 cents declined 11.1% from the year-ago profit level. Total revenues of $308.8 million lagged the consensus mark of $327 million by 5.5%. Also, the reported figure was down 9.1% on a year-over-year basis.

On a same-store basis, revenues fell 6% due to lower contribution from a large coating project at Corrosion Protection.

Aegion Corporation Price, Consensus and EPS Surprise

Aegion Corporation Price, Consensus and EPS Surprise

Aegion Corporation price-consensus-eps-surprise-chart | Aegion Corporation Quote

Operating Highlights

Adjusted gross margin of 21.6% remained on par with the year-ago period. However, adjusted operating margin contracted 100 bps year over year to 6.4% owing to lack of high-margin coating project contributions within Corrosion Protection.

Segmental Performance

Infrastructure Solutions: Revenues in the segment inched up 0.3% year over year to $156.1 million. Excluding exited or to-be-exited businesses, the same grew 2% from the prior-year period, driven by strong improvements in crew productivity in the North America CIPP business.

Adjusted gross and operating margins rose 70 bps and 60 bps, respectively, during the reported quarter. The upside was driven by a solid uptick in the North America CIPP business and the exit of underperforming international CIPP operations. In fact, gross margins in the North America CIPP business improved nearly 200 bps from the prior year.

New orders in the segment jumped more than 40% from the year-ago period, backed by strongest quarterly wins in the North America CIPP business. Segment’s backlog (excluding the impact of exited or to-be-exited businesses) came in at $310.9 million as of Sep 30, 2019, marginally down from the corresponding period of 2018. The decline was mainly due to softness in the AsiaPacific Fyfe business, caused by economic and geopolitical challenges.

Corrosion Protection: The segment’s revenues deteriorated 28.1% year over year to $75.9 million. Excluding exited or to-be-exited operations, revenues were down 21% year over year due to the absence of contributions from large Middle East coating projects completed in the prior year. Market softness in the Canadian cathodic protection business added to the woes.

Adjusted gross margin contracted 280 bps in the quarter, which can be attributed to top-line weakness. Adjusted operating margin also shrank a significant 620 bps year over year due to the above-mentioned headwinds.

Backlog (excluding the impact of exited or to-be-exited businesses) in the segment came in at $134.8 million as of Sep 30, 2019, up 7.6% year over year.

Energy Services: The segment’s revenues during the reported quarter totaled $76.8 million, down 2% year over year. The decrease was primarily due to lower construction revenues, partly offset by higher maintenance and turnaround volumes.

Nonetheless, adjusted gross and operating margins improved a whopping 260 bps and 250 bps, respectively, from the year-ago level, backed by significant improvement in construction profits following isolated project challenges in the prior year.

Backlog in the said segment grew 11.7% from the year-ago quarter to $213.4 million as of Sep 30, 2019.

Financial Update

Aegion’s cash and cash equivalents as of Sep 30, 2019 were $52 million, down from $83.5 million at the end of 2018. Net cash provided by operations was $31.2 million in first nine months of 2019 compared with net cash of $14 million provided by operations in the comparable period of 2018.

Backlog as of Sep 30, 2019 totaled $683 million. Excluding the impact of exited or to-be-exited businesses, the said metric grew 5% year over year, driven by a 16% increase in orders.

Update on Strategic Actions

In 2017, Aegion had embarked on a series of strategic actions targeted to generate more predictable and sustainable long-term earnings growth. In October 2019, the company divested the CIPP contracting operations in the Netherlands and a 55% interest in the Tite Liner joint venture in Mexico.

The company expects planned divestitures and its exit from the remaining international businesses to be completed by the end of 2019, except the Northern Ireland operation, which is expected to complete by early 2020.

Sale of the Middle East unit will substantially complete within 2019, however, some immaterial wind-down activities will extend through Jun 30, 2020 due to completion of projects remaining in backlog.

2019 Guidance Tweaked

Aegion expects a modest improvement in 2019 adjusted EPS on the back of a strong backlog position and market outlook in core businesses.

The company predicts revenue growth to be flat to slightly down in the Infrastructure Solutions business. Minus the effect of exited or to-be-exited operations, its top line is projected to grow 1-2% from a year ago (compared with 2-4% expected earlier). Adjusted gross margins in the said segment are likely to improve 250-300 bps compared with 150-250 bps projected earlier.

Revenues in the Corrosion Protection unit are anticipated to decline 23-26% year over year versus 15-20% expected earlier. Exclusive of the impact of discontinued or to-be-discontinued operations, revenues might decline 13-16% from the prior-year level (5-10% projected earlier). The segment’s adjusted gross margins will probably be 21-22%.

In the Energy Services segment, revenues will possibly fall 2-4% year over year, thanks to lower turnaround activities. Adjusted gross margins are projected to expand in the band of 50-100 bps.

Zacks Rank & Peer Releases

Aegion currently sports a Zacks #1 Rank (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

United Rentals URI reported third-quarter 2019 results, wherein earnings and revenues beat the respective Zacks Consensus Estimate. However, the company narrowed its full-year guidance. United Rentals remains concerned about the lingering economic uncertainty that could impact construction and industrial activity.

Masco Corporation MAS came up with disappointing results in third-quarter 2019. Both the top and bottom line missed the Zacks Consensus Estimate. Resultantly, it lowered its earnings guidance for 2019. Nonetheless, the company’s revenues and earnings improved year over year, driven by growth in both Plumbing Products and Decorative Architectural Products segments.

Owens Corning’s OC reported better-than-expected third-quarter 2019 results. The company’s earnings and net sales topped their respective Zacks Consensus Estimate and improved on a year-over-year basis. The upside was backed by increased organic growth, improved operating efficiencies as well as higher contribution from the Roofing and Composites businesses. However, bearish view for the roofing industry in fourth-quarter 2019 seems to have dented investors’ sentiment.

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