Aegion Corp - FORM 10-Q - November 2, 2017

Attached files

file filename
EX-32.2 - EXHIBIT 32.2 - Aegion Corpexhibit322-10q09302017q3.htm
EX-32.1 - EXHIBIT 32.1 - Aegion Corpexhibit321-10q09302017q3.htm
EX-31.2 - EXHIBIT 31.2 - Aegion Corpexhibit312-10q09302017q3.htm
EX-31.1 - EXHIBIT 31.1 - Aegion Corpexhibit311-10q09302017q3.htm
EX-10.1 - EXHIBIT 10.1 - Aegion Corpexhibit101-10q09302017q3.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from                                                              to                                                                     
Commission File Number: 001-35328
Aegion Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
45-3117900
(State or other jurisdiction of incorporation or organization) 
 
(I.R.S. Employer Identification No.)
 
 
 
17988 Edison Avenue, Chesterfield, Missouri
 
63005-1195
(Address of principal executive offices) 
 
(Zip Code)
 
 
 
(636) 530-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
 
 
 
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ¨ No ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 32,526,821 shares of common stock, $.01 par value per share, outstanding at October 26, 2017.




TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
 
 
 
Item 1. Financial Statements (Unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II—OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I—FINANCIAL INFORMATION
 
Item 1. Financial Statements
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)

 
For the Quarters Ended September 30,
 
For the Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues
$
341,872

 
$
308,524


$
1,021,520


$
900,118

Cost of revenues
268,430

 
242,206

 
800,898

 
718,196

Gross profit
73,442

 
66,318


220,622


181,922

Operating expenses
54,610

 
45,277

 
165,465

 
146,808

Goodwill impairment
45,390

 
—

 
45,390

 
—

Definite-lived intangible asset impairment
41,032

 
—

 
41,032

 
—

Acquisition and divestiture expenses
1,980

 
324

 
2,513

 
2,059

Restructuring and related charges
5,439

 
212

 
5,439

 
8,544

Operating income (loss)
(75,009
)
 
20,505

 
(39,217
)
 
24,511

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(3,962
)
 
(3,825
)
 
(12,014
)
 
(11,081
)
Interest income
33

 
37

 
117

 
197

Other
(798
)
 
288

 
(1,593
)
 
(1,183
)
Total other expense
(4,727
)
 
(3,500
)
 
(13,490
)
 
(12,067
)
Income (loss) before taxes on income
(79,736
)
 
17,005

 
(52,707
)
 
12,444

Taxes (benefit) on income (loss)
(5,954
)
 
5,218

 
1,144

 
1,413

Net income (loss)
(73,782
)
 
11,787

 
(53,851
)
 
11,031

Non-controlling interests (income) loss
546

 
280

 
(2,414
)
 
666

Net income (loss) attributable to Aegion Corporation
$
(73,236
)
 
$
12,067

 
$
(56,265
)
 
$
11,697

 
 
 
 
 
 
 
 
Earnings (loss) per share attributable to Aegion Corporation:
 
 
 
 
 
 
 
Basic
$
(2.23
)
 
$
0.35

 
$
(1.69
)
 
$
0.33

Diluted
$
(2.23
)
 
$
0.34

 
$
(1.69
)
 
$
0.33


The accompanying notes are an integral part of the consolidated financial statements.

3


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)

For the Quarters Ended September 30,
 
For the Nine Months Ended September 30,

2017
 
2016
 
2017
 
2016
Net income (loss)
$
(73,782
)
 
$
11,787

 
$
(53,851
)
 
$
11,031

Other comprehensive income (loss):
 
 
 
 
 
 
 
Currency translation adjustments
(250
)
 
3,885

 
16,188

 
2,928

Deferred gain (loss) on hedging activity, net of tax (1)
89

 
895

 
265

 
(3,163
)
Pension activity, net of tax (2)
(9
)
 
90

 
(25
)
 
(83
)
Total comprehensive income (loss)
(73,952
)
 
16,657

 
(37,423
)
 
10,713

Comprehensive (income) loss attributable to non-controlling interests
480

 
365

 
(2,500
)
 
593

Comprehensive income (loss) attributable to Aegion Corporation
$
(73,472
)
 
$
17,022

 
$
(39,923
)
 
$
11,306

__________________________
(1) 
Amounts presented net of tax of $59 and $617 for the quarters ended September 30, 2017 and 2016, respectively, and $176 and $(2,100) for the nine months ended September 30, 2017 and 2016, respectively.
(2) 
Amounts presented net of tax of $(2) and $23 for the quarters ended September 30, 2017 and 2016, respectively, and $(6) and $(21) for the nine months ended September 30, 2017 and 2016, respectively.


The accompanying notes are an integral part of the consolidated financial statements.

4


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
 
September 30, 
 2017
 
December 31, 
 2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
94,787

 
$
129,500

Restricted cash
1,938

 
4,892

Receivables, net of allowances of $4,611 and $6,098, respectively
212,042

 
186,016

Retainage
33,119

 
33,643

Costs and estimated earnings in excess of billings
88,887

 
62,401

Inventories
68,721

 
63,953

Prepaid expenses and other current assets
37,016

 
51,832

Assets held for sale
78,223

 
—

Total current assets
614,733

 
532,237

Property, plant & equipment, less accumulated depreciation
110,790

 
156,747

Other assets
 
 
 
Goodwill
259,791

 
298,619

Identified intangible assets, less accumulated amortization
141,084

 
194,911

Deferred income tax assets
2,393

 
1,848

Other assets
11,752

 
9,220

Total other assets
415,020

 
504,598

Total Assets
$
1,140,543

 
$
1,193,582

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
82,390

 
$
63,058

Accrued expenses
85,322

 
85,010

Billings in excess of costs and estimated earnings
46,678

 
62,698

Current maturities of long-term debt
26,556

 
19,835

Liabilities held for sale
19,990

 
—

Total current liabilities
260,936

 
230,601

Long-term debt, less current maturities
336,063

 
350,785

Deferred income tax liabilities
14,444

 
23,339

Other non-current liabilities
12,776

 
12,674

Total liabilities
624,219

 
617,399

 
 
 
 
(See Commitments and Contingencies: Note 10)


 


 
 
 
 
Equity
 
 
 
Preferred stock, undesignated, $.10 par – shares authorized 2,000,000; none outstanding
—

 
—

Common stock, $.01 par – shares authorized 125,000,000; shares issued and outstanding 32,673,818 and 33,956,304, respectively
327

 
340

Additional paid-in capital
144,088

 
166,598

Retained earnings
398,797

 
455,062

Accumulated other comprehensive loss
(37,158
)
 
(53,500
)
Total stockholders’ equity
506,054

 
568,500

Non-controlling interests
10,270

 
7,683

Total equity
516,324

 
576,183

Total Liabilities and Equity
$
1,140,543

 
$
1,193,582


The accompanying notes are an integral part of the consolidated financial statements.

5


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(in thousands, except number of shares)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Non-
Controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
BALANCE, December 31, 2015
36,053,499

 
$
361

 
$
199,951

 
$
425,574

 
$
(47,861
)
 
$
16,531

 
$
594,556

Net income (loss)
—

 
—

 
—

 
11,697

 
—

 
(666
)
 
11,031

Issuance of common stock upon stock option exercises, including tax benefit
18,193

 
—

 
(10
)
 
—

 
—

 
—

 
(10
)
Issuance of shares pursuant to restricted stock units
14,034

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of shares pursuant to deferred stock unit awards
39,660

 
—

 
—

 
—

 
—

 
—

 
—

Forfeitures of restricted shares
(18,499
)
 
—

 
—

 
—

 
—

 
—

 
—

Shares repurchased and retired
(1,967,347
)
 
(20
)
 
(36,577
)
 
—

 
—

 
—

 
(36,597
)
Equity-based compensation expense
—

 
—

 
7,689

 
—

 
—

 
—

 
7,689

Sale of non-controlling interest
—

 
—

 
—

 
—

 
—

 
(7,278
)
 
(7,278
)
Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
(1,276
)
 
(1,276
)
Currency translation adjustment and derivative transactions, net
—

 
—

 
—

 
—

 
(391
)
 
73

 
(318
)
BALANCE, September 30, 2016
34,139,540

 
$
341

 
$
171,053

 
$
437,271

 
$
(48,252
)
 
$
7,384

 
$
567,797

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, December 31, 2016
33,956,304

 
$
340

 
$
166,598

 
$
455,062

 
$
(53,500
)
 
$
7,683

 
$
576,183

Net income (loss)
—

 
—

 
—

 
(56,265
)
 
—

 
2,414

 
(53,851
)
Issuance of shares pursuant to restricted stock units
90,663

 
1

 
—

 
—

 
—

 
—

 
1

Issuance of shares pursuant to performance units
49,672

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of shares pursuant to deferred stock unit awards
30,559

 
—

 
—

 
—

 
—

 
—

 
—

Forfeitures of restricted shares
(1,084
)
 
—

 
—

 
—

 
—

 
—

 
—

Shares repurchased and retired
(1,452,296
)
 
(14
)
 
(31,716
)
 
—

 
—

 
—

 
(31,730
)
Equity-based compensation expense
—

 
—

 
9,206

 
—

 
—

 
—

 
9,206

Investments from non-controlling interests
—

 
—

 
—

 
—

 
—

 
158

 
158

Distributions to non-controlling interests
—

 
—

 
—

 
—

 
—

 
(71
)
 
(71
)
Currency translation adjustment and derivative transactions, net
—

 
—

 
—

 
—

 
16,342

 
86

 
16,428

BALANCE, September 30, 2017
32,673,818

 
$
327

 
$
144,088

 
$
398,797

 
$
(37,158
)
 
$
10,270

 
$
516,324


The accompanying notes are an integral part of the consolidated financial statements.

6


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
 
For the Nine Months Ended
September 30,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(53,851
)
 
$
11,031

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization
34,410

 
34,406

Gain on sale of fixed assets
(6
)
 
(1,960
)
Equity-based compensation expense
9,206

 
7,689

Deferred income taxes
(4,511
)
 
(613
)
Non-cash restructuring charges
102

 
300

Goodwill impairment
45,390

 
—

Definite-lived intangible asset impairment
41,032

 
—

Loss on foreign currency transactions
1,659

 
1,351

Other
(1,129
)
 
440

Changes in operating assets and liabilities (net of acquisitions):
 
 
 
Restricted cash related to operating activities
1,117

 
1,704

Receivables net, retainage and costs and estimated earnings in excess of billings
(54,040
)
 
26,402

Inventories
(4,645
)
 
(510
)
Prepaid expenses and other assets
6,562

 
(3,094
)
Accounts payable and accrued expenses
23,726

 
(41,698
)
Billings in excess of costs and estimated earnings
(9,869
)
 
212

Other operating
(79
)
 
1,038

Net cash provided by operating activities
35,074

 
36,698

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(22,515
)
 
(31,485
)
Proceeds from sale of fixed assets
423

 
3,083

Patent expenditures
(340
)
 
(1,034
)
Restricted cash related to investing activities
2,000

 
(1,086
)
Purchase of Underground Solutions, Inc., net of cash acquired
—

 
(84,740
)
Other acquisition activity, net of cash acquired
(9,045
)
 
(11,567
)
Sale of interest in Bayou Perma-Pipe Canada, Ltd., net of cash disposed
—

 
6,599

Net cash used in investing activities
(29,477
)
 
(120,230
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock upon stock option exercises
—

 
37

Repurchase of common stock
(31,730
)
 
(36,597
)
Investments from non-controlling interests
158

 
—

Distributions to non-controlling interests
(71
)
 
(1,276
)
Payment of contingent consideration
(500
)
 
(500
)
Proceeds from notes payable
150

 
—

Proceeds from line of credit, net
14,000

 
36,000

Principal payments on long-term debt
(15,085
)
 
(13,125
)
Net cash used in financing activities
(33,078
)
 
(15,461
)
Effect of exchange rate changes on cash
1,677

 
561

Net decrease in cash and cash equivalents for the period
(25,804
)

(98,432
)
Cash and cash equivalents, beginning of year
129,500

 
211,696

Cash and cash equivalents, end of period
103,696

 
113,264

Cash and cash equivalents associated with assets held for sale, end of period
(8,909
)
 
—

Cash and cash equivalents from continuing operations, end of period
$
94,787

 
$
113,264

The accompanying notes are an integral part of the consolidated financial statements.

7


AEGION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    GENERAL
The accompanying unaudited consolidated financial statements of Aegion Corporation and its subsidiaries (collectively, “Aegion” or the “Company”) reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All significant intercompany related accounts and transactions have been eliminated in consolidation.
The consolidated balance sheet as of December 31, 2016, which is derived from the audited consolidated financial statements, and the interim unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2016 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2017.

Acquisitions/Strategic Initiatives/Divestitures
2017 Restructuring
On July 28, 2017, the Company’s board of directors approved a realignment and restructuring plan (the “2017 Restructuring”) to: (i) divest the Company’s pipe coating and insulation businesses in Louisiana, The Bayou Companies, LLC and Bayou Wasco Insulation, LLC (collectively “Bayou”); (ii) exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America; (iii) right-size the cathodic protection services operation in Canada; and (iv) reduce corporate and other operating costs. These decisions reflect the Company’s: (i) desire to reduce further its exposure in the North American upstream oil and gas markets; (ii) assessment of its ability to drive sustainable, profitable growth in the non-pipe fiber reinforced polymer (“FRP”) contracting market in North America; and (iii) assessment of continuing weak conditions in the Canadian oil and gas markets. During the third quarter of 2017, the Company also completed a detailed assessment of Infrastructure Solutions’ businesses in Australia and Denmark, which resulted in additional restructuring actions in both countries. See Note 3.
2016 Restructuring
On January 4, 2016, the Company’s board of directors approved a restructuring plan (the “2016 Restructuring”) to reduce the Company’s exposure to the upstream oil markets and to reduce consolidated expenses. The 2016 Restructuring repositioned Energy Services’ upstream operations in California, reduced Corrosion Protection’s upstream exposure by divesting its interest in a Canadian pipe coating joint venture, right-sized Corrosion Protection to compete more effectively and reduced corporate and other operating costs. See Note 3.
Infrastructure Solutions Segment (“Infrastructure Solutions”)
On March 1, 2017, the Company acquired Environmental Techniques Limited and its parent holding company, Killeen Trading Limited (collectively “Environmental Techniques”), for a purchase price of £6.5 million, approximately $8.0 million, which was funded from the Company’s international cash balances. The purchase price is subject to post-closing working capital adjustments and included £1.0 million, approximately $1.2 million, held in escrow as security for any post-closing purchase price adjustments and post-closing indemnification obligations of Environmental Techniques’ previous owners. Environmental Techniques provides trenchless drainage inspection, cleaning and rehabilitation services throughout the United Kingdom and the Republic of Ireland.
On July 1, 2016, the Company acquired Concrete Solutions Limited (“CSL”) and Building Chemical Supplies Limited (“BCS”), two New Zealand companies (collectively, “Concrete Solutions”), for a purchase price paid at closing of NZD 7.5 million, approximately $5.5 million, which was funded from the Company’s cash balances. The sellers have the ability to earn up to an additional NZD 2.0 million, approximately $1.4 million, of proceeds based on reaching certain future performance targets. CSL provides structural strengthening, concrete repair and bridge jointing solutions primarily through application of fiber reinforced polymer and injection resins and had served as a Fibrwrap® certified applicator in New Zealand for a number

8


of years. BCS imports and distributes materials, including fiber reinforced polymer, injection resins, repair mortars and protective coatings.
On June 2, 2016, the Company acquired the cured-in-place pipe (“CIPP”) contracting operations of Leif M. Jensen A/S (“LMJ”), a Danish company and the Insituform licensee in Denmark since 2011. The purchase price was €2.9 million, approximately $3.2 million, and was funded from the Company’s international cash balances.
On May 13, 2016, the Company acquired the operations and territories of Fyfe Europe S.A. and related companies (“Fyfe Europe”) for a purchase price of $3.0 million. The transaction was funded from the Company’s cash balances. Fyfe Europe holds the rights to provide Fibrwrap® product engineering and support to installers and applicators of FRP systems in 72 countries throughout Europe, the Middle East and North Africa. The acquisition of these territories provides the Company with worldwide rights to market, manufacture and install the patented Tyfo® Fibrwrap® FRP technology.
On February 18, 2016, the Company acquired Underground Solutions, Inc. and its subsidiary, Underground Solutions Technologies Group, Inc. (collectively, “Underground Solutions”), for an initial purchase price of $85.0 million plus an additional $5.0 million for the value of the estimated tax benefits associated with Underground Solutions’ net operating loss carry forwards. The transaction was funded partially from the Company’s cash balances and partially from borrowings under the Company’s revolving credit facility. Underground Solutions provides infrastructure technologies for water, sewer and conduit applications.
Corrosion Protection Segment (“Corrosion Protection”)
In September 2017, the Company organized Aegion South Africa Proprietary Limited, a joint venture in South Africa between Aegion International Holdings Limited, a subsidiary of the Company (“Aegion International”), and Robor Proprietary Limited (“Robor”), for the purpose of providing Aegion’s Corrosion Protection and Infrastructure Solutions products and services to sub-Sahara Africa. Aegion International owns sixty percent (60%) of the joint venture and Robor owns the remaining forty percent (40%).
On July 28, 2017, the Company’s board of directors approved a plan to divest Bayou. Accordingly, the Company has classified Bayou’s assets and liabilities as held for sale on the Consolidated Balance Sheet at September 30, 2017. See Note 5. On February 1, 2016, the Company sold its fifty-one percent (51%) interest in its Canadian pipe coating joint venture, Bayou Perma-Pipe Canada, Ltd. (“BPPC”), to its joint venture partner, Perma-Pipe, Inc. The sale price was $9.6 million, which consisted of a $7.6 million payment at closing and a $2.0 million promissory note, which was paid in full on July 28, 2016. BPPC served as the Company’s pipe coating and insulation operation in Canada. The sale of its interests in Bayou and BPPC is part of a broader effort by the Company to reduce its exposure in the North American upstream market in light of expectations for a prolonged low oil price environment.
Purchase Price Accounting
During the first nine months of 2017, the Company determined its preliminary accounting for Environmental Techniques and finalized its accounting for Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions. There were no significant adjustments to the purchase price accounting for Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions during the first nine months of 2017. As the Company completes its final accounting for the Environmental Techniques acquisition, future adjustments related to working capital, deferred income taxes, definite-lived intangible assets and goodwill could occur. The goodwill and definite-lived intangible assets associated with the Fyfe Europe, LMJ and Concrete Solutions acquisitions are deductible for tax purposes; whereas, the goodwill and definite-lived intangible assets associated with the Environmental Techniques and Underground Solutions acquisitions are not deductible for tax purposes.

9


Underground Solutions, Fyfe Europe, LMJ, Concrete Solutions and Environmental Techniques made the following contributions to the Company’s revenues and profits (in thousands):
 
Quarters Ended September 30,
 
2017
 
2016
 
Revenues
 
Net Loss
 
Revenues
 
Net Income (Loss)
Underground Solutions (1)
$
9,304

 
$
(374
)
 
$
8,273

 
$
101

Fyfe Europe (2)
35

 
(1,857
)
 
15

 
(202
)
LMJ (3)
342

 
(596
)
 
1,446

 
(134
)
Concrete Solutions (4)
1,561

 
(2,080
)
 
1,344

 
68

Environmental Techniques
1,322

 
(166
)
 
N/A

 
N/A

_____________________
“N/A” represents not applicable.
(1) 
The reported net income (loss) for Underground Solutions includes an allocation of corporate expenses of $0.7 million and $0.3 million in the quarters ended September 30, 2017 and 2016, respectively.
(2) 
The reported net loss for Fyfe Europe in the quarter ended September 30, 2017 includes $1.8 million of impairment charges allocated from goodwill impairments at the Fyfe reporting unit (see Note 2).
(3) 
The reported net loss for LMJ in the quarter ended September 30, 2017 includes 2017 Restructuring charges of $0.1 million.
(4) 
The reported net loss for Concrete Solutions in the quarter ended September 30, 2017 includes $2.2 million of impairment charges allocated from goodwill impairments at the Fyfe reporting unit (see Note 2).
 
Nine Months Ended September 30,
 
2017
 
2016
 
Revenues
 
Net Loss
 
Revenues
 
Net Income (Loss)
Underground Solutions (1)
$
25,349

 
$
(2,049
)
 
$
23,916

 
$
(1,661
)
Fyfe Europe (2)
396

 
(2,001
)
 
23

 
(300
)
LMJ (3)
2,702

 
(2,213
)
 
2,779

 
(221
)
Concrete Solutions (4)
4,276

 
(2,033
)
 
1,344

 
68

Environmental Techniques
3,245

 
(561
)
 
N/A

 
N/A

_____________________
“N/A” represents not applicable.
(1) 
The reported net loss for Underground Solutions in the nine months ended September 30, 2017 includes an allocation of corporate expenses of $1.8 million. The reported net loss for Underground Solutions in the nine months ended September 30, 2016 includes inventory step-up expense of $3.6 million, recognized as part of the accounting for business combinations, and an allocation of corporate expenses of $1.6 million.
(2) 
The reported net loss for Fyfe Europe in the nine months ended September 30, 2017 includes $1.8 million of impairment charges allocated from goodwill impairments at the Fyfe reporting unit (see Note 2).
(3) 
The reported net loss for LMJ in the nine months ended September 30, 2017 includes 2017 Restructuring charges of $0.1 million.
(4) 
The reported net loss for Concrete Solutions in the nine months ended September 30, 2017 includes $2.2 million of impairment charges allocated from goodwill impairments at the Fyfe reporting unit (see Note 2).

10


The following pro forma summary presents combined information of the Company as if the Environmental Techniques, Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions acquisitions had occurred at the beginning of the year preceding their acquisition (in thousands, except earnings per share):
 
Quarters Ended September 30,
 
Nine Months Ended September 30,

2017
 
   2016 (1)
 
   2017 (1)
 
   2016 (2)
Revenues
$
341,872

 
$
310,022

 
$
1,022,402

 
$
915,289

Net income (loss) attributable to Aegion Corporation(3)
(73,236
)
 
12,024

 
(56,438
)
 
12,171

Diluted earnings (loss) per share
$
(2.23
)
 
$
0.34

 
$
(1.69
)
 
$
0.34

_____________________
(1) 
Includes pro-forma results related to Environmental Techniques.
(2) 
Includes pro-forma results related to Environmental Techniques, Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions.
(3) 
Includes pro-forma adjustments for depreciation and amortization associated with acquired tangible and intangible assets, as if those assets were recorded at the beginning of the year preceding the acquisition date.
The transaction purchase price to acquire Environmental Techniques was £6.5 million, approximately $8.0 million, which represented cash consideration paid at closing.
The transaction purchase price to acquire Underground Solutions was $88.4 million, which included: (i) a payment at closing of $85.0 million; (ii) a payment of $5.0 million for the value of the estimated tax benefits associated with Underground Solutions’ net operating loss carry forwards; and (iii) working capital adjustments of $1.6 million payable to the Company.
The transaction purchase price to acquire Fyfe Europe was $3.0 million, which represented cash consideration paid at closing of $2.8 million plus $0.2 million of deferred contingent consideration, which was paid during the first quarter of 2017.
The transaction purchase price to acquire LMJ was €2.9 million, approximately $3.2 million, which was paid at closing.
The transaction purchase price to acquire Concrete Solutions was NZD 8.9 million, approximately $6.4 million, which included: (i) a payment at closing of NZD 7.5 million, approximately $5.5 million; (ii) a preliminary working capital adjustment payable to the sellers of NZD 0.2 million, approximately $0.1 million; and (iii) the estimated fair value of earnout consideration of NZD 1.2 million, approximately $0.9 million. During the second quarter of 2017, the Company reversed $0.1 million of the earnout consideration due to operating results for the twelve-month period ended June 30, 2017 being below the target amounts in the purchase agreement. The accrual adjustment resulted in an offset to “Operating expense” in the Consolidated Statement of Operations. After the accrual adjustment, the estimated fair value of the contingent consideration was NZD 1.0 million, approximately $0.8 million, and recorded to “Other non-current liabilities” in the Consolidated Balance Sheet. The fair value estimate was determined using observable inputs and significant unobservable inputs, which are based on level 3 inputs as defined in Note 12.
The following table summarizes the fair value of identified assets and liabilities of the Environmental Techniques acquisition at its acquisition date (in thousands):
 
Environmental
Techniques
Receivables and cost and estimated earnings in excess of billings
$
801

Inventories
1,281

Prepaid expenses and other current assets
93

Property, plant and equipment
2,147

Identified intangible assets
1,869

Deferred income tax assets
124

Accounts payable
(1,025
)
Accrued expenses
(186
)
Deferred income tax liabilities
(413
)
Total identifiable net assets
$
4,691


 
Total consideration recorded
$
8,046

Less: total identifiable net assets
4,691

Goodwill at September 30, 2017
$
3,355


11


2.    ACCOUNTING POLICIES
There were no material changes in accounting policies from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
Foreign Currency Translation
For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are translated into U.S. dollars using average exchange rates. The cumulative translation adjustment resulting from changes in exchange rates are included in the Consolidated Balance Sheets as a component of accumulated other comprehensive loss in total stockholders’ equity.
The Company’s accumulated other comprehensive loss is comprised of three main components: (i) currency translation; (ii) derivatives; and (iii) gains and losses associated with the Company’s defined benefit plan in the United Kingdom (in thousands):
 
September 30, 
 2017
 
December 31,
2016
Currency translation adjustments (1)
$
(38,993
)
 
$
(54,863
)
Derivative hedging activity
1,445

 
1,004

Pension activity
390

 
359

Total accumulated other comprehensive loss
$
(37,158
)
 
$
(53,500
)
__________________________
(1) 
Due to the weakening of the U.S. dollar, there was a substantial increase during the first nine months of 2017, primarily the second quarter of 2017, with respect to certain functional currencies and their relation to the U.S. dollar, most notably the Canadian dollar, Australian dollar, British pound and euro.
Net foreign exchange transaction losses of $0.8 million and $0.3 million in the third quarters of 2017 and 2016, respectively, and $1.7 million and $1.4 million for the nine months ended September 30, 2017 and 2016, respectively, are included in “Other expense” in the Consolidated Statements of Operations.
Long-Lived Assets
Property, plant and equipment and other identified intangibles (primarily customer relationships, patents and acquired technologies, trademarks and license agreements) are recorded at cost, net of accumulated depreciation and impairment, and, except for goodwill and certain trademarks, are depreciated or amortized on a straight-line basis over their estimated useful lives. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital strategy can result in the actual useful lives differing from the Company’s estimates. During the first nine months of 2017, no such changes were noted. If the Company determines that the useful life of its property, plant and equipment or its identified intangible assets should be changed, the Company would depreciate or amortize the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing or decreasing depreciation or amortization expense.
Long-lived assets, including property, plant and equipment and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. The estimate of cash flow is based upon, among other things, assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Impairment Review – Third Quarter 2017
As part of the 2017 Restructuring, which was approved by the Company’s board of directors on July 28, 2017, the Company is exiting all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America. As a result of this action, the Company evaluated the long-lived assets of its Fyfe Reporting Unit, which caused the Company to review the financial performance of at-risk asset groups within the Fyfe Reporting Unit in accordance with FASB ASC 360, Property, Plant and Equipment (“FASB ASC 360”). The results of the Fyfe Reporting Unit and its related asset groups are reported within the Infrastructure Solutions reportable segment.

12


The assets of an asset group represent the lowest level for which identifiable cash flows can be determined independent of other groups of assets and liabilities. The Fyfe North America asset group was the only at-risk asset group reviewed for impairment. The Company developed internal forward business plans under the guidance of local and regional leadership to determine the undiscounted expected future cash flows derived from Fyfe North America’s long-lived assets. Such were based on management’s best estimates considering the likelihood of various outcomes. Based on the internal projections, the Company determined that the sum of the undiscounted expected future cash flows for the Fyfe North America asset group was less than the carrying value of the assets, and as a result, engaged a third-party valuation firm to assist in determining the fair value of long-lived assets at the Fyfe North America asset group.
In order to determine the impairment amount of long-lived assets, the Company first determined the fair value of each key component of its long-lived assets at the Fyfe North America asset group. The fair values were derived using various income-based approaches, which utilize discounted cash flows to evaluate the net earnings attributable to the asset being measured. Key assumptions used in assessment include the discount rate (based on weighted-average cost of capital), revenue growth rates, contributory asset charges, customer attrition, income tax rates and working capital needs, which were based on current market conditions and were consistent with internal management projections.
Based on the results of the valuation, the carrying amount of certain long-lived assets at the Fyfe North America asset group exceeded the fair value. Accordingly, the Company recorded impairment charges of $3.4 million to trademarks, $20.8 million to customer relationships and $16.8 million to patents and acquired technology in the third quarter of 2017. The impairment charges were recorded to definite-lived intangible asset impairment in the Consolidated Statements of Operations. Property, plant and equipment was determined to have a carrying value that approximated fair value; thus, no impairment was recorded.
The fair value estimates described above were determined using observable inputs and significant unobservable inputs, which are based on level 3 inputs as defined in Note 12.
Goodwill
Under FASB ASC 350, Intangibles – Goodwill and Other (“FASB ASC 350”), the Company assesses recoverability of goodwill on an annual basis or when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. An impairment charge will be recognized to the extent that the implied fair value of a reporting unit is less than its carrying value. Factors that could potentially trigger an impairment review include (but are not limited to):
•
significant underperformance of a segment relative to expected, historical or forecasted operating results;
•
significant negative industry or economic trends;
•
significant changes in the strategy for a segment including extended slowdowns in the segment’s market;
•
a decrease in market capitalization below the Company’s book value; and
•
a significant change in regulations.
Whether during the annual impairment assessment or during a trigger-based impairment review, the Company determines the fair value of its reporting units and compares such fair value to the carrying value of those reporting units to determine if there are any indications of goodwill impairment.
Fair value of reporting units is determined using a combination of two valuation methods: a market approach and an income approach with each method given equal weight in determining the fair value assigned to each reporting unit. Absent an indication of fair value from a potential buyer or similar specific transaction, the Company believes the use of these two methods provides a reasonable estimate of a reporting unit’s fair value. Assumptions common to both methods are operating plans and economic outlooks, which are used to forecast future revenues, earnings and after-tax cash flows for each reporting unit. These assumptions are applied consistently for both methods.
The market approach estimates fair value by first determining earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples for comparable publicly-traded companies with similar characteristics of the reporting unit. The EBITDA multiples for comparable companies are based upon current enterprise value. The enterprise value is based upon current market capitalization and includes a control premium. The Company believes this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to its reporting units.
The income approach is based on forecasted future (debt-free) cash flows that are discounted to present value using factors that consider timing and risk of future cash flows. The Company believes this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. Discounted cash flow projections are based on financial forecasts developed from operating plans and economic outlooks, growth rates, estimates of future operating margins, future capital expenditures, income tax rates and changes in working capital requirements. Estimates

13


of discounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to business models, changes in the Company’s weighted average cost of capital, or changes in operating performance.
The discount rate applied to the estimated future cash flows is one of the most significant assumptions utilized under the income approach. The Company determines the appropriate discount rate for each of its reporting units based on the weighted average cost of capital (“WACC”) for each individual reporting unit. The WACC takes into account both the pre-tax cost of debt and cost of equity (including the risk-free rate on twenty year U.S. Treasury bonds), and certain other company-specific and market-based factors. As each reporting unit has a different risk profile based on the nature of its operations, the WACC for each reporting unit is adjusted, as appropriate, to account for company-specific risks. Accordingly, the WACC for each reporting unit may differ.
Impairment Review - Third Quarter 2017
As part of the 2017 Restructuring, which was approved by the Company’s board of directors on July 28, 2017, the Company is exiting all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America. As a result of this action, the Company evaluated the goodwill of its Fyfe Reporting Unit and determined that a triggering event occurred. As such, the Company engaged a third-party valuation firm and performed a goodwill impairment review for its Fyfe Reporting Unit during the third quarter of 2017. In accordance with the provisions of FASB ASC 350, the Company determined the fair value of the reporting unit and compared such fair value to the carrying value of the reporting unit. For the Fyfe Reporting Unit, carrying value, as adjusted for the long-lived asset impairments discussed previously, exceeded fair value by approximately 45%.
Despite the Company’s recent investments in sales resources to drive growth in North America, FRP technology has become more widely accepted and more contractors have become proficient with installation, which has begun to commoditize the application of the Tyfo® Fibrwrap® system during construction in the North American market. As a result of this and other factors, the Company decided to exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America. The Company is now focused on using its expertise in FRP technologies to promote third-party product sales, continuing pipe-related FRP installations and providing technical engineering support in the civil structural market in North America. The FRP operations in Asia and Europe are expected to remain largely unchanged as market conditions remain favorable for both operations.
The Company’s decision, as noted above, permanently lowered the expected future cash flows of the reporting unit. As a result, the values derived from both the income approach and the market approach decreased from the October 1, 2016 annual goodwill impairment analysis. The fair value for the Fyfe Reporting Unit decreased $105.2 million, or 65.3%, from the previous analysis. The impairment analysis assumed a weighted average cost of capital of 17.0%, which is higher than the 16.0% utilized in the October 1, 2016 review, primarily due to rising risk-free rates on twenty-year U.S. Treasury bonds. The company-specific factors influencing discount rates remained consistent in both analyses. The impairment analysis also assumed a long-term growth rate of 2.5%, which was reduced from 3.5% used in the October 1, 2016 review. This change reflects the Company’s expectations for future annual revenue growth, which were lowered from 10.8% in the previous analysis to 4.0%, primarily due to the downsizing of the North American operations. Expected gross margins were consistent between both analyses.
As of January 1, 2017, the Company adopted FASB Accounting Standards Update No. 2017-04, Simplifying the Test for Goodwill Impairment, which states that an impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. Based on the impairment analysis, the Company determined that recorded goodwill at the Fyfe Reporting Unit was impaired by $45.4 million, which was recorded to “Goodwill impairment” in the Consolidated Statement of Operations during the third quarter of 2017. As of September 30, 2017, the Company had remaining Fyfe goodwill of $9.6 million. Projected cash flows were based, in part, on the ability to grow third-party product sales and pressure pipe contracting in North America, and maintaining a presence in other international markets. If these assumptions do not materialize in a manner consistent with Company’s expectations, there is risk of additional impairment to recorded goodwill.
Investments in Variable Interest Entities
The Company evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation.
The Company’s overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps:
•
determine whether the entity meets the criteria to qualify as a VIE; and
•
determine whether the Company is the primary beneficiary of the VIE.

14


In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include:
•
the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders;
•
the nature of the Company’s involvement with the entity;
•
whether control of the entity may be achieved through arrangements that do not involve voting equity;
•
whether there is sufficient equity investment at risk to finance the activities of the entity; and
•
whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns.
If the Company identifies a VIE based on the above considerations, it then performs the second step and evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments:
•
whether the entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and
•
whether the entity has the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
Based on its evaluation of the above factors and judgments, as of September 30, 2017, the Company consolidated any VIEs in which it was the primary beneficiary.
Financial data for consolidated variable interest entities are summarized in the following table (in thousands):
Balance sheet data (1)
September 30, 
 2017 (2)
 
December 31, 
 2016
Current assets
$
39,966

 
$
51,354

Non-current assets
25,068

 
25,607

Current liabilities
13,550

 
29,324

Non-current liabilities
26,583

 
28,849

 
Nine Months Ended September 30,
Income statement data (1)
2017
 
2016
Revenue
$
72,916

 
$
35,409

Gross profit
11,704

 
2,713

Net income (loss) attributable to Aegion Corporation
3,071

 
(3,869
)
__________________________
(1) 
During the first nine months of 2017, changes were primarily driven from our joint venture in Louisiana, which continued its work on a large deepwater pipe coating and insulation project.
(2) 
Amounts include $23.9 million of assets and $5.8 million of liabilities classified as held for sale relating to our pipe coating and insulation joint venture in Louisiana, Bayou Wasco Insulation, LLC. See Note 5.
Newly Issued Accounting Pronouncements
In August 2017, the FASB issued guidance that amends the recognition and presentation requirements for hedge accounting activities. The standard will improve the financial reporting of hedging relationships to better portray the economic results of an entity’s risk management activities in its financial statements and reduce the complexity of applying hedge accounting. This new guidance is effective for the Company’s fiscal year beginning January 1, 2019, including interim periods within that fiscal year. Early adoption is permitted, and the new guidance is to be applied retrospectively. The Company is currently evaluating the effect the guidance will have on its consolidated financial statements.
In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The standard requires an entity to perform its goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value. The standard was effective for the Company’s fiscal year beginning January 1, 2020, but early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company adopted this standard, effective January 1, 2017, and applied the guidance in its goodwill impairment testing for the Fyfe reporting unit, as described above.

15


In November 2016, the FASB issued guidance requiring that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and restricted cash. As a result, restricted cash will be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This new guidance is effective for the Company’s fiscal year beginning January 1, 2018, including interim periods within that fiscal year. Early adoption is permitted, and the new guidance is to be applied retrospectively. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements, other than the classification of restricted cash on the consolidated statement of cash flows.
In August 2016, the FASB issued guidance to address diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for the Company’s fiscal year beginning January 1, 2018, including interim periods within that fiscal year. Early adoption is permitted, and the new guidance is to be applied retrospectively. The Company is currently evaluating the effect the guidance will have on its statement of cash flows.
In March 2016, the FASB issued guidance that simplifies several aspects of the accounting for share-based payment awards to employees, including the accounting for income taxes, classification of awards as either equity or liabilities and classification in the statement of cash flows. The standard was effective for the Company’s fiscal year beginning January 1, 2017, including interim periods within the year. The Company’s adoption of this standard, effective January 1, 2017, did not have a material impact on its consolidated financial statements.
In February 2016, the FASB issued guidance that requires lessees to present right-of-use assets and lease liabilities on the balance sheet for all leases with lease terms longer than twelve months. The standard is effective for the Company’s fiscal year beginning January 1, 2019, including interim periods within that fiscal year. Early adoption is permitted. Entities are required to use the modified retrospective approach for all existing leases as of the effective date; however, the standard provides for certain practical expedients. The Company is currently evaluating the effect the guidance will have on its financial condition and results of operations, including an analysis of its current lease contracts as well as other existing arrangements to determine if they qualify for lease accounting under the new standard.
In November 2015, the FASB issued guidance that requires all deferred tax assets and liabilities, along with any related valuation allowance, to be presented as non-current within the Consolidated Balance Sheet. It was effective for the Company’s fiscal year beginning January 1, 2017, including interim periods within the year. The Company’s adoption of this standard, effective January 1, 2017, did not have a material impact on its consolidated financial statements. Prior period balances were not retrospectively adjusted.
In May 2014, the FASB issued guidance that supersedes revenue recognition requirements regarding contracts with customers to transfer goods or services or for the transfer of non-financial assets. Under the new guidance, entities are required to recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides a five-step analysis to be performed on transactions to determine when and how revenue is recognized. This new guidance is effective for the Company’s fiscal year beginning January 1, 2018. Early adoption is permitted, although the Company does not intend to do so. Entities are allowed to transition to the new standard either on a full retrospective basis or under the cumulative effect method. The Company intends to adopt the new guidance using the cumulative effect method. Under this method, the new guidance would apply to all new contracts initiated on or after January 1, 2018. For existing contracts that have remaining obligations as of January 1, 2018, any difference between the recognition criteria in the new guidance and the Company’s current revenue recognition practices would be recognized using a cumulative effect adjustment to the opening balance of retained earnings.
In early 2016, the Company identified a project manager as well as a cross-functional implementation team responsible for assessing the impact on its contracts. During 2017, the implementation team: (i) finalized the assessment phase, which included the identification of the Company’s key revenue streams (fixed fee, time and materials, product sales and royalty fees from license arrangements) and the comparison of historical accounting policies and practices to the requirements of the new revenue standard; (ii) finalized the contract review phase, which included identifying the population of contracts and a deep analysis of the new standard on individual contract terms; and (iii) made substantial progress in the process of identifying potential changes to business processes, systems and controls to support recognition and disclosure under the new standard.
Based on the conclusions of the assessment phase, the Company determined that the majority of its revenues, which are earned from construction, engineering and installation services and currently recognized using the percentage-of-completion method of accounting, are expected to follow a revenue recognition pattern consistent with current practice. The Company also determined that revenues related to time and materials projects and product sales are expected to follow a revenue recognition pattern consistent with current practice. The Company identified required changes under the new guidance for the recognition of royalty fees and the capitalization of contract fees. Based on the review of contracts across all of the Company’s business units, changes related to these items are expected to have an inconsequential impact on the timing or amount of revenue

16


recognized as compared to current practices. The Company will continue to monitor any new contracts up through the date of adoption.
The Company is implementing changes to its financial reporting process to comply with the disclosure requirements of the new guidance including: (i) changes to balances in contract assets and contract liabilities; and (ii) disaggregation of revenues. The Company plans to finalize the impacts of the new revenue standard on its operations, financial position and financial reporting disclosures in the fourth quarter of 2017, prior to its adoption in the first quarter of 2018.

3.    RESTRUCTURING
2017 Restructuring
On July 28, 2017, the Company’s board of directors approved the 2017 Restructuring to: (i) divest the Company’s pipe coating and insulation businesses in Louisiana, The Bayou Companies, LLC and Bayou Wasco Insulation, LLC (collectively “Bayou”); (ii) exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America; (iii) right-size the cathodic protection services operation in Canada; and (iv) reduce corporate and other operating costs. These decisions reflect the Company’s: (i) desire to further reduce its exposure in the North American upstream oil and gas markets; (ii) assessment of its ability to drive sustainable, profitable growth in the non-pipe FRP contracting market in North America; and (iii) assessment of continuing weak conditions in the Canadian oil and gas markets. During the third quarter of 2017, the Company also completed a detailed assessment of the Infrastructure Solutions businesses in Australia and Denmark, which resulted in additional restructuring actions in both countries.
During the third quarter of 2017, total pre-tax 2017 Restructuring charges recorded were $6.7 million ($5.7 million after tax) and consisted of employee severance, retention, extension of benefits, employment assistance programs, early lease termination and other restructuring costs associated with the restructuring efforts described above. The Company expects to incur charges of $12 million to $15 million, most of which are expected to be cash charges and incurred in the second half of 2017 and the first quarter of 2018. These charges are mainly in the Infrastructure Solutions segment and, to a lesser extent, the Corrosion Protection segment. The Company expects to reduce headcount by approximately 300 employees as a result of these actions.
During the quarter ended September 30, 2017, the Company recorded pre-tax expenses related to the 2017 Restructuring as follows (in thousands):
 
Infrastructure
Solutions
 
Corrosion
Protection
 
Total
Severance and benefit related costs
$
3,140

 
$
1,930

 
$
5,070

Lease termination costs
250

 
90

 
340

Relocation and other moving costs
—

 
29

 
29

Other restructuring costs (1)
1,183

 
115

 
1,298

Total pre-tax restructuring charges (2)
$
4,573

 
$
2,164

 
$
6,737

__________________________
(1) 
Includes charges primarily related to exiting non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America and right-sizing the cathodic protection services operation in Canada, inclusive of wind-down costs, professional fees, fixed asset disposals and certain other restructuring and related charges.
(2) 
Includes $0.8 million of corporate-related restructuring charges that have been allocated to the reportable segments.
2017 Restructuring costs related to severance, other termination benefit costs and early lease termination costs were $5.4 million for the quarter ended September 30, 2017 and are reported on a separate line in the Consolidated Statements of Operations.

17


The following table summarizes all charges related to the 2017 Restructuring recognized in the quarter ended September 30, 2017 as presented in their affected line in the Consolidated Statements of Operations (in thousands):
 
Infrastructure
Solutions
 
Corrosion
Protection
 
  Total (1)
Cost of revenues
$
30

 
$
15

 
$
45

Operating expenses
1,153

 
100

 
1,253

Restructuring and related charges
3,390

 
2,049

 
5,439

Total pre-tax restructuring charges
$
4,573

 
$
2,164

 
$
6,737

__________________________
(1) 
Total pre-tax restructuring charges include cash charges of $6.6 million and non-cash charges of $0.1 million. Cash charges consist of charges incurred during the quarter that will be settled in cash, either during the current period or future periods.
The following table summarizes the 2017 Restructuring activity during the quarter ended September 30, 2017 (in thousands):
 
2017
Charge to
Income
 
Utilized in 2017
 
Reserves at
September 30,
2017
 
 
Cash(1)
 
Non-Cash
 
Severance and benefit related costs
$
5,070

 
$
1,639

 
$
—

 
$
3,431

Lease termination costs
340

 
264

 
—

 
76

Relocation and other moving costs
29

 
29

 
—

 
—

Other restructuring costs
1,298

 
521

 
77

 
700

Total pre-tax restructuring charges
$
6,737

 
$
2,453

 
$
77

 
$
4,207

__________________________
(1) 
Refers to cash utilized to settle charges during the third quarter of 2017.
2016 Restructuring
On January 4, 2016, the Company’s board of directors approved the 2016 Restructuring to reduce its exposure to the upstream oil markets and to reduce consolidated expenses. During 2016, the Company completed its restructuring, which included repositioning Energy Services’ upstream operations in California, reducing Corrosion Protection’s upstream exposure by divesting its interest in a Canadian pipe coating joint venture, right-sizing Corrosion Protection to compete more effectively and reducing corporate and other operating costs. Cost savings were achieved primarily through office closures and headcount reductions of 964 employees, or 15.5% of the Company’s total workforce as of December 31, 2015.
Total pre-tax 2016 Restructuring charges recorded since inception were $16.1 million ($10.3 million after tax) and consisted of employee severance, retention, extension of benefits, employment assistance programs, early lease termination and other restructuring costs associated with the restructuring efforts described above. The majority of 2016 Restructuring costs were cash charges.
There were no expenses incurred in the first nine months of 2017 related to the 2016 Restructuring. During the quarter and nine months ended September 30, 2016, the Company recorded pre-tax expenses related to the 2016 Restructuring as follows (in thousands):
 
Quarter Ended September 30, 2016
 
Infrastructure
Solutions
 
Corrosion
Protection
 
Energy
Services
 
Total
Severance and benefit related costs
$
—

 
$
48

 
$
98

 
$
146

Relocation and other moving costs
—

 
—

 
66

 
66

Other restructuring costs (1)
(31
)
 
130

 
976

 
1,075

Total pre-tax restructuring charges (reversals) (2)
$
(31
)
 
$
178

 
$
1,140

 
$
1,287

__________________________
(1) 
Includes charges primarily related to downsizing the Company’s upstream operations in California, inclusive of wind-down costs, professional fees, fixed asset disposals and certain other restructuring charges.
(2) 
Includes less than $0.1 million of corporate-related restructuring charges that have been allocated to the reportable segments.

18


 
Nine Months Ended September 30, 2016
 
Infrastructure
Solutions
 
Corrosion
Protection
 
Energy
Services
 
Total
Severance and benefit related costs
$
2,256

 
$
3,182

 
$
1,501

 
$
6,939

Lease termination costs
—

 
—

 
969

 
969

Relocation and other moving costs
307

 
62

 
200

 
569

Other restructuring costs (1)
777

 
628

 
4,909

 
6,314

Total pre-tax restructuring charges (2)
$
3,340

 
$
3,872

 
$
7,579

 
$
14,791

__________________________
(1) 
Includes charges primarily related to downsizing the Company’s upstream operations in California, inclusive of wind-down costs, professional fees, fixed asset disposals and certain other restructuring charges.
(2) 
Includes $1.2 million of corporate-related restructuring charges that have been allocated to the reportable segments.
2016 Restructuring costs related to severance, other termination benefit costs and early lease termination costs were zero and $0.2 million for the quarters ended September 30, 2017 and 2016, respectively, and zero and $8.5 million for the nine months ended September 30, 2017 and 2016, respectively, and are reported on a separate line in the Consolidated Statements of Operations.
The following tables summarize all charges related to the 2016 Restructuring recognized in the quarter and nine months ended September 30, 2016 as presented in their affected line in the Consolidated Statements of Operations (in thousands):
 
Quarter Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
Infrastructure
Solutions
 
Corrosion
Protection
 
Energy
Services
 
  Total (1)
 
Infrastructure
Solutions
 
Corrosion
Protection
 
Energy
Services
 
  Total (1)
Cost of revenues
$
—

 
$
130

 
$
—

 
$
130

 
$
—

 
$
189

 
$
—

 
$
189

Operating expenses
(31
)
 
—

 
976

 
945

 
528

 
439

 
4,909

 
5,876

Restructuring and related charges
 
 
48

 
164

 
212

 
2,563

 
3,244

 
2,670

 
8,477

Other expense
—

 
—

 
—

 
—

 
249

 
—

 
—

 
249

Total pre-tax charges
$
(31
)
 
$
178

 
$
1,140

 
$
1,287

 
$
3,340

 
$
3,872

 
$
7,579

 
$
14,791

__________________________
(1) 
Total pre-tax restructuring charges include cash charges of $1.0 million and non-cash charges of $0.3 million for the quarter ended September 30, 2016 and cash charges of $14.0 million and non-cash charges of $0.8 million for the nine months ended September 30, 2016. Cash charges consist of charges incurred during the period that will be settled in cash, either during the current period or future periods.
The following tables summarize the 2016 Restructuring activity during the nine months ended September 30, 2017 and 2016 (in thousands):
 
Reserves at
December 31,
2016
 
Cash
Utilized in
2017 (1)
 
Reserves at
September 30,
2017
 
 
Severance and benefit related costs
$
645

 
$
549

 
$
96

Lease termination costs
125

 
125

 
—

Relocation and other moving costs
10

 
10

 
—

Other restructuring costs
120

 
66

 
54

Total pre-tax restructuring charges
$
900

 
$
750

 
$
150

__________________________
(1) 
Refers to cash utilized to settle charges that were reserved at December 31, 2016.

19


 
2016
Charge to
Income
 
Utilized in 2016
 
Reserves at
September 30,
2016
 
 
Cash(1)
 
Non-Cash
 
Severance and benefit related costs
$
6,939

 
$
5,835

 
$
—

 
$
1,104

Lease termination costs
969

 
969

 
—

 
—

Relocation and other moving costs
569

 
569

 
—

 
—

Other restructuring costs
6,314

 
5,549

 
765

 
—

Total pre-tax restructuring charges
$
14,791

 
$
12,922

 
$
765

 
$
1,104

__________________________
(1) 
Refers to cash utilized to settle charges during the first nine months of 2016.

4.    SHARE INFORMATION
Earnings per share have been calculated using the following share information:

Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,

2017
 
2016
 
2017
 
2016
Weighted average number of common shares used for basic EPS
32,905,142

 
34,462,579

 
33,363,472

 
34,977,469

Effect of dilutive stock options and restricted and deferred stock unit awards
—

 
518,411

 
—

 
462,562

Weighted average number of common shares and dilutive potential common stock used in dilutive EPS
32,905,142

 
34,980,990

 
33,363,472

 
35,440,031

The Company excluded 737,423 and 702,544 stock options and restricted and deferred stock units for the quarter and nine-month period ended September 30, 2017, respectively, from the diluted earnings per share calculation for the Company’s common stock because of the reported net loss for the periods. The Company excluded 77,807 and 162,178 stock options for the quarters ended September 30, 2017 and 2016, respectively, and 77,807 and 160,191 stock options for the nine months ended September 30, 2017 and 2016, respectively, from the diluted earnings per share calculations for the Company’s common stock because they were anti-dilutive as their exercise prices were greater than the average market price of common shares for each period.

5.    ASSETS AND LIABILITIES HELD FOR SALE
On July 28, 2017, the Company’s board of directors approved a plan to sell the assets and liabilities of Bayou (see Note 1). It is probable that such sale will occur within one year. As a result, the relevant asset and liability balances are accounted for as held for sale and measured at the lower of carrying value or fair value less cost to sell. No impairment charges were recorded as the net carrying value approximated or was less than the expected fair value less cost to sell, as determined after consideration of preliminary indications of interest received.
On September 17, 2017, the Company entered into an agreement with Wasco Coatings UK Ltd. (“Wasco UK”), the Company’s joint venture partner in Bayou Wasco Insulation, LLC (“Bayou Wasco”), whereby the Company paid $1.5 million to Wasco UK for Wasco UK’s waiver of its transfer restrictions contained in the original operating agreement for Bayou Wasco. The payment was recorded to “Acquisition and divestiture expenses” in the Consolidated Statement of Operations for the quarter and nine-month period ended September 30, 2017.

20


The following table provides the components of assets and liabilities held for sale (in thousands):
 
September 30, 
 2017
Assets held for sale:
 
Current assets:
 
Cash and cash equivalents
$
8,910

Receivables, net
9,121

Costs and estimated earnings in excess of billings
831

Inventories
3,141

Prepaid expenses and other current assets
1,201

Total current assets
23,204

Property, plant & equipment, less accumulated depreciation
51,803

Identified intangible assets, less accumulated amortization
3,216

Total assets held for sale
$
78,223

 
 
Liabilities held for sale:
 
Current liabilities
 
Accounts payable
$
2,196

Accrued expenses
3,373

Billings in excess of costs and estimated earnings
6,645

Total current liabilities
12,214

Long-term debt
7,689

Other non-current liabilities
87

Total liabilities held for sale
$
19,990

 
 
Non-controlling interests
$
2,957


6.    GOODWILL AND IDENTIFIED INTANGIBLE ASSETS
Goodwill
The following table presents a reconciliation of the beginning and ending balances of the Company’s goodwill at January 1, 2017 and September 30, 2017 (in thousands):
 
Infrastructure
Solutions
 
Corrosion
Protection
 
Energy
Services
 
Total
Balance, January 1, 2017:
 
 
 
 
 
 
 
Goodwill, gross
$
239,494

 
$
73,875

 
$
80,246

 
$
393,615

Accumulated impairment losses
(16,069
)
 
(45,400
)
 
(33,527
)
 
(94,996
)
Goodwill, net
223,425

 
28,475

 
46,719

 
298,619

2017 Activity:
 
 
 
 
 
 
 
Acquisitions (1)
3,355

 
—

 
—

 
3,355

Impairments (2)
(45,390
)
 
—

 
—

 
(45,390
)
Foreign currency translation
2,642

 
565

 
—

 
3,207

Balance, September 30, 2017:
 
 
 
 
 
 
 
Goodwill, gross
245,491

 
74,440

 
80,246

 
400,177

Accumulated impairment losses
(61,459
)
 
(45,400
)
 
(33,527
)
 
(140,386
)
Goodwill, net
$
184,032

 
$
29,040

 
$
46,719

 
$
259,791

__________________________
(1) 
During the first nine months of 2017, the Company recorded goodwill of $3.4 million related to the acquisition of Environmental Techniques (see Note 1).

21


(2) 
During the third quarter of 2017, the Company recorded a $45.4 million goodwill impairment to its Fyfe reporting unit, which is included in the Infrastructure Solutions reportable segment (see Note 2).
Identified Intangible Assets
Identified intangible assets consisted of the following (in thousands):
 
 
 
September 30, 2017
 
December 31, 2016
 
Weighted
Average
Useful
Lives
(Years)
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
License agreements
10.3
 
$
4,489

 
$
(3,578
)
 
$
911

 
$
4,418

 
$
(3,438
)
 
$
980

Leases
3.3
 
796

 
(512
)
 
284

 
2,065

 
(912
)
 
1,153

Trademarks (1)(2)
10.5
 
15,448

 
(5,861
)
 
9,587

 
24,185

 
(7,868
)
 
16,317

Non-competes
1.6
 
1,196

 
(1,020
)
 
176

 
1,308

 
(1,054
)
 
254

Customer relationships (1)(2)
10.1
 
160,414

 
(54,184
)
 
106,230

 
187,554

 
(53,830
)
 
133,724

Patents and acquired technology (2)
9.3
 
45,146

 
(21,250
)
 
23,896

 
66,222

 
(23,739
)
 
42,483

 
 
 
$
227,489

 
$
(86,405
)
 
$
141,084

 
$
285,752

 
$
(90,841
)
 
$
194,911

__________________________
(1) 
During the first nine months of 2017, the Company recorded trademarks of $0.1 million and customer relationships of $1.7 million related to the acquisition of Environmental Techniques (see Note 1).
(2) 
During the third quarter of 2017, the Company recorded intangible asset impairments related to restructuring and realignment efforts at Fyfe North America of $3.4 million for trademarks, $20.8 million for customer relationships and $16.8 million for patents and acquired technology (see Note 2).
Amortization expense was $3.8 million and $4.2 million for the quarters ended September 30, 2017 and 2016, respectively, and $12.5 million and $12.2 million for the nine months ended September 30, 2017 and 2016, respectively. Estimated amortization expense by year is as follows (in thousands):
2017
 
$
16,078

2018
 
14,102

2019
 
13,914

2020
 
13,766

2021
 
13,605


7.    LONG-TERM DEBT AND CREDIT FACILITY
Financing Arrangements
Long-term debt consisted of the following (in thousands):
 
September 30, 
 2017
 
December 31, 
 2016
Term note, due October 30, 2020, annualized rates of 3.26% and 3.08%, respectively
$
315,000

 
$
328,125

Line of credit, 3.23% and 2.96%, respectively
50,000

 
36,000

Other notes with interest rates from 3.26% to 6.50%
358

 
9,901

Subtotal
365,358

 
374,026

Less – Current maturities of long-term debt
26,556

 
19,835

Less – Unamortized loan costs
2,739

 
3,406

Total
$
336,063

 
$
350,785

In October 2015, the Company entered into an amended and restated $650.0 million senior secured credit facility (the “Credit Facility”) with a syndicate of banks. Bank of America, N.A. served as the sole administrative agent and JP Morgan Chase Bank, N.A. and U.S. Bank National Association acted as co-syndication agents. Merrill Lynch Pierce Fenner & Smith

22


Incorporated, JPMorgan Securities LLC and U.S. Bank National Association acted as joint lead arrangers and joint book managers in the syndication of the Credit Facility.
The Credit Facility consists of a $300.0 million five-year revolving line of credit and a $350.0 million five-year term loan facility. The Company drew the entire term loan from the Credit Facility to (i) retire $344.7 million in indebtedness outstanding under the Company’s prior credit facility; (ii) fund expenses associated with the Credit Facility; and (iii) fund general corporate purposes.
Generally, interest is charged on the principal amounts outstanding under the Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from 1.25% to 2.25% depending on the Company’s consolidated leverage ratio. The Company can also opt for an interest rate equal to a base rate (as defined in the credit documents) plus an applicable rate, which also is based on the Company’s consolidated leverage ratio. The applicable LIBOR borrowing rate (LIBOR plus Company’s applicable rate) as of September 30, 2017 was approximately 3.26%.
The Company’s indebtedness at September 30, 2017 consisted of $315.0 million outstanding from the $350.0 million term loan under the Credit Facility, $50.0 million on the line of credit under the Credit Facility and $0.4 million of third-party notes and bank debt. Additionally, the Company had $7.7 million of debt held by its joint venture partner (representing funds loaned by its joint venture partner) listed as held for sale at September 30, 2017 related to the planned sale of Bayou. During the first nine months of 2017, the Company had net borrowings of $14.0 million on the line of credit for domestic working capital needs.
As of September 30, 2017, the Company had $38.2 million in letters of credit issued and outstanding under the Credit Facility. Of such amount, $16.2 million was collateral for the benefit of certain of our insurance carriers and $22.0 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.
The Company’s indebtedness at December 31, 2016 consisted of $328.1 million outstanding from the term loan under the Credit Facility and $36.0 million on the line of credit under the Credit Facility. Additionally, the Company designated $9.6 million of debt held by its joint ventures (representing funds loaned by its joint venture partners) as third-party debt in the consolidated financial statements and held $0.3 million of third-party notes and bank debt at December 31, 2016.
At September 30, 2017 and December 31, 2016, the estimated fair value of the Company’s long-term debt was approximately $373.9 million and $366.0 million, respectively. Fair value was estimated using market rates for debt of similar risk and maturity and a discounted cash flow model, which are based on Level 3 inputs as defined in Note 12.
In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $262.5 million, which is set to expire in October 2020. The notional amount of this swap mirrors the amortization of a $262.5 million portion of the Company’s $350.0 million term loan drawn from the Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 1.46% calculated on the amortizing $262.5 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $262.5 million notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $262.5 million portion of the Company’s term loan from the Credit Facility. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge. See Note 12.
The Credit Facility is subject to certain financial covenants, including a consolidated financial leverage ratio and consolidated fixed charge coverage ratio. Subject to the specifically defined terms and methods of calculation as set forth in the Credit Facility’s credit agreement, the financial covenant requirements, as of each quarterly reporting period end, are defined as follows:
•
Consolidated financial leverage ratio compares consolidated funded indebtedness to Credit Facility defined income. The initial maximum amount was not to initially exceed 3.75 to 1.00, but decreased, as scheduled, to not more than 3.50 to 1.00 beginning with the quarter ending June 30, 2017. At September 30, 2017, the Company’s consolidated financial leverage ratio was 2.98 to 1.00 and, using the Credit Facility defined income, the Company had the capacity to borrow up to $65.9 million of additional debt.
•
Consolidated fixed charge coverage ratio compares Credit Facility defined income to Credit Facility defined fixed charges with a minimum permitted ratio of not less than 1.25 to 1.00. At September 30, 2017, the Company’s fixed charge ratio was 1.90 to 1.00.
At September 30, 2017, the Company was in compliance with all of its debt and financial covenants as required under the Credit Facility.


23


8.    STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION
Share Repurchase Plan
Under the terms of its Credit Facility, the Company is authorized to purchase up to $40.0 million of shares of its common stock in open market purchases on an annual basis, subject to board of director authorization. In October 2016, the Company’s board of directors authorized the open market repurchase of up to $40.0 million of our common stock to be made during 2017. The Company began repurchasing shares under this program in January 2017. In October 2017, the Company’s board of directors authorized a similar $40.0 million program for 2018. Once repurchased, the Company promptly retires such shares.
The Company is also authorized to repurchase up to $10.0 million of the Company’s common stock in each calendar year in connection with the Company’s equity compensation programs for employees. The participants in the Company’s equity plans may surrender shares of common stock in satisfaction of tax obligations arising from the vesting of restricted stock, restricted stock unit awards and performance unit awards under such plans and in connection with the exercise of stock option awards. The deemed price paid is the closing price of the Company’s common stock on the Nasdaq Global Select Market on the date that the restricted stock, restricted stock unit or performance unit vests or the shares of the Company’s common stock are surrendered in exchange for stock option exercises. The option holder may elect a “net, net” exercise in connection with the exercise of employee stock options such that the option holder receives a number of shares equal to (1) the built-in gain in the option shares divided by the market price of the Company’s common stock on the date of exercise, less (2) a number of shares equal to the taxes due upon the exercise of the option divided by the market price of the Company’s common stock on the date of exercise. The shares of Company common stock surrendered to the Company for taxes due on the exercise of the option are deemed repurchased by the Company.
During the nine months ended September 30, 2017, the Company acquired 1,346,132 shares of the Company’s common stock for $29.4 million ($21.81 average price per share) through the open market repurchase program discussed above and 106,164 shares of the Company’s common stock for $2.4 million ($22.25 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock, restricted stock units and performance units. Once repurchased, the Company immediately retired all such shares.
During the nine months ended September 30, 2016, the Company acquired 1,908,380 shares of the Company’s common stock for $35.4 million ($18.57 average price per share) through the open market repurchase program discussed above and 58,967 shares of the Company’s common stock for $1.2 million ($19.67 average price per share) in connection with the vesting of restricted stock and restricted stock units and the exercise of stock options. Once repurchased, the Company immediately retired all such shares.
Equity-Based Compensation Plans
In April 2016, the Company’s stockholders approved the 2016 Employee Equity Incentive Plan (the “2016 Employee Plan”), which replaced the 2013 Employee Equity Incentive Plan. The 2016 Employee Plan provides for equity-based compensation awards, including restricted shares of common stock, performance awards, stock options, stock units and stock appreciation rights. The 2016 Employee Plan is administered by the Compensation Committee of the board of directors, which determines eligibility, timing, pricing, amount and other terms or conditions of awards. In April 2017, the Company’s stockholders approved the First Amendment to the 2016 Employee Equity Incentive Plan, which increased by 1,000,000 the number of shares of the Company’s common stock reserved and available for issuance in connection with awards issued under the 2016 Employee Plan. As of September 30, 2017, 1,391,711 shares of common stock were available for issuance under the 2016 Employee Plan.
In April 2016, the Company’s stockholders approved the 2016 Non-Employee Director Equity Incentive Plan (the “2016 Director Plan”), which replaced the 2011 Non-Employee Director Equity Incentive Plan. The 2016 Director Plan provides for equity-based compensation awards, including non-qualified stock options and stock units. The board of directors administers the 2016 Director Plan and has the authority to establish, amend and rescind any rules and regulations related to the 2016 Director Plan. As of September 30, 2017, 119,310 shares of common stock were available for issuance under the 2016 Director Plan.
Stock Awards
Stock awards, which include shares of restricted stock, restricted stock units and performance stock units, are awarded from time to time to executive officers and certain key employees of the Company. Stock award compensation is recorded based on the award date fair value and charged to expense ratably through the requisite service period. The forfeiture of unvested restricted stock, restricted stock units and performance stock units causes the reversal of all previous expense to be recorded as a reduction of current period expense.

24


A summary of the stock award activity is as follows:
 
Nine Months Ended
September 30, 2017
 
Stock Awards
 
Weighted
Average
Award Date
Fair Value
Outstanding at January 1, 2017
1,501,021

 
$
18.78

Restricted stock units awarded
248,547

 
22.96

Performance stock units awarded
213,436

 
23.04

Restricted shares distributed
(167,130
)
 
22.77

Restricted stock units distributed
(90,663
)
 
20.87

Performance stock units distributed
(49,672
)
 
21.95

Restricted shares forfeited
(1,084
)
 
23.01

Restricted stock units forfeited
(54,548
)
 
19.84

Performance stock units forfeited
(100,896
)
 
19.17

Outstanding at September 30, 2017
1,499,011

 
$
19.34

Expense associated with stock awards was $2.5 million and $2.1 million for the quarters ended September 30, 2017 and 2016, respectively, and $8.1 million and $6.7 million for the nine months ended September 30, 2017 and 2016, respectively. Unrecognized pre-tax expense of $14.1 million related to stock awards is expected to be recognized over the weighted average remaining service period of 1.87 years for awards outstanding at September 30, 2017.
Deferred Stock Unit Awards
Deferred stock units are generally awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date and are generally fully vested on the date of grant. The expense related to the issuance of deferred stock units is recorded as of the date of the award.
A summary of deferred stock unit activity is as follows:
 
Nine Months Ended
September 30, 2017

Deferred
Stock
Units

Weighted
Average
Award Date
Fair Value
Outstanding at January 1, 2017
253,445

 
$
19.93

Awarded
45,042

 
23.53

Distributed
(30,559
)
 
23.57

Outstanding at September 30, 2017
267,928

 
$
20.12

Expense associated with awards of deferred stock units was less than $0.1 million for the quarters ended September 30, 2017 and 2016, respectively, and $1.1 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively.
Stock Options
Stock options on the Company’s common stock are awarded from time to time to executive officers and certain key employees of the Company. Stock options granted generally have a term of seven to ten years and an exercise price equal to the market value of the underlying common stock on the date of grant.
There was no stock option activity during the nine months ended September 30, 2017. Stock option shares outstanding and exercisable at September 30, 2017 were 170,253, with a weighted average exercise price of $21.99 per share.
Expense associated with stock option grants was zero for both the nine months ended September 30, 2017 and 2016. There was no unrecognized pre-tax expense related to stock option grants at September 30, 2017.

25


Financial data for stock option exercises are summarized as follows (in thousands):

Nine Months Ended
September 30,

2017
 
2016
Amount collected from stock option exercises
$
—

 
$
306

Total intrinsic value of stock option exercises
—

 
47

Tax shortfall of stock option exercises recorded in additional paid-in-capital
—

 
315

Aggregate intrinsic value of outstanding stock options
478

 
102

Aggregate intrinsic value of exercisable stock options
478

 
102

The intrinsic value calculations are based on the Company’s closing stock price of $23.28 and $19.07 on September 30, 2017 and 2016, respectively.
The Company uses a binomial option-pricing model for valuation purposes to reflect the features of stock options granted. Volatility, expected term and dividend yield assumptions are based on the Company’s historical experience. The risk-free rate is based on a U.S. treasury note with a maturity similar to the option grant’s expected term. There were no stock options awarded during 2017 or 2016.

9.    TAXES ON INCOME
The Company’s effective tax rate in the quarter and nine-month period ended September 30, 2017 was a benefit of 7.5% on a pre-tax loss and an expense of 2.2% on a pre-tax loss, respectively. The low effective tax rates, as compared to the U.S. federal statutory income tax rate of 35%, were unfavorably impacted by: (i) significant pre-tax charges related to goodwill and definite-lived intangible asset impairments, certain of which are not deductible for tax purposes; and (ii) the impact of establishing a $14.9 million valuation allowance on net operating losses and other deferred tax assets in jurisdictions, primarily in the United States, where the Company is unlikely to recognize these benefits. The effective tax rate for the first nine months of 2017 was also unfavorably impacted by a higher mix of earnings in the United States, primarily from income generated on a large deepwater project in the Company’s pipe coating and insulation operation.
For the quarter and nine-month period ended September 30, 2016, the Company’s effective tax rate was 30.7% and 11.4%, respectively. These effective rates were favorably impacted by a higher mix of earnings towards foreign jurisdictions, which generally have lower statutory tax rates, and the impact of certain discrete tax items relating to the 2016 Restructuring. The effective tax rate for the first nine months of 2016 was also favorably impacted by a $1.9 million benefit, or 15.3% benefit to the effective tax rate, related to the reversal of a previously recorded valuation allowance due to changes in the realization of future tax benefits.

10.    COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in certain litigation incidental to the conduct of its business and affairs. Management, after consultation with legal counsel, does not believe that the outcome of any such litigation, individually or in the aggregate, will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
Contingencies
In connection with the Brinderson acquisition, certain pre-acquisition matters were identified in 2014 whereby a loss is both probable and reasonably estimable. The Company establishes liabilities in accordance with FASB ASC Subtopic No. 450-20, Contingencies - Loss Contingencies, and accordingly, recorded an accrual related to various legal, tax, employee benefit and employment matters. At December 31, 2016, the accrual relating to these matters was $6.0 million. During the first quarter of 2017, the Company reassessed its reserve, as certain payroll tax statutory limitation periods lapsed, and lowered its accrual for such matters by $0.7 million. The accrual adjustments resulted in an offset to “Operating expense” in the Consolidated Statement of Operations. As of September 30, 2017, the remaining accrual relating to these matters was $5.3 million.

26


Purchase Commitments
The Company had no material purchase commitments at September 30, 2017.
Guarantees
The Company has many contracts that require the Company to indemnify the other party against loss from claims, including claims of patent or trademark infringement or other third party claims for injuries, damages or losses. The Company has agreed to indemnify its surety against losses from third-party claims of subcontractors. The Company has not previously experienced material losses under these provisions and, while there can be no assurances, currently does not anticipate any future material adverse impact on its consolidated financial position, results of operations or cash flows.
The Company regularly reviews its exposure under all its engagements, including performance guarantees by contractual joint ventures and indemnification of its surety. As a result of the most recent review, the Company has determined that the risk of material loss is remote under these arrangements and has not recorded a liability for these risks at September 30, 2017 on its consolidated balance sheet.

11.    SEGMENT REPORTING
The Company has three operating segments, which are also its reportable segments: Infrastructure Solutions; Corrosion Protection; and Energy Services. The Company’s operating segments correspond to its management organizational structure. Each operating segment has a president who reports to the Company’s chief executive officer, who is also the chief operating decision manager (“CODM”). The operating results and financial information reported by each of the segments are evaluated separately, regularly reviewed and used by the CODM to evaluate segment performance, allocate resources and determine management incentive compensation.
The following disaggregated financial results have been prepared using a management approach that is consistent with the basis and manner with which management internally disaggregates financial information for the purpose of making internal operating decisions. The Company evaluates performance based on stand-alone operating income (loss), which includes acquisition-related expenses, restructuring charges and an allocation of corporate-related expenses.

27


Financial information by segment was as follows (in thousands):
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
  2017 (1)
 
  2016 (2)
 
  2017 (3)
 
  2016 (4)
Revenues:
 
 
 
 
 
 
 
Infrastructure Solutions
$
174,161

 
$
158,562

 
$
451,340

 
$
434,523

Corrosion Protection
102,276

 
95,084

 
353,381

 
281,939

Energy Services
65,435

 
54,878

 
216,799

 
183,656

Total revenues
$
341,872

 
$
308,524

 
$
1,021,520

 
$
900,118

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Infrastructure Solutions
$
41,189

 
$
40,566

 
$
106,803

 
$
109,485

Corrosion Protection
23,063

 
18,374

 
86,663

 
52,676

Energy Services
9,190

 
7,378

 
27,156

 
19,761

Total gross profit
$
73,442

 
$
66,318

 
$
220,622

 
$
181,922

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Infrastructure Solutions (5)
$
(73,786
)
 
$
18,573

 
$
(59,786
)
 
$
37,448

Corrosion Protection (6)
(2,659
)
 
513

 
15,793

 
(7,626
)
Energy Services (7)
1,436

 
1,419

 
4,776

 
(5,311
)
Total operating income (loss)
(75,009
)
 
20,505

 
(39,217
)
 
24,511

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(3,962
)
 
(3,825
)
 
(12,014
)
 
(11,081
)
Interest income
33

 
37

 
117

 
197

Other (8)
(798
)
 
288

 
(1,593
)
 
(1,183
)
Total other expense
(4,727
)
 
(3,500
)
 
(13,490
)
 
(12,067
)
Income (loss) before taxes on income
$
(79,736
)
 
$
17,005

 
$
(52,707
)
 
$
12,444

_______________________
(1) 
Results include: (i) $6.7 million of 2017 Restructuring charges (see Note 3); (ii) $45.4 million of goodwill impairment charges (see Note 2); (iii) $41.0 million of definite-lived intangible asset impairment charges (see Note 2); and (iv) $2.0 million of costs incurred primarily related to the acquisition of Environmental Techniques and the planned divestiture of Bayou.
(2) 
Results include: (i) $1.3 million of 2016 Restructuring charges (see Note 3); and (ii) $0.3 million of costs incurred primarily related to the acquisition of Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions.
(3) 
Results include: (i) $6.7 million of 2017 Restructuring charges (see Note 3); (ii) $45.4 million of goodwill impairment charges (see Note 2); (iii) $41.0 million of definite-lived intangible asset impairment charges (see Note 2); and (iv) $2.5 million of costs incurred primarily related to the acquisition of Environmental Techniques and the planned divestiture of Bayou.
(4) 
Results include: (i) $14.8 million of 2016 Restructuring charges (see Note 3); (ii) $2.1 million of costs incurred primarily related to the acquisition of Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions; and (iii) inventory step up expense of $3.6 million recognized as part of the accounting for business combinations (see Note 1).
(5) 
Operating loss in the third quarter of 2017 includes: (i) $4.6 million of 2017 Restructuring charges (see Note 3); (ii) $45.4 million of goodwill impairment charges (see Note 2); (iii) $41.0 million of definite-lived intangible asset impairment charges (see Note 2); and (iv) $0.1 million of costs incurred primarily related to the acquisition of Environmental Techniques. Operating income in the third quarter of 2016 includes $0.3 million of costs incurred primarily related to the acquisition of Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions.
Operating loss in the nine months ended September 30, 2017 includes: (i) $4.6 million of 2017 Restructuring charges (see Note 3); (ii) $45.4 million of goodwill impairment charges (see Note 2); (iii) $41.0 million of definite-lived intangible asset impairment charges (see Note 2); and (iv) $0.7 million of costs incurred primarily related to the acquisition of Environmental Techniques. Operating income in the nine months ended September 30, 2016 includes: (i) $3.1 million of 2016 Restructuring charges (see Note 3); (ii) $2.1 million of costs incurred primarily related to the acquisition of Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions; and (iii) inventory step up expense of $3.6 million recognized as part of the accounting for business combinations (see Note 1).
(6) 
Operating income (loss) in the quarter and nine months ended September 30, 2017 includes: (i) $2.2 million of 2017 Restructuring charges (see Note 3); and (ii) $1.9 million of costs incurred primarily related to the planned divestiture of Bayou.

28


Operating income (loss) in the quarter and nine months ended September 30, 2016 includes 2016 Restructuring charges of $0.2 million and $3.9 million, respectively (see Note 3).
(7) 
Operating income in the quarter and nine months ended September 30, 2016 includes 2016 Restructuring charges of $1.1 million and $7.6 million, respectively (see Note 3).
(8) 
Other expenses for the nine months ended September 30, 2016 includes 2016 Restructuring charges of $0.3 million (see Note 3).
The following table summarizes revenues, gross profit and operating income (loss) by geographic region (in thousands):
 
Quarters Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2017
 
2016
 
2017
 
2016
Revenues (1):
 
 
 
 
 
 
 
United States
$
250,815

 
$
232,734

 
$
787,046

 
$
684,088

Canada
41,939

 
39,161

 
98,053

 
94,113

Europe
17,367

 
13,850

 
51,656

 
43,771

Other foreign
31,751

 
22,779

 
84,765

 
78,146

Total revenues
$
341,872

 
$
308,524

 
$
1,021,520

 
$
900,118

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
United States
$
56,295

 
$
51,217

 
$
179,029

 
$
138,869

Canada
9,099

 
8,373

 
19,703

 
19,644

Europe
2,989

 
2,794

 
9,414

 
8,893

Other foreign
5,059

 
3,934

 
12,476

 
14,516

Total gross profit
$
73,442

 
$
66,318

 
$
220,622

 
$
181,922

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
United States
$
(57,537
)
 
$
15,402

 
$
(25,405
)
 
$
15,547

Canada
1,148

 
5,410

 
5,086

 
10,208

Europe
(2,860
)
 
352

 
(2,672
)
 
1,108

Other foreign
(15,760
)
 
(659
)
 
(16,226
)
 
(2,352
)
Total operating income (loss)
$
(75,009
)
 
$
20,505

 
$
(39,217
)
 
$
24,511

__________________________
(1) 
Revenues are attributed to the country of origin for the Company’s legal entities. For a significant majority of its legal entities, the country of origin relates to the country or geographic area that it services.

12.    DERIVATIVE FINANCIAL INSTRUMENTS
As a matter of policy, the Company uses derivatives for risk management purposes, and does not use derivatives for speculative purposes. From time to time, the Company may enter into foreign currency forward contracts to hedge foreign currency cash flow transactions. For cash flow hedges, a gain or loss is recorded in the Consolidated Statements of Operations upon settlement of the hedge. All of the Company’s hedges that are designated as hedges for accounting purposes were highly effective; therefore, no notable amounts of hedge ineffectiveness were recorded in the Company’s Consolidated Statements of Operations for the outstanding hedged balance. During the first nine months of 2017 and 2016, the Company recorded less than $0.1 million as a gain on the consolidated statements of operations in the other income (expense) line item upon settlement of cash flow hedges. At September 30, 2017, the Company’s cash flow hedges were in a net deferred loss position of $0.1 million due to unfavorable movements in short-term interest rates relative to the hedged position. The loss was recorded in accrued expenses and other comprehensive income on the Consolidated Balance Sheets and on the foreign currency translation adjustment and derivative transactions line of the Consolidated Statements of Equity. The Company presents derivative instruments in the consolidated financial statements on a gross basis. The gross and net difference of derivative instruments are considered to be immaterial to the financial position presented in the financial statements.
The Company engages in regular inter-company trade activities and receives royalty payments from its wholly-owned Canadian entities, paid in Canadian dollars, rather than the Company’s functional currency, U.S. dollars. The Company utilizes

29


foreign currency forward exchange contracts to mitigate the currency risk associated with the anticipated future payments from its Canadian entities.
In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $262.5 million, which is set to expire in October 2020. The notional amount of this swap mirrored the amortization of a $262.5 million portion of the Company’s $350.0 million term loan drawn from the Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 1.46% calculated on the amortizing $262.5 million notional amount and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated by amortizing the $262.5 million same notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $262.5 million portion of the Company’s term loan from the Credit Facility. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge.
The following table provides a summary of the fair value amounts of our derivative instruments, all of which are Level 2 inputs as defined below (in thousands):
Designation of Derivatives
 
Balance Sheet Location
 
September 30, 
 2017
 
December 31, 
 2016
Derivatives Designated as Hedging Instruments:
 
 
 
 
Interest Rate Swaps
 
Other non-current assets
 
$
1,588

 
$
1,061

 
 
Total Assets
 
$
1,588

 
$
1,061

 
 
 
 
 
 
 
Forward Currency Contracts
 
Accrued expenses
 
$
143

 
$
57

 
 
Total Liabilities
 
$
143

 
$
57

 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
Forward Currency Contracts
 
Prepaid expenses and other current assets
 
$
—

 
$
26

 
 
Total Assets
 
$
—

 
$
26

 
 
 
 
 
 
 
Forward Currency Contracts
 
Accrued expenses
 
$
124

 
$
—

 
 
Total Liabilities
 
$
124

 
$
—

 
 
 
 
 
 
 
 
 
Total Derivative Assets
 
$
1,588

 
$
1,087

 
 
Total Derivative Liabilities
 
267

 
57

 
 
Total Net Derivative Asset
 
$
1,321

 
$
1,030

FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements for interim and annual reporting periods. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 – defined as quoted prices in active markets for identical instruments; Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. In accordance with FASB ASC 820, the Company determined that the instruments summarized below are derived from significant observable inputs, referred to as Level 2 inputs.

30


The following tables represent assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):
 
Total Fair Value at
September 30, 2017
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:







Forward Currency Contracts
$
—

 
$
—

 
$
—

 
$
—

Interest Rate Swap
1,588

 
—

 
1,588

 
—

Total
$
1,588

 
$
—

 
$
1,588

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Forward Currency Contracts
$
267

 
$
—

 
$
267

 
$
—

Total
$
267

 
$
—

 
$
267

 
$
—



Total Fair Value at
December 31, 2016

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Forward Currency Contracts
$
26

 
$
—

 
$
26

 
$
—

Interest Rate Swap
1,061

 
—

 
1,061

 
—

Total
$
1,087

 
$
—

 
$
1,087

 
$
—

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Forward Currency Contracts
$
57

 
$
—

 
$
57

 
$
—

Total
$
57

 
$
—

 
$
57

 
$
—

The following table summarizes the Company’s derivative positions at September 30, 2017:
 
Position
 
Notional
Amount
 
Weighted
Average
Remaining
Maturity
In Years
 
Average
Exchange
Rate
Canadian Dollar/USD
Sell
 
$
1,662,500

 
0.3
 
1.24
Canadian Dollar/British Pound
Sell
 
£
2,700,000

 
0.3
 
1.67
USD/EURO
Sell
 
€
3,400,000

 
0.3
 
1.19
USD/British Pound
Sell
 
£
4,595,000

 
0.3
 
1.34
EURO/British Pound
Sell
 
£
4,700,000

 
0.3
 
.88
ZAR/USD
Sell
 
R
47,459,403

 
0.2
 
13.64
Interest Rate Swap
 
 
$
236,250,000

 
3.1
 
 
The Company had no transfers between Level 1, 2 or 3 inputs during the quarter ended September 30, 2017. Certain financial instruments are required to be recorded at fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, the Company does not believe any such changes would have a material impact on its financial condition, results of operations or cash flows. Other financial instruments including cash and cash equivalents and short-term borrowings, including notes payable, are recorded at cost, which approximates fair value, which is based on Level 2 inputs as previously defined.

31


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis of certain significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
We believe that certain accounting policies could potentially have a more significant impact on our consolidated financial statements, either because of the significance of the consolidated financial statements to which they relate or because they involve a higher degree of judgment and complexity. A summary of such critical accounting policies can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2016 and in Note 2 to the consolidated financial statements contained in this report.

Forward-Looking Information
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. We make forward-looking statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q 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 and projections and are not guarantees of future events or results. When used in this report, 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, 2016, as filed with the Securities and Exchange Commission on March 1, 2017, and in our subsequent filed reports, including this report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed 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 report are qualified by these cautionary statements.

Executive Summary
Aegion combines innovative technologies with market leading expertise to maintain, rehabilitate and strengthen infrastructure around the world. Since 1971, we have played a pioneering role in finding innovative solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. We also maintain the efficient operation of refineries and other industrial facilities. We are committed to Stronger. Safer. Infrastructure®. Our products and services are currently utilized in approximately 80 countries across six continents. We believe the depth and breadth of our products and services make us a leading provider for the world’s infrastructure rehabilitation and protection needs.
Our Segments
We have three operating segments, which are also our reportable segments: Infrastructure Solutions, Corrosion Protection and Energy Services. Our operating segments correspond to the Company’s management organizational structure.
Infrastructure Solutions – The majority of our work is performed in the municipal water and wastewater pipeline sector and, while the pace of growth is primarily driven by government funding, we believe the overall market needs result in a long-term stable growth opportunity for our market leading product brands, Insituform® cured-in-place pipe (“CIPP”), Tyfo® Fibrwrap® and Fusible PVC®.
Corrosion Protection – Investment in North America’s pipeline infrastructure is required to transport product from onshore and offshore oil and gas fields to its proper end markets. Corrosion Protection has a broad portfolio of technologies and services to protect and monitor pipelines from the effects of corrosion, including cathodic protection, interior pipe linings, interior and exterior pipe coatings as well as an increasing offering of inspection and repair capabilities. We provide solutions to customers to enhance the safety, environmental integrity, reliability and compliance of their pipelines in the oil and gas market.

32


Energy Services – We offer a unique value proposition based on our world class safety and labor productivity programs, which allows us to provide cost effective maintenance, turnaround and construction services at our customers’ refineries and petrochemical and other industrial facilities.
Strategic Initiatives
We are committed to being a valued partner to our customers. We are focused on expanding those relationships by improving execution while also developing or acquiring innovative technologies and comprehensive services to enhance our capabilities to solve complex infrastructure problems. We are pursuing three strategic initiatives:
Municipal Pipeline Rehabilitation – The fundamental driver in the global municipal pipeline rehabilitation market is the growing gap between the need and current spend. While we do not expect the spending gap to close any time soon, the increasing need for pipeline rehabilitation supports a long-term sustainable market for the technologies and services offered by our Infrastructure Solutions segment. We are committed to maintaining our market leadership position in the rehabilitation of wastewater pipelines in North America using our CIPP technology, the largest source of Aegion’s consolidated revenues. We have a diverse portfolio of trenchless technologies to rehabilitate aging and damaged municipal pipelines. The focus today is growing our presence in the rehabilitation of pressure pipelines in North America through both internal development and acquisitions. In 2016, we acquired Underground Solutions, Inc. and its subsidiary, Underground Solutions Technologies Group, Inc. (collectively, “Underground Solutions”), adding its patented Fusible PVC® pipe technology to our pressure pipe portfolio, which includes Insituform® CIPP, Tyfo® Fibrwrap® fiber-reinforce polymer (“FRP”) and Tite Liner® high-density polyethylene liner. Our international strategy is to use a blend of third-party product sales as well as CIPP and FRP contract installation operations primarily in Northwest Europe and Asia. A key to the success of this strategy is a continuing focus on improving productivity to reduce costs and increase efficiencies across the entire value chain from engineering, manufacturing and installation of our technology-based solutions.
Midstream Pipeline Integrity Management – There are over one million miles of regulated pipelines in North America, which remain the safest and most cost effective mode of oil and gas transmission. Within our Corrosion Protection segment, we design and install cathodic protection systems to help prevent pipeline corrosion, which represents a majority of the revenues and profits for the segment. We also provide inspection services to monitor these systems and detect early signs of corrosion. In 2017, we launched a new asset integrity management program designed to increase the efficiency and accuracy of the pipeline corrosion assessment data we collect and upgrade how we share this valuable information with customers. We seek to improve customer regulatory compliance and provide services in areas such as data validation, advanced analytics and predictive maintenance.
Downstream Refining and Industrial Facility Maintenance – Through our Energy Services segment, we have long-term relationships with refinery and industrial customers on the United States West Coast. Our objective is to leverage those relationships to expand the services we provide in mechanical maintenance, electrical and instrumentation services, small capital construction and shutdown (or “turnaround”) maintenance activity. There are opportunities in other industries on the West Coast such as pipelines and terminals, chemicals, industrial gas and power to leverage our experience in maintenance and construction services.

Business Outlook
Favorable end markets and the progress made over the last two years to advance our long-term strategy positioned us to grow revenue and operating income across all three platforms during the first nine months of 2017. However, the financial performance fell short of expectations because of isolated market challenges and performance issues. Management expects corrective actions underway will improve performance in these affected areas by the end of 2017 and early 2018. As a result of the shortfall in the first nine months of the year, full year earnings per share (after non-recurring charges) are expected to be similar to the result in 2016.
Infrastructure Solutions
We have made investments in 2017 to expand the use of Insituform® CIPP in several regions previously underserved by Insituform in the North American wastewater pipeline market. Our objective is to maintain growth and our leading share in a large and mature market. Outside North America, we are selectively targeting markets in Northwest Europe for contract installation of Insituform® CIPP to complement a strategy to grow third-party product sales across the continent and in several countries in Asia. Limited contract backlog in Denmark and performance issues in Australia for contract installation of Insituform® CIPP resulted in negative impacts to gross profit of $2.5 million and $5.2 million in the third quarter and first nine months of 2017, respectively, compared to the prior year periods. New leadership was recently brought in to improve operations and project management in Denmark and a restructuring program was started in Australia in September 2017 to reduce costs and realign resources.

33


One of the most attractive areas for growth is in the rehabilitation of municipal pressure pipelines, primarily in North America. We have a diverse portfolio of solutions in a highly fragmented and growing North American market. We also have an attractive market in Asia-Pacific for large-diameter pressure pipe strengthening. We completed a research and development effort in 2016 to significantly reduce material and installation costs for Tyfo® Fibrwrap® technology while maintaining the superior material properties and quality of the technology. We also improved our InsituMain® CIPP technology to give customers a more robust solution. We anticipate that the impact from these initiatives will lead to profitable growth in the future.
We believe there is a growing acceptance and increasing market opportunity for the Tyfo® Fibrwrap® technology in the rehabilitation and strengthening of buildings, bridges and other civil structures in North America, Asia-Pacific and Europe over the long-term. While we have had success in Asia-Pacific in this market segment, efforts to date to grow in North America proved to be more challenging, which resulted in gross profit declines of $3.0 million and $5.3 million in the third quarter and the first nine months of 2017, respectively, compared to the prior year periods. For this reason, we are exiting all non-pipe contract applications of the Tyfo® Fibrwrap® technology in North America in favor of leveraging our position as a technology provider through manufacturing of Tyfo® Fibrwrap® materials as well as expertise in engineering, material science and technical support.
Although the above challenges negatively impacted the first nine months of 2017, favorable end markets, strategic investments for growth and technology enhancements support expectations for Infrastructure Solutions to grow revenues in 2017 ahead of the three-year target rate of low-to-mid-single digits. During the third quarter of 2017, excluding impairment and restructuring charges, operating margins for the segment improved sequentially from the second quarter of 2017 despite the negative performance of the CIPP operations in Australia and Denmark and the Tyfo® Fibrwrap® operation in North America.
Corrosion Protection
Historically, over 50 percent of Corrosion Protection’s revenues comes from cathodic protection services for midstream oil and gas pipelines in North America, an attractive and growing market that we believe justifies further investment to outpace market growth. To that end, we are commercializing a new asset integrity management system in 2017 for pipeline corrosion inspections. The new service is expected to improve data accuracy and processing efficiency, customize the data transfer format (including geospatial mapping) and provide faster access to the information by customers. Corrosion Protection’s pipeline inspection services typically create a multiplier effect for our other capabilities in direct pipeline inspections, engineering, cathodic protection system installation and pipeline corrosion remediation. Our objective is to expand the relationships with our top customers, who are the leading pipeline owners in North America, to accelerate revenue growth. Asset integrity management is an important element of that strategy and we expect to transition a number of those customers to the new system in 2017. Despite these favorable market conditions, gross profit for our North America cathodic protection services operation was negatively impacted by $1.5 million in the third quarter of 2017 compared to the third quarter of 2016 due to a unfavorable mix of lower margin activity and certain isolated performance issues on several large projects.
With oil prices trading in a more stable range since the fall of 2016, we are seeing signs of a modest market recovery in 2017. We were awarded sizable international contracts for our Tite Liner® pipeline protection system and robotic internal field pipe weld coatings in the Middle East. The activity in the Middle East pertains to an onshore and offshore gas field development. The project consists of two related contracts valued at approximately $35 million, with over 75% of the value related to offshore pipeline weld coatings at expected gross margins consistent with past offshore projects.
We substantially completed the $134 million deepwater pipe coating and insulation project during the second quarter of 2017 at our pipe coating and insulation business in Louisiana. The execution of the project exceeded expectations and was a primary driver of Corrosion Protection’s and Aegion’s revenues and gross profit in the first nine months of 2017.
We expect performance in the fourth quarter of 2017 to exceed the results in the fourth quarter of 2016, excluding the contribution from the deepwater project in the fourth quarter of 2016. Despite the challenges in the U.S. cathodic protection services business in the first nine months of the year, the contribution from the deepwater project, expected improvements in the market for cathodic protection services in the U.S. and increased project activity for pipe linings and field weld coatings supports our expectations for the platform to grow revenues by mid-teens with mid-single digit operating margins in 2017, excluding restructuring and divestiture related charges.
Energy Services
Energy Services has been building momentum since the second half of 2016 after completing the downsizing of its upstream operations in Central California and the Permian Basin as part of the 2016 Restructuring. The outlook for day-to-day downstream refinery maintenance remains strong based on long-term contracts and our position as the lead maintenance provider in 13 out of the 17 refineries on the United States West Coast. We have an effort underway to expand our services over time to those customers in mechanical maintenance, turnaround support, electrical and instrumentation maintenance and small capital construction activities. We have been successful securing new contract awards as part of this strategy. As

34


expected, we have seen increased activity in 2017, for turnaround, or refinery shutdown, maintenance services. A preliminary assessment indicates 2018 should be another good year for turnarounds. Finally, we are making progress improving operating efficiencies through several initiatives designed to maximize margins and cash generation. Strong results in the first nine months of 2017 and a favorable outlook for the fourth quarter now supports revenue growth near 15% in 2017, ahead of our three-year financial objectives, and operating margins nearing 2.5% for the full year.

Acquisitions/Strategic Initiatives/Divestitures
2017 Restructuring
On July 28, 2017, our board of directors approved a realignment and restructuring plan (the “2017 Restructuring”) to: (i) divest our pipe coating and insulation businesses in Louisiana, The Bayou Companies, LLC and Bayou Wasco Insulation, LLC (collectively “Bayou”); (ii) exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America; (iii) right-size our cathodic protection services operation in Canada; and (iv) reduce corporate and other operating costs. These decisions reflect our: (i) desire to further reduce our exposure in the North American upstream oil and gas markets; (ii) assessment of our ability to drive sustainable, profitable growth in the non-pipe FRP contracting market in North America; and (iii) assessment of continuing weak conditions in the Canadian oil and gas markets. During the third quarter of 2017, we also completed a detailed assessment of the Infrastructure Solutions’ businesses in Australia and Denmark, which resulted in additional restructuring actions in both countries.
We expect the 2017 Restructuring to generate over $17 million in cost reductions, of which approximately $10 million and $3 million relate to cost reductions expected to be recognized within Infrastructure Solutions and Corrosion Protection, respectively, and $4 million related to reduced corporate and other costs. Cost reductions are expected to be fully realized in 2018.
Total pre-tax 2017 Restructuring charges recorded during the third quarter of 2017 were $6.7 million ($5.7 million after tax) and consisted of employee severance, retention, extension of benefits, employment assistance programs, early lease termination and other restructuring costs associated with the restructuring efforts described above. We expect to incur charges of $12 million to $15 million, most of which are expected to be cash charges incurred in the second half of 2017 and first quarter of 2018. These charges are mainly in the Infrastructure Solutions segment and, to a lesser extent, the Corrosion Protection segment. The Company expects to reduce headcount by approximately 300 employees as a result of these actions.
As a result of the above actions to exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America, during the third quarter of 2017 we recorded pre-tax, non-cash goodwill impairment charges of $45.4 million ($41.6 million post-tax) and pre-tax, non-cash long-lived asset impairment charges of $41.0 million ($35.6 million post-tax) related to the Fyfe reporting unit, which is included in the Infrastructure Solutions reportable segment.
Acquisitions
Our recent acquisition strategy has focused on the world’s aging infrastructure and the investment needed to maintain infrastructure in North America and overseas. During 2017 and 2016, we targeted strategic acquisitions in the infrastructure sector by:
i.
adding patented Fusible PVC® pipe technology to our pressure pipe rehabilitation portfolio through the acquisition of Underground Solutions;
ii.
expanding our CIPP presence in Europe by acquiring the CIPP contracting operations of Leif M. Jensen A/S (“LMJ”), a Danish company and the Insituform licensee in Denmark since 2011, and acquiring Environmental Techniques Limited and its parent holding company, Killeen Trading Limited (collectively “Environmental Techniques”), a Northern Ireland-based provider of trenchless drainage inspection, cleaning and rehabilitation services throughout the United Kingdom and the Republic of Ireland;
iii.
acquiring the remaining worldwide rights that we did not already own to market, manufacture and install the patented Tyfo® Fibrwrap® FRP technology by acquiring the operations and territories of Fyfe Europe S.A. and related companies (“Fyfe Europe”); and
iv.
expanding our FRP presence in Asia through the acquisition of Concrete Solutions Limited (“CSL”) and Building Chemical Supplies Limited (“BCS”), two New Zealand-based companies that operated as a Fibrwrap® certified applicator in New Zealand for a number of years (collectively, “Concrete Solutions”).
See Note 1 to the consolidated financial statements contained in this report for additional information and disclosures regarding our acquisitions.

35


2016 Restructuring
On January 4, 2016, our board of directors approved a restructuring plan (the “2016 Restructuring”) to reduce our exposure to the upstream oil markets and to reduce consolidated expenses. During 2016, we completed the restructuring, which: (i) repositioned Energy Services’ upstream operations in California; (ii) reduced Corrosion Protection’s upstream exposure by divesting our interest in Bayou Perma-Pipe Canada, Ltd. (“BPPC”), our Canadian pipe coating joint venture; (iii) right-sized Corrosion Protection to compete more effectively; and (iv) reduced corporate and other operating costs. The 2016 Restructuring reduced consolidated annual costs by approximately $17.4 million, of which approximately $1.2 million, $6.6 million and $5.6 million related to recognized savings within Infrastructure Solutions, Corrosion Protection and Energy Services, respectively, and $4.0 million related to reduced corporate costs. Cost savings were achieved primarily through office closures and headcount reductions of 964 employees, or 15.5% of our total workforce as of December 31, 2015.
There were no expenses incurred in the first nine months of 2017 related to the 2016 Restructuring. Total pre-tax 2016 Restructuring charges recorded during 2016 were $16.1 million ($10.3 million after tax), most of which were cash charges, consisting primarily of employee severance and benefits, early lease terminations and other costs associated with the restructuring efforts as described above. We do not expect to incur any future charges related to the 2016 Restructuring.
See Notes 1 and 3 to the consolidated financial statements contained in this Report for a detailed discussion regarding strategic initiatives and restructuring efforts.

Results of Operations – Quarters and Nine-Month Periods Ended September 30, 2017 and 2016
Significant Events
2017 Restructuring – As part of the 2017 Restructuring, we recorded pre-tax charges of $6.7 million ($5.7 million post-tax) during the quarter ended September 30, 2017. Restructuring charges impacted the Infrastructure Solutions and Corrosion Protection reportable segments. See Note 3 to the consolidated financial statements contained in this Report.
Goodwill and Intangible Asset Impairment – During the third quarter of 2017, as a result of our decision to exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America, we recorded pre-tax, non-cash goodwill impairment charges of $45.4 million ($41.6 million post-tax) and pre-tax, non-cash long-lived asset impairment charges of $41.0 million ($35.6 million post-tax) related to the Fyfe reporting unit, which is included in the Infrastructure Solutions reportable segment. See Note 2 to the consolidated financial statements contained in this Report.
2016 Restructuring – As part of the 2016 Restructuring, we recorded pre-tax charges of $1.3 million ($0.6 million post-tax) and $14.8 million ($9.7 million post-tax) during the quarter and nine-month period ended September 30, 2016, respectively. See Note 3 to the consolidated financial statements contained in this Report.
Acquisition and Divestiture Expenses – We recorded pre-tax expenses of $2.0 million ($1.2 million post-tax) and $2.5 million ($1.6 million post-tax) during the quarter and nine-month period ended September 30, 2017, respectively, related primarily to the acquisition of Environmental Techniques and the planned sale of Bayou. Expenses impacted the Infrastructure Solutions and Corrosion Protection reportable segments. During the quarter and nine-month period ended September 30, 2016, we recorded pre-tax expenses of $0.3 million ($0.2 million post-tax) and $2.1 million ($1.4 million post-tax), respectively, related primarily to the acquisitions of Underground Solutions, LMJ, Fyfe Europe and Concrete Solutions. Expenses impacted the Infrastructure Solutions reportable segment only.


36


Consolidated Operating Results
Key financial data for consolidated operations was as follows:
(dollars in thousands)
Quarters Ended September 30,

Increase (Decrease)

2017

2016

$

%
Revenues
$
341,872


$
308,524


$
33,348


10.8
 %
Gross profit
73,442


66,318


7,124


10.7

Gross profit margin
21.5
 %

21.5
%

N/A


—

Operating expenses
54,610


45,277


9,333


20.6

Goodwill impairment
45,390

 
—

 
45,390

 
N/M

Definite-lived intangible asset impairment
41,032

 
—

 
41,032

 
N/M

Acquisition and divestiture expenses
1,980


324


1,656


511.1

Restructuring and related charges
5,439

 
212

 
5,227

 
2,465.6

Operating income (loss)
(75,009
)

20,505


(95,514
)

(465.8
)
Operating margin
(21.9
)%

6.6
%

N/A


(2,850
)bp
Net income (loss) attributable to Aegion Corporation
(73,236
)
 
12,067

 
(85,303
)
 
(706.9
)

(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
$
 
%
Revenues
$
1,021,520

 
$
900,118

 
$
121,402

 
13.5
 %
Gross profit
220,622

 
181,922

 
38,700

 
21.3

Gross profit margin
21.6
 %
 
20.2
%
 
N/A

 
140
bp
Operating expenses
165,465

 
146,808

 
18,657

 
12.7

Goodwill impairment
45,390

 
—

 
45,390

 
N/M

Definite-lived intangible asset impairment
41,032

 
—

 
41,032

 
N/M

Acquisition and divestiture expenses
2,513

 
2,059

 
454

 
22.0

Restructuring and related charges
5,439

 
8,544

 
(3,105
)
 
(36.3
)
Operating income (loss)
(39,217
)
 
24,511

 
(63,728
)
 
(260.0
)
Operating margin
(3.8
)%
 
2.7
%
 
N/A

 
(650
)bp
Net income (loss) attributable to Aegion Corporation
(56,265
)
 
11,697

 
(67,962
)
 
(581.0
)
_____________________________
“N/A” represents not applicable.
“N/M” represents not meaningful.

Revenues
Revenues increased $33.3 million, or 10.8%, in the third quarter of 2017 compared to the third quarter of 2016. The increase in revenues was due to a $15.6 million increase in Infrastructure Solutions primarily from increased CIPP contracting installation services activity in our North American and European operations, a $10.6 million increase in Energy Services primarily from the increase in turnaround services activity and, to a lesser extent, higher maintenance and construction services activities, and a $7.2 million increase in Corrosion Protection primarily from increased project activities in our industrial linings operation, our robotic coating services operation and our pipe coating and insulation operation, partially offset by a decline in revenues in our North American cathodic protection operation.
Revenues increased $121.4 million, or 13.5%, in the first nine months of 2017 compared to the first nine months of 2016. The increase in revenues was primarily due to a $71.4 million increase in Corrosion Protection, driven by a $85.1 million increase in revenues from a large deepwater project in our pipe coating and insulation operation in the first nine months of 2017, a $33.1 million increase in Energy Services mainly due to an increase in turnaround and maintenance services activities, and a $16.8 million increase in Infrastructure Solutions primarily as a result of an increase in CIPP contracting installation services activity in our North American and European operations.

37


Gross Profit and Gross Profit Margin
Gross profit increased $7.1 million, or 10.7%, and gross profit margin remained consistent in the third quarter of 2017 compared to the third quarter of 2016. The increase in gross profit was due to: (i) a $4.7 million increase in Corrosion Protection primarily from higher revenues and improved project performance in our robotic coating services operation and our pipe coating and insulation operation; (ii) a $1.8 million increase in Energy Services mainly due to increased revenues and improved labor efficiency associated with turnaround and maintenance services activities; and (iii) a $0.6 million increase in Infrastructure Solutions primarily due to an increase in CIPP related revenues, including contracting installation services activity and increased license royalty income from a $3.9 million license settlement, in our North American operation, partially offset by a decrease in gross profit related to a decline in revenues and lower project performance associated with FRP project activity in our North American operation and CIPP project activity in our Asia-Pacific operation.
Gross profit margin remained consistent as a result of improved gross profit margin performance in Corrosion Protection related to improved project performance in our robotic coating services operation and our pipe coating and insulation operation, offset by a decline in gross profit margin in Infrastructure Solutions, despite the increased royalty income noted above, mainly due to lower project performance associated with FRP project activity in our North American operation and CIPP project activity in our international operations, specifically in Australia and Denmark.
Gross profit increased $38.7 million, or 21.3%, and gross profit margin improved 140 basis points in the first nine months of 2017 compared to the first nine months of 2016. The increase in gross profit was due to: (i) a $34.0 million increase in Corrosion Protection driven by significantly higher revenues and performance on the large deepwater project, noted above, partially offset by project inefficiencies in our cathodic protection operation; and (ii) a $7.4 million increase in Energy Services primarily from increased revenues and improved efficiencies, as noted above. Gross profit decreased $2.7 million in Infrastructure Solutions primarily due to a decrease in FRP activity in North America and project performance issues in our international CIPP operations, most notably in Australia and Denmark, partially offset by increased royalty income noted above and an increase due to a $3.6 million expense in the first nine months of 2016 related to the recognition of inventory step up expense associated with the acquisition of Underground Solutions. Gross profit margin improved primarily due to the same factors impacting the changes in gross profit margin in the third quarter of 2017 compared to the third quarter of 2016.
Operating Expenses
Operating expenses increased $9.3 million, or 20.6%, in the third quarter of 2017 compared to the third quarter of 2016. As part of our restructuring efforts, we recognized charges of $1.3 million and $0.6 million in the third quarters of 2017 and 2016, respectively. Excluding restructuring charges, operating expenses increased $8.7 million, or 19.4%, in the third quarter of 2017 compared to the third quarter of 2016. The increase in operating expenses was mainly due to: (i) a $3.9 million increase in Corrosion Protection primarily due to increased incentive compensation expense, gains from sales of fixed assets in the third quarter of 2016 and added sales and administrative support costs; (ii) a $2.9 million increase in Energy Services primarily due to a decrease in reserves for certain Brinderson pre-acquisition matters in the third quarter of 2016; and (iii) a $1.8 million increase in Infrastructure Solutions primarily from added sales and business development costs as part of our growth initiatives.
Operating expenses as a percentage of revenues were 16.0% in the third quarter of 2017 compared to 14.7% in the third quarter of 2016. Excluding restructuring charges, operating expenses as a percentage of revenues were 15.6% in the third quarter of 2017 compared to 14.5% in the third quarter of 2016.
Operating expenses increased $18.7 million, or 12.7%, in the first nine months of 2017 compared to the first nine months of 2016. As part of our restructuring efforts, we recognized charges of $1.3 million and $5.3 million in the first nine months of 2017 and 2016, respectively. Excluding restructuring charges, operating expenses increased $22.7 million, or 16.1%, in the first nine months of 2017 compared to the first nine months of 2016. The increase in operating expenses was mainly due to: (i) a $10.2 million increase in Corrosion Protection primarily due to increased incentive compensation expense, gains from sales of fixed assets in the first nine months of 2016 and added sales and administrative support costs; (ii) a $7.6 million increase in Infrastructure Solutions primarily from business acquisitions in 2016, which resulted in a full period of operating expenses recognized in the first nine months of 2017, and added sales and business development costs as part of our growth initiatives; and (iii) a $4.9 million increase in Energy Services primarily due to a decrease in reserves for certain Brinderson pre-acquisition matters in the first nine months of 2016.
Operating expenses as a percentage of revenues were 16.2% in the first nine months of 2017 compared to 16.3% in the first nine months of 2016. Excluding restructuring charges, operating expenses as a percentage of revenues were 16.1% in the first nine months of 2017 compared to 15.7% in the first nine months of 2016.
Consolidated Net Income (Loss)
Consolidated net income (loss) was a loss of $73.2 million in the third quarter of 2017, a decrease of $85.3 million, or 706.9%, from consolidated net income of $12.1 million in the third quarter of 2016.

38


Included in consolidated net income (loss) were the following pre-tax items: (i) goodwill impairment charges of $45.4 million in the third quarter of 2017; (ii) definite-lived intangible asset impairment charges of $41.0 million in the third quarter of 2017; (iii) restructuring charges of $6.7 million and $0.9 million in the third quarters of 2017 and 2016, respectively; and (iv) acquisition and divestiture expenses of $2.0 million and $0.3 million in the third quarters of 2017 and 2016, respectively.
Excluding the above items, consolidated net income was $10.9 million in the third quarter of 2017, a decrease of $1.8 million, or 14.5%, from $12.7 million in the third quarter of 2016. The decrease was primarily due to: (i) lower operating income in Infrastructure Solutions primarily due to a decline in project performance in certain international CIPP operations and a decline in FRP activity in our North American operation; and (ii) lower operating income in Energy Services due the prior year decrease in reserves for certain Brinderson pre-acquisition matters as noted above. Partially offsetting the decrease in consolidated net income was an increase from higher revenues, gross profit and operating income in Corrosion Protection related to improved performance in our robotic coating services operation and pipe coating and insulation operation, and increased royalty income from our North American CIPP operation. Consolidated net income in the third quarter of 2017, as compared to the third quarter of 2016, was also negatively impacted by a $1.1 million increase in foreign currency transaction losses, a $0.1 million increase in interest expense due to higher prevailing interest rates and tax valuation allowances on net operating losses and other deferred tax assets, primarily in the United States, recorded during the third quarter of 2017.
Consolidated net loss was $56.3 million in the first nine months of 2017, a decrease of $68.0 million from net income of $11.7 million in the first nine months of 2016.
Included in consolidated net income (loss) were the following pre-tax items: (i) goodwill impairment charges of $45.4 million in the first nine months of 2017; (ii) definite-lived intangible asset impairment charges of $41.0 million in the first nine months of 2017; (iii) restructuring charges of $6.9 million and $14.3 million in the first nine months of 2017 and 2016, respectively; (iv) inventory step up costs related to purchase accounting adjustments for Underground Solutions of $3.6 million in the first nine months of 2016; and (v) acquisition and divestiture expenses of $2.5 million and $2.1 million in the first nine months of 2017 and 2016, respectively.
Excluding the above items, consolidated net income was $28.2 million in the first nine months of 2017, an increase of $3.2 million, or 12.7%, from consolidated net income of $25.1 million in the first nine months of 2016. The increase was primarily due to higher revenues, gross profit and operating income in Corrosion Protection related to production on the large deepwater project in our pipe coating and insulation operation and Energy Services primarily related to increased turnaround and maintenance services activity and improved efficiencies. Partially offsetting the increase in consolidated net income was a decrease from lower operating income in Infrastructure Solutions primarily due to a decline in FRP activity in our North American operation and a decline in project performance in certain international CIPP operations, most notably in Australia and Denmark. Consolidated net income in the first nine months of 2017 was was also negatively impacted by: (i) an increase in interest expense due to higher prevailing interest rates; (ii) a higher effective income tax rate due to recorded valuation allowances on net operating losses and other deferred tax assets, primarily in the United States, and a higher mix of earnings towards the United States; and (iii) increased non-controlling interest income primarily driven from our joint venture in Louisiana, which was involved in the large deepwater pipe coating and insulation project. Additionally, consolidated net income in the first nine months of 2016 was favorably impacted by: (i) the decrease in reserves for certain Brinderson pre-acquisition matters as noted above; and (ii) a $1.9 million benefit recorded in the first quarter of 2016 related to the reversal of a previously recorded valuation allowance due to changes in the realization of future tax benefits.

Contract Backlog
Contract backlog is our expectation of revenues to be generated from received, signed and uncompleted contracts, the cancellation of which is not anticipated at the time of reporting. We assume that these signed contracts are funded. For government or municipal contracts, our customers generally obtain funding through local budgets or pre-approved bond financing. We have not undertaken a process to verify funding status of these contracts and, therefore, cannot reasonably estimate what portion, if any, of our contracts in backlog have not been funded. However, we have little history of signed contracts being canceled due to the lack of funding. Contract backlog excludes any term contract amounts for which there are not specific and determinable work releases or values beyond a renewal date in the forward 12-month period. Projects whereby we have been advised that we are the low bidder, but have not formally been awarded the contract, are not included. Although backlog represents only those contracts and Master Service Agreements (“MSAs”) that are considered to be firm, there can be no assurance that cancellation or scope adjustments will not occur with respect to such contracts.

39


The following table sets forth our consolidated backlog by segment (in millions):
 
September 30,
2017
 
June 30,
2017
 
December 31,
2016
 
September 30,
2016
Infrastructure Solutions
$
358.5

 
$
379.0

 
$
283.4

 
$
312.2

Corrosion Protection (1)
190.7

 
198.6

 
213.4

 
254.5

Energy Services (2)
213.0

 
196.8

 
192.8

 
177.2

Total backlog (1)
$
762.2

 
$
774.4

 
$
689.6

 
$
743.9

__________________________
(1) 
September 30, 2017, June 30, 2017, December 31, 2016 and September 30, 2016 included backlog from our large, domestic deepwater pipe coating and insulation contract of $6.0 million, $9.6 million, $96.8 million and $128.7 million, respectively.
(2) 
Represents expected unrecognized revenues to be realized under long-term MSAs and other signed contracts. If the remaining term of these arrangements exceeds 12 months, the unrecognized revenues attributable to such arrangements included in backlog are limited to only the next 12 months of expected revenues.
Within our Infrastructure Solutions and Corrosion Protection segments, certain contracts are performed through our variable interest entities, in which we own a controlling portion of the entity. As of September 30, 2017, 1.0% and 17.6% of our Infrastructure Solutions backlog and Corrosion Protection backlog, respectively, related to these variable interest entities. A substantial majority of our contracts in these two segments are fixed price contracts with individual private businesses and municipal and federal government entities across the world. Energy Services generally enters into cost reimbursable contracts that are based on costs incurred at agreed upon contractual rates.
Consolidated customer orders, net of cancellations (“New Orders”), increased $29.7 million, or 9.9%, to $330.3 million in the quarter ended September 30, 2017 compared to $300.6 million in the quarter ended September 30, 2016. New Orders increased $227.3 million, or 26.2%, to $1,094.8 million in the nine months ended September 30, 2017 compared to $867.5 million in the nine months ended September 30, 2016.

Infrastructure Solutions Segment
During the third quarter of 2017, as a result of our decision to exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America, we recorded pre-tax, non-cash goodwill impairment charges of $45.4 million and pre-tax, non-cash long-lived asset impairment charges of $41.0 million related to the Fyfe reporting unit, which is included in the Infrastructure Solutions reportable segment. See Note 2 to the consolidated financial statements contained in this Report.
Key financial data for Infrastructure Solutions was as follows:
(dollars in thousands)
Quarters Ended September 30,
 
Increase (Decrease)

2017

2016
 
$ 

%
Revenues
$
174,161


$
158,562


$
15,599


9.8
 %
Gross profit
41,189


40,566


623


1.5

Gross profit margin
23.6
 %

25.6
%

N/A


(200
)bp
Operating expenses
25,045


21,646


3,399


15.7

Goodwill impairment
45,390

 
—

 
45,390

 
N/M

Definite-lived intangible asset impairment
41,032

 
—

 
41,032

 
N/M

Acquisition and divestiture expenses
118

 
324

 
(206
)
 
(63.6
)
Restructuring and related charges
3,390

 
23

 
3,367

 
14,639.1

Operating income (loss)
(73,786
)

18,573


(92,359
)

(497.3
)
Operating margin
(42.4
)%

11.7
%

N/A


(5,410
)bp
______________________________
“N/A” represents not applicable.
“N/M” represents not meaningful.


40


(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
$ 
 
%
Revenues
$
451,340

 
$
434,523

 
$
16,817

 
3.9
 %
Gross profit
106,803

 
109,485

 
(2,682
)
 
(2.4
)
Gross profit margin
23.7
 %
 
25.2
%
 
N/A

 
(150
)bp
Operating expenses
76,126

 
67,348

 
8,778

 
13.0

Goodwill impairment
45,390

 
—

 
45,390

 
N/M

Definite-lived intangible asset impairment
41,032

 
—

 
41,032

 
N/M

Acquisition and divestiture expenses
651

 
2,059

 
(1,408
)
 
(68.4
)
Restructuring and related charges
3,390

 
2,630

 
760

 
28.9

Operating income (loss)
(59,786
)
 
37,448

 
(97,234
)
 
(259.7
)
Operating margin
(13.2
)%
 
8.6
%
 
N/A

 
(2,180
)bp
______________________________
“N/A” represents not applicable.
“N/M” represents not meaningful.

Revenues
Revenues in Infrastructure Solutions increased $15.6 million, or 9.8%, in the third quarter of 2017 compared to the third quarter of 2016. The increase in revenues was primarily due to an increase in CIPP contracting installation services activity in our North American and European operations and increased license royalty income from a $3.9 million license settlement in our North American CIPP operation. Partially offsetting the increase in revenues were decreases in FRP project activity in our North American operation and CIPP project activity in our Asia-Pacific operation.
Revenues increased $16.8 million, or 3.9%, in the first nine months of 2017 compared to the first nine months of 2016. The changes in revenues in the first nine months of 2017 compared to the first nine months of 2016 were primarily due to the same factors impacting the changes in revenues in the third quarter of 2017 compared to the third quarter of 2016, as well as an increase in revenues related to contributions from business acquisitions in the CIPP market in Europe and the FRP market in Asia-Pacific made during the second and third quarters of 2016.
Gross Profit and Gross Profit Margin
Gross profit in Infrastructure Solutions increased $0.6 million, or 1.5%, in the third quarter of 2017 compared to the third quarter of 2016. The increase was primarily due to an increase in CIPP related revenues, including contracting installation services activity and royalty income, in our North American operation. Partially offsetting the increase in gross profit was a decrease driven by a $5.5 million gross profit decline from lower revenues and lower project performance associated with FRP project activity in our North American operation and CIPP project activity in Denmark and Australia within our European and Asia-Pacific operations, respectively. Gross profit margin declined 200 basis points primarily from lower project performance, as noted above, partially offset by the increase in CIPP royalty income in our North American operation noted above.
Gross profit decreased $2.7 million, or 2.4%, and gross profit margin declined 150 basis points in the first nine months of 2017 compared to the first nine months of 2016. The decreases in gross profit and gross profit margin were primarily due to a decrease in gross profit driven by a $10.5 million gross profit decline from lower, high-margin revenues and lower project performance associated with FRP project activity in our North American operation and lower project performance in CIPP project activity in Denmark and Australia within our European and Asia-Pacific operations, respectively. Partially offsetting the decreases in gross profit and gross profit margin were increases primarily due to an increase in CIPP royalty income in our North American operation, as noted above, and the absence of a $3.6 million expense in the first half of 2016 related to the recognition of inventory step up required in the accounting for business combinations related to the Underground Solutions acquisition.
Operating Expenses
Operating expenses in Infrastructure Solutions increased $3.4 million, or 15.7%, in the third quarter of 2017 compared to the third quarter of 2016. As part of our restructuring efforts, we recognized charges of $1.2 million in the third quarter of 2017 and expense reversals of $0.4 million in the third quarter of 2016, respectively. Excluding restructuring charges, operating expenses increased $1.8 million, or 8.3%, in the third quarter of 2017 compared to the third quarter of 2016. The increase in operating expenses was primarily due to incremental operating expense contributions from acquisitions made in the European CIPP market during 2017 and investments made to hire experienced sales and business development professionals in our North American operation to facilitate growth.

41


Operating expenses as a percentage of revenues were 14.4% in the third quarter of 2017 compared to 13.7% in the third quarter of 2016. Excluding restructuring charges, operating expenses as a percentage of revenues were 13.7% in the third quarter of 2017 compared to 13.9% in the third quarter of 2016.
Operating expenses increased $8.8 million, or 13.0%, in the first nine months of 2017 compared to the first nine months of 2016. As part of our restructuring efforts, we recognized charges of $1.2 million in the first nine months of 2017. Excluding restructuring charges, operating expenses increased $7.6 million, or 11.3%, in the first nine months of 2017 compared to the first nine months of 2016. The increase in operating expenses was primarily due to incremental operating expense contributions from acquisitions made in the European CIPP market and the Asia-Pacific FRP market during 2017 and 2016, as well as the operating expense contribution from the acquisition of Underground Solutions in the first quarter of 2016. Operating expenses also increased due to higher sales and business development expenses in our North American operation, as noted above.
Operating expenses as a percentage of revenues were 16.9% for the first nine months of 2017 compared to 15.5% in the first nine months of 2016. Excluding restructuring charges, operating expenses as a percentage of revenues were 16.6% in the first nine months of 2017 compared to 15.5% in the first nine months of 2016.
Operating Income (Loss) and Operating Margin
Operating income in Infrastructure Solutions decreased $92.4 million, or 497.3%, to a loss of $73.8 million in the third quarter of 2017 compared to income of $18.6 million in the third quarter of 2016. Operating margin declined to (42.4)% in the third quarter of 2017 compared to 11.7% in the third quarter of 2016.
Included in operating income (loss) are the following items: (i) goodwill impairment charges of $45.4 million in the third quarter of 2017; (ii) definite-lived intangible asset impairment charges of $41.0 million in the third quarter of 2017; (iii) restructuring charges of $4.5 million and expense reversals of $0.4 million in the third quarters of 2017 and 2016, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs; and (iv) acquisition-related expenses of $0.1 million and $0.3 million in the third quarters of 2017 and 2016, respectively.
Excluding the above items, operating income decreased $1.2 million, or 6.6%, to $17.3 million in the third quarter of 2017 compared to $18.5 million in the third quarter of 2016 and operating margin declined 180 basis points to 9.9% in the third quarter of 2017 compared to 11.7% in the third quarter of 2016. Operating income and operating margin decreased primarily due to poor international CIPP project performance specifically in Australia and Denmark, declining revenues and project performance related to FRP project activity in our North American operation, incremental operating expenses from acquisitions made during 2017 and 2016. Partially offsetting the decreases in operating income and operating margin was an increase mainly driven by higher revenues and operating performance from the North American CIPP operation, as noted above.
Operating income decreased $97.2 million, or 259.7%, to a loss of $59.8 million in the first nine months of 2017 compared to income of $37.4 million in the first nine months of 2016. Operating margin declined 2,180 basis points to (13.2)% in the first nine months of 2017 compared to 8.6% in the first nine months of 2016.
Included in operating income (loss) are the following items: (i) goodwill impairment charges of $45.4 million in the first nine months of 2017; (ii) definite-lived intangible asset impairment charges of $41.0 million in the first nine months of 2017; (iii) restructuring charges of $4.7 million and $2.6 million in the first nine months of 2017 and 2016, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs; (iv) an expense of $3.6 million in the first nine months of 2016 related to the recognition of inventory step up for Underground Solutions; and (v) acquisition-related expenses of $0.7 million and $2.1 million in the first nine months of 2017 and 2016, respectively.
Excluding the above items, operating income decreased $13.7 million, or 29.9%, to $32.0 million in the first nine months of 2017 compared to $45.7 million in the first nine months of 2016. Operating margin declined 340 basis points to 7.1% in the first nine months of 2017 compared to 10.5% in the first nine months of 2016. Operating income and operating margin decreased primarily due to the same factors impacting the changes in operating income and operating margin in the third quarter of 2017 compared to the third quarter of 2016.


42


Corrosion Protection Segment
Key financial data for Corrosion Protection was as follows:
(dollars in thousands)
Quarters Ended September 30,

Increase (Decrease)

2017

2016

$

%
Revenues
$
102,276


$
95,084


$
7,192


7.6
 %
Gross profit
23,063


18,374


4,689


25.5

Gross profit margin
22.5
 %

19.3
%

N/A


320
bp
Operating expenses
21,811


17,842


3,969


22.2

Acquisition and divestiture expenses
1,862


—


1,862


N/M

Restructuring and related charges
2,049

 
19

 
2,030

 
10,684.2

Operating income (loss)
(2,659
)

513


(3,172
)

(618.3
)
Operating margin
(2.6
)%

0.5
%

N/A


(310
)bp

(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
$
 
%
Revenues
$
353,381

 
$
281,939

 
$
71,442

 
25.3
 %
Gross profit
86,663

 
52,676

 
33,987

 
64.5

Gross profit margin
24.5
%
 
18.7
 %
 
N/A

 
580
bp
Operating expenses
66,959

 
57,058

 
9,901

 
17.4

Acquisition and divestiture expenses
1,862

 
—

 
1,862

 
N/M

Restructuring and related charges
2,049

 
3,244

 
(1,195
)
 
(36.8
)
Operating income (loss)
15,793

 
(7,626
)
 
23,419

 
307.1

Operating margin
4.5
%
 
(2.7
)%
 
N/A

 
720
bp
______________________________
“N/A” represents not applicable.
“N/M” represents not meaningful.

Revenues
Revenues in Corrosion Protection increased $7.2 million, or 7.6%, in the third quarter of 2017 compared to the third quarter of 2016. The increase in revenues was primarily due to an increase in project activities in our industrial linings operation, our robotic coating services operation and our pipe coating and insulation operation, partially offset by a decline in revenues in our cathodic protection operation, specifically in North America.
Revenues increased $71.4 million, or 25.3%, in the first nine months of 2017 compared to the first nine months of 2016. The increase was due to a $69.7 million increase in revenues associated with project activities in our pipe coating and insulation operation, which included revenues from a large deepwater project totaling $90.9 million and $5.8 million in the first nine months of 2017 and 2016, respectively. Also contributing to the increase in revenues was an increase in project activities in our robotic coating services operation. Revenues associated with our cathodic protection operation and our industrial linings operation were similar to the prior year period.
Gross Profit and Gross Profit Margin
Gross profit in Corrosion Protection increased $4.7 million, or 25.5%, and gross profit margin improved 320 basis points in the third quarter of 2017 compared to the third quarter of 2016. Gross profit increased primarily due to higher revenues associated with a mix in project activities and improved project performance in our robotic coating services operation and our pipe coating and insulation operation. The increase in gross profit was partially offset by a decline in gross profit in our cathodic protection operation due to a decline in revenues. Gross profit margin increased primarily due to improved project performance in our robotic coating services operation and our pipe coating and insulation operation.
Gross profit increased $34.0 million, or 64.5%, and gross profit margin improved 580 basis points in the first nine months of 2017 compared to the first nine months of 2016. The increase in gross profit was substantially due to production on a large deepwater project in our pipe coating and insulation operation and, to a lesser extent, improved gross profit from our coating services operation, which incurred added costs on certain projects in the Middle East in the first half of 2016. Partially

43


offsetting the increases in gross profit was a decrease in our cathodic protection operation as a result of project mix and isolated project performance issues in the United States. Gross profit margin improved primarily due to higher margins generated from a large deepwater project in our pipe coating and insulation operation and improved margin performance in our coating services operation. Partially offsetting the increase in gross profit margin was a decline resulting from isolated project performance issues in our cathodic protection operation in the United States.
Operating Expenses
Operating expenses in Corrosion Protection increased $4.0 million, or 22.2%, in the third quarter of 2017 compared to the third quarter of 2016. Operating expenses increased primarily due to increased incentive compensation expense, gains from sales of fixed assets in the third quarter of 2016 and added sales and administrative support costs. Operating expenses as a percentage of revenues were 21.3% in the third quarter of 2017 compared to 18.8% in the third quarter of 2016. The increase in operating expenses as a percentage of revenues was due to the increased costs, as noted above.
Operating expenses increased $9.9 million, or 17.4%, in the first nine months of 2017 compared to the first nine months of 2016. Operating expenses increased mainly due to the same factors impacting the changes in operating expenses in the third quarter of 2017 compared to the third quarter of 2016. Operating expenses as a percentage of revenues were 18.9% in the first nine months of 2017 compared to 20.2% in the first nine months of 2016. The decrease in operating expenses as a percentage of revenues was due to the growth in revenues, as noted above.
Operating Income (Loss) and Operating Margin
Operating income in Corrosion Protection decreased $3.2 million, or 618.3%, to a loss of $2.7 million in the third quarter of 2017 compared to income of $0.5 million in the third quarter of 2016. Operating margin declined to (2.6)% in the third quarter of 2017 compared to 0.5% in the third quarter of 2016.
Included in operating income are (i) restructuring charges of $2.2 million and $0.2 million in the third quarters of 2017 and 2016, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs, and (ii) acquisition and divestiture related expenses of $1.9 million in the third quarter of 2017 primarily related to the planned sale of our pipe coating and insulation operation.
Excluding restructuring charges and acquisition and divestiture expenses, operating income increased $0.7 million, or 98.1%, to $1.4 million in the third quarter of 2017 compared to $0.7 million in the third quarter of 2016 and operating margin improved to 1.3% in the third quarter of 2017 compared to 0.7% in the third quarter of 2016. The increases in operating income and operating margin were primarily the result of increased gross profit and related gross profit margin contribution in our robotic coating services operation and our pipe coating and insulation operation, partially offset by a lower contribution from our cathodic protection operation and increased operating expenses, as discussed above.
Operating income increased $23.4 million, or 307.1%, to $15.8 million in the first nine months of 2017 compared to an operating loss of $7.6 million in the first nine months of 2016. Operating margin improved to 4.5% in the first nine months of 2017 compared to (2.7)% in the first nine months of 2016.
Included in operating income (loss) are (i) restructuring charges of $2.2 million and $3.9 million in the first nine months of 2017 and 2016, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs, and (ii) acquisition and divestiture related expenses of $1.9 million in the first nine months of 2017 primarily related to the planned sale of our pipe coating and insulation operation.
Excluding restructuring charges and acquisition and divestiture expenses, operating income increased $23.6 million, or 627.8%, to $19.8 million in the first nine months of 2017 compared to an operating loss of $3.8 million in the first nine months of 2016 and operating margin improved to 5.6% in the first nine months of 2017 compared to (1.3)% in the first nine months of 2016. The increases in operating income and operating margin were primarily the result of increased gross profit and related gross profit margin contribution from a large deepwater project in our pipe coating and insulation operation and, to a lesser extent, our robotic coating services operation, partially offset by a lower contribution from our cathodic protection operation and increased operating expenses, as discussed above.


44


Energy Services Segment
Key financial data for Energy Services was as follows:
(dollars in thousands)
Quarters Ended September 30,

Increase (Decrease)

2017

2016

$

%
Revenues
$
65,435


$
54,878


$
10,557


19.2
 %
Gross profit
9,190


7,378


1,812


24.6

Gross profit margin
14.0
%

13.4
%

N/A


60
bp
Operating expenses
7,754


5,789


1,965


33.9

Restructuring and related charges
—

 
170

 
(170
)
 
(100.0
)
Operating income
1,436


1,419


17


1.2

Operating margin
2.2
%

2.6
%

N/A


(40
)bp

(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2017
 
2016
 
 $
 
%
Revenues
$
216,799

 
$
183,656

 
$
33,143

 
18.0
 %
Gross profit
27,156

 
19,761

 
7,395

 
37.4

Gross profit margin
12.5
%
 
10.8
 %
 
N/A

 
170
bp
Operating expenses
22,380

 
22,402

 
(22
)
 
(0.1
)
Restructuring and related charges
—

 
2,670

 
(2,670
)
 
(100.0
)
Operating income (loss)
4,776

 
(5,311
)
 
10,087

 
189.9

Operating margin
2.2
%
 
(2.9
)%
 
N/A

 
510
bp
______________________________
“N/A” represents not applicable.
Revenues
Revenues in Energy Services increased $10.6 million, or 19.2%, in the third quarter of 2017 compared to the third quarter of 2016. The increase was due to higher volume associated with turnaround services activity and, to a lesser extent, increased maintenance and construction services activities. These increases were the result of increased demand from existing customers, coupled with expanded market share from various customers on the west coast of the United States.
Revenues increased $33.1 million, or 18.0%, in the first nine months of 2017 compared to the first nine months of 2016. The increase was higher volume associated with turnaround and maintenance services activities. Partially offsetting the increase in revenues was a slight decrease resulting from a decline in construction services activity attributable to upstream construction projects that were performed and completed in 2016.
Gross Profit and Gross Profit Margin
Gross profit in Energy Services increased $1.8 million, or 24.6%, and gross profit margin improved 60 basis points in the third quarter of 2017 compared to the third quarter of 2016. The increase in gross profit was primarily due to an increase in revenues and cost control efforts associated with turnaround and maintenance services activities, while gross profit from construction services activity was similar to the prior year period. Gross profit margin increased mainly due to improved project performance associated with turnaround and maintenance services activities.
Gross profit increased $7.4 million, or 37.4%, and gross profit margin improved 170 basis points in the first nine months of 2017 compared to the first nine months of 2016. The increase in gross profit was primarily due to an increase in revenues associated with turnaround and maintenance services activities and improved project performance associated with construction services activity. Gross profit margin increased mainly due to improved project performance associated with construction, turnaround and maintenance services activities. These improvements were primarily due to cost control and higher utilization achievements from focused management efforts and from actions taken in 2016 as part of our 2016 Restructuring. Gross profit margin associated with construction services activity accounted for the largest increase and was driven by the elimination of cost overruns on certain upstream, lump sum construction projects recognized in the second quarter of 2016.

45


Operating Expenses
Operating expenses in Energy Services increased $2.0 million, or 33.9%, in the third quarter of 2017 compared to the third quarter of 2016. As part of the 2016 Restructuring, we recognized charges of $1.0 million in the third quarter of 2016 primarily related to wind-down and other restructuring-related costs to downsize our upstream operation. Excluding 2016 Restructuring charges, operating expenses increased $3.0 million, or 61.0%, primarily due to a $2.3 million decrease in reserves for certain Brinderson pre-acquisition matters in the third quarter of 2016 and increased incentive compensation expense and administrative expenses in the third quarter of 2017 to support the growth in the business.
Operating expenses as a percentage of revenues were 11.8% in the third quarter of 2017 compared to 10.5% in the third quarter of 2016. Excluding 2016 Restructuring charges, operating expenses as a percentage of revenues were 11.8% in the third quarter of 2017 compared to 8.8% in the third quarter of 2016.
Operating expenses in the first nine months of 2017 remained consistent at $22.4 million compared to the first nine months of 2016. As part of the 2016 Restructuring, we recognized charges of $4.9 million in the first nine months of 2016 primarily related to wind-down and other restructuring-related costs to downsize our upstream operation. Excluding 2016 Restructuring charges, operating expenses increased $4.9 million, or 28.0%, primarily due to a $4.1 million decrease in reserves for certain Brinderson pre-acquisition matters in the first nine months of 2016 and an increase in general and administrative expenses in the first nine months of 2017 to support the growth in the business.
Operating expenses as a percentage of revenues were 10.3% in the first nine months of 2017 compared to 12.2% in the first nine months of 2016. Excluding 2016 Restructuring charges, operating expenses as a percentage of revenues were 10.3% in the first nine months of 2017 compared to 9.5% in the first nine months of 2016.
Operating Income (Loss) and Operating Margin
Operating income in Energy Services remained consistent at $1.4 million in the third quarter of 2017 and in the third quarter of 2016. Operating margin declined to 2.2% in the third quarter of 2017 compared to 2.6% in the third quarter of 2016.
Included in operating income are 2016 Restructuring charges of $1.1 million in the third quarter of 2016 primarily related to severance and employee-related benefits, early lease termination, wind-down and other restructuring costs. Excluding 2016 Restructuring charges, operating income decreased $1.1 million, or 43.9%, to $1.4 million in the third quarter of 2017 compared to $2.6 million million in the third quarter of 2016 and operating margin declined to 2.2% in the third quarter of 2017 compared to 4.7% in the third quarter of 2016. The decreases in operating income and operating margin were primarily due to the decrease in reserves for certain Brinderson pre-acquisition matters in the third quarter of 2016, as noted above, partially offset by increased revenues and gross profit contributions associated with turnaround and maintenance services activities.
Operating income increased $10.1 million, or 189.9%, to $4.8 million in the first nine months of 2017 compared to an operating loss of $5.3 million in the first nine months of 2016. Operating margin improved to 2.2% in the first nine months of 2017 compared to (2.9)% in the first nine months of 2016.
Included in operating income (loss) are 2016 Restructuring charges of $7.6 million in the first nine months of 2016 primarily related to severance and employee-related benefits, early lease termination and other restructuring costs. Excluding 2016 Restructuring charges, operating income in the first nine months of 2017 increased $2.5 million, or 110.4%, from $2.3 million in the first nine months of 2016 and operating margin improved 100 basis points from 1.2% in the first nine months of 2016. The increases in operating income and operating margin were driven by increased revenues and gross profit contributions associated with turnaround and maintenance services activities and higher gross profit contributions from construction services activities, as noted above, partially offset by the decrease in reserves for certain Brinderson pre-acquisition matters in the first nine months of 2016.

Other Income (Expense)
Interest Income and Expense
Interest income decreased an immaterial amount in the third quarter of 2017 compared to the prior year quarter. Interest expense increased $0.1 million in the third quarter of 2017 compared to the prior year quarter due to higher LIBOR-based borrowing costs under our Credit Facility, partially offset by lower average debt balances in the current year period.
Interest income decreased $0.1 million in the first nine months of 2017 compared to the prior year period. Interest expense increased $0.9 million in the first nine months of 2017 compared to the same period in the prior year due to higher LIBOR-based borrowing costs under our Credit Facility.

46


Other Income (Expense)
Other expense was $0.8 million in the quarter ended September 30, 2017 and other income was $0.3 million in the quarter ended September 30, 2016. In both periods, the balances primarily consisted of foreign currency transaction gains and losses.
Other expense was $1.6 million in the nine months ended September 30, 2017 and $1.2 million in the nine months ended September 30, 2016 and primarily consisted of foreign currency transaction losses in both periods.

Taxes (Benefit) on Income (Loss)
Taxes on income decreased $11.2 million during the third quarter of 2017 compared to the third quarter of 2016. Our effective tax rate was a benefit of 7.5% on a pre-tax loss in the quarter ended September 30, 2017 compared to an expense of 30.7% on pre-tax income in the quarter ended September 30, 2016. The effective tax rate for the quarter ended September 30, 2017 was lower than the U.S. federal statutory income tax rate of 35% and unfavorably impacted by: (i) significant pre-tax charges related to goodwill and definite-lived intangible asset impairments, certain of which are not deductible for tax purposes; and (ii) the impact of establishing a $14.9 million valuation allowance on net operating losses and other deferred tax assets in jurisdictions, primarily the United States, where we are unlikely to realize these benefits. The effective tax rate for the quarter ended September 30, 2016 was favorably impacted by a lower mix of earnings toward foreign jurisdictions, which generally have lower statutory tax rates, and the positive impact of certain discrete tax items relating to the 2016 Restructuring.
Taxes on income decreased $0.3 million during the first nine months of 2017 compared to the first nine months of 2016. Our effective tax rate was an expense of 2.2% on a pre-tax loss in the nine months ended September 30, 2017 and an expense of 11.4% on pre-tax income in the nine months ended September 30, 2016. The effective tax rate in the nine months ended September 30, 2017 was lower than the U.S. federal statutory income tax rate of 35% and unfavorably impacted by: (i) significant pre-tax charges related to goodwill and definite-lived intangible asset impairments, certain of which are not deductible for tax purposes; (ii) the net impact of the $14.9 million valuation allowance recorded in the third quarter of 2017, as noted above, partially offset by the reversal of previously recorded valuation allowances recorded in the first quarter of 2017; and (iii) a higher mix of earnings in the United States, primarily from income generated on a large deepwater project in our pipe coating and insulation operation. The effective tax rate in the nine months ended September 30, 2016 was impacted by the same factors impacting the effective tax rate in the third quarter of 2016, and a $1.9 million, or 15.3%, benefit to the effective tax rate, related to the reversal of a previously recorded valuation allowance due to changes in the realization of future tax benefits recorded in the first quarter of 2016.

Non-controlling Interests
Loss attributable to non-controlling interests was $0.5 million in the quarter ended September 30, 2017 compared to a loss of $0.3 million in the quarter ended September 30, 2016. In the third quarter of 2017, losses were primarily driven from our joint venture in Louisiana, partially offset by profitability from our joint ventures in Oman, Indonesia and Saudi Arabia. In the third quarter of 2016, losses from our joint ventures in Louisiana and Mexico, were partially offset by profitability from our joint venture in Oman.
Income attributable to non-controlling interests was $2.4 million in the nine months ended September 30, 2017 compared to a loss attributable to non-controlling interests of $0.7 million in the nine months ended September 30, 2016. In the first nine months of 2017, income was primarily driven from our joint venture in Louisiana, which performed a majority of its work on a large deepwater project in our pipe coating and insulation operation. Our joint ventures in Oman and Indonesia also contributed positive earnings in the first nine months of 2017. In the nine months ended September 30, 2016, losses from our joint ventures in Louisiana, Mexico and Saudi Arabia were partially offset by profitability from our joint venture in Oman.

Liquidity and Capital Resources
Cash and Cash Equivalents
(in thousands)
September 30, 
 2017
 
December 31, 
 2016
Cash and cash equivalents
$
94,787

 
$
129,500

Restricted cash
1,938

 
4,892

Restricted cash held in escrow primarily relates to funds reserved for legal requirements, deposits made in lieu of retention on specific projects performed for municipalities and state agencies, or advance customer payments and compensating balances

47


for bank undertakings in Europe. Changes in restricted cash flows are reported in the consolidated statements of cash flows based on the nature of the restriction.
Sources and Uses of Cash
We expect the principal operational use of funds for the foreseeable future will be for capital expenditures, working capital, debt service, share repurchases and potential acquisitions.
During the first nine months of 2017, capital expenditures were primarily related to growth and maintenance capital related to the CIPP operations in Infrastructure Solutions, primarily in the United States and Europe. For 2017, we expect a similar overall level of capital expenditures as was made in 2016, with slightly increased capital expenditures to support anticipated growth in Infrastructure Solutions, partially offset by the 2016 completion of the pipe coating and insulation plant in Corrosion Protection.
As part of our 2017 Restructuring, we incurred charges of $6.7 million during the third quarter of 2017 related to employee severance, extension of benefits, employment assistance programs, early lease termination and other restructuring related costs as we exit our non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America, right-size our cathodic protection services operations in Canada, right-size our Infrastructure Solutions businesses in Australia and Denmark, and reduce corporate and other operating costs. We estimate our remaining costs in 2017 and 2018 to be approximately $7.0 million related to these activities. These actions, however, are expected to reduce consolidated annual expenses by more than $17 million, most of which is expected to be realized in 2018, primarily through headcount reductions, office closures and reduced amortization of intangible assets.
Under the terms of our Credit Facility, we are authorized to annually purchase up to $40 million of our common stock in open market transactions, subject to board of director authorization. The shares are repurchased from time to time in the open market, subject to cash availability, market conditions and other factors, and in accordance with applicable regulatory requirements. We are not obligated to acquire any particular amount of common stock and, subject to applicable regulatory requirements, may commence, suspend or discontinue purchases at any time without notice or authorization. In October 2016, our board of directors authorized the open market repurchase of up to $40.0 million of our common stock to be made during 2017. Any shares repurchased during 2017 are expected to be funded primarily through cash balances. During the nine months ended September 30, 2017, we acquired 1,346,132 shares of our common stock for $29.4 million ($21.81 average price per share) through the open market repurchase program discussed above. In addition, we repurchased 106,164 shares of our common stock for $2.4 million ($22.25 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock, restricted stock units and performance units. Once repurchased, we promptly retired such shares. In October 2017, our board of directors authorized a similar $40.0 million program for 2018.
At September 30, 2017, our cash balances were located worldwide for working capital, potential acquisitions and support needs. Given the breadth of our international operations, approximately $50.0 million, or 48.2%, of our cash was denominated in currencies other than the United States dollar as of September 30, 2017. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations. With few exceptions, U.S. income taxes, net of applicable foreign tax credits, have not been provided on undistributed earnings of international subsidiaries. Our intention is to permanently reinvest these earnings.
Our primary source of cash is operating activities. We occasionally borrow under our line of credit’s available capacity to fund operating activities, including working capital investments. Our operating activities include the collection of accounts receivable as well as the ultimate billing and collection of costs and estimated earnings in excess of billings. At September 30, 2017, we believed our net accounts receivable and our costs and estimated earnings in excess of billings, as reported on our consolidated balance sheet, were fully collectible and a significant portion of the receivables will be collected within the next twelve months. From time to time, we have net receivables recorded that we believe will be collected but are being disputed by the customer in some manner. Disputes of this nature could meaningfully impact the timing of receivable collection or require us to invoke our contractual or legal rights in a lawsuit or alternative dispute resolution proceeding. If in a future period we determine that any of these receivables are no longer collectible, we will increase our allowance for bad debts through a charge to earnings.
Cash Flows from Operations
Cash flows from operating activities provided $35.1 million in the first nine months of 2017 compared to $36.7 million provided in the first nine months of 2016. The decrease in operating cash flow from the prior year period was primarily due to lower cash flows related to working capital as a result of the timing of customer payments. Working capital used $38.3 million

48


of cash during the first nine months of 2017 compared to $18.7 million used in the first nine months of 2016, primarily due to the timing of customer payments on certain large projects and growth in revenues during the most recent quarterly period.
Cash Flows from Investing Activities
Cash flows from investing activities used $29.5 million during the first nine months of 2017 compared to $120.2 million used during the first nine months of 2016. During the first nine months of 2017, we used £6.5 million, approximately $8.0 million, to acquire Environmental Techniques. During the first nine months of 2016, we used $96.3 million to acquire Underground Solutions, Fyfe Europe, the CIPP business of LMJ and Concrete Solutions. During the first nine months of 2016, we received proceeds of $6.6 million, net of cash disposed, from the sale of our interest in our Canadian pipe coating operation. We used $22.5 million in cash for capital expenditures in the first nine months of 2017 compared to $31.5 million in the prior year period. In the first nine months of 2017 and 2016, $0.9 million and $1.2 million, respectively, of non-cash capital expenditures were included in accounts payable and accrued expenses. Capital expenditures in the first nine months of 2017 and 2016 were partially offset by $0.4 million and $3.1 million, respectively, in proceeds received from asset disposals.
We anticipate approximately $30.0 million to $35.0 million to be spent in 2017 on capital expenditures to support our global operations.
Cash Flows from Financing Activities
Cash flows from financing activities used $33.1 million during the first nine months of 2017 compared to $15.5 million used in the first nine months of 2016. During the first nine months of 2017 and 2016, we used net cash of $31.7 million and $36.6 million, respectively, to repurchase 1,452,296 and 1,967,347 shares, respectively, of our common stock through open market purchases and in connection with our equity compensation programs as discussed in Note 8 to the consolidated financial statements contained in this report. During the first nine months of 2017, we had net borrowings of $14.0 million from our line of credit to fund domestic working capital needs, and we used cash of $15.1 million to pay down the principal balance of our term loans. During the first nine months of 2016, we had net borrowings of $36.0 million from our line of credit primarily to fund our acquisition activity, and we used cash of $13.1 million to pay down the principal balance of our term loan.
Long-Term Debt
In October 2015, we entered into an amended and restated $650.0 million senior secured credit facility (the “Credit Facility”) with a syndicate of banks. The Credit Facility consists of a $300.0 million five-year revolving line of credit and a $350.0 million five-year term loan facility, each with an original maturity date in October 2020.
Our indebtedness at September 30, 2017 consisted of $315.0 million outstanding from the $350.0 million term loan under the Credit Facility, $50.0 million on the line of credit under the Credit Facility and $0.4 million of third-party notes and bank debt. Additionally, we had $7.7 million of debt held by our joint venture partner (representing funds loaned by our joint venture partner) listed as held for sale at September 30, 2017 related to the planned sale of Bayou. During the first nine months of 2017, we had net borrowings of $14.0 million on the line of credit for domestic working capital needs.
As of September 30, 2017, we had $38.2 million in letters of credit issued and outstanding under the Credit Facility. Of such amount, $16.2 million was collateral for the benefit of certain of our insurance carriers and $22.0 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.
In October 2015, we entered into an interest rate swap agreement for a notional amount of $262.5 million, which is set to expire in October 2020. The notional amount of this swap mirrors the amortization of a $262.5 million portion of our $350.0 million term loan drawn from the Credit Facility. The swap requires us to make a monthly fixed rate payment of 1.46% calculated on the amortizing $262.5 million notional amount, and provides for us to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $262.5 million notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $262.5 million portion of our term loan from the Credit Facility. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge.
The Credit Facility is subject to certain financial covenants including a consolidated financial leverage ratio and consolidated fixed charge coverage ratio. We were in compliance with all covenants at September 30, 2017 and expect continued compliance for the foreseeable future.
We believe that we have adequate resources and liquidity to fund future cash requirements and debt repayments with cash generated from operations, existing cash balances and additional short- and long-term borrowing capacity for the next 12 months.
See Note 7 to the consolidated financial statements contained in this report for additional information and disclosures regarding our long-term debt.

49



Disclosure of Contractual Obligations and Commercial Commitments
There were no material changes in contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016. See Note 10 to the consolidated financial statements contained in this report for further discussion regarding our commitments and contingencies.

Critical Accounting Policies
Goodwill
We review our long-lived assets, including goodwill and other intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. During the third quarter of 2017, as a result of our decision to exit all non-pipe related contract applications for the Tyfo® Fibrwrap® system in North America, we recorded pre-tax, non-cash goodwill impairment charges of $45.4 million ($41.6 million post-tax) related to the Fyfe reporting unit (see Note 2 to the consolidated financial statements contained in this report). Our annual impairment assessment is October 1, 2017. During that analysis, we will determine the fair value of all our reporting units and compare such fair value to the carrying value of those reporting units to determine if there are any indications of goodwill impairment.

Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
We are exposed to the effect of interest rate changes and of foreign currency and commodity price fluctuations. We currently do not use derivative contracts to manage commodity risks. From time to time, we may enter into foreign currency forward contracts to fix exchange rates for net investments in foreign operations to hedge our foreign exchange risk.
Interest Rate Risk
The fair value of our cash and short-term investment portfolio at September 30, 2017 approximated carrying value. Given the short-term nature of these instruments, market risk, as measured by the change in fair value resulting from a hypothetical 100 basis point change in interest rates, would not be material.
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we maintain fixed rate debt whenever favorable; however, the majority of our debt at September 30, 2017 was variable rate debt. We substantially mitigate our interest rate risk through interest rate swap agreements, which are used to hedge the volatility of monthly LIBOR rate movement of our debt. We currently utilize interest rate swap agreements with a notional amount that mirrors approximately 75% of our outstanding borrowings from the term loan under our Credit Facility.
At September 30, 2017, the estimated fair value of our long-term debt was approximately $373.9 million. Fair value was estimated using market rates for debt of similar risk and maturity and a discounted cash flow model. Market risk related to the potential increase in fair value resulting from a hypothetical 100 basis point increase in our debt specific borrowing rates at September 30, 2017 would result in a $1.0 million increase in interest expense.
Foreign Exchange Risk
We operate subsidiaries and are associated with licensees and affiliated companies operating solely outside of the United States and in foreign currencies. Consequently, we are inherently exposed to risks associated with the fluctuation in the value of the local currencies compared to the U.S. dollar. At September 30, 2017, a substantial portion of our cash and cash equivalents was denominated in foreign currencies, and a hypothetical 10.0% change in currency exchange rates could result in an approximate $12.2 million impact to our equity through accumulated other comprehensive income (loss).
In order to help mitigate this risk, we may enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations. We do not engage in hedging transactions for speculative investment reasons. There can be no assurance that our hedging operations will eliminate or substantially reduce risks associated with fluctuating currencies. At September 30, 2017, there were no material foreign currency hedge instruments outstanding. See Note 12 to the consolidated financial statements contained in this report for additional information and disclosures regarding our derivative financial instruments.
Commodity Risk
We have exposure to the effect of limitations on supply and changes in commodity pricing relative to a variety of raw materials that we purchase and use in our operating activities, most notably resin, iron ore, chemicals, staple fiber, fuel, metals and pipe. We manage this risk by entering into agreements with certain suppliers utilizing a request for proposal, or RFP,

50


format and purchasing in bulk, and advantageous buying on the spot market for certain metals, when possible. We also manage this risk by continuously updating our estimation systems for bidding contracts so that we are able to price our products and services appropriately to our customers. However, we face exposure on contracts in process that have already been priced and are not subject to any cost adjustments in the contract. This exposure is potentially more significant on our longer-term projects.
We obtain a majority of our global resin requirements, one of our primary raw materials, from multiple suppliers in order to diversify our supplier base and thus reduce the risks inherent in concentrated supply streams. We have qualified a number of vendors in North America, Europe and Asia that can deliver, and are currently delivering, proprietary resins that meet our specifications.
The primary products and raw materials used by our infrastructure rehabilitation operations in the manufacture of fiber reinforced polymer composite systems are carbon, glass, resins, fabric and epoxy raw materials. Fabric and epoxies are the largest materials purchased, which are currently purchased through a select group of suppliers, although we believe these and the other materials are available from a number of vendors. The price of epoxy historically is affected by the price of oil. In addition, a number of factors such as worldwide demand, labor costs, energy costs, import duties and other trade restrictions may influence the price of these raw materials.
We rely on a select group of third-party extruders to manufacture our Fusible PVC® pipe products.
Iron ore inventory balances are managed according to our anticipated volume of concrete weight coating projects. We obtain the majority of our iron ore from a limited number of suppliers, and pricing can be volatile. Iron ore is typically purchased near the start of each project. Concrete weight coating revenue accounts for a small percentage of our overall revenues.

Item 4. Controls and Procedures
Our management, under the supervision and with the participation of our Chief Executive Officer (our principal executive officer) and Chief Financial Officer (our principal financial officer), has conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2017. Based upon and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Exchange Act (a) is recorded, processed, summarized and reported within the time period specified in the Securities and Exchange Commission’s rules and forms and (b) is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2017 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


51


PART II—OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in certain actions incidental to the conduct of our business and affairs. Management, after consultation with legal counsel, does not believe that the outcome of any such actions, individually and in the aggregate, will have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 1A. Risk Factors
Other than described below, there have been no material changes to the risk factors described in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2016.
The actual timing, costs and benefits of the 2017 Restructuring may differ from those currently expected, which may reduce our operating results.
On July 28, 2017, we announced the 2017 Restructuring, which is intended to reduce the Company’s consolidated annual expenses by more than $17 million. We expect to complete a majority of the 2017 Restructuring during the second half of 2017 and the first quarter of 2018. See Notes 1 and 3 to the consolidated financial statements contained in this report for additional information and disclosures regarding our restructuring activities.
The 2017 Restructuring is subject to various risks, which could result in the actual timing, costs and benefits of the plan differing from those currently anticipated. These risks and uncertainties include, among others that: (i) we may not be able to implement the 2017 Restructuring in the timeframe currently planned; (ii) our costs related to the 2017 Restructuring may be higher than currently estimated; (iii) the expected annual expense reductions may be less than currently estimated; and (iv) unanticipated disruptions to our operations may result in additional costs being incurred. We also cannot assure you that we will not undertake additional restructuring activities in the future. Because of these and other factors, we cannot predict whether we will realize the purpose and anticipated benefits of the 2017 Restructuring, and if we do not, our business and results of operations may be adversely impacted.
Additionally, the 2017 Restructuring may yield unintended consequences, such as:
•
actual or perceived disruption of service or reduction in service standards to customers;
•
the failure to preserve supplier relationships and distribution, sales and other important relationships and to resolve conflicts that may arise;
•
attrition beyond our intended reduction in headcount and reduced employee morale, which may cause our employees who were not affected by the 2017 Restructuring to seek alternate employment;
•
increased risk of employment litigation; and
•
diversion of management attention from ongoing business activities.
We may face significant challenges in our plans to divest The Bayou Companies, LLC and Bayou Wasco Insulation, LLC
On July 28, 2017, we initiated actions to divest our pipe coating and insulation businesses in Louisiana, The Bayou Companies, LLC and Bayou Wasco Insulation, LLC (collectively “Bayou”). Divestitures pose risks and challenges that could negatively impact our business, including required separation or carve-out activities, disputes with buyers and unexpected costs. The uncertainty resulting from our announced plans to divest Bayou could cause significant disruption to the Bayou businesses. Our management’s attention to our ongoing operations may be diverted by efforts to divest Bayou. There are significant risks and uncertainties in the sales process, including the timing and uncertainty of completion of any transaction and the fulfillment of closing conditions, some of which may be outside of our control. Any significant delay in the completion of this divestiture, or the failure to complete the divestiture, may negatively impact our ability to implement new strategic plans, or achieve our previously announced strategic plans. We may also dispose of a business at a price or on terms that are less favorable, or at a higher cost, than we had previously anticipated, which may result in impairment charges or losses on disposal. If we reach an agreement with a buyer for the disposition of a business, we might be subject to satisfaction of pre-closing conditions, as well as necessary regulatory and governmental approvals on acceptable terms, which may prevent us from completing a transaction. Dispositions may also involve continued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against contingent liabilities related to businesses sold, such as lawsuits, tax liabilities, lease payments, product liability claims or environmental matters. Under these types of arrangements, performance by the divested businesses or other conditions outside of our control could affect future financial results.


52


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
 
 
Total Number of Shares (or Units) Purchased
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
 
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 2017 (1) (2)
 
117,029

 
 
$
22.92

 
 
107,647

 
$
37,540,031

February 2017 (1) (2)
 
125,211

 
 
22.95

 
 
108,355

 
35,054,935

March 2017 (1) (2)
 
220,077

 
 
22.49

 
 
150,912

 
31,627,784

April 2017 (1) (2)
 
126,448

 
 
22.76

 
 
126,400

 
28,751,326

May 2017 (1) (2)
 
205,735

 
 
19.99

 
 
205,200

 
24,649,082

June 2017 (1) (2)
 
171,037

 
 
20.67

 
 
169,708

 
21,140,282

July 2017 (1) (2)
 
152,479

 
 
23.17

 
 
149,100

 
17,682,708

August 2017 (1) (2)
 
179,652

 
 
20.66

 
 
178,810

 
13,988,740

September 2017 (1) (2) (3)
 
154,628

 
 
22.25

 
 
150,000

 
10,645,225

Total
 
1,452,296

 
 
$
21.84

 
 
1,346,132

 

_________________________________
(1) 
In October 2016, our board of directors authorized the open market repurchase of up to $40.0 million of our common stock to be made during 2017. We began repurchasing shares under this program in January 2017. Once repurchased, we promptly retire the shares.
(2) 
In connection with approval of our credit facility, our board of directors approved the purchase of up to $10.0 million of our common stock in each calendar year in connection with our equity compensation programs for employees and directors. The number of shares purchased includes shares surrendered to us to pay the exercise price and/or to satisfy tax withholding obligations in connection with “net, net” exercises of employee stock options and/or the vesting of restricted stock, restricted stock units or performance units issued to employees. For the nine months ended September 30, 2017, 106,164 shares were surrendered in connection with restricted stock, restricted stock unit and performance unit transactions. The deemed price paid was the closing price of our common stock on the Nasdaq Global Select Market on the date that the restricted stock, restricted stock units or performance units vested. Once repurchased, we promptly retire the shares.
(3) 
In October 2017, our board of directors authorized the open market repurchase of up to $40.0 million of our common stock to be made during 2018. Any shares repurchased will be pursuant to one or more 10b5-1 plans. The program will expire on the earlier of: (i) December 31, 2018; (ii) the repurchase by the Company of $40.0 million of common stock pursuant to the program; or (iii) the board of director’s termination of the program.

Item 6. Exhibits
The exhibits required to be filed as part of this Quarterly Report on Form 10-Q are listed on the Index to Exhibits attached hereto.

53


SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AEGION CORPORATION
 
 
Date: November 2, 2017
/s/ David A. Martin
 
David A. Martin
 
Executive Vice President and Chief Financial Officer
 
(Principal Financial Officer)

54


INDEX TO EXHIBITS
These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
10.1
 
 
31.1
 
 
31.2
 
 
32.1
 
 
32.2
 
 
101.INS
XBRL Instance Document*
 
 
101.SCH
XBRL Taxonomy Extension Schema Document*
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
In accordance with Rule 406T under Regulation S-T, the XBRL-related information in Exhibit 101 shall be deemed “furnished” and not “filed”.
(1) 
Management contract or compensatory plan or arrangement.



55

Stock widget

Investing forum

Aegion Corp Reports