Aegion Reports 2014 Second Quarter Financial Results

Aegion Corporation (Nasdaq Global Select Market: AEGN) today reported financial results for the second quarter and first six months of 2014. For the second quarter, reported GAAP income from continuing operations totaled $12.8 million, or $0.33 per diluted share, compared to $18.2 million, or $0.47 per diluted share, in the prior year period. Excluding adjustments, income from continuing operations was $13.1 million, or $0.34 per diluted share, for the second quarter of 2014 compared to $13.3 million, or $0.34 per diluted share for the prior year quarter (non-GAAP1). In the second quarter of 2013, the Company recognized $1.3 million, or $0.03 per diluted share, for equity in earnings of affiliated companies from two joint ventures that were divested prior to April 1, 2014, with no resulting contribution in the second quarter of 2014.

For the first six months of 2014, reported GAAP income from continuing operations was $17.3 million, or $0.45 per diluted share, compared to $21.8 million, or $0.56 per diluted share, in the prior year period. Excluding adjustments, income from continuing operations for the first six months of 2014 totaled $17.9 million, or $0.47 per diluted share, compared to $16.9 million, or $0.43 per diluted share.

Chuck Gordon, Aegion’s Interim Chief Executive Officer, commented, “Aegion achieved second quarter results that were largely in line with expectations as Corrpro’s performance rebounded in May and June. Insituform’s North American business completed a strong second quarter and Fyfe North America delivered improved performance consistent with our expectations for a recovery in 2014. We did experience unplanned project delays late in the quarter, particularly related to the CRTS/Wasit project and United Pipeline Systems. While Brinderson’s upstream business increased over 50 percent year-over-year on a pro forma basis, additional opportunities expected in the quarter have not materialized including slower progress in the Permian Basin. Aegion has a strong backlog position, which supports our expectations for a seasonally strong second half of the year that can achieve full-year non-GAAP earnings per share from continuing operations in the range of $1.50 to $1.65, in line with our previously stated guidance.”

2014 Second Half Outlook

The second half of the year is seasonally the largest for Corrpro, United Pipeline Systems and Brinderson within the Energy and Mining platform. Corrpro’s backlog, as of June 30, 2014, was a record $87 million as new orders increased by 9.4 percent in the second quarter compared to prior year period and the bid table remains robust. United Pipeline Systems has an active bid table, which is indicative of the favorable market conditions in North America and the Middle East, as well as new opportunities in South America. Brinderson enjoyed record billable hours for the downstream maintenance business in the first half of 2014, which we expect to continue in the second half of the year. Brinderson also is pursuing several opportunities in the upstream market with the potential for contribution in the second half of 2014. For the project-based Energy and Mining businesses, pipe welding rates for the offshore portion of the Wasit project have improved in July from the significantly slower pace in the second quarter. The delays experienced in the second quarter shifts the expected completion date to early 2015, consistent with prior forecasts. Bayou has a strong backlog position in Canada and the United States. Bayou’s facility in Louisiana recently received two key project awards increasing backlog to the highest levels since mid-2012. The timing for pipe delivery and coating schedules, which define the start-date for these projects, is yet to be determined. Based on these favorable market conditions and backlog, the Company continues to expect 2014 revenues in the range of $770 million to $800 million and operating margins in the range of 8.0 percent to 9.0 percent.

For the Water and Wastewater platform, backlog as of June 30, 2014 was $317.3 million, a 19.6 percent increase from June 30, 2013. Insituform’s North American business has a strong backlog position, creating a solid base for continued improved performance in the second half of 2014. The international markets generally remain stable. The strong North America position continues to support full year 2014 revenues of $500 million to $525 million and operating margins of 7.0 percent to 8.0 percent.

The Company achieved progress in the first half of 2014 with respect to Commercial and Structural’s North American business. Investments made in 2013 and 2014 to create a more robust sales organization and stronger project management capabilities are taking hold through increased sales visibility reflected in recent new orders that were the highest since 2012. Improving conditions in the North American operation and opportunities in Asia reaffirm the expectations for Commercial and Structural revenues in the range of $70 million to $85 million and operating margins ranging from negative low single digits to positive low single digits.

“We have the backlog in hand and a solid bid table with our core businesses for a strong second half of 2014,” said Mr. Gordon. “While we have a cautious outlook this year with respect to the project-based businesses, we are making progress in the expected recovery of our Commercial and Structural platform. As we look ahead, our top priority is to improve execution across the organization through investments in people and best-in-class operating systems, assessing businesses and markets to best position our go-to-market strategies, and engendering stronger cooperation and collaboration to leverage resources and best practices. These efforts are part of our ongoing commitment to further the Company’s long-term strategic and financial objectives. Aegion enjoys favorable end markets that support both our current expectations for growth in 2014, as well as our strategy to achieve sustainable growth and improve return on invested capital.”

Consolidated Highlights

Second Quarter 2014 versus Second Quarter 2013

Revenues increased $80.8 million, or 33.4 percent. Brinderson contributed $72.7 million in revenues during the quarter with no revenue contribution during the second quarter of 2013. Revenues from the Water and Wastewater segment increased $14.0 million, or 12.1 percent, primarily in the North American business. Partially offsetting these increases were decreased revenues from the industrial linings business as a result of declines in certain international mining markets and the completion of the large Moroccan project in late 2013, and the continued lull in pipe coating project activity for the Gulf of Mexico. Commercial and Structural revenues decreased $0.2 million from lower workable backlog and customer driven project delays in the North American operations, partially offset by increase in material sales and installation revenues in the Asian operations.

Gross profit increased $13.4 million, or 22.8 percent, to $71.9 million, with Brinderson contributing $10.9 million. Water and Wastewater increased gross profit by $3.7 million, or 14.4 percent, due to increased revenues and improved margins from the North American operations. Partially offsetting the increases were the issues noted above impacting revenues and decreased project work from both CRTS and Bayou coating operations. Excluding Brinderson, consolidated gross margins improved by 20 basis points in the quarter primarily due to improved margins for Insituform’s North America business and higher margin work performed in Bayou’s operations in Louisiana. Commercial and Structural gross profit of $6.7 million was even with the prior year quarter.

Operating expenses increased $9.9 million, or 24.3 percent. Brinderson added $7.3 million to operating expenses during the second quarter of 2014. Exclusive of Brinderson, operating expenses as a percent of revenue for Energy and Mining increased 300 basis points, primarily due to continued strategic investments in the Middle East. Water and Wastewater operating expenses as a percent of revenue decreased 150 basis points as expenses remained relatively flat year over year while revenues grew 12.1 percent. Operating expenses as a percent of revenue for Commercial and Structural increased 270 basis points year over year due to an increase in North America related to the investments made to restore growth and improve operational capabilities.

Operating income increased 30.3 percent to $20.6 million in the second quarter of 2014 compared to the second quarter of 2013. Excluding acquisition-related expenses, operating income increased $3.4 million, or 19.3 percent, to $21.2 million (non-GAAP). The Energy and Mining and Water and Wastewater segments increased operating income by $1.6 million and $3.6 million, respectively.

The second quarter 2014 financial results also include a $0.5 million, or $0.01 per diluted share, non-cash unrealized loss from foreign currency fluctuations on dollar denominated foreign subsidiary loans and payables.

Cash Flow

Net cash flow provided by continuing operations for the first six months of 2014 was $19.0 million compared to $16.9 million provided in the first six months of 2013. The increase in operating cash flow compared to 2013 was primarily due to improved net income, partially offset by the timing of working capital requirements.

Net cash flow used by investing activities in the first six months of 2014 was $5.6 million compared to $6.5 million of cash provided by investing activities in the first six months of 2013. Capital expenditures in the first six months of 2014 were $13.8 million compared to $13.1 million in the first six months of 2013, a slight increase due to the addition of Brinderson and more maintenance capital to support Insituform’s growing North American business. On March 31, 2014, we sold our 49% ownership interest in Bayou Coating, L.L.C. for $9.1 million. On June 30, 2013, we received $18.3 million in connection with the sale of our 50 percent interest in our German joint venture.

Net cash flows from financing activities used $25.2 million during the first six months of 2014 compared to $28.1 million used in the first six months of 2013. During 2014, the Company used $20.7 million to repurchase 882,840 shares of common stock through open market purchases and in connection with the Company’s equity compensation programs, as compared to $15.8 million to repurchase 696,310 shares in the first six months of 2013. During the first six months of 2014 and 2013, the Company made scheduled principal payments on its long-term debt of $8.9 million and $12.5 million, respectively.

Net cash flow for the first six months of 2014 was an outflow of $11.9 million compared to an outflow of $15.4 million in the first six months of 2013.

Energy and Mining segment contract backlog at June 30, 2014 was $463.5 million, which included backlog of $248.1 million related to Brinderson. Exclusive of Brinderson, backlog at June 30, 2014 was $215.4 million, which was an increase of $54.4 million, or 33.8 percent, compared to March 31, 2014, and a $22.4 million, or 11.6 percent, increase compared to June 30, 2013. Backlog for the Energy and Mining segment (exclusive of Brinderson) improved on a year over year basis primarily due to improvements in Corrpro protection operations, primarily in the United States, and Bayou’s operations in Louisiana, which recently secured large contracts with two major customers. Offsetting these improvements were year over year declines due to the completion of the large Moroccan project in late 2013, a reduction in capital and maintenance expenditures impacting the industrial linings operations, primarily in South America and Mexico, and progress on the Wasit gas field project in Saudi Arabia. At the date of its acquisition, July 1, 2013, backlog for Brinderson was $201.0 million and has increased 23.4 percent to $248.1 million at June 30, 2014. This increase was principally due to securing significant new downstream long-term maintenance contracts with customers in the fourth quarter of 2013.

Contract backlog in our Water and Wastewater segment was $317.3 million at June 30, 2014, a $31.8 million, or 11.1 percent, increase from backlog at March 31, 2014 and a $52.1 million, or 19.6 percent, increase from backlog at June 30, 2013.

Contract backlog for the Commercial and Structural segment was $48.4 million at June 30, 2014. This represented an increase of $2.0 million, or 4.3 percent, compared to March 31, 2014 and a decrease of $3.8 million, or 7.3 percent, compared to June 30, 2013. The increase compared to the prior quarter is attributable to North American backlog improvements due to improved volume of new orders and better visibility into project opportunities.

Segment Reporting

Energy and Mining

Second Quarter 2014 versus Second Quarter 2013

Excluding acquisition-related expenses (non-GAAP), Energy and Mining operating income increased $0.2 million, or 2.7 percent, to $8.3 million due principally to a $3.6 million contribution from Brinderson in the second quarter of 2014. In addition, gross profits from Bayou’s operations in Canada and Louisiana were strong when compared to the prior year second quarter. Offsetting these increases were declines in United Pipeline Systems caused by soft market conditions in several international markets and the completion of the large Morocco project in 2013 with no comparable contribution during the second quarter of 2014.

Water and Wastewater

Second Quarter 2014 versus Second Quarter 2013

Water and Wastewater achieved a $3.6 million, or 40.0 percent, increase in operating income compared to the prior year quarter. The increase came from higher revenues in Insituform’s North American operations as a result of increased workable backlog. Operating expenses increased by only a modest 0.4 percent, another contributing factor to a 200 basis point improvement in operating margins. The successes achieved from the efforts to improve project cost estimating, maintain bidding discipline and focus on strong project management execution contributed to the quarter’s results.

Commercial and Structural

Second Quarter 2014 versus Second Quarter 2013

Commercial and Structural operating income decreased $0.4 million primarily driven by increased operating expenses resulting from the investments made in 2013 and 2014 in business development professionals, operation and project management, and systems to restore the sales growth and improve the business’ operational capabilities. Second quarter 2014 operating results improved $1.8 million from the first quarter of 2014, marking the third consecutive quarter of improved operating income.

About Aegion

Aegion Corporation is a global leader in infrastructure protection and maintenance, providing proprietary technologies and services: (i) to protect against the corrosion of industrial pipelines; (ii) to rehabilitate and strengthen water, wastewater, energy and mining piping systems and buildings, bridges, tunnels and waterfront structures; and (iii) to utilize integrated professional services in engineering, procurement, construction, maintenance and turnaround services for a broad range of energy related industries. Our business activities include manufacturing, distribution, maintenance, construction, installation, coating and insulation, cathodic protection, research and development and licensing. More information about Aegion can be found on our internet site at www.aegion.com.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. We make forward-looking statements in this news release that represent our beliefs or expectations about future events or financial performance. These forward-looking statements are based on information currently available to us and on management’s beliefs, assumptions, estimates or projections and are not guarantees of future events or results. When used in this document, the words “anticipate,” “estimate,” “believe,” “plan,” “intend, “may,” “will” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission on February 28, 2014, and in subsequently filed documents. In light of these risks, uncertainties and assumptions, the forward-looking events may not occur. In addition, our actual results may vary materially from those anticipated, estimated, suggested or projected. Except as required by law, we do not assume a duty to update forward-looking statements, whether as a result of new information, future events or otherwise. Investors should, however, review additional disclosures made by us from time to time in our filings with the Securities and Exchange Commission. Please use caution and do not place reliance on forward-looking statements. All forward-looking statements made by us in this news release are qualified by these cautionary statements.

Regulation G Statement

We have presented certain information in this release excluding certain items that impacted income, expense and earnings per share from continuing operations. The non-GAAP earnings per share in 2014 exclude the earnings impact of acquisition-related expenses and the loss on sale of our 49 percent interest in Bayou Coating, L.L.C. The non-GAAP earnings per share in 2013 exclude the earnings impact of acquisition-related expenses, the gain related to the sale of our German joint venture, charges associated with our decision to liquidate Bayou Welding Works and a goodwill write-off associated with the sale of our interest in Bayou Coating, L.L.C. Aegion management uses such non-GAAP information internally to evaluate financial performance for our operations, as we believe it allows us to more accurately compare our ongoing performance across periods.

Aegion®, the Aegion® logo, Insituform®, the Insituform® logo, United Pipeline Systems®, Bayou Companies®, Corrpro®, CRTS™, Fyfe® and Brinderson® are the registered and unregistered trademarks of Aegion Corporation and its affiliates.