DESCRIPTION OF BUSINESS

Aegion Corporation combines innovative technologies with market leading expertise to maintain, rehabilitate and strengthen pipelines and other infrastructure around the world. Since 1971, the Company has played a pioneering role in finding transformational solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. The Company also maintains the efficient operation of refineries and other industrial facilities and provide innovative solutions for the strengthening of buildings, bridges and other structures. Aegion is committed to Stronger. Safer. Infrastructure^®. The Company believes that the depth and breadth of its products and services platform make Aegion a leading “one-stop” provider for the world’s infrastructure rehabilitation and protection needs.

The Company is primarily built on the premise that it is possible to use technology to extend the structural design life and maintain, if not improve, the performance of infrastructure, mostly pipe. The Company is proving that this expertise can be applied in a variety of markets to protect pipelines in oil, gas, mining, wastewater and water applications and extending this to the rehabilitation and maintenance of commercial structures and the provision of professional services in energy-related industries. Many types of infrastructure must be protected from the corrosive and abrasive materials that pass through or near them. The Company’s expertise in non-disruptive corrosion engineering and abrasion protection is now wide-ranging, opening new markets for growth. The Company has a long history of product development and intellectual property management. The Company manufactures most of the engineered solutions it creates as well as the specialized equipment required to install them. Finally, decades of experience give the Company an advantage in understanding municipal, energy, mining, industrial and commercial customers. Strong customer relationships and brand recognition allow the Company to support the expansion of existing and innovative technologies into new high growth end markets.

The Company’s predecessor was originally incorporated in Delaware in 1980 to act as the exclusive United States licensee of the Insituform^® cured-in-place pipe (“CIPP”) process, which Insituform’s founder invented in 1971. The Insituform^® CIPP process served as the first trenchless technology for rehabilitating sewer pipelines and has enabled municipalities and private industry to avoid the extraordinary expense and extreme disruption that can result from conventional “dig-and-replace” methods. For more than 45 years, the Company has maintained its leadership position in the CIPP market from manufacturing to technological innovations and market share.

In order to strengthen the Company’s ability to service the emerging demands of the infrastructure protection market and to better position the Company for sustainable growth, the Company embarked on a diversification strategy in 2009 to expand its product and service portfolio and its geographical reach. Through a series of strategic initiatives and key acquisitions, the Company now possesses a broad portfolio of cost-effective solutions for rehabilitating and maintaining aging or deteriorating infrastructure, protecting new infrastructure from corrosion worldwide and providing integrated professional services in engineering, procurement, construction, maintenance, and turnaround services for oil and natural gas companies, primarily in the midstream and downstream markets.

Recognizing that the breadth of offerings expanded beyond the Company’s flagship Insituform^®brand, which constituted less than half of the Company’s revenues in 2011, the Company reorganized Insituform Technologies, Inc. (“Insituform”), the parent company at the time, into a new holding company structure in October 2011. Aegion became the new parent company and Insituform became a wholly-owned subsidiary of Aegion. Aegion reflects the Company’s mission of extending its leadership capabilities to furnish products and services to provide: (i) long-term protection for water and wastewater pipes, oil and gas pipelines and infrastructure as well as commercial and governmental structures and transportation infrastructure; and (ii) integrated professional services to energy companies.

Revision

The Company identified errors related to intercompany accounts, stock compensation and accrued contract costs prior to December 31, 2015 of approximately $8.9 million and corrected these errors as a cumulative decrease to beginning retained earnings of $8.9 million with a corresponding increase to accrued expenses, additional paid-in capital and accumulated other comprehensive loss of $0.8 million, $0.3 million and $7.8 million, respectively, as of December 31, 2015. The Company also revised the results for 2017 and 2016 to reflect the correction of these errors, resulting in: (i) a net increase to operating expenses of $0.3 million and a corresponding decrease in net income (loss) for 2017; (ii) an increase to currency translation adjustments, which is a component of accumulated other comprehensive loss, of $1.4 million for 2017; (iii) a decrease of $1.1 million and an increase of $0.8 million related to equity-based compensation expense for 2017 and 2016, respectively; and (iv) a decrease to cost of revenues of $0.8 million and an increase to operating expenses of $0.8 million for 2016. The Company also revised net cash provided by operating activities, which resulted in a decrease of $1.4 million for 2017.

The Company evaluated the impact of these errors on the prior period quarterly and annual financial statements, assessing materiality both quantitatively and qualitatively. The Company determined that these errors were not material to any of the Company’s prior annual and interim period consolidated financial statements and therefore, amendments of previously filed reports were not required. As such, the revision for the corrections is reflected in the financial information of the applicable prior periods in this Form 10-K filing and disclosure of the revised amount on other prior periods will be reflected in future filings containing the applicable period.

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”). As part of the 2017 Restructuring, the Company announced plans 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^® system in North America; (iii) right-size the cathodic protection services operation in Canada and the CIPP businesses in Australia and Denmark; and (iv) reduce corporate and other operating costs.

During 2018, the Company’s board of directors approved additional actions with respect to the 2017 Restructuring, which included the decisions to: (i) divest the Australia and Denmark CIPP businesses; (ii) take actions to further optimize operations within North America, including measures to reduce consolidated operating costs; and (iii) divest or otherwise exit multiple additional international businesses. See Note 4.

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. The Company completed all of the aforementioned objectives related to the 2016 Restructuring. See Note 4.

Infrastructure Solutions Segment (“Infrastructure Solutions”)

On November 1, 2018, the Company sold substantially all of the fixed assets and inventory from its CIPP operations in Denmark for a sale price of DKK 10.5 million (approximately $1.6 million). In connection with the sale, the Company entered into a five-year exclusive tube-supply agreement whereby the buyers will purchase Insituform^® CIPP liners from the Company. The buyers are also entitled to use the Insituform^® trade name based on a trademark license granted for the same five-year time period.

On May 14, 2018, the Company’s board of directors approved a plan to divest the Company’s CIPP business in Australia. While restructuring actions in Australia led to year-over-year improvements in operating results in 2018, an assessment of the long-term fit within the Company’s portfolio led to the decision to divest the business. Accordingly, the Company has classified Australia’s assets and liabilities as held for sale on the Consolidated Balance Sheet at December 31, 2018. See Note 6.

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. 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 FRP and injection resins and had served as a Tyfo^® system certified applicator in New Zealand since the late 1990’s. BCS imports and distributes materials, including fiber reinforced polymer, injection resins, repair mortars and protective coatings.

On June 2, 2016, the Company acquired the 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 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 held rights to provide Fyfe^® 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^®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 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 $29.7 million from foreign subsidiaries to assist in funding the transaction, incurring approximately $3.2 million in additional taxes, an accrual for which was included in the Company’s tax provision amounts for 2015. Underground Solutions provides infrastructure technologies for water, sewer and conduit applications.

Corrosion Protection Segment (“Corrosion Protection”)

On August 31, 2018, the Company sold substantially all of the assets of its wholly-owned subsidiary, The Bayou Companies, LLC and its fifty-one percent (51%) interest in Bayou Wasco Insulation, LLC. The sale price was $46 million, consisting of $38 million paid in cash at closing and $8 million in a fully secured, two-year loan payable to Aegion. Aegion is also eligible to receive an additional $4 million in total earn-out payments based on performance of the divested businesses in 2019 and 2020. Cash proceeds, net of customary closing costs, were used to repay outstanding borrowings on the Company’s line of credit. The sale resulted in a pre-tax loss of $7.0 million during 2018, which was corrected from the $8.7 million previously reported in the third quarter of 2018. The loss is included in “Other expense” in the Consolidated Statements of Operations.

On May 4, 2018, the Company acquired the operations of Hebna Inc., Hebna Canada Inc. and Hebna Corporation (collectively “Hebna”), for a total purchase price of $6.0 million ($3.0 million was paid during the second quarter of 2018 and $3.0 million was paid during the third quarter of 2018). The transaction was funded from a combination of domestic and international cash balances, with fifty percent (50%) of the purchase price being paid by the Company’s joint venture in Oman, in which the Company is a fifty-one percent (51%) partner. Hebna provides pipeline lining services, including compressed-fit lining, slip-lining, liner and free-standing pipe fusing, pipeline assessment and integrity management, pipeline pigging and calibration, and roto-lining services primarily in the United States, Canada and Middle East.

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 Eastern and Southern Africa. Aegion International owns sixty percent (60%) of the joint venture and Robor owns the remaining forty percent (40%).

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.

Energy Services Segment (“Energy Services”)

On July 20, 2018, the Company acquired the operations of Plant Performance Services LLC and P2S LLC (collectively “P2S”), for a total purchase price of $3.0 million. The transaction was funded from domestic cash balances. P2S specializes in general mechanical turnaround services, specialty welding services and field fabrication services primarily for the downstream oil and gas industry.

Purchase Price Accounting

The Company finalized its accounting for Environmental Techniques in 2018 and Underground Solutions, Fyfe Europe, LMJ and Concrete Solutions in 2017. There were no significant adjustments to the purchase price accounting in either period. 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.

The Company’s acquisitions made the following contributions to its revenues and profits (in thousands):



	Year Ended December 31,
	2018					2017					2016
	Revenues		Net Loss			Revenues		Net Loss			Revenues		Net Loss
Underground Solutions ⁽¹⁾	$	45,738	$	(790	)	$	32,063	$	(3,778	)	$	29,425	$	(2,694	)
Other acquisitions ⁽²⁾⁽³⁾	17,315		(555		)	14,845		(5,225		)	7,588		(1,811		)

_____________________

“N/A” represents not applicable.

⁽¹⁾

The reported net loss in 2018 includes a pre-tax allocation of corporate expenses of $5.0 million. The reported net loss in 2017 includes a pre-tax allocation of corporate expenses of $4.5 million.The reported net loss in 2016 includes a pre-tax charge for inventory step-up of $3.6 million, recognized as part of the accounting for business combinations, and a pre-tax allocation of corporate expenses of $3.2 million.


⁽²⁾	The reported net loss in 2018 and 2017 includes pre-tax restructuring charges of $4.8 million and $0.1 million, respectively.


⁽³⁾	The reported net loss in 2017 includes a pre-tax impairment charge of $2.2 million allocated from goodwill impairments in the Fyfe reporting unit (see Note 2).

The following unaudited pro forma summary presents combined information of the Company as if its acquisitions had occurred at the beginning of the year preceding their acquisition (in thousands, except earnings per share):



	Years Ended December 31,
	2017⁽¹⁾			2016⁽²⁾
Revenues	$	1,359,901		$	1,238,730
Net income (loss) ⁽³⁾	(69,574		)	29,924
Diluted earnings (loss) per share	$	(2.10	)	$	0.85

_____________________


⁽¹⁾	Includes pro-forma results related to Environmental Techniques, Hebna and P2S. 2018 contributions related to Hebna and P2S were immaterial.


⁽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 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 2018 and 2017, the Company reversed $0.3 million and $0.1 million, respectively, of the earnout consideration as operating results for the twelve-month periods ended June 30, 2018 and 2017 were below the target amounts in the purchase agreement. The accrual adjustments resulted in an offset to “Operating expenses” in the Consolidated Statement of Operations for each respective year. After the accrual adjustments, the estimated fair value of the contingent consideration was NZD 0.6 million, approximately $0.4 million. The fair value estimate was determined using observable inputs and significant unobservable inputs, which are based on level 3 inputs as defined in Note 13.

The following table summarizes the fair value of identified assets and liabilities of the Company’s acquisitions at their acquisition dates (in thousands):



	Underground Solutions			Other Acquisitions⁽¹⁾
Cash	$	3,630		$	—
Receivables and contract assets	6,339			2,270
Inventories	12,629			2,642
Prepaid expenses and other current assets	671			111
Property, plant and equipment	2,755			5,216
Identified intangible assets	33,370			8,523
Deferred income tax assets	13,282			124
Other assets	90			—
Accounts payable	(4,653		)	(1,862		)
Accrued expenses	(5,900		)	(335		)
Contract liabilities	(2,943		)	—
Deferred tax liabilities	(14,562		)	(895		)
Total identifiable net assets	$	44,708		$	15,794

Total consideration recorded	$	88,370		$	29,674
Less: total identifiable net assets	44,708			15,794
Final purchase price goodwill	$	43,662		$	13,880


⁽¹⁾	Total includes P2S, Hebna, Environmental Techniques, Fyfe Europe, LMJ and Concrete Solutions.