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, 2015, 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 2015 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2016.

Acquisitions/Strategic Initiatives/Divestitures

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. As part of management’s ongoing assessment of its energy-related businesses, the Company determined that the persistent low price of oil was expected to create market challenges for the foreseeable future, including reduced customer spending in 2016. The Company substantially completed its 2016 Restructuring objectives in the first six months of 2016, including 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. The 2016 Restructuring is expected to reduce consolidated annual expenses by approximately $17.0 million, most of which is expected to be realized in 2016, primarily through headcount reductions and office closures. See Note 3.

Infrastructure Solutions Segment (“Infrastructure Solutions”)

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.

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. Fyfe Europe held rights to provide Fibrwrap^® product engineering and support to installers and applicators of fiber reinforced polymer (“FRP”) systems in 72 countries throughout Europe, Middle East and North Africa. The acquisition of these territories now provides the Company with worldwide rights to market, manufacture and install the patented Tyfo^®Fibrwrap^®FRP technology for strengthening, repair and restoration of masonry, concrete, steel and wooden infrastructures.

On February 18, 2016, the Company acquired Underground Solutions, Inc. and its subsidiary, Underground Solutions Technologies Group, Inc. (collectively, “Underground Solutions”), for a purchase price of $85.0 million plus an additional $5.3 million for the value of the estimated tax benefits associated with Underground Solutions’ net operating loss carry forwards. The purchase price is subject to post-closing working capital adjustments and post-closing adjustments to the value of the net operating loss tax asset. The purchase price included $6.3 million held in escrow as security for the post-closing purchase price adjustments and post-closing indemnification obligations of Underground Solutions’ previous owners. The transaction was funded partially from the Company’s cash balances and partially from borrowings under the Company’s revolving credit facility. To supplement the domestic cash balances, the Company repatriated approximately $30.4 million from foreign subsidiaries to assist in funding the transaction, incurring approximately $3.5 million in additional taxes, a reserve for which was included in the Company’s tax provision amounts for 2015. Underground Solutions provides infrastructure technologies for water, sewer and conduit applications.

In February 2015, the Company sold its wholly-owned subsidiary, Video Injection - Insituform SAS (“VII”), the Company’s French CIPP contracting operation, to certain employees of VII. In connection with the sale, the Company entered into a five-year exclusive tube supply agreement whereby VII will purchase liners from Insituform Linings Limited. VII will also be entitled to continue to use its trade name based on a trade mark license granted for the same five-year time period. The sale resulted in a loss of approximately $2.9 million that was recorded to other income (expense) in the Consolidated Statement of Operations during the first quarter of 2015.

On October 6, 2014, the Company’s board of directors approved a realignment and restructuring plan (the “2014 Restructuring”) which included the decision to exit Insituform’s contracting markets in France, Switzerland, Hong Kong, Malaysia and Singapore. The Company has substantially completed all of the aforementioned objectives related to the 2014 Restructuring. See Note 3.

Corrosion Protection Segment (“Corrosion Protection”)

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 US $9.6 million, which consisted of a US $7.6 million payment at closing and a US $2.0 million promissory note, which was paid on July 28, 2016. BPPC served as the Company’s pipe coating and insulation operation in Canada. The sale of its interest in BPPC was part of a broader effort by the Company to reduce its exposure in the North American upstream market in light of its expectations for a prolonged low oil price environment. As a result of the sale, the Company recognized a pre-tax, non-cash charge of approximately $0.6 million at December 31, 2015 to reflect the expected loss on the sale of the business. This loss was derived primarily from the release of cumulative currency translation adjustments and was recorded to other income (expense) in the Consolidated Statement of Operations.

In July 2015, the Company paid $0.7 million to the sellers of CRTS, Inc. (“CRTS”) related to contingent consideration achieved during the year ended December 31, 2013. This amount was fully accrued as of June 30, 2015 and December 31, 2014. Also, in June 2015, the Company finalized the settlement of escrow claims made pursuant to the CRTS purchase agreement. As a result of the settlement, the Company received proceeds of approximately $1.0 million in July 2015, of which $0.2 million was recorded as an offset to operating expenses and the remaining $0.8 million was recorded to other income (expense) in the Consolidated Statement of Operations for the quarter and six months ended June 30, 2015.

Energy Services Segment (“Energy Services”)

On March 1, 2015, the Company acquired Schultz Mechanical Contractors, Inc. (“Schultz”), a California corporation, for a total purchase price of $7.7 million. Schultz primarily services customers in California and Arizona and is a provider of piping installations, concrete construction and excavation and trenching services to the downstream and upstream oil and gas markets.

Purchase Price Accounting

During the second quarter of 2016, the Company determined its preliminary accounting for Fyfe Europe and LMJ, and substantially completed its accounting for Underground Solutions, with the exception of final working capital and net operating loss tax asset adjustments. Purchase price accounting related to Schultz was finalized in the first quarter of 2016. As the Company completes its final accounting for the Underground Solutions, Fyfe Europe and LMJ acquisitions, future adjustments related to working capital, deferred income taxes and goodwill could occur. The goodwill and definite-lived intangible assets associated with the Schultz, Fyfe Europe and LMJ acquisitions are deductible for tax purposes; whereas, the goodwill and definite-lived intangible assets associated with the Underground Solutions acquisition are not deductible for tax purposes.

Underground Solutions, Fyfe Europe, LMJ and Schultz made the following contributions to the Company’s revenues and profits (in thousands):



	Quarter Ended June 30, 2016												Quarter Ended June 30, 2015
	Underground Solutions⁽¹⁾			Fyfe Europe			LMJ			Schultz⁽²⁾			Schultz⁽³⁾
Revenues	$	10,977		$	8		$	1,333		$	5,611		$	3,970
Net loss	(1,638		)	(98		)	(87		)	(59		)	(19		)

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⁽¹⁾	The reported net loss for Underground Solutions for the quarter ended June 30, 2016 includes inventory step up expense of $2.4 million, recognized as part of the accounting for business combinations, and an allocation of corporate expenses of $1.3 million.


⁽²⁾	The reported net loss for Schultz for the quarter ended June 30, 2016 includes an allocation of corporate expenses of $0.3 million.


⁽³⁾	The reported net loss for Schultz for the quarter ended June 30, 2015 includes an allocation of corporate expenses of $0.2 million.



	Six Months Ended June 30, 2016												Six Months Ended June 30, 2015
	Underground Solutions⁽¹⁾			Fyfe Europe			LMJ			Schultz⁽²⁾			Schultz⁽³⁾
Revenues	$	15,643		$	8		$	1,333		$	10,321		$	4,487
Net loss	(1,762		)	(98		)	(87		)	(400		)	(26		)

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⁽¹⁾	The reported net loss for Underground Solutions for the six months ended June 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 $1.3 million.


⁽²⁾	The reported net loss for Schultz for the six months ended June 30, 2016 includes charges related to the 2016 Restructuring of $0.2 million and an allocation of corporate expenses of $0.3 million.


⁽³⁾	The reported net loss for Schultz for the six months ended June 30, 2015 includes an allocation of corporate expenses of $0.2 million.

The following unaudited pro forma summary presents combined information of the Company as if the Underground Solutions, Fyfe Europe, LMJ and Schultz acquisitions had occurred at the beginning of the year preceding their acquisition (in thousands, except earnings (loss) per share):



	Quarters Ended June 30,				Six Months Ended June 30,
	2016		2015		2016			2015
Revenues	$	299,165	$	350,953	$	599,059		$	668,068
Net income (loss) attributable to Aegion Corporation ⁽¹⁾	3,458		9,665		(196		)	10,266
Earnings (loss) per share	$	0.10	$	0.26	$	(0.01	)	$	0.28

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⁽¹⁾	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 Underground Solutions was $88.7 million, which included: (i) a payment at closing of $85.0 million; (ii) a payment of $5.3 million for the value of the estimated tax benefits associated with Underground Solutions’ net operating loss carry forwards; and (iii) preliminary 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.

The purchase price to acquire LMJ was €2.9 million, approximately $3.2 million, which was paid at closing.

Total cash consideration recorded to acquire Schultz was $6.7 million, which was funded by the Company’s cash reserves. The cash consideration included the purchase price paid at closing of $7.1 million less working capital adjustments of $0.4 million. The total purchase price was $7.7 million, which represented the cash consideration of $6.7 million plus $1.0 million of deferred contingent consideration. During the first quarter of 2016, $0.5 million of the contingent consideration was paid to the previous owners.

The following table summarizes the fair value of identified assets and liabilities of the Underground Solutions, Fyfe Europe, LMJ and Schultz acquisitions at their respective acquisition dates (in thousands):



	Underground Solutions			Fyfe Europe		LMJ		Schultz
Cash	$	3,630		$	—	$	—	$	—
Receivables and cost and estimated earnings in excess of billings	6,339			—		—		1,086
Inventories	12,629			—		504		—
Prepaid expenses and other current assets	587			—		—		19
Property, plant and equipment	2,755			50		1,194		162
Identified intangible assets	33,740			513		795		3,060
Deferred income tax assets	12,967			—		—		—
Other assets	29			—		—		—
Accounts payable	(4,653		)	—		—		(663		)
Accrued expenses	(5,274		)	—		—		—
Billings in excess of cost and estimated earnings	(2,943		)	—		—		—
Deferred income tax liabilities	(14,924		)	—		—		—
Total identifiable net assets	$	44,882		$	563	$	2,493	$	3,664

Total consideration recorded	$	88,681		$	3,000	$	3,235	$	7,662
Less: total identifiable net assets	44,882			563		2,493		3,664
Goodwill at June 30, 2016	$	43,799		$	2,437	$	742	$	3,998