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Aegion Corp (AEGN)
Q3Â 2020 Earnings Call
Oct 29, 2020, 3:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning and welcome to Aegion Corporation Third Quarter 2020 earnings call. [Operator Instructions].
It is my pleasure to turn the call over to your host, Katie Kazan, Senior Vice President of strategy and communications. Katie, you may proceed.
Katie Cason -- Senior Vice President, Strategy and Communications
Good morning and thank you for joining us today. On the line with me are Chuck Gordon, Aegion's President and Chief Executive Officer; and David Morris, Aegion's Executive Vice President and Chief Financial Officer. We issued a press release yesterday that will be referenced during the prepared remarks on this call. You can find a copy of our press release and our safe harbor statement on the investors section of Aegion's website at www.aegion.com.
During this call, the company will make forward looking statements which are inherently subject to risk and uncertainty, particularly given the unknown impact of the current COVID pandemic and the company's response to these evolving circumstances. The company does not assume the duty to update forward looking statements.
With that, I'm pleased to turn the call over to chuck Gordon.
Charles Gordon -- President and Chief Executive Officer
Thank you, Katie. And good morning to everyone joining us on the call today. I'm pleased overall with results Aegion delivered in the third quarter. Our adjusted EPS at 0.32 cents came in at the high end of the guidance range we provided in late July. Driven by strong performance from our core in situ forum and corporate business units. In situ for North America business delivered exceptional results, increasing its year over year contributions for the seventh consecutive quarter. The business continues to benefit from a healthy market outlook, a favorable mix of back project backlog, operational excellence and strong cash collections. The corporate North America business also performed well putting up another quarter of strong year over year improvements driven by higher utilization, a right sized overhead structure and increased profitability.
Following restructuring activities early in the year, the business has made gains across many disciplines including project execution, order intake and cash collections, and I'm confident is on track to be a critical and stable earnings contributor following a period of underperformance. Finally, UPS business has performed very well operationally, while reacting very quickly to changing market conditions. While you're today, revenues are down versus prior year operating contribution has increased. Despite this strength, the quarter was not without its challenges, driven by more significant COVID related disruptions for the coating services business and energy services segment that began in March and persisted over the last several months.
These impacts in the form of international project delays and reduced refinery maintenance demand resulted in a combined 0.16 cent year over year reduction in adjusted DPS in the quarter, and a 45% reduction to the first nine months. David will provide more detail on our quarterly performance in a few minutes. But before that, I'd like to spend some time discussing the key initiatives we announced yesterday, starting with the strategic review of the energy services segment. The energy services business has been challenged in the near term by a sharp reduction in West Coast fuel consumption and increased pricing pressures from refinery operators. Over time, we believe the business will return to pre COVID volume and profitability levels.
However, the pace of recovery is likely to be slower than we initially expected. And the goodwill impairment charge we recorded in the quarter reflects this uncertainty over the near to medium term. Our decision to engage Bank of America as our advisors to review strategic alternatives for the energy services segment is not based on a reaction to these more recent events, but rather recognition of the lack of a long term fit of the business within the ATM portfolio. The business was acquired in 2013 as part of a strategy to diversify into oil and gas markets. as a stand-alone, the business has multiple strengths.
It's the leading provider of outsource maintenance services on the west coast. It's led by a strong and tenured management team that has built long standing relationships with leading blue chip refinery operators. Long term demand is underpinned by the need to keep aging refineries operating safely and efficiently as a critical component of the energy mix on the west coast. And the business has been a consistent free cash flow generator for ag on aided by low capital intensity, strong cash conversion and a relatively low operating risk profile driven by a stable backlog of highly reoccurring. revenue streams.
However, the business lacks of fit within the overall AGM portfolio in a couple of key areas. It does not offer the potential for significant technical differentiation, particularly in the area of pipeline infrastructure rehabilitation and protection, which we are striving for our core markets. The bill business model as a contract mean, its labor provider does not match the rest of the ag on businesses. Its margin profile is lower than our other two platforms and we don't see a path to increase margins to meet a John's expectations for our business units or segments are actions over the last several years to reduce complexity and simplify the organization and key markets have yielded multiple benefits.
The management team with the support of the board of directors believes this evaluation further advances that strategy to narrow our focus and resource allocation toward being a leading provider of differentiated pipeline rehabilitation and protection technologies. With that goal in mind, we also announced our plans to evaluate opportunities to meaningfully grow our North America water and wastewater presence with the following considerations in mind. Our Cornerstone and such foreign business has been an industry leader in the trenchless rehabilitation space for almost 50 years, and we believe there's further opportunities to whale an unmatched market reach.
In search for North America is our largest and most profitable business generating returns on capital well north of 20% for the last several years. The municipal water and wastewater space benefits from significant long term demand trends to keep the nation's aging infrastructure operating safely and efficiently for the benefit of public health and the environment. Some of the more recent studies estimate that annual spending for current water and sewer rehabilitation would have to more than double to meet current needs. And we've seen over the last several months, the need for pipeline repair has been largely unhindered by the pandemic and economic uncertainty. While we believe there's growth on the wastewater side, the drinking water market represents significant untapped potential.
We estimate that approximately 2 billion in annual spending today occurs to dig and replace aging while drinking water pipeline systems. The social disruption increased carbon footprint and rising costs to dig and replace methods, particularly in urban areas, creates a significant long term runway for growth and trenchless rehabilitation technologies. Certainly, this is new strategy for us. As we've been advancing efforts to tap into this market for several years. We remain committed to the development commercialization of a robotic solution to solve the challenge of reinstating connections in the small diameter pressure pipe market. Well, our efforts have been slowed this year due to the pandemic.
We have field tested. We have field testing opportunities planned in the fourth quarter for Amina spoke client in Illinois. We are encouraged by the reliability of our robots during lab testing over the last several months, and we are excited to prove this technology out in the field. We also continue to see increasing demand for fusible PVC and tight liner, as accepted translates pipeline rehabilitation technologies. Notwithstanding this progress, we believe there's more we can do to penetrate the drinking water market to be an early and leading transport solutions provider in the space. Well, our top priority today is an expanding our water and wastewater presence. We also remain committed to the leading technologies within our corrosion protection segment, which today primarily serve the oil and gas markets.
The corporate North America business which is focused on maintaining pipeline safety and environmental performance, as a leading North American provider of cathodic protection technology remains a key focus for Aegion and represents significant earnings upside over the next several years. Long term demand is supported by compliance driven mandates for midstream pipeline operators, and is more insulated from impacts related to commodity price fluctuations. Additionally, we are focused on expanding corporate offerings to serve broader energy market applications, including those in the growing renewables landscape.
Our asset integrity management tool continues to gain broader acceptance and adoption by some of our larger customers as their primary corrosion assessment tool for maintaining compliance and to assist in prioritizing their integrity spend. A differentiating feature of our asset integrity platform is that allows customers to align their inline inspection data with the cathodic protection information we generate to provide a more comprehensive view of the condition of their pipeline asset.
Our united business has been and will continue to be a leading market provider of pipeline lining technology in the oil and gas space space, but there exists a good opportunity in the municipal market as well. The tight liner technology continues to be successful used a municipal pressure pipe projects, and we believe there's significant pet potential to better leverage this technology to support our growth initiatives in the pressure market. Our coating services business has a strong niche market position, and we are focused on continuing to leverage our differentiated robots and coding technologies into other markets and across other portions of the AGI business. to support these strategic efforts, agent's balance sheet is in the best shape of the last several years and we have significant financial firepower to advance a combination of organic and inorganic condition is to grow the business.
We can also further differentiate ourselves as a leading technology provider sustainable solutions for critical pipeline rehabilitation and protection, which represents an attractive investment opportunity for what we believe will be a long term shift in investment dollars toward toward supporting sustainable and ESG friendly solutions. We plan to provide more update on these strategic initiatives, including the evaluation of energy services within the coming months. Before I turn the call over to David, I want to spend a few minutes discussing our backlog position and current market outlook for each of the segments. Our consolidated contract backlog as of September 30 2020, was 670 8 million up 2% over the prior year when excluding accident or to be exited operations. backlog for the infrastructure solutions segment is down two and a half percent compared to prior year. driven primarily by a slight decline in in situ form North America.
This decline is not a function of weakening market, it is more a reflection of comparing to a very strong Q3 backlog number last year, which was capped off by a record order intake month in September 2019. Year to date, new orders for unstitch for North America are up 3% compared to 2019. And we continue to project overall market growth for the misko wastewater business this year. While backlog is down for our five structural strengthening business, primarily due to covid weakness. Underground solutions backlog is up 16% year over year, which further supports a positive outlook for municipal market demand. In recent months, we've spent a fair amount of time communicating about the resiliency of municipal funding for water and wastewater markets.
We have certainly seen this play out in our strong order intake this year. But there remains some broader concern about the next 12 to 18 months and what they might look like. During the quarter we surveyed many of our municipal agencies to better understand set and set sentiment as they begin to roll out plans for their fiscal year 2021 budgeting. Based on our survey results, more than half of the respondents expected no change to water and wastewater capital funding in 2021. And approximately 30% of respondents actually expect to see increases in spending next year, which we believe provides a nice counterbalance to the 20% of respondents that signaled the potential for reduced spending. The water and wastewater market is highly fragmented, so it's difficult to project the behavior of our more than 1200 North America customers.
However, we believe our findings, which have been corroborated by other market research reports we've seen in the last month provide strong support for continued stability in the North America ci PP market in 2021. Additionally, ag on in our in situ form business in particular, would be a clear beneficiary of any potential federal stimulus that offers support to water and wastewater infrastructure investment. shifting to corrosion protection, contract backlog excluding exited businesses was up 3% compared to price growth was driven primarily by a 12% increase in corporate North America backlog driven by strong order intake over the last several months.
This growth is known to be more selective in bidding higher value at design and engineering projects and shift away from the riskier and lower margin construction projects that have resulted in lower revenues this year after rebate after a rebasing of our revenues this year due to downsizing our footprint in certain in certain North America regions. We expect to see top line growth as we move into 2021. backlog for the United businesses down compared to the prior year, primarily driven by weaknesses in the North American oil and gas market. However, we continue to see strong growth in the Middle East, following our successful expansion in last year into Saudi Arabia. The strength of the Middle East business has helped united to maintain results on par with the prior year despite pronounced impacts in the North American markets.
Coding services backlog is higher than prior year, primarily due to the large international projects that have been delayed this year. Two projects alone, one in the Middle East and one in South America represent approximately 12 million of revenue and backlog that were expected to be performed this year, but will now shift the majority of contributions into 2021. While we are disappointed with Project delays, it is important to note that none of our coatings projects have been cancelled. COVID impacts have likely pushed our sales funnels out by 12 to 18 months, months, which provides earnings upside for the next couple years. Shifting energy services contract backlog increased 9% over the prior year to 230 2 million.
The increase here is not intuitive, given the volume weaknesses we've seen over the last several months, but it's driven by a few key factors. First, our turnaround backlog is up sharply driven by expectations for a strong q 20 q1 21 turnaround season, following the impact of several deferrals this year. Construction backlog is up slightly driven by remaining work on the renewable diesel construction project that we announced in late June. The scope of this project has increased from the 8 million previously announced over $14 million. Maintenance volumes overall are on par with the prior year with new Rocky Mountain winds helping to offset lower hours with some of our larger West Coast clients.
That wraps a review of the market outlook. One last brief update I want to touch on as a CEO search we announced last quarter as part of my plans to retire. We are now four months into a process that often takes six to nine months. Our board of directors continues to advance the search process for a CEO successor and I continue to remain committed through this transition.
I'll turn the call over to David to discuss our quarter results in Q4 Corp for Q4 guidance for the business, David?
David Morris -- Executive Vice President and Chief Financial Officer
Thank you Chuck. And good morning to everyone on the call. I will walk through a more detailed review of our third quarter results and our guidance outlook as we close out the year. Echoing Chuck's comments I am pleased with the results in the quarter which came in toward the high end of our guidance. I am also very pleased with the strength of our balance sheet. The cash discipline AGM has achieved this year positions the Oregon organization very nicely to capitalize on growth opportunities moving forward. And we'll discuss that more in a few minutes. But first I'll start with a review of our consolidated p&l results for the third quarter. Starting with the top line, total revenues in the quarter were $276 million declining 33 million or 11% compared to the prior year when excluding exited or to be exited businesses.
The revenue decline was 6%, which was generally in line with our guidance range. As was the case in the second quarter, we saw varying degrees of COVID related reductions across much of the business. However, the in situ for North American business continued to be a bright spot and grew his top line revenues by $12 million, or 10% from the prior year, which helped offset reduced volumes in other parts of the business. We achieved a 90 basis point improvement in adjusted gross margins, as well as a 30 basis point improvement in adjusted operating margins. This margin performance helped us to manage a nearly $33 million reduction in revenues to a decline of just over $1 million in adjusted operating income.
In addition to strong operational performance costs. Discipline was a key driver in the quarter. We also benefited from some of the saving measures that were still in place in the quarter, including approximately 3 million in savings relating related to a combination of foreign weight subsidies and the suspension of company matching contributions for retirement plans, which were partially offset by higher equity compensation expense related to the return of salary to employees following the reductions that were in place in the second quarter. We have since lifted most of the more targeted measures that were put in place in late March and expect an immaterial benefit from these actions going forward.
These items helped us to navigate reduced demand and keep employees working in certain parts of the business where we may have needed to take harsher actions otherwise, below adjusted operating income we had increased adjusted interest expense due to higher rates related to our recent credit facility amendment partially offset by reduced debt balances compared to the prior year. within other income and expense net foreign currency transit transaction losses were 700,000 in Q3 2020, compared to a gain of 100,000.
In the prior year. Our adjusted effective tax rate was 21.5%, which was slightly lower than the prior year due to the mix of earnings. Our minority interest earnings were slightly higher than the prior year due to stronger contributions from our United pipeline systems joint venture in the Middle East. All in we delivered adjusted earnings per share of 0.32 cents on a gap basis. We recorded a loss per share of 0.93 cents, which reflected a $39 million pre tax non cash charge related to the write down of goodwill and energy services. Chuck highlighted the challenges we have experienced in this business related to significant activity reductions and pricing pressure.
Given the prolonged uncertainty around the expected recovery for the business, we determined in the third quarter that a triggering event had occurred and worked with external advisors to perform a fair value evaluation, which resulted in the impairment. Other adjustments to earnings included 4.2 million in pre tax restructuring charges, the majority of which were cast charges primarily related to the substantial completion of restructuring activities in corporate North America, including the downsizing of the lower margin construction, business, and other profitability improvement initiatives. We also implemented a small number of reductions in force across other corrosion protection businesses, driven by COVID related slow downs.
Additionally, we recorded $1.3 million in charges primarily related to the divestiture of our Australian contracting business, which we announced earlier this year. We will continue to evaluate the long term financial impacts to the business and the need for more permanent or structural changes in light of covid challenges and the related oil and gas market weakness. Future charges related to the previously announced activities are expected to be immaterial. Though our evaluation of strategic alternatives for the energy services business may result in additional structural changes.
As Chuck mentioned, we plan to provide an update on this evaluation in the coming months. I will now now walk through a high level review of our third quarter results in fourth quarter guidance outlook for each of the segments. infrastructure solutions delivered another quarter of strong results that exceeded expectations driven by continued outstanding performance from the in situ for North America business. Total segment revenues declined 3%. Excluding exited or to be exited, a business's revenues increased 6% driven by a 10% increase in tissue for North America volumes, which more than offset declines from our smaller Fife, underground solutions and international businesses. adjusted gross profit margins reached the highest quarterly levels in more than four years, and adjusted operating margins increased 240 basis points to more than 15%.
Results benefited from strong productivity in North America, improved international results, and favorable fuel and material cost variances. All in we increased adjusted operating profit for the segment by 16% to more than $23 million, which is a tremendous result in light of the day to day challenges our crews face to continue to face and successfully navigate during this pandemic. For the fourth quarter, we expect infrastructure solutions revenues to decline five to 7% compared to the prior year, excluding the impact of exited or to be exited businesses revenues are projected to be flat to slightly improved. adjusted adjusted operating margins are expected to be 50 to 100 basis points higher than the prior year margins over the last six months have benefited from an estimated 100 to 150 basis point uplift related to fuel pricing variances on projects that were bid prior to the sharp downturn in oil prices, as well as a benefit related to foreign wage subsidies.
We expect this benefit to taper off as we close out the year and move into 2021 shifting to our corrosion protection segment, top line performance came in shy of our guidance expectations primarily due to delays and international coatings projects. However, strong margin performance primarily from our corporate North America business helped to offset these impacts. revenues for the segment declined 20% overall and 17% when excluding exited or to be exited businesses. Much of the year over year decline was expected as a result of the downsizing of some of our unprofitable corporate us construction activities. So though we saw additional reductions due to the international coding project delays, despite these top line changes, we kept adjusted operating income largely flat to the prior year due to strong adjusted margin increases.
Corporate North America was a bright spot here delivering adjusted gross margin increases of 640 basis points and adjusted earnings contributions that more than doubled the prior year's results. The majority of this increase was due to higher utilization and improved performance, although we also received a benefit for more foreign wage subsidies. For the fourth quarter corrosion protection segment revenues are expected to decline 12% to 17%. From the prior year. adjusted operating margins are expected to increase 200 to 300 basis points, primarily driven by continued improvements in corporate North America profitability and contributions. The large coding projects in the Middle East and South America, representing approximately 12 million in current backlog are currently expected to contribute an immaterial amount in the fourth quarter, with the majority of contributions shifting into 2021.
Any acceleration of scheduling to provide upside to the quarter, though we are not expecting that at this time. The energy services segment remains the most heavily impacted from the pandemic and results came in lower than our expectations due to the sharp reduction in West Coast fuel consumption that has forced refinery operators to pull back on maintenance spending. While revenues declined 18% from Q3 2019 revenues increased 20% compared to the trough we experienced in the second quarter, reflecting our partial recovery in volumes. adjusted margins were impacted by the effects of temporary price concessions granted to refinery operators, as well as unfavorable fixed costs absorption. As we look to the fourth quarter, we expect energy services to experience revenue declines of 30% to 40% compared to the prior year, resulting in a projected adjusted operating loss for the quarter.
As we look toward 2021. We expect revenues and profitability to improve sharply and we are well positioned with backlog for a strong first quarter turnaround season. The business also continues to have opportunities to increase this activities through additional expansion in Washington State and the mark Rocky Mountain region and into adjacent industrial spaces. However, we are not projecting recovered to pre COVID volume levels for this segment for the next 18 to 36 months. And we expect the impact of pricing pressures to read results in a 100 to 150 basis point decline in gross margins over the near to medium term.
That wraps the review of our operating segment results and outlook. All in we are projecting adjusted earnings per share in the fourth quarter to be slightly below Q3 20 results with the biggest sequential change driven by typical seasonal revenue reductions in infrastructure solutions related to the holidays, and anticipated winter weather impacts in the North America in Singapore and business. While it is too early for us to provide a guidance outlook for 2021. We would expect earnings upside compared to this year's results in several parts of the business including the smaller phife underground solutions and international operations within infrastructure solutions.
Due to an expected recovery in volumes following COVID related weakness this year, the coating services business which should benefit from execution in 2021. of the large international projects that had been delayed this year, the corporate business due to the Analyze benefit of the strong margin improvements we have seen in the last two quarter as a result of our restructuring activities, and finally the energy services business as it begins to recover from the sharp volume and margin reductions experienced this year.
On the flip side, while we expect strong cost discipline to continue into next year and beyond, there were strict cost savings measures that benefited 2020 that we would expect to return to more normalized spending levels in 2021. Overall, we believe we are well positioned to deliver earnings above 2019 adjusted results recovering from the declines we experienced in 2020 due to the pandemic. This outlook does not assume any structural changes to the business that may result from the strategic initiative Chuck outlined earlier. We are working through our annual budgeting process right now and look forward to providing more details in the next few months.
Before wrapping up, I want to highlight our cash flows and balance sheet strength which continued to be major differentiators for us as we navigate the pandemic. Our ending global bank cash balance as of September 30, was 77 million, which was net of significant further debt repayments in the quarter and comprise nearly 80% of cash held in the US, which enables easier access to fund working capital needs for the business. Our net debt level as of September 30, was less than $150 million, the lowest level since 2015. Our leverage ratio was 2.3 times and well within our required covenant compliance limits.
We paid off all outstanding revolver borrowings of 26 million in the quarter, including required amortization payments on our term loan, debt reduction through the first nine months was more than $50 million, and we have current capacity to borrow more than 100 and 40 million on our revolving line of credit. Six months ago we were facing we were preparing our balance sheet and liquidity position to be defensive in the face of prolonged pandemic uncertainty to today, we believe we can be more aggressive.
Today, we believe we can be more offensive with our balance sheet and cash flows. And as Chuck laid out, are looking to capitalize on this strength with investments to grow the business both organically and in organically. net operating cash flows year to date through September 30. We're 79 million, which is two and a half times higher than the prior year level and exceeds the full year generation from each of the last five years. A big driver of the increase year over year was through working capital improvements of nearly $33 million dollars. We have been aggressive in accounts receivable monitoring and collections, reducing inventory needs where we can and working to extend payment terms with suppliers.
Key businesses driving the favorable working capital changes include in situ for North America, corporate North America and united pipeline systems, each of which has made significant project progress with cash collections this year. Additionally, operating cash flows have benefited year to date by approximately $8 million in deferred payments related to the timing of federal estimated tax payments and employer payroll taxes as permitted by the cares act. capital expenditures year to date were 15 million down nearly 30% from the prior year period due to spending restrictions. expenditures year to date were used primarily to support the Institute for North American business and Middle East project activity.
We continue to target full year capex spending to be between $15 and $20 million with a focus on only funding critical business needs. Our share repurchase program was suspended during the second and third quarters does due to the financial uncertainties of COVID following $5 million in first quarter purchases. At this time we currently expect to resume resume our open market share repurchase program in November. Over the last five years AGM has returned more than $150 million to its stockholders through open market share repurchases. The expected reinstatement of AIG on share repurchase program is based on the company's strong cash position, expectations for continued strong cash flow generation, and our sustained commitment to returning cash to stockholders. That wraps a review of our third quarter results and outlook as we close out the year with that operator.
At this time, we would be pleased to take questions.
Questions and Answers:
Operator
[Operator Instructions] Your first question is from the line of Eric Stine with Craig-Hallum. Your lines is open.
Eric Stine -- Craig-Hallum -- Analyst
Morning. Hey, maybe just starting on energy services and what you're looking at in that process? You know, just curious. I mean, it sounds like this is a decision not made, because businesses has been difficult due to COVID. But just, you know, curious, given that you think there's a you know, a pretty steep improvement and maybe not back to normalize levels? Is this something where you think it is potential or possible that it makes some sense to wait a bit that you can maximize what that value is? Or, you know, is this something where, you know, you potentially just decide, look, this has been a distraction, it's not a great fit. You know, it's not what was envisioned back in 2013, was acquired. Just some thoughts on that.
Charles Gordon -- President and Chief Executive Officer
So what I tell you is, all those options are on the table. What we've found over the last six months, or I would say probably the last three or four months, is that the recovery has been slower than we initially thought when we went into this in March, we thought that we'd have a pretty steep recovery with that business. As we look at the business now, we would expect it to probably be more in that 18 to 24 month range, but all options are on the table at this point. That's why we hired you in the banker and we're gonna we're gonna look hard at what the best option is for us as we go forward. And we'd I would expect to have a real clear answer on that by the certainly by the end of the year or over the next couple months.
Eric Stine -- Craig-Hallum -- Analyst
Got it. Okay, I guess we'll stay tuned there. I'd love to just talk about pathetic protection. And you know, first time we've heard that you may move into the renewable space there. You know, just maybe what that Looks like relative to the rest of the business, you know, curious, is this an area where you've gotten some inbound interest? And then, you know, is there investment needed if you were to go down that path?
Charles Gordon -- President and Chief Executive Officer
So the technology transfers pretty well. We have had inbound inquiries, particularly with wind energy. And today, it's a very small portion of the business, but we see an exciting opportunity as we move forward to begin to penetrate that space in a bigger way than we have in the past. We're excited about it. It will be -- it's a good opportunity for the business.
Eric Stine -- Craig-Hallum -- Analyst
Got it. But any other areas? Or I mean, should we think about this as wind? That's the primary area for this.
Charles Gordon -- President and Chief Executive Officer
The other area that we've seen a fair amount of interest is a lot of the transmission lines in North America have been out there for quite a while. They're aged. Most of the lines, the big ones, have a cathodic protection system around the base. We see an opportunity there, too. And we're starting to bid some of that kind of work as those lines are upgraded and rehabilitated. So both those areas are really not necessarily renewable, but it's certainly outside of our core oil and gas business.
Eric Stine -- Craig-Hallum -- Analyst
Got it. Okay. Maybe just one more I'll sneak in. The gross margins in Insituform North America, I mean, that infrastructure as a whole were great. I mean, is it fair to say, it sounds like you had some -- not necessarily onetime items, but that this was kind of a -- you had a lot of things come together to push that number. I mean, we shouldn't think that this is a sustainable number. Obviously, you're pushing for a higher number always. But is that a fair way to characterize it?
David Morris -- Executive Vice President and Chief Financial Officer
Yes. Eric, it's David. Yes, I think where we are through the nine months, it's probably 100 basis points higher than it otherwise would have been. For the quarter, probably 100 to 150. And what I would look at is we have had the favorable impact of lower oil prices as compared to the pricing we assume when we bid projects, that's beginning to taper off. And as we move into 2021, that really should not be a benefit. Separately, we did have some wage subsidies in Canada during the quarter. And then the third thing is, I guess, going the other way is the salary deferrals that we had in the second quarter. There was the financial impact of those in the third quarter, but then that was somewhat offset by we did not have the 401(k) match in the third quarter, which we are restating -- or we are reinstating that as of November 1.
So a number of items. Certainly, we believe the margins are significantly improved from previously. That has a lot to do with the exit of the international operations, the lower-performing contracting operations, great performance out of the NAR business. We believe there's continued opportunity for improvement in margins as we move forward. And we complete the exit of all the contracting operations that we're exiting and continue to increase our third-party product sales.
Eric Stine -- Craig-Hallum -- Analyst
Okay, thanks a lot.
Charles Gordon -- President and Chief Executive Officer
Thank you.
Operator
Your next question comes from the line of Will Jellison with D.A. Davidson. Your line is open.
Will Jellison -- D.A. Davidson -- Analyst
Good morning, Charles and David.
Charles Gordon -- President and Chief Executive Officer
Good morning. How are you?
Will Jellison -- D.A. Davidson -- Analyst
Good. Thank you. My questions today are mostly about your balance sheet strength and capital expenditures. First question is regarding the balance sheet strength and the plan to be more offensive with capital spending, would you have to wait until you've chosen your new CEO before moving forward with any big expenditures?
Charles Gordon -- President and Chief Executive Officer
I think -- so I guess a couple of questions on -- it's a great question. The management team and the Board is very well aligned on what we need to do as we go forward. Certainly, the new CEO needs to be part of a process and have ownership in whatever strategic direction that we've put in place. We believe we've got a great strategy in place and needs to be executed. The new CEO will have to be part of that execution. But we also recognize very clearly that M&A always has an opportunistic element to it. And while we certainly want the new CEO to have ownership of the strategy, we are prepared to move forward if we need to quicker, although I would suspect that a new CEO would be in place and be very much part of whatever process that we go through as we spend capital in the future.
Will Jellison -- D.A. Davidson -- Analyst
Okay. That helps. And then the second part of that is, when you're thinking about organic investments, are there any of your business segments that would receive a disproportionately large amount of internal capex, where you think you could compound those capital expenditures the best?
Charles Gordon -- President and Chief Executive Officer
I don't think -- I guess a couple of comments. For the business that we're in, I feel like our businesses are pretty well capitalized. I don't -- I think our maintenance capital has been more than adequate over the last four or five years. We are certainly looking across the business at where we can invest capital to enhance growth. And we're going through our 2021 budgeting process right now, and that's a critical component of it. But overall, I think the business is well capitalized. David, maybe you want to add to that?
David Morris -- Executive Vice President and Chief Financial Officer
Yes. No, I agree with that. I think post the divestiture of Bayou, our capex, including maintenance and growth capital, has been about $25 million on an annual basis. About $3 million of that would be Energy Services. So as we look forward, I would expect that our capex would be somewhere in the $20 million to $25 million range, and that would be capital to support both organic growth as well as maintenance capital.
Will Jellison -- D.A. Davidson -- Analyst
Okay, great. Thank you. I'll jump back in queue.
Charles Gordon -- President and Chief Executive Officer
Thank you.
Operator
The next question comes from the line of Noelle Dilts with Stifel. Your line is open. Good morning, Noel. Hi, good morning, sir.
Charles Gordon -- President and Chief Executive Officer
Good morning, Noelle.
Noelle Dilts -- Stifel -- Analyst
Hi, good morning, Charles, David, good performance in a tough environment. So Chuck, as you know, I've been waiting for this nice improvement in the Corrpro margin for a long time. So congrats for that. I guess I just wanted to -- you obviously talked about getting out of some of the low-margin construction business and entered utilization. Are you seeing like the businesses now where you want it to be? Or are there still incremental steps forward that you're looking to achieve? I know you talked about some of the other markets you're looking into. But are you feeling pretty good about the cost structure as it stands right now?
Charles Gordon -- President and Chief Executive Officer
I think I -- you were kind of breaking in and out a little bit on me. I think what you asked is the business where you want it to be today, and you're talking specifically about Corrpro or in general?
Noelle Dilts -- Stifel -- Analyst
Corrpro, specifically, just on the -- do you feel like you've kind of executed on -- and you've moved the cost structure to kind of your targets that you've been talking about here for quite a while.
Charles Gordon -- President and Chief Executive Officer
So we're real pleased with the way the business is executing. I would say that the gross margins and the operating margin in Q3 were actually better than what I would have expected them to be. There's always room for more improvement in that business. I think you'll continue to see improvement, although the improvements going forward in terms of margin percentages, I think, will be lower than they have been over the last couple of quarters. The area that we're excited about, though, is we think there's -- there remains some pretty good market opportunities out there. It's a challenge to go through the kind of restructuring that they went through and keep everybody focused on the market. We're glad that, that's behind us. And while we're happy with, I think, with the cost structure and the gross margins and operating margins, the big challenge now for the business and one we feel really good about is the opportunity to grow the top line.
Noelle Dilts -- Stifel -- Analyst
Okay. That's helpful. And then given your strategic focus on really growing and enhancing the water and wastewater side of the business, could you just give us a bit of a sense in terms of inorganic opportunities if you're looking at things? Would they be smaller deals kind of akin to Underground Solutions or Fyfe? Are there some bigger assets that you might look at as you potentially look to become bigger in that market, both organically and inorganically?
Charles Gordon -- President and Chief Executive Officer
Yes. So Noelle, I guess, there's a couple of answers to that question. We -- I don't -- we're going to look at whatever opportunities that are out there. And while size certainly matters and Underground Solutions, as you know, is about a $90 million acquisition, and we would really like to do some of that size or maybe even larger, the bigger issue for us is making sure we've got a good strategic fit, that we understand the business. And we understand that municipal water and wastewater market really well now. And I think the -- we're going to focus on opportunities there first. We have a very well-functioning business. I think we have the ability to integrate a business into that space.
And as we go forward, we're going to look for ways that we can scale up that business over the next several years. I think what you'll see coming out of that is you'll start to see -- as you know, the municipal water and wastewater business and the tech -- the pace of technology changes is slow. And I think what you'll see coming out of the next couple years is you'll see us get more and more traction with the pressure pipe technology. But I think in the near to medium term here, we are going to look at opportunities to scale that business.
Noelle Dilts -- Stifel -- Analyst
Okay. Great. And then last question just with the elections approaching, anything notable you guys are really thinking about or watching, given either outcome? And does it change how you're thinking about the potential for an infrastructure bill?
Charles Gordon -- President and Chief Executive Officer
Katie, I'm going to turn that over to you. You probably have more on that than I am.
Katie Cason -- Senior Vice President, Strategy and Communications
Sure. Yes. Noelle, I think no matter what happens to the administration, we feel like there's a lot of support today for a potential infrastructure bill. And as Chuck mentioned in his remarks, Insituform, in particular, would be an obvious beneficiary in that scenario. I think the other thing to consider with the upcoming elections is wherever things turn out, historically, a stronger regulatory environment, whether that's through the EPA or on the oil and gas side through FERC or FEMSA, historically, that stands to benefit our business on the wastewater side as well as the cathodic protection side. So I think we're going to be well positioned no matter what the administration looks like over the next four years.
Noelle Dilts -- Stifel -- Analyst
Very helpful, thank you.
Operator
[Operator Instructions] There are no further questions at this time. I'd like to turn the call back over to speaker, Chuck Gordon.
Charles Gordon -- President and Chief Executive Officer
Thank you, operator. We are focused on closing out the year safely and advancing the key strategic initiatives we laid out in our release yesterday. We have a lot of exciting opportunities in front of us, and I look forward to providing more updates over the coming months.
Operator
[Operator Closing Remarks]
Duration: 48 minutes
Call participants:
Katie Cason -- Senior Vice President, Strategy and Communications
Charles Gordon -- President and Chief Executive Officer
David Morris -- Executive Vice President and Chief Financial Officer
Eric Stine -- Craig-Hallum -- Analyst
Will Jellison -- D.A. Davidson -- Analyst
Noelle Dilts -- Stifel -- Analyst
