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 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.

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).

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