UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number:
| Aegion Corporation |
| (Exact name of registrant as specified in its charter) |
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(I.R.S. Employer Identification No.) |
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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.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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Accelerated filer ☐ |
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| Non-accelerated filer ☐ |
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Smaller reporting company |
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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 check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class |
Trading Symbol(s) |
Name of each exchange on which registered |
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There were
PART I—FINANCIAL INFORMATION
Item 1. Financial Statements
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share amounts)
| Quarters Ended September 30, |
Nine Months Ended September 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| Revenues |
$ | $ | $ | $ | ||||||||||||
| Cost of revenues |
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| Gross profit |
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| Operating expenses |
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| Goodwill impairment |
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| Definite-lived intangible asset impairment |
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| Impairment of assets held for sale |
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| Acquisition and divestiture expenses |
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| Restructuring and related charges |
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| Operating income |
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| Other income (expense): |
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| Interest expense |
( |
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) | ( |
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| Interest income |
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| Other |
( |
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| Total other expense |
( |
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| Income (loss) before taxes on income |
( |
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| Taxes (benefit) on income (loss) |
( |
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| Net income (loss) |
( |
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| Non-controlling interests income |
( |
) | ( |
) | ( |
) | ( |
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| Net income (loss) attributable to Aegion Corporation |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
| Earnings (loss) per share attributable to Aegion Corporation: |
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| Basic |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
| Diluted |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
| Quarters Ended September 30, |
Nine Months Ended September 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| Net income (loss) |
$ | $ | $ | ( |
) | $ | ||||||||||
| Other comprehensive income (loss): |
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| Currency translation adjustments |
( |
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| Deferred gain (loss) on hedging activity, net of tax (1) |
( |
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| Pension activity, net of tax (2) |
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| Total comprehensive income (loss) |
( |
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| Comprehensive income attributable to non-controlling interests |
( |
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| Comprehensive income (loss) attributable to Aegion Corporation |
$ | $ | ( |
) | $ | ( |
) | $ | ( |
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| (1) |
Amounts presented net of tax of $30 and $171 for the quarters ended September 30, 2019 and 2018, respectively, and $180 and $593 for the nine months ended September 30, 2019 and 2018, respectively. |
| (2) |
Amounts presented net of tax of $6 and $1 for the quarters ended September 30, 2019 and 2018, respectively, and $7 and $2 for the nine months ended September 30, 2019 and 2018, respectively. |
The accompanying notes are an integral part of the consolidated financial statements.
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
| September 30, 2019 |
December 31, 2018 |
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| Assets |
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| Current assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Restricted cash |
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| Receivables, net of allowances of $7,488 and $9,695, respectively |
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| Retainage |
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| Contract assets |
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| Inventories |
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| Prepaid expenses and other current assets |
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| Assets held for sale |
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| Total current assets |
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| Property, plant & equipment, less accumulated depreciation |
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| Other assets |
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| Goodwill |
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| Intangible assets, less accumulated amortization |
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| Operating lease assets |
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| Deferred income tax assets |
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| Other assets |
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| Total other assets |
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| Total Assets |
$ | $ | ||||||
| Liabilities and Equity |
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| Current liabilities |
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| Accounts payable |
$ | $ | ||||||
| Accrued expenses |
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| Contract liabilities |
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| Current maturities of long-term debt |
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| Liabilities held for sale |
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| Total current liabilities |
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| Long-term debt, less current maturities |
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| Operating lease liabilities |
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| Deferred income tax liabilities |
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| Other non-current liabilities |
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| Total liabilities |
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| (See Commitments and Contingencies: Note 11) |
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| Equity |
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| Preferred stock, undesignated, $.10 par – shares authorized 2,000,000; none outstanding |
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| Common stock, $.01 par – shares authorized 125,000,000; shares issued and outstanding 30,807,548 and 31,922,409, respectively |
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| Additional paid-in capital |
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| Retained earnings |
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| Accumulated other comprehensive loss |
( |
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| Total stockholders’ equity |
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| Non-controlling interests |
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| Total equity |
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| Total Liabilities and Equity |
$ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(in thousands, except number of shares)
| Quarters Ended September 30, |
Nine Months Ended September 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| Common Stock - Shares |
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| Balance, beginning of period |
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| Issuance of common stock upon stock option exercises |
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| Issuance of shares pursuant to restricted stock units |
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| Issuance of shares pursuant to performance units |
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| Issuance of shares pursuant to deferred stock units |
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| Shares repurchased and retired |
( |
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| Balance, end of period |
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| Common Stock - Amount |
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| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Issuance of common stock upon stock option exercises |
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| Issuance of shares pursuant to restricted stock units |
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| Issuance of shares pursuant to performance units |
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| Issuance of shares pursuant to deferred stock units |
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| Shares repurchased and retired |
( |
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| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
| Additional Paid-In Capital |
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| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Issuance of common stock upon stock option exercises |
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| Shares repurchased and retired |
( |
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| Equity-based compensation expense |
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| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
| Retained Earnings |
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| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Cumulative effect adjustment (see Revenues: Note 3) |
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| Net income (loss) attributable to Aegion Corporation |
( |
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| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
| Accumulated Other Comprehensive Loss |
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| Balance, beginning of period |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Currency translation adjustment and derivative transactions, net |
( |
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| Balance, end of period |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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| Non-Controlling Interests |
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| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Net income |
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| Distributions to non-controlling interests |
( |
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| Sale of non-controlling interests |
( |
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| Currency translation adjustment, net |
( |
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| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
| Total Equity |
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| Balance, beginning of period |
$ | $ | $ | $ | ||||||||||||
| Cumulative effect adjustment (See Revenues: Note 3) |
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| Net income (loss) |
( |
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| Issuance of common stock upon stock option exercises |
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| Issuance of shares pursuant to restricted stock units |
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| Issuance of shares pursuant to performance units |
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| Issuance of shares pursuant to deferred stock units |
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| Shares repurchased and retired |
( |
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| Equity-based compensation expense |
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| Distributions to non-controlling interests |
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| Sale of non-controlling interests |
( |
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| Currency translation adjustment and derivative transactions, net |
( |
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| Balance, end of period |
$ | $ | $ | $ | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Nine Months Ended September 30, |
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| 2019 |
2018 |
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| Cash flows from operating activities: |
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| Net income (loss) |
$ | ( |
) | $ | ||||
| Adjustments to reconcile to net cash provided by operating activities: |
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| Depreciation and amortization |
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| Gain on sale of fixed assets |
( |
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| Equity-based compensation expense |
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| Deferred income taxes |
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| Non-cash restructuring charges |
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| Goodwill impairment |
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| Definite-lived intangible asset impairment |
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| Impairment of assets held for sale |
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| Loss on sale of businesses |
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| Loss on foreign currency transactions |
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| Other |
( |
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| Changes in operating assets and liabilities (net of acquisitions): |
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| Receivables net, retainage and contract assets |
( |
) | ( |
) | ||||
| Inventories |
( |
) | ( |
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| Prepaid expenses and other assets |
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| Accounts payable and accrued expenses |
( |
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| Contract liabilities |
( |
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| Other operating |
( |
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| Net cash provided by operating activities |
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| Cash flows from investing activities: |
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| Capital expenditures |
( |
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| Proceeds from sale of fixed assets |
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| Patent expenditures |
( |
) | ( |
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| Other acquisition activity |
( |
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| Sale of Bayou, net of cash disposed |
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| Net cash provided by (used in) investing activities |
( |
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| Cash flows from financing activities: |
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| Proceeds from issuance of common stock upon stock option exercises |
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| Repurchase of common stock |
( |
) | ( |
) | ||||
| Distributions to non-controlling interests |
( |
) | ||||||
| Credit facility amendment fees |
( |
) | ||||||
| Payments on notes payable, net |
( |
) | ( |
) | ||||
| Proceeds from line of credit, net |
( |
) | ||||||
| Principal payments on long-term debt |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
) | ||||
| Effect of exchange rate changes on cash |
( |
) | ( |
) | ||||
| Net decrease in cash, cash equivalents and restricted cash for the period |
( |
) | ( |
) | ||||
| Cash, cash equivalents and restricted cash, beginning of year |
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| Cash, cash equivalents and restricted cash, end of period |
$ | $ | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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, 2018, 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 2018 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 1, 2019.
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 cured-in-place pipe (“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. During the second quarter of 2019, the Company initiated plans to exit additional international businesses. See further discussion in Note 4.
Infrastructure Solutions Segment (“Infrastructure Solutions”)
During 2018, the Company’s board of directors approved a plan to divest the Company’s CIPP business in Australia (“Insituform Australia”). While restructuring actions in Insituform Australia led to improvements in operating results, 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 Insituform Australia’s assets and liabilities as held for sale on the Consolidated Balance Sheet at September 30, 2019 and December 31, 2018. See Note 5.
During the second quarter of 2019, the Company initiated plans to sell its CIPP contracting businesses in Europe: Insituform Rioolrenovatietechnicken B.V. (“Insituform Netherlands”); Insituform Technologies Iberica SA (“Insituform Spain”); and Environmental Techniques Limited (“Environmental Techniques”). Accordingly, the Company has classified the assets and liabilities of these businesses as held for sale on the Consolidated Balance Sheet at September 30, 2019. See Note 5. Additionally, see Note 14 for additional information on the sale of the CIPP contracting operations of Insituform Netherlands, effective October 11, 2019.
Corrosion Protection Segment (“Corrosion Protection”)
During the second quarter of 2019, the Company began negotiating with a prospective buyer for its interest in its Tite Liner® joint venture in Mexico, United Pipeline de Mexico S.A. de C.V. (“United Mexico”). Accordingly, the Company has classified the assets and liabilities of this business as held for sale on the Consolidated Balance Sheet at September 30, 2019. See Note 5. Additionally, see Note 14 for additional information on the sale of the Company’s interest in United Mexico, effective October 11, 2019.
During the first quarter of 2019, the Company initiated plans to sell its interest in its cathodic protection materials manufacturing and production joint venture in Saudi Arabia, Corrpower International Limited (“Corrpower”), and its interest in its Tite Liner® and CIPP joint venture in South Africa, Aegion South Africa Proprietary Limited (“Aegion South Africa”). During the third quarter of 2019, the Company ended its negotiations with potential buyers for Corrpower and Aegion South Africa. Accordingly, the relevant assets and liabilities for each of the entities were removed from held for sale and accounted for as held and used at September 30, 2019. These entities will now be exited as part of the 2017 Restructuring.
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 (
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 $
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 $
| 2. |
ACCOUNTING POLICIES |
On January 1, 2019, the Company adopted FASB ASC 842, Leases (“FASB ASC 842”). See Note 6 for further information. Other than the adoption of FASB ASC 842, 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, 2018.
Accumulated Other Comprehensive Loss
As set forth below, 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, 2019 |
December 31, 2018 |
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| Currency translation adjustments (1) |
$ | ( |
) | $ | ( |
) | ||
| Derivative hedging activity |
( |
) | ||||||
| Pension activity |
( |
) | ( |
) | ||||
| Total accumulated other comprehensive loss |
$ | ( |
) | $ | ( |
) |
||
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(1) |
During the nine months ended September 30, 2019, as a result of disposing of certain international entities, $ |
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. Net foreign exchange transaction losses of $
Taxation
The Company provides for estimated income taxes payable or refundable on current year income tax returns as well as the estimated future tax effects attributable to temporary differences and carryforwards, based upon enacted tax laws and tax rates, and in accordance with FASB ASC 740, Income Taxes (“FASB ASC 740”). FASB ASC 740 also requires that a valuation allowance be recorded against any deferred tax assets that are not likely to be realized in the future. The determination is based on the Company’s ability to generate future taxable income and, at times, is dependent on its ability to implement strategic tax initiatives to ensure full utilization of recorded deferred tax assets. Should the Company not be able to implement the necessary tax strategies, it may need to record valuation allowances for certain deferred tax assets, including those related to foreign income tax benefits. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against net deferred tax assets.
Earnings per Share
Earnings per share have been calculated using the following share information:
| Quarters Ended September 30, |
Nine Months Ended September 30, |
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| 2019 |
2018 |
2019 |
2018 |
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| Weighted average number of common shares used for basic EPS |
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| Effect of dilutive stock options and restricted and deferred stock unit awards |
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| Weighted average number of common shares and dilutive potential common stock used for dilutive EPS |
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The Company excluded
Cash, Cash Equivalents and Restricted Cash
The Company classifies highly liquid investments with original maturities of 90 days or less as cash equivalents. Recorded book values are reasonable estimates of fair value for cash and cash equivalents.
Cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets and Consolidated Statements of Cash Flows are as follows (in thousands):
| Balance sheet data |
September 30, 2019 |
December 31, 2018 |
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| Cash and cash equivalents |
$ | $ | ||||||
| Restricted cash |
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| Cash, cash equivalents and restricted cash |
$ | $ | ||||||
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 for bank undertakings in Europe. Restricted cash related to operations is similar to retainage, and is, therefore, classified as a current asset, consistent with the Company’s policy on retainage.
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. There were no changes in the Company’s VIEs during the quarter ended September 30, 2019.
Financial data for consolidated variable interest entities are summarized in the following tables (in thousands):
| Balance sheet data |
September 30, 2019 (1) |
December 31, 2018 |
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| Current assets |
$ | $ | ||||||
| Non-current assets |
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| Current liabilities |
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| Non-current liabilities |
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| (1) |
Includes $ |
| Quarters Ended September 30, |
Nine Months Ended September 30, |
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| Statement of operations data |
2019 |
2018 (1) | 2019 | 2018 (1) | ||||||||||||
| Revenue |
$ | $ | $ | $ | ||||||||||||
| Gross profit |
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| Net income attributable to Aegion Corporation |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| (1) |
Includes activity from our pipe coating and insulation joint venture in Louisiana, which was sold during the third quarter of 2018. |
Newly Issued Accounting Pronouncements
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The guidance is effective for the Company’s fiscal year beginning January 1, 2020, including interim periods within that fiscal year. The adoption of this standard is not expected to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits a company to reclassify the income tax effects of the Tax Cuts and Jobs Act on items within accumulated other comprehensive income to retained earnings. Companies may adopt the new guidance using one of two transition methods: (i) retrospective to each period (or periods) in which the income tax effects are recognized, or (ii) at the beginning of the period of adoption. The Company adopted this standard effective January 1, 2019 and elected not to reclassify the tax effects due to the immaterial impact on the Company’s consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the way in which entities estimate and present credit losses for most financial assets, including accounts receivable. The guidance is effective for the Company’s fiscal year beginning January 1, 2020, including interim periods within that fiscal year. Early adoption is permitted, although the Company does not intend to do so. For the Company’s trade receivables, certain other receivables and certain other financial instruments, it will be required to use a new forward-looking “expected” credit loss model based on historical loss rates that will replace the existing “incurred” credit loss model, which will generally result in earlier recognition of allowances for credit losses. The Company is currently evaluating the impact this guidance will have on its consolidated financial statements and does not expect it will have a material impact on the Company’s consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842), which 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 Company adopted this standard, effective January 1, 2019, using the adoption-date transition provision, which recognizes and measures leases existing at January 1, 2019 but without retrospective application. See Note 6.
| 3. |
REVENUES |
On January 1, 2018, the Company adopted FASB ASC 606 for all contracts that were not completed using the modified retrospective transition method. The Company recognized the cumulative effect of initially applying FASB ASC 606 as a net reduction to opening retained earnings of $
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in FASB ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For contracts in which construction, engineering and installation services are provided, there is generally a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. The bundle of goods and services represents the combined output for which the customer has contracted. For product sales contracts with multiple performance obligations where each product is distinct, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good in the contract. For royalty license agreements whereby intellectual property is transferred to the customer, there is a single performance obligation as the license is not separately identifiable from the other goods and services in the contract.
The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenues from products and services transferred to customers over time accounted for
On September 30, 2019, the Company had $
Contract Estimates
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract, and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that sometimes span multiple years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
The Company’s contracts do not typically contain variable consideration or other provisions that increase or decrease the transaction price. In rare situations where the transaction price is not fixed, the Company estimates variable consideration at the most likely amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. For royalty license agreements, the Company applies the sales-based and usage-based royalty exception and recognizes royalties at the later of: (i) when the subsequent sale or usage occurs; or (ii) the satisfaction or partial satisfaction of the performance obligation to which some or all of the sales-or usage-based royalty has been allocated. For contracts in which a portion of the transaction price is retained and paid after the good or service has been transferred to the customer, the Company does not recognize a significant financing component. The primary purpose of the retainage payment is often to provide the customer with assurance that the Company will perform its obligations under the contract, rather than to provide financing to the customer.
The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available.
Revenue by Category
The following tables summarize revenues by segment and geography (in thousands):
| Quarter Ended September 30, 2019 |
Quarter Ended September 30, 2018 |
|||||||||||||||||||||||||||||||
| Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
|||||||||||||||||||||||||
| Geographic region: |
||||||||||||||||||||||||||||||||
| United States |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Canada |
||||||||||||||||||||||||||||||||
| Europe |
||||||||||||||||||||||||||||||||
| Other foreign |
||||||||||||||||||||||||||||||||
| Total revenues |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 |
Nine Months Ended September 30, 2018 |
|||||||||||||||||||||||||||||||
| Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
|||||||||||||||||||||||||
| Geographic region: |
||||||||||||||||||||||||||||||||
| United States |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Canada |
||||||||||||||||||||||||||||||||
| Europe |
||||||||||||||||||||||||||||||||
| Other foreign |
||||||||||||||||||||||||||||||||
| Total revenues |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
The following tables summarize revenues by segment and contract type (in thousands):
| Quarter Ended September 30, 2019 |
Quarter Ended September 30, 2018 |
|||||||||||||||||||||||||||||||
| Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
|||||||||||||||||||||||||
| Contract type: |
||||||||||||||||||||||||||||||||
| Fixed fee |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Time and materials |
||||||||||||||||||||||||||||||||
| Product sales |
||||||||||||||||||||||||||||||||
| License fees |
||||||||||||||||||||||||||||||||
| Total revenues |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Nine Months Ended September 30, 2019 |
Nine Months Ended September 30, 2018 |
|||||||||||||||||||||||||||||||
| Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
Infrastructure Solutions | Corrosion Protection | Energy Services | Total |
|||||||||||||||||||||||||
| Contract type: |
||||||||||||||||||||||||||||||||
| Fixed fee |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
| Time and materials |
||||||||||||||||||||||||||||||||
| Product sales |
||||||||||||||||||||||||||||||||
| License fees |
||||||||||||||||||||||||||||||||
| Total revenues |
$ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets and contract liabilities on the Consolidated Balance Sheets. Contract assets represent work performed that could not be billed either due to contract stipulations or the required contractual documentation has not been finalized. Substantially all unbilled amounts are expected to be billed and collected within one year.
For fixed fee and time-and-materials based contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. For some royalty license arrangements, minimum amounts are billed over the license term as quarterly royalty amounts are determined. This results in contract assets as the Company recognizes revenue for the license when the license is transferred to the customer at contract inception. The Company’s contract liabilities consist of advance payments, billings in excess of revenue recognized and deferred revenue.
The Company’s contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Advance payments, billings in excess of revenue recognized and deferred revenue are each classified as current.
Net contract assets (liabilities) consisted of the following (in thousands):
| September 30, 2019 (1) |
December 31, 2018 (2) |
|||||||
| Contract assets – current |
$ | $ | ||||||
| Contract liabilities – current |
( |
) | ( |
) | ||||
| Net contract assets |
$ | $ | ||||||
| (1) | Amounts exclude contract assets of $ |
| (2) | Amounts exclude contract assets of $ |
Substantially all of the $
Impairment losses recognized on receivables and contract assets were not material during the first nine months of 2019 and 2018.
| 4. |
RESTRUCTURING |
On July 28, 2017, the Company’s board of directors approved the 2017 Restructuring. As part of the 2017 Restructuring, the Company announced plans to: (i) divest 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 and the first quarter of 2019, 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, including: (a) the Company’s cathodic protection installation activities in the Middle East, including Corrpower; (b) United Pipeline de Mexico S.A. de C.V., the Company’s Tite Liner® joint venture in Mexico; (c) the Company’s Tite Liner® businesses in Brazil and Argentina; (d) Aegion South Africa; and (e) the Company’s CIPP contract installation operations in England. During the second quarter of 2019, as part of the 2017 Restructuring, the Company initiated plans to exit additional international businesses, including Insituform Netherlands, Insituform Spain and Environmental Techniques.
Total pre-tax 2017 Restructuring and related impairment charges since inception were $
The Company expects to incur additional cash charges of less than $
During the quarters and nine months ended September 30, 2019 and 2018, the Company recorded pre-tax expenses related to the 2017 Restructuring as follows (in thousands):
| Quarter Ended September 30, 2019 |
Quarter Ended September 30, 2018 |
||||||||||||||||||||||||||||||||||
| Infrastructure Solutions |
Corrosion Protection |
Energy Services |
Corporate |
Total |
Infrastructure Solutions |
Corrosion Protection |
Corporate |
Total |
|||||||||||||||||||||||||||
| Severance and benefit related costs | $ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| Contract termination costs | |||||||||||||||||||||||||||||||||||
| Relocation and other moving costs | |||||||||||||||||||||||||||||||||||
| Other restructuring costs (1) | |||||||||||||||||||||||||||||||||||
| Total pre-tax restructuring charges |
$ | $ | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||
| (1) |
For the quarter ended September 30, 2019, charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals, release of cumulative currency translation adjustments and other restructuring-related costs in connection with exiting the CIPP operations in Europe, exiting the cathodic protection operations in the Middle East, disposing of certain international businesses and other cost savings initiatives. For the quarter ended September 30, 2018, charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals, and other restructuring-related costs in connection with exiting non-pipe-related applications for the Tyfo® systems in North America and right-sizing the CIPP operations in Australia and Denmark. |
| Nine Months Ended September 30, 2019 |
Nine Months Ended September 30, 2018 |
|||||||||||||||||||||||||||||||||||
| Infrastructure Solutions |
Corrosion Protection |
Energy Services |
Corporate |
Total |
Infrastructure Solutions |
Corrosion Protection |
Corporate |
Total |
||||||||||||||||||||||||||||
| Severance and benefit related costs | $ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Contract termination costs | ||||||||||||||||||||||||||||||||||||
| Relocation and other moving costs | ||||||||||||||||||||||||||||||||||||
| Other restructuring costs (1) | ||||||||||||||||||||||||||||||||||||
| Total pre-tax restructuring charges |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| (1) |
For the nine months ended September 30, 2019, charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals, release of cumulative currency translation adjustments and other restructuring-related costs in connection with exiting the CIPP operations in Europe, exiting the cathodic protection operations in the Middle East, disposing of certain international businesses and other cost savings initiatives. For the nine months ended September 30, 2018, charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals, and other restructuring-related costs in connection with exiting non-pipe-related applications for the Tyfo® systems in North America and right-sizing the CIPP operations in Australia and Denmark. |
2017 Restructuring costs related to severance, other termination benefit costs and early contract termination costs were $
The following tables summarize all charges related to the 2017 Restructuring recognized in the quarters and nine months ended September 30, 2019 and 2018 as presented in their affected line in the Consolidated Statements of Operations (in thousands):
| Quarter Ended September 30, 2019 |
Quarter Ended September 30, 2018 |
|||||||||||||||||||||||||||||||||||
| Infrastructure Solutions |
Corrosion Protection |
Energy Services |
Corporate |
Total (1) |
Infrastructure Solutions |
Corrosion Protection |
Corporate |
Total (2) |
||||||||||||||||||||||||||||
| Cost of revenues | $ | ( |
) | $ | ( |
) | $ | $ | $ | ( |
) | $ | $ | $ | $ | |||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||||||||||||||||||
| Definite-lived intangible asset impairment | ||||||||||||||||||||||||||||||||||||
| Restructuring and related charges | ||||||||||||||||||||||||||||||||||||
| Other expense | ||||||||||||||||||||||||||||||||||||
| Total pre-tax restructuring charges |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| (1) |
Total pre-tax restructuring charges for the quarter ended September 30, 2019, include cash charges of $ |
| (2) |
Total pre-tax restructuring charges for the quarter ended September 30, 2018, include cash charges of $ |
| Nine Months Ended September 30, 2019 |
Nine Months Ended September 30, 2018 |
|||||||||||||||||||||||||||||||||||
| Infrastructure Solutions |
Corrosion Protection |
Energy Services |
Corporate |
Total (1) |
Infrastructure Solutions |
Corrosion Protection |
Corporate |
Total (2) |
||||||||||||||||||||||||||||
| Cost of revenues | $ | ( |
) | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||
| Operating expenses | ||||||||||||||||||||||||||||||||||||
| Goodwill impairment | ||||||||||||||||||||||||||||||||||||
| Definite-lived intangible asset impairment | ||||||||||||||||||||||||||||||||||||
| Restructuring and related charges | ||||||||||||||||||||||||||||||||||||
| Other expense | ||||||||||||||||||||||||||||||||||||
| Total pre-tax restructuring charges |
$ | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||
| (1) |
Total pre-tax restructuring charges include cash charges of $ |
| (2) |
Total pre-tax restructuring charges include cash charges of $ |
The following tables summarize the 2017 Restructuring activity during the first nine months of 2019 and 2018 (in thousands):
| Utilized in 2019 |
||||||||||||||||||||||||
| Reserves at December 31, 2018 | 2019 Charge to Income |
Foreign Currency Translation |
Cash(1) |
Non-Cash |
Reserves at September 30, 2019 |
|||||||||||||||||||
| Severance and benefit related costs |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||
| Contract termination costs |
( |
) | ||||||||||||||||||||||
| Relocation and other moving costs |
( |
) | ||||||||||||||||||||||
| Other restructuring costs |
( |
) | ||||||||||||||||||||||
| Total pre-tax restructuring charges |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||
| (1) |
Refers to cash utilized to settle charges during the first nine months of 2019. |
| Utilized in 2018 |
||||||||||||||||||||||||
| Reserves at December 31, 2017 | 2018 Charge to Income |
Foreign Currency Translation |
Cash(1) |
Non-Cash |
Reserves at September 30, 2018 |
|||||||||||||||||||
| Severance and benefit related costs |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||
| Contract termination costs |
( |
) | ||||||||||||||||||||||
| Relocation and other moving costs |
||||||||||||||||||||||||
| Other restructuring costs |
||||||||||||||||||||||||
| Total pre-tax restructuring charges |
$ | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||||
| (1) |
Refers to cash utilized to settle charges during the first nine months of 2018. |
| 5. |
ASSETS AND LIABILITIES HELD FOR SALE |
During the first half of 2019, the Company initiated plans to sell several entities as part of its ongoing strategic actions intended to generate higher returns and more predictable and sustainable long-term earnings growth. Within Infrastructure Solutions, the Company initiated plans to divest its CIPP contracting businesses in Europe: Insituform Netherlands, Insituform Spain and Environmental Techniques. See Note 14 for additional information on the sale of the CIPP contracting operations of Insituform Netherlands, effective October 11, 2019. Within Corrosion Protection, the Company initiated plans to divest its interests in Corrpower, Aegion South Africa and United Mexico. See Note 14 for additional information on the sale of the Company’s interest in United Mexico, effective October 11, 2019. During the third quarter of 2019, the Company ended its negotiations with potential buyers for Corrpower and Aegion South Africa. Accordingly, the relevant assets and liabilities for each of these entities was removed from held for sale and accounted for as held and used at September 30, 2019. These entities will now be exited as part of the 2017 Restructuring. Based on management's expectation of liquidation value, no additional impairment losses were recorded as a result of the change in accounting. In the event the Company is unable to liquidate the assets and liabilities at a price that is less than favorable, the Company could incur a loss on disposal.
The Company is currently in various stages of discussions with third parties for each of the remaining entities and believes that it is probable that a sale of each entity will occur in the second half of 2019 or early in 2020.
During 2018, the Company’s board of directors approved a plan to divest the assets and liabilities of Insituform Australia. During the second quarter of 2019, the Company ended its negotiations with a potential third-party acquirer and began discussions with another third party. Because of these new negotiations, management believes that it is probable that a sale will occur in the fourth quarter of 2019.
The relevant asset and liability balances at September 30, 2019 and December 31, 2018 are accounted for as held for sale and measured at the lower of carrying value or fair value less cost to sell. Based on management’s expectation of fair value less cost to sell, the Company recorded an impairment of assets held for sale of $
The following table provides the components of assets and liabilities held for sale (in thousands):
| September 30, 2019(1) |
December 31, 2018(2) |
|||||||
| Assets held for sale: |
||||||||
| Current assets |
||||||||
| Receivables, net |
$ | $ | ||||||
| Retainage |
||||||||
| Contract assets |
||||||||
| Inventories |
||||||||
| Prepaid expenses and other current assets |
||||||||
| Total current assets |
||||||||
| Property, plant & equipment, less accumulated depreciation |
||||||||
| Goodwill |
||||||||
| Intangible assets, less accumulated amortization |
||||||||
| Operating lease assets |
||||||||
| Deferred income tax assets |
||||||||
| Other assets |
||||||||
| Impairment of assets held for sale |
( |
) | ||||||
| Total assets held for sale |
$ | $ | ||||||
| Liabilities held for sale: |
||||||||
| Current liabilities |
||||||||
| Accounts payable |
$ | $ | ||||||
| Accrued expenses |
||||||||
| Contract liabilities |
||||||||
| Current maturities of long-term debt |
||||||||
| Total current liabilities |
||||||||
| Operating lease liabilities |
||||||||
| Other non-current liabilities |
||||||||
| Total liabilities held for sale |
$ | $ | ||||||
| (1) |
Includes Insituform Australia, Insituform Netherlands, Insituform Spain, Environmental Techniques and United Mexico. |
| (2) |
Includes Insituform Australia. |
| 6. |
LEASES |
Effective January 1, 2019, the Company adopted FASB ASC 842 using the adoption-date transition provision rather than at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components. The Company also made a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. The impact of FASB ASC 842 on the Consolidated Balance Sheet beginning January 1, 2019 was through the recognition of operating lease assets and corresponding operating lease liabilities of $
The Company’s operating lease portfolio includes operational field locations, administrative offices, equipment, vehicles and information technology equipment. The majority of the Company’s leases have remaining lease terms of
Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term at inception. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 1, 2019. A portion of the Company’s real estate, equipment and vehicle leases is subject to periodic changes in the Consumer Price Index, LIBOR or other market index. The changes to these indexes are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. Because most leases do not provide an explicit rate of return, the Company utilizes its incremental secured borrowing rate on a lease-by-lease basis in determining the present value of lease payments at the commencement date of the lease.
The following table presents the components of lease expense (in thousands):
| Quarter Ended September 30, 2019 |
Nine Months Ended September 30, 2019 |
|||||||
| Operating lease cost |
$ | $ | ||||||
| Short-term lease cost |
||||||||
| Total lease cost |
$ | $ | ||||||
Supplemental cash flow information related to leases was as follows (in thousands):
| Quarter Ended September 30, 2019 |
Nine Months Ended September 30, 2019 |
|||||||
| Cash paid for amounts included in the measurement of lease liabilities: |
||||||||
| Operating cash flows – Operating leases |
$ | $ | ||||||
| Right-of-use assets obtained in exchange for lease obligations: |
||||||||
| Operating leases |
$ | $ | ||||||
Supplemental balance sheet information related to leases was as follows (in thousands):
| September 30, 2019(1) |
||||
| Operating leases: |
||||
| Operating lease assets |
$ | |||
| Accrued expenses |
$ | |||
| Other liabilities |
||||
| Total operating lease liabilities |
$ | |||
| Weighted-average remaining lease term (in years) |
||||
| Weighted-average discount rate |
% | |||
| (1) |
Amounts exclude operating lease assets of $ |
Operating lease liabilities under non-cancellable leases were as follows (in thousands):
| September 30, 2019 |
||||
| Three months ended December 31, 2019 |
$ | |||
| 2020 |
||||
| 2021 |
||||
| 2022 |
||||
| 2023 |
||||
| Thereafter |
||||
| Total undiscounted operating lease liabilities |
||||
| Less: Imputed interest |
( |
) | ||
| Total discounted operating lease liabilities |
$ | |||
Minimum rental commitments under non-cancellable leases as of December 31, 2018 for years 2019 through 2023 were $
| 7. |
GOODWILL AND INTANGIBLE ASSETS |
Goodwill
The following table presents a reconciliation of the beginning and ending balances of goodwill (in thousands):
| Infrastructure Solutions |
Corrosion Protection |
Energy Services |
Total |
|||||||||||||
| Balance, December 31, 2018 |
||||||||||||||||
| Goodwill, gross |
$ | $ | $ | $ | ||||||||||||
| Accumulated impairment losses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Goodwill, net |
||||||||||||||||
| 2019 Activity: |
||||||||||||||||
| Foreign currency translation |
( |
) | ( |
) | ||||||||||||
| Reclassification to assets held for sale (1) |
( |
) | ( |
) | ||||||||||||
| Balance, September 30, 2019 |
||||||||||||||||
| Goodwill, gross |
||||||||||||||||
| Accumulated impairment losses |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Goodwill, net |
$ | $ | $ | $ | ||||||||||||
| (1) |
During the second quarter of 2019, the Company classified certain assets of its CIPP contracting operation in Europe as held for sale. See Note 5. |
Intangible Assets
Intangible assets consisted of the following (in thousands):
| September 30, 2019 |
December 31, 2018 |
||||||||||||||||||||||||||
| Weighted Average Useful Lives (Years) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
|||||||||||||||||||||
| License agreements |
$ | $ | ( |
) | $ | $ | $ | ( |
) | $ | |||||||||||||||||
| Leases |
( |
) | ( |
) | |||||||||||||||||||||||
| Trademarks |
( |
) | ( |
) | |||||||||||||||||||||||
| Non-competes |
( |
) | ( |
) | |||||||||||||||||||||||
| Customer relationships |
( |
) | ( |
) | |||||||||||||||||||||||
| Patents and acquired technology |
( |
) | ( |
) | |||||||||||||||||||||||
| Total intangible assets |
— | $ | $ | ( |
) | $ | $ | $ | ( |
) | $ | ||||||||||||||||
Amortization expense was $
| 2019 |
$ | |||
| 2020 |
||||
| 2021 |
||||
| 2022 |
||||
| 2023 |
| 8. |
LONG-TERM DEBT AND CREDIT FACILITY |
Long-term debt consisted of the following (in thousands):
| September 30, 2019 |
December 31, 2018 |
|||||||
| Term note, due February 27, 2023, annualized rates of 4.10% and 4.59%, respectively |
$ | $ | ||||||
| Line of credit, 4.04% and 4.45%, respectively |
||||||||
| Other notes with interest rates from 3.3% to 7.8% |
||||||||
| Subtotal |
||||||||
| Less – Current maturities of long-term debt |
||||||||
| Less – Unamortized loan costs |
||||||||
| Total |
$ | $ | ||||||
In October 2015, the Company entered into an amended and restated $
In 2018, the Company paid expenses of $
Generally, interest is charged on the principal amounts outstanding under the amended Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from
The Company’s indebtedness at September 30, 2019 consisted of $
As of September 30, 2019, the Company had $
The Company’s indebtedness at December 31, 2018 consisted of $
At September 30, 2019 and December 31, 2018, the estimated fair value of the Company’s long-term debt was approximately $
In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $
On March 12, 2018, the Company entered into an interest rate swap forward agreement that begins in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap will require the Company to make a monthly fixed rate payment of
The amended 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 amended 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 amended Credit Facility defined income with a maximum amount not to exceed |
| • |
Consolidated fixed charge coverage ratio compares amended Credit Facility defined income to amended Credit Facility defined fixed charges with a minimum permitted ratio of not less than |
At September 30, 2019, the Company was in compliance with all of its debt and financial covenants as required under the amended Credit Facility.
| 9. |
STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION |
Share Repurchase Plan
In December 2018, the Company’s board of directors authorized the open market repurchase of up to shares of the Company’s common stock through one or more trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The program did not establish a time period in which the repurchases had to be made. In December 2018, the Company amended its Credit Facility, which limits the open market share repurchases to $
The Company is also authorized to repurchase up to $
During the first nine months of 2019, the Company acquired
During the first nine months of 2018, the Company acquired
Equity-Based Compensation Plans
In April 2016, the Company’s stockholders approved the 2016 Employee Equity Incentive Plan, which was amended in 2017 by the First Amendment to the 2016 Employee Equity Incentive Plan (as amended, the “2016 Employee Plan”). In April 2018, the Company’s stockholders approved the Second Amendment to the 2016 Employee Equity Incentive Plan, which increased by
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. In April 2019, the Company’s stockholders approved an amendment and restatement of the 2016 Director Plan, which among other things, increased by
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.
A summary of the stock award activity is as follows:
| Stock Awards |
Weighted Average Award Date Fair Value |
|||||||
| Outstanding at December 31, 2018 |
$ | |||||||
| Period Activity: | ||||||||
| Restricted stock units awarded |
||||||||
| Performance stock units awarded |
||||||||
| Restricted stock units distributed |
( |
) | ||||||
| Performance stock units distributed |
( |
) | ||||||
| Restricted stock units forfeited |
( |
) | ||||||
| Performance stock units forfeited |
( |
) | ||||||
| Outstanding at September 30, 2019 |
$ | |||||||
Expense associated with stock awards was $
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. Historically, awards were fully vested, and fully expensed, on the date of grant. Beginning in April 2019, as a result of the amendment and restatement of the 2016 Director Plan discussed above, the expense related to the issuance of deferred stock units is based on the award date fair value and charged to expense ratably through the requisite service period, which is generally year. The forfeiture of unvested deferred stock units causes the reversal of all previous expense to be recorded as a reduction of current period expense.
A summary of deferred stock unit activity is as follows:
| Deferred Stock Units |
Weighted Average Award Date Fair Value |
|||||||
| Outstanding at December 31, 2018 |
$ | |||||||
| Period Activity: | ||||||||
| Awarded |
||||||||
| Distributed |
( |
) | ||||||
| Outstanding at September 30, 2019 |
$ | |||||||
Expense associated with deferred stock unit awards was $
Stock Options
Stock options on the Company’s common stock were previously awarded from time to time to executive officers and certain key employees of the Company. Stock options granted generally had a term of to years and an exercise price equal to the market value of the underlying common stock on the date of grant. There were
| 10. |
TAXES ON INCOME |
The Company’s effective tax rate in the quarter and nine month period ended September 30, 2019 was a benefit of
The Company’s effective tax rate in the quarter and nine-month period ended September 30, 2018 was a benefit of
| 11. |
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 benefits and employment matters. At December 31, 2018, the remaining accrual relating to these matters was $
Purchase Commitments
The Company had no material purchase commitments at September 30, 2019.
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, 2019 on its Consolidated Balance Sheet.
| 12. |
SEGMENT REPORTING |
The Company has
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 and divestiture expenses and restructuring charges, if applicable.
In 2019, the Company began reporting Corporate expenses separately rather than allocating those costs to the operating segments. The reported information for the quarter and nine months ended September 30, 2018 has been revised to conform to the current period presentation.
Financial information by segment was as follows (in thousands):
| Quarters Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Revenues: |
||||||||||||||||
| Infrastructure Solutions |
$ | $ | $ | $ | ||||||||||||
| Corrosion Protection |
||||||||||||||||
| Energy Services |
||||||||||||||||
| Total revenues |
$ | $ | $ | $ | ||||||||||||
| Gross profit: |
||||||||||||||||
| Infrastructure Solutions |
$ | $ | $ | $ | ||||||||||||
| Corrosion Protection |
||||||||||||||||
| Energy Services |
||||||||||||||||
| Total gross profit |
$ | $ | $ | $ | ||||||||||||
| Operating income (loss): |
||||||||||||||||
| Infrastructure Solutions (1) |
$ | $ | $ | $ | ||||||||||||
| Corrosion Protection (2) |
( |
) | ||||||||||||||
| Energy Services |
||||||||||||||||
| Corporate (3) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total operating income |
||||||||||||||||
| Other income (expense): |
||||||||||||||||
| Interest expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Interest income |
||||||||||||||||
| Other (4) |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Total other expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Income (loss) before taxes on income |
$ | $ | ( |
) | $ | ( |
) | $ | ||||||||
| (1) |
Operating income in the third quarters of 2019 and 2018 include $ |
| (2) |
Operating income in the third quarters of 2019 and 2018 include $ |
| (3) |
Operating loss in the third quarters of 2019 and 2018 include $ |
| (4) |
Other expense in the third quarter and first nine months of 2019 includes $
|
The following table summarizes revenues and gross profit by geographic region (in thousands):
| Quarters Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2019 |
2018 |
2019 |
2018 |
|||||||||||||
| Revenues: (1) |
||||||||||||||||
| United States |
$ | $ | $ | $ | ||||||||||||
| Canada |
||||||||||||||||
| Europe |
||||||||||||||||
| Other foreign |
||||||||||||||||
| Total revenues |
$ | $ | $ | $ | ||||||||||||
| Gross profit: (1) |
||||||||||||||||
| United States |
$ | $ | $ | $ | ||||||||||||
| Canada |
||||||||||||||||
| Europe |
||||||||||||||||
| Other foreign |
||||||||||||||||
| Total gross profit |
$ | $ | $ | $ | ||||||||||||
| (1) |
Revenues and gross profit are attributed to the country of origin |
| 13. |
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 either the settlement of cash flow hedges or the outstanding hedged balance. At September 30, 2019, the Company’s cash flow hedges were in a net deferred loss position of $
The Company also engages in regular inter-company trade activities and receives royalty payments from certain of its wholly-owned entities, paid in local currency, rather than the Company’s functional currency, U.S. dollars. The Company utilizes foreign currency forward exchange contracts to mitigate the currency risk associated with the anticipated future payments from certain of its international entities. During the first nine months of 2019 and 2018, losses of $
In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $
On March 12, 2018, the Company entered into an interest rate swap forward agreement that begins in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap will require the Company to make a monthly fixed rate payment of
The following table summarizes the Company’s derivative position at September 30, 2019:
| Position |
Notional Amount |
Weighted Average Remaining Maturity In Years |
Average Exchange Rate |
|||||||||||||
| Interest Rate Swap |
— | $ | ||||||||||||||
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, 2019 |
December 31, 2018 |
||||||
| Derivatives Designated as Hedging Instruments: |
|||||||||
| Interest Rate Swaps |
Other non-current assets |
$ | $ | ||||||
| Total Assets |
$ | $ | |||||||
| Interest Rate Swaps |
Other non-current liabilities |
$ | $ | ||||||
| Total Liabilities |
$ | $ | |||||||
| Derivatives Not Designated as Hedging Instruments: |
|||||||||
| Forward Currency Contracts |
Prepaid expenses and other current assets |
$ | $ | ||||||
| Total Assets |
$ | $ | |||||||
| Forward Currency Contracts |
Accrued expenses |
$ | $ | ||||||
| Total Liabilities |
$ | $ | |||||||
| Total Derivative Assets |
$ | $ | |||||||
| Total Derivative Liabilities |
|||||||||
| Total Net Derivative Asset (Liability) |
$ | ( |
) | $ | |||||
FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value and establishes a framework for measuring and disclosing fair value instruments. 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; |
| • |
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 value of all of its derivative instruments, which are measured at fair value on a recurring basis, are derived from significant observable inputs, referred to as Level 2 inputs.
The Company had no transfers between Level 1, 2 or 3 inputs during the quarter ended September 30, 2019. 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.
| 14. | SUBSEQUENT EVENTS |
Sale of Certain Assets of Insituform Netherlands
On October 11, 2019, the Company sold its CIPP contracting operations of Insituform Netherlands to GMB Rioleringstechnieken B.V., a Dutch company (“GMB”). The CIPP contracting operations of Insituform Netherlands were part of the Company’s Infrastructure Solutions segment. The Company retained certain assets relating to the wet-out facility in The Netherlands and will continue such operation in order to provide liners in continental Europe as part of the Company’s tube manufacturing and product sales business. In connection with the sale, the Company entered into a five-year tube supply agreement whereby GMB will buy liners from the Company. During the second quarter of 2019, the Company recorded an impairment charge of $
Sale of United Mexico
On October 11, 2019, the Company sold its fifty-five percent (
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, 2018.
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, 2018 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, 2018, as filed with the Securities and Exchange Commission on March 1, 2019, 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 pipelines and other 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 and provide innovative solutions for the strengthening of buildings, bridges and other structures. We are committed to Stronger. Safer. Infrastructure®. 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 and spending, overall demand due to required infrastructure improvements in our core markets should result in a long-term stable growth opportunity for our market leading products, Insituform® CIPP, the Tyfo® system and Fusible PVC® pipe.
Corrosion Protection – Corrosion Protection is positioned to capture the benefits of continued oil and natural gas pipeline infrastructure developments across North America and internationally, as producers and midstream pipeline companies transport their product from onshore and offshore oil and gas fields to regional demand centers. The segment has a broad portfolio of technologies, products and services to protect, maintain, rehabilitate, assess and monitor pipelines from the effects of corrosion, including cathodic protection, interior pipe linings, interior and exterior pipe coatings and inspection and repair capabilities, as well as an increasing offering of data management capabilities related to these services. We provide solutions to customers to enhance the safety, environmental integrity, reliability and compliance of their pipelines in the global transmission and distribution network, especially in the oil and gas markets.
Energy Services – We offer a unique value proposition based on our world-class safety and labor productivity programs, which allow us to provide cost-effective construction, maintenance, turnaround and specialty services at customers’ refineries as well as chemical and other industrial facilities. We understand the demands and the level of critical planning required to ensure a successful turnaround or shutdown and offer a full range of services as part of our facility maintenance solutions, while maintaining a reputation for being safe, professional and providing predictable value.
In 2019, we began reporting Corporate expenses separately rather than allocating those costs to the operating segments. The reported information for the quarter and nine months ended September 30, 2018 has been revised to conform to the current period presentation.
Our Long-Term Strategy
We are committed to being a valued partner to our customers, with a constant focus on expanding those relationships by solving complex infrastructure problems, enhancing our capabilities and improving execution while also developing or acquiring innovative technologies and comprehensive services. We are pursuing three key 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 contributor to 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, primarily through internal development; and potentially, acquisitions. Our pressure pipe portfolio includes Fusible PVC®, InsituMain® CIPP, Tyfo® fiber-reinforce polymer (“FRP”) and Tite Liner® high-density polyethylene (“HDPE”) systems. As part of our pressure pipe strategy, we have continued to invest in the development of a mechanical services reinstatement for pressure pipe lateral connections. We believe this new technology will allow Aegion to become a leading provider in the North American pressure pipe rehabilitation market, with the offering currently anticipated to be ready for commercialization during the fourth quarter of 2019 or early 2020. We also are continuing to grow our third-party product sales, both domestically and internationally. Our international strategy is to use a blend of third-party product sales as well as FRP contract installation operations in select markets. 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.
Pipeline Integrity and Corrosion 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, the design and installation of cathodic protection systems to help prevent pipeline corrosion have historically represented a large portion 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 as well as upgrade how we share this valuable information with customers. Through this program, we seek to improve customer regulatory compliance and add new services in the areas of data gathering and validation, advanced analytics and predictive maintenance.
Downstream Oil Refining and Industrial Facility Maintenance – We have long-term relationships with oil refinery and industrial customers on the United States West Coast through our Energy Services segment. Our objective is to leverage those relationships to expand the services we provide in mechanical maintenance, electrical and instrumentation services, small capital construction, shutdown and turnaround maintenance activity and specialty services. We also continue to promote our safety and turnaround specialty services. There are opportunities in other industries on the West Coast such as oil and oil product terminals, chemicals, industrial gas and power to leverage our experience in maintenance and construction services. In addition, we are looking to expand our turnaround and specialty services beyond the West Coast to the Rocky Mountain region.
Business Outlook
We believe a positive commercial outlook and the progress made over the last several years to simplify and position the Company in markets with favorable scale and earnings profiles will lead to modest earnings growth in 2019, despite a projected decline in consolidated revenues due to the lack of large project contributions during the year. Longer term, we believe our core businesses can generate annual revenue growth in the low to mid-single digit range, which should result in double-digit annual earnings per share growth.
Infrastructure Solutions
One of the most attractive areas for growth is in the rehabilitation of municipal wastewater and pressure pipelines, primarily in North America. We offer a diverse portfolio of solutions in a highly fragmented and growing market. Outside North America, we also have an attractive market in Asia-Pacific for large-diameter pressure pipe strengthening, and we are continuing to pursue a strategy of growing third-party product sales around the globe. Our objective is to maintain growth and our share in a large and mature market through a continued focus on productivity and offering customer-driven solutions through technological differentiation.
Over the last few years, we completed a research and development effort that significantly reduced material and installation costs for the Tyfo® system 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. In 2019, we are focused on two key technology initiatives to serve the pressure pipe and wastewater rehabilitation business. We are in final development and field testing for a robotic system to mechanically and effectively seal the service connection between a CIPP pressurized water main line to residential lines into homes. Success with this development initiative could address a weak point in current commercially available small-diameter pressure pipe rehabilitation systems today. We also recently introduced the application of ultraviolet light technology to cure felt CIPP tubes, which has the potential to reduce the environmental and equipment footprint that is currently required for the curing process. Any new technology takes time to penetrate the market, but we believe both initiatives represent long-term growth levers for the segment.
Corrosion Protection
Over 50 percent of Corrosion Protection’s revenues come 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 continue to promote our new asset integrity management program for pipeline corrosion assessments. This new service improves data accuracy and processing efficiency, customizes the data transfer format (including geospatial mapping) and provides faster access to the information by customers. Corrosion Protection’s pipeline assessment services are expected to create a multiplier effect for our other capabilities in direct pipeline assessments, 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.
With oil prices trading in a more stable range, we have seen improved demand for our Tite Liner® lining pipeline protection system and our field pipe coatings applications, both in our North America market as well as overseas. We are focused on capturing additional opportunities in the Middle East, where we see a robust sales funnel over the next several years as national energy companies look to increase production through multiple major onshore and offshore gas and oil field development and expansion projects.
Energy Services
We expect Energy Services to continue to build on the momentum achieved in 2018 and the first half of 2019. The outlook for day-to-day downstream refinery maintenance remains robust based on long-term contracts and our position as the lead outsourced provider of maintenance services at refineries on the United States West Coast. We have an effort underway to expand our services to those customers in mechanical maintenance, turnaround services, electrical and instrumentation maintenance and small capital construction activities as well as expand beyond our current West Coast footprint to the Rocky Mountain region.
Strategic Initiatives/Divestiture
2017 Restructuring
On July 28, 2017, our board of directors approved the 2017 Restructuring. As part of the 2017 Restructuring, we announced plans 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® 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 and 2019, our 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, including: (a) our cathodic protection installation activities in the Middle East, including Corrpower International Limited, our cathodic protection materials manufacturing and production joint venture in Saudi Arabia; (b) United Pipeline de Mexico S.A. de C.V., our Tite Liner® joint venture in Mexico (“United Mexico”); (c) our Tite Liner® businesses in Brazil and Argentina; (d) Aegion South Africa Proprietary Limited, our Tite Liner® and CIPP joint venture in the Republic of South Africa; and (e) our CIPP contract installation operations in England, the Netherlands, Spain and Northern Ireland.
We divested our Bayou and Denmark CIPP businesses in 2018. Discussions are underway with a prospective buyer for the sale of the Australia CIPP business and we believe that it is probable that a sale will occur in 2019. During the second quarter of 2019, we initiated plans to exit additional international businesses, including our remaining CIPP contracting businesses in Europe: Insituform Rioolrenovatietechnicken B.V. (“Insituform Netherlands”); Insituform Technologies Iberica SA (“Insituform Spain”); and Environmental Techniques Limited (“Environmental Techniques”). With the exception of Environmental Techniques, planned divestitures and exits of all international businesses are expected to be substantially complete by December 31, 2019.
Total pre-tax 2017 Restructuring charges recorded during the first nine months of 2019 were $18.0 million ($15.1 million post-tax) and consisted of employee severance, retention, extension of benefits, employment assistance programs, early contract termination and other restructuring costs associated with the restructuring efforts described above. Total pre-tax 2017 Restructuring and related impairment charges since inception were $157.6 million ($140.9 million post-tax), including cash charges of $37.3 million and non-cash charges of $120.3 million, of which $86.4 million relates to goodwill and long-lived asset impairment charges recorded in 2017 as part of exiting the non-pipe FRP contracting market in North America.
We expect to incur additional cash charges of less than $5 million related to the 2017 Restructuring. We could also incur additional non-cash charges primarily associated with the release of cumulative currency translation adjustments and losses on the closure or liquidation of international entities. The identified charges are primarily focused in the international operations of both Infrastructure Solutions and Corrosion Protection, but will also include certain charges in Energy Services and Corporate to a lesser extent. We expect to reduce headcount by 30 employees as a result of these further actions.
Additionally, we expect to reduce our global headcount at September 30, 2019 by nearly 250 employees as a result of the planned divestitures described below.
See Notes 4 and 14 to the consolidated financial statements contained in this Report for a detailed discussion regarding our restructuring efforts.
Divestitures – Planned and Completed
Through our restructuring efforts to exit higher risk, low return markets and streamline our operations, we have divested, or planned to divest, certain businesses in our Infrastructure Solutions and Corrosion Protection segments during 2019 and 2018:
| i. | In October 2019, we sold the CIPP contracting operations of Insituform Netherlands. We retained certain assets relating to the wet-out facility in The Netherlands and will continue such operation in order to provide liners in continental Europe as part of our tube manufacturing and product sales business. In connection with the sale, we entered into a five-year tube supply agreement whereby the buyers will purchase our Insituform® CIPP liners. | |
| ii. | In October 2019, we sold our interest in United Mexico to our joint venture partner. In connection with the sale, we entered into a long-term license agreement pursuant to which United Mexico will be the exclusive licensee in Mexico with respect to certain trademarks, patents and other intellectual property relating to our pipe lining business. We further expect to enter into a long-term agreement for the supply of equipment and consumables as well as the provision of services to United Mexico. | |
| iii. | During the second quarter of 2019, we initiated plans to sell Insituform Spain and Environmental Techniques. We currently believe it is probable that a sale of Insituform Spain will occur in the fourth quarter of 2019 and a sale of Environmental Techniques will occur in early 2020. | |
| iv. |
During the third quarter of 2018, we sold substantially all of the fixed assets and inventory from our CIPP operations in Denmark. In connection with the sale, we entered into a five-year exclusive tube-supply agreement whereby the buyers will exclusively purchase our Insituform® CIPP liners. The buyers will also be entitled to use the Insituform® trade name based on a trademark license granted for the same five-year time period. |
| v. |
During the third quarter of 2018, we sold substantially all of the assets of Bayou and our ownership interest in Bayou Wasco Insulation LLC, which collectively had been held for sale as part of the 2017 Restructuring and reflected our desire to reduce further our exposure in the North American upstream oil and gas markets. |
| vi. |
During the second quarter of 2018, our board of directors approved plans to divest the assets and liabilities of our CIPP operations in Australia (“Insituform Australia”). During the second quarter of 2019, we ended our negotiations with a potential third-party acquirer and began discussions with another third party. Because of these new negotiations, we believe that it is probable that we will close a transaction in the fourth quarter of 2019. |
See Notes 1 and 5 to the consolidated financial statements contained in this Report for additional information.
Results of Operations – Quarters and Nine Month Periods Ended September 30, 2019 and 2018
Significant Events
2017 Restructuring – As part of the 2017 Restructuring, we recorded pre-tax charges of $18.0 million ($15.1 million post-tax) and $15.6 million ($14.0 million post-tax) during the first nine months of 2019 and 2018, respectively. Restructuring charges primarily impacted the Infrastructure Solutions and Corrosion Protection reportable segments. See Note 4 to the consolidated financial statements contained in this Report.
Impairment of Assets Held for Sale – During the second quarter of 2019, we recorded a loss on assets held for sale of $11.9 million based on our expectation of fair value less cost to sell. Charges impacted the Infrastructure Solutions and Corrosion Protection reportable segments.
Acquisition and Divestiture Expenses – We recorded pre-tax expenses of $2.8 million ($2.2 million post-tax) and $6.0 million ($4.5 million post-tax) during the first nine months of 2019 and 2018, respectively, related primarily to the planned divestitures of Insituform Australia, Insituform Netherlands, Insituform Spain, Environmental Techniques and United Mexico in 2019 and the Bayou divestiture and acquisitions of Hebna and P2S in 2018. Expenses primarily impacted the Infrastructure Solutions and Corrosion Protection reportable segments.
Warranty Reserve – In the first quarter of 2019, we recorded a pre-tax estimated project warranty reserve of $4.4 million ($3.3 million post-tax) related to a CIPP wastewater project in our North American operation of Infrastructure Solutions. The project was originally awarded in 2016 and construction was substantially completed during 2017. Recent inspections of the installed liners revealed structural failures due to extreme environmental conditions at the time of the installation. Replacement work is being performed during 2019 to remediate the warranty issues.
Consolidated Operating Results
Key financial data for consolidated operations was as follows:
| (dollars in thousands) |
Quarters Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ | % |
|||||||||||||
| Revenues |
$ | 308,789 | $ | 339,679 | $ | (30,890 | ) | (9.1 | )% | |||||||
| Gross profit |
66,792 | 72,673 | (5,881 | ) | (8.1 | )% | ||||||||||
| Gross profit margin |
21.6 | % | 21.4 | % | N/A | 20bp |
||||||||||
| Operating expenses |
48,866 | 51,386 | (2,520 | ) | (4.9 | )% | ||||||||||
| Goodwill impairment | — | 1,389 | (1,389 | ) | N/M | |||||||||||
| Definite-lived intangible asset impairment |
— | 870 | (870 | ) | N/M |
|||||||||||
| Acquisition and divestiture expenses |
1,842 | 4,800 | (2,958 | ) | (61.6 | )% | ||||||||||
| Restructuring and related charges |
1,435 | 1,219 | 216 | 17.7 | % | |||||||||||
| Operating income |
14,649 | 13,009 | 1,640 | 12.6 | % | |||||||||||
| Operating margin |
4.7 | % | 3.8 | % | N/A | 90bp |
||||||||||
| Net income (loss) attributable to Aegion Corporation |
6,036 | (447 | ) | 6,483 | (1450.3 | )% | ||||||||||
| (dollars in thousands) |
Nine Months Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ | % |
|||||||||||||
| Revenues |
$ | 904,433 | $ | 999,570 | $ | (95,137 | ) | (9.5 | )% | |||||||
| Gross profit |
182,524 | 205,230 | (22,706 | ) | (11.1 | )% | ||||||||||
| Gross profit margin |
20.2 | % | 20.5 | % | N/A | (30)bp |
||||||||||
| Operating expenses |
147,990 | 161,750 | (13,760 | ) | (8.5 | )% | ||||||||||
| Goodwill impairment | — | 1,389 | (1,389 | ) | N/M | |||||||||||
| Definite-lived intangible asset impairment | — | 870 | (870 | ) | N/M | |||||||||||
| Impairment of assets held for sale |
11,946 | — | 11,946 | N/M |
||||||||||||
| Acquisition and divestiture expenses |
2,759 | 6,024 | (3,265 | ) | (54.2 | )% | ||||||||||
| Restructuring and related charges |
5,495 | 4,548 | 947 | 20.8 | % | |||||||||||
| Operating income |
14,334 | 30,649 | (16,315 | ) | (53.2 | )% | ||||||||||
| Operating margin |
1.6 | % | 3.1 | % | N/A | (150)bp |
||||||||||
| Net income (loss) attributable to Aegion Corporation |
(6,331 | ) | 5,405 | (11,736 | ) | (217.1 | )% | |||||||||
“N/A” represents not applicable.
“N/M” represents not meaningful.
Revenues
Revenues decreased $30.9 million, or 9.1%, in the third quarter of 2019 compared to the third quarter of 2018. The decrease in revenues was due to a $29.7 million decrease in Corrosion Protection primarily from lower revenues in our Middle East coating services operation due to the absence of large coatings projects in 2019 and the sale of our pipe coating and insulation operation in 2018, and a $1.6 million decrease in Energy Services due to lower construction activities partially offset by higher maintenance activity. Partially offsetting these decreases was a $0.4 million increase in Infrastructure Solutions primarily due to increased North American revenues from CIPP contracting installation services and FRP projects.
Revenues decreased $95.1 million, or 9.5%, in the first nine months of 2019 compared to the first nine months of 2018. The decrease in revenues was due to: (i) a $82.1 million decrease in Corrosion Protection, driven by the sale of our pipe coating and insulation operation in 2018 and lower revenues in our Middle East coating services operation due to the absence of large coatings projects in 2019; (ii) a $7.8 million decrease in Infrastructure Solutions from lower international revenues from our CIPP contracting installation services operations as we exit certain international markets and decreased Fusible PVC® project activity; and (iii) a $5.2 million decrease in Energy Services mainly due to decreased turnaround and construction services activities.
Gross Profit and Gross Profit Margin
Gross profit decreased $5.9 million, or 8.1%, in the third quarter of 2019 compared to the third quarter of 2018. As part of our restructuring efforts, we recognized charges of $0.7 million in the third quarter of 2018. Excluding restructuring charges, gross profit decreased $6.6 million, or 9.0%, in the third quarter of 2019 compared to the third quarter of 2018. The decrease in gross profit was due to a $9.8 million decrease in Corrosion Protection primarily from lower gross margins associated with our Middle East coating services operation as larger projects were completed in the prior year and lower revenues and gross profit associated with our North American cathodic protection operations. Partially offsetting this decrease was: (i) a $1.9 million increase in Energy Services mainly due to higher revenues associated with maintenance service activities and an improved mix of higher margin services; and (ii) a $1.3 million increase in Infrastructure Solutions primarily due to improved productivity related to CIPP contracting installation services activity in our North American operation and loss avoidance from the divestiture of the Denmark CIPP operation in 2018.
Gross profit margin improved 20 basis points to 21.6% in the third quarter of 2019 from 21.4% in the third quarter of 2018. Excluding restructuring charges, gross profit margin remained consistent at 21.6% in the third quarters of 2019 and 2018. Infrastructure Solutions gross profit margin improved 70 basis points due to productivity improvements in North American CIPP contracting activity and loss avoidance from Denmark noted above. Energy Services also improved 260 basis points due to higher margins on maintenance services in the current year combined with the negative prior year impact of performance issues on one large construction services project. Offsetting these improvements was a 280 basis point decrease in gross profit margin in Corrosion Protection primarily from lower gross margins associated with our Middle East coating services operation.
Gross profit decreased $22.7 million, or 11.1%, and gross profit margin declined 30 basis points in the first nine months of 2019 compared to the first nine months of 2018. As part of our restructuring efforts, we recognized charges of $0.4 million and $0.7 million in the first nine months of 2019 and 2018, respectively. Also during the first nine months of 2019, we recorded a $4.4 million charge for estimated project warranty costs in Infrastructure Solutions. Excluding restructuring charges and warranty costs, gross profit decreased $18.5 million, or 9.0%, but gross profit margin improved 10 basis points in the first nine months of 2019 compared to the same period in the prior year. The decrease in gross profit was due to a $27.7 million decrease in Corrosion Protection driven by decreased gross profit from our divested pipe coating and insulation operation and lower gross profit from our Middle East coating services operation. Offsetting the decreases was: (i) an $8.4 million increase in Infrastructure Solutions primarily due to greater execution efficiencies related to CIPP contracting installation services activity in our North American operation and loss avoidance due to the divestiture of Denmark in 2018; and (ii) a $0.8 million increase in Energy Services primarily from higher revenues associated with maintenance service activities. Gross profit margin increased primarily due to the improvements noted in Infrastructure Solutions.
Operating Expenses
Operating expenses decreased $2.5 million, or 4.9%, in the third quarter of 2019 compared to the third quarter of 2018. As part of our restructuring efforts, we recognized charges of $1.9 million and $3.0 million in the third quarters of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses decreased $1.4 million, or 2.8%, in the third quarter of 2019 compared to the third quarter of 2018. The decrease in operating expenses was due to a $2.0 million decrease in Corrosion Protection primarily due to our divested pipe coating and insulation operation and cost savings achieved in connection with our 2017 Restructuring actions. Partially offsetting this decrease was a $0.3 million increase in Infrastructure Solutions primarily from increased costs to support the growth of and technology investments in our North American CIPP operation and increased incentive compensation expense.
Operating expenses as a percentage of revenues were 15.8% in the third quarter of 2019 compared to 15.1% in the third quarter of 2018. Excluding restructuring charges, operating expenses as a percentage of revenues were 15.2% in the third quarter of 2019 compared to 14.2% in the third quarter of 2018, primarily due to decreased revenues from Corrosion Protection as noted above.
Operating expenses decreased $13.8 million, or 8.5%, in the first nine months of 2019 compared to the first nine months of 2018. As part of our restructuring efforts, we recognized charges of $5.6 million and $7.8 million in the first nine months of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses decreased $11.6 million, or 7.5%, in the first nine months of 2019 compared to the same period in the prior year. The decrease in operating expenses was due to cost savings in all platforms. Corrosion Protection decreased $7.0 million due to the same factors as noted above. Infrastructure Solutions decreased $2.6 million due to exiting CIPP contracting installation services in certain international locations in Europe and Asia, and achieved cost savings in North America. Energy Services decreased $0.8 million primarily due to lower variable costs associated with decreased turnaround and construction activity as well as higher prior year costs to support the labor transitions at refineries to comply with labor laws in California. Corporate expenses were reduced by $1.1 million from decreased spending and other cost reduction initiatives and lower medical and prescription drug expenses as a result of improved claims history and changes to the structure of our medical plan to reduce costs.
Operating expenses as a percentage of revenues were 16.4% in the first nine months of 2019 compared to 16.2% in the first nine months of 2018. Excluding restructuring charges, operating expenses as a percentage of revenues were 15.7% in the first nine months of 2019 compared to 15.4% in the comparable prior year period.
Consolidated Net Income (Loss)
Consolidated net income was $6.0 million in the third quarter of 2019 compared to a loss of $0.4 million in the third quarter of 2018.
Included in consolidated net income (loss) were the following pre-tax items: (i) restructuring charges of $8.6 million and $5.1 million in the third quarters of 2019 and 2018, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down costs, release of cumulative currency translation adjustments and other related restructuring costs; (ii) goodwill impairment charges of $1.4 million in the third quarter of 2018; (iii) definite-lived intangible asset impairment charges of $0.9 million in the third quarter of 2018; (iv) acquisition and divestiture expenses of $1.8 million and $4.8 million in the third quarters of 2019 and 2018, respectively; and (v) an $8.7 million loss on the sale of Bayou in the third quarter of 2018.
Excluding the after-tax effect of the above items, consolidated net income was $12.5 million in the third quarter of 2019, a decrease of $2.4 million, or 16.2%, from $14.9 million in the third quarter of 2018. The decrease was primarily due to lower operating income in Corrosion Protection due to lower contributions from the high-margin, large projects in our Middle East coating services operation in 2018 and lower revenues and gross profit associated with our North American cathodic protection operations in 2019. Partially offsetting the decrease in consolidated net income was: (i) increased maintenance service activities and an improved mix of higher margin services at Energy Services; (ii) increased contributions from Infrastructure Solutions related to higher profitability from our North American CIPP operation and loss avoidance from the Denmark sale in 2018; and (iii) a lower effective income tax rate due to positive return-to-provision true-ups in the third quarter of 2019. Consolidated net income in the third quarter of 2019, as compared to the third quarter of 2018, was also positively impacted by lower interest expense and fewer charges related to foreign currency transaction losses.
Consolidated net loss was $6.3 million in the first nine months of 2019, a decrease of $11.7 million from net income of $5.4 million in the first nine months of 2018.
Included in consolidated net income (loss) were the following pre-tax items; (i) restructuring charges of $18.0 million and $13.3 million in the first nine months of 2019 and 2018, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down costs, release of cumulative currency translation adjustments and other related restructuring costs; (ii) goodwill impairment charges of $1.4 million in the first nine months of 2018; (iii) definite-lived intangible asset impairment charges of $0.9 million in the first nine months of 2018; (iv) acquisition and divestiture expenses of $2.8 million and $6.0 million in the first nine months of 2019 and 2018, respectively; (v) warranty reserve charges of $4.4 million related to a CIPP wastewater project in our North American operation of Infrastructure Solutions in the first nine months of 2019; (vi) impairment charges of $11.9 million related to assets held for sale in the first nine months of 2019; (vii) credit facility amendment fees of $1.8 million in the first nine months of 2018; and (viii) an $8.7 million loss on the sale of Bayou in the first nine months of 2018.
Excluding the after-tax effect of the above items, consolidated net income was $26.1 million for the nine months ended September 30, 2019, a decrease of $4.0 million, or 13.4%, from $30.2 million during the first nine months of 2018. This decrease was due to lower operating income in Corrosion Protection, as noted in the quarterly variance discussion above. Partially offsetting this decrease was an increase in operating income related to Infrastructure Solutions and Energy Services, as noted above, and decreased spending at Corporate. Consolidated net income in the first nine months of 2019, as compared to the first nine months of 2018, was also positively impacted by lower interest expense and fewer charges related to foreign currency transaction losses, but was negatively impacted by higher non-controlling interest income and a slightly higher income tax rate due to discrete benefits recorded in the prior year period.
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.
The following table sets forth our consolidated backlog by segment (in millions):
| September 30, 2019 |
June 30, 2019 |
December 31, 2018 |
September 30, 2018 |
|||||||||||||
| Infrastructure Solutions (1) | $ | 329.6 | $ | 310.0 | $ | 323.3 | $ | 343.0 | ||||||||
| Corrosion Protection (2) | 139.8 | 141.4 | 127.9 | 136.7 | ||||||||||||
| Energy Services | 213.4 | 218.5 | 218.2 | 191.0 | ||||||||||||
| Total backlog (3) |
$ | 682.8 | $ | 669.9 | $ | 669.4 | $ | 670.7 | ||||||||
| (1) |
Included backlog from exited or to-be exited operations of $18.7 million, $19.0 million, $32.3 million and $29.2 million at September 30, 2019, June 30, 2019, December 31, 2018 and September 30, 2018, respectively. |
| (2) |
Included backlog from exited or to-be exited operations of $5.0 million, $7.1 million, $11.6 million and $11.4 million at September 30, 2019, June 30, 2019, December 31, 2018 and September 30, 2018, respectively. |
| (3) |
Total backlog for September 30, 2019, June 30, 2019, December 31, 2018 and September 30, 2018 included backlog from exited or to-be exited operations of $23.7 million, $26.1 million, $43.9 million and $40.6 million, respectively. |
Included within backlog for Energy Services are amounts that represent expected 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. Although backlog represents only those contracts and 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.
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, 2019, 21.1% of our Corrosion Protection backlog related to these variable interest entities. The backlog related to variable interest entities in Infrastructure Solutions was de minimus. 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 $23.3 million, or 7.8%, to $321.7 million in the third quarter of 2019 compared to $298.4 million in the third quarter of 2018. New orders decreased $85.6 million, or 8.5%, to $917.8 million in the nine months ended September 30, 2019 compared to $1,003.4 million in the nine months ended September 30, 2018.
Infrastructure Solutions Segment
Key financial data for Infrastructure Solutions was as follows:
| (dollars in thousands) |
Quarters Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ | % |
|||||||||||||
| Revenues |
$ | 156,087 | $ | 155,681 | $ | 406 | 0.3 | % | ||||||||
| Gross profit |
39,569 | 38,135 | 1,434 | 3.8 | % | |||||||||||
| Gross profit margin |
25.4 | % | 24.5 | % | N/A | 90bp |
||||||||||
| Operating expenses |
20,201 | 21,479 | (1,278 | ) | (5.9 | )% | ||||||||||
| Goodwill impairment | — | 1,389 | (1,389 | ) | N/M | |||||||||||
| Definite-lived intangible asset impairment |
— | 870 | (870 | ) | N/M |
|||||||||||
| Acquisition and divestiture expenses |
502 | 125 | 377 | 301.6 | % | |||||||||||
| Restructuring and related charges |
490 | 1,184 | (694 | ) | (58.6 | )% | ||||||||||
| Operating income |
18,376 | 13,088 | 5,288 | 40.4 | % | |||||||||||
| Operating margin |
11.8 | % | 8.4 | % | N/A | 340bp |
||||||||||
| (dollars in thousands) |
Nine Months Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ | % |
|||||||||||||
| Revenues |
$ | 443,069 | $ | 450,840 | $ | (7,771 | ) | (1.7 | )% | |||||||
| Gross profit |
105,026 | 100,793 | 4,233 | 4.2 | % | |||||||||||
| Gross profit margin |
23.7 | % | 22.4 | % | N/A | 130bp |
||||||||||
| Operating expenses |
60,109 | 65,052 | (4,943 | ) | (7.6 | )% | ||||||||||
| Goodwill impairment | — | 1,389 | (1,389 | ) | N/M | |||||||||||
| Definite-lived intangible asset impairment | — | 870 | (870 | ) | N/M | |||||||||||
| Impairment of assets held for sale |
8,996 | — | 8,996 | N/M |
||||||||||||
| Acquisition and divestiture expenses |
1,003 | 365 | 638 | 174.8 | % | |||||||||||
| Restructuring and related charges |
1,707 | 3,876 | (2,169 | ) | (56.0 | )% | ||||||||||
| Operating income |
33,211 | 29,241 | 3,970 | 13.6 | % | |||||||||||
| Operating margin |
7.5 | % | 6.5 | % | N/A | 100bp |
||||||||||
“N/A” represents not applicable.
“N/M” represents not meaningful.
Revenues
Revenues increased $0.4 million, or 0.3%, in the third quarter of 2019 compared to the third quarter of 2018. The increase in revenues was primarily due to increased North American activity for CIPP contracting installation services and FRP projects, partially offset by decreased international revenues from our CIPP contracting installation services operations as we exit or divest non-core operations as part of the 2017 Restructuring and decreased Fusible PVC® project activity in our North American operation.
Revenues decreased $7.8 million, or 1.7%, in the first nine months of 2019 compared to the first nine months of 2018. The decrease in revenues was primarily due to: (i) decreased international revenues from our CIPP contracting installation services operations as discussed above; and (ii) decreased Fusible PVC® project activity in our North American operation following a strong comparable period in the prior year. Partially offsetting the decrease in revenues was an increase in FRP project activity in our North American operation and CIPP contracting installation services activity in North America as a result of improved crew productivity.
Gross Profit and Gross Profit Margin
Gross profit increased $1.4 million, or 3.8%, in the third quarter of 2019 compared to the third quarter of 2018. The increase in gross profit was primarily due to: (i) greater execution efficiencies related to CIPP contracting installation services activity in our North American operation; and (ii) loss avoidance due to the divestiture of Denmark in 2018. Partially offsetting the increases were decreased contributions from our exited international CIPP contracting installation services operations and lower revenues and resulting gross profit from Fusible PVC® activity. Gross profit margin improved 90 basis points in the third quarter of 2019 compared to the third quarter of 2018 mainly due to the same factors that improved gross profit above.
Gross profit increased $4.2 million, or 4.2%, and gross profit margin improved 130 basis points in the first nine months of 2019 compared to the first nine months of 2018. During the first nine months of 2019, we recorded a $4.4 million charge for estimated project warranty costs related to one CIPP contracting installation project in our North American operation. Excluding this charge, gross profit increased $8.4 million, or 8.3%, in the first nine months of 2019 compared to the first nine months of 2018. The increases in gross profit and gross profit margin were primarily due to the same factors impacting the changes in gross profit in the third quarter of 2019 compared to the third quarter of 2018.
Operating Expenses
Operating expenses decreased $1.3 million, or 5.9%, in the third quarter of 2019 compared to the third quarter of 2018. As part of our restructuring efforts, we recognized charges of $0.7 million and $2.3 million in the third quarters of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses increased $0.3 million, or 1.6%, in the third quarter of 2019 compared to the third quarter of 2018. The increase in operating expenses was primarily due to increased costs to support the growth of and technology investments in our North American CIPP operation, partially offset by exiting CIPP contracting installation services in certain international locations in Europe and Asia, and achieved cost savings in North America in connection with our 2017 Restructuring actions.
Operating expenses as a percentage of revenues were 12.9% in the third quarter of 2019 compared to 13.8% in the third quarter of 2018. Excluding restructuring charges, operating expenses as a percentage of revenues were 12.5% in the third quarter of 2019 compared to 12.3% in the third quarter of 2018.
Operating expenses decreased $4.9 million, or 7.6%, in the first nine months of 2019 compared to the first nine months of 2018. As part of our restructuring efforts, we recognized charges of $3.1 million and $5.4 million in the first nine months of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses decreased $2.6 million, or 4.4%, in the first nine months of 2019 compared to the first nine months of 2018. The decrease in operating expenses was primarily due to exiting CIPP contracting installation services in certain international locations in Europe and Asia, and achieved cost savings in North America in connection with our 2017 Restructuring actions. These decreases were partially offset by increased costs to support the growth of our North American CIPP operation.
Operating expenses as a percentage of revenues were 13.6% for the first nine months of 2019 compared to 14.4% in the first nine months of 2018. Excluding restructuring charges, operating expenses as a percentage of revenues were 12.9% in the first nine months of 2019 compared to 13.2% in the first nine months of 2018.
Operating Income and Operating Margin
Operating income increased $5.3 million, or 40.4%, to $18.4 million in the third quarter of 2019 compared to $13.1 million in the third quarter of 2018. Operating margin improved to 11.8% in the third quarter of 2019 compared to 8.4% in the third quarter of 2018.
Included in operating income are the following items: (i) restructuring charges of $1.2 million and $3.8 million in the third quarters of 2019 and 2018, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs; (ii) goodwill impairment charges of $1.4 million in the third quarter of 2018; (iii) definite-lived intangible asset impairment charges of $0.9 million in the third quarter of 2018; and (iv) acquisition and divestiture related expenses of $0.5 million and $0.1 million in the third quarters of 2019 and 2018, respectively.
Excluding the above items, operating income increased $1.0 million, or 5.0%, to $20.1 million in the third quarter of 2019 compared to $19.1 million in the third quarter of 2018, and operating margin improved 60 basis points to 12.9% in the third quarter of 2019 compared to 12.3% in the third quarter of 2018. Operating income increased primarily due to: (i) improved profitability from our North American CIPP operation due to crew productivity improvement; and (ii) loss avoidance from the divestiture of Denmark in 2018. These increases were partially offset by decreased profitability from Fusible PVC® project activity in our North American operation.
Operating income increased $4.0 million, or 13.6%, to $33.2 million in the first nine months of 2019 compared to $29.2 million in the first nine months of 2018. Operating margin increased 100 basis points to 7.5% in the first nine months of 2019 compared to 6.5% in the first nine months of 2018.
Included in operating income are the following items: (i) restructuring charges of $4.7 million and $9.4 million in the first nine months of 2019 and 2018, respectively; (ii) goodwill impairment charges of $1.4 million in the first nine months of 2018; (iii) definite-lived intangible asset impairment charges of $0.9 million in the first nine months of 2018; (iv) acquisition and divestiture related expenses of $1.0 million and $0.4 million in the first nine months of 2019 and 2018, respectively; (v) a $4.4 million charge in the first nine months of 2019 for estimated project warranty costs related to one CIPP contracting installation project in our North American operation; and (vi) impairment charges of $9.0 million in the first nine months of 2019 related to assets held for sale.
Excluding the above items, operating income increased $11.0 million, or 26.7%, to $52.3 million in the first nine months of 2019 compared to $41.3 million in the first nine months of 2018. Operating margin increased 260 basis points to 11.8% for the nine months ended September 30, 2019 compared to 9.2% for the nine months ended September 30, 2018. The increase in operating income was primarily due to the same factors impacting the improvement in operating income in the third quarter of 2019 compared to the third quarter of 2018.
Corrosion Protection Segment
Key financial data for Corrosion Protection was as follows:
| (dollars in thousands) |
Quarters Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ |
% |
|||||||||||||
| Revenues |
$ | 75,901 | $ | 105,624 | $ | (29,723 | ) | (28.1 | )% | |||||||
| Gross profit |
17,232 | 26,411 | (9,179 | ) | (34.8 | )% | ||||||||||
| Gross profit margin |
22.7 | % | 25.0 | % | N/A | (230)bp |
||||||||||
| Operating expenses |
14,348 | 16,466 | (2,118 | ) | (12.9 | )% | ||||||||||
| Acquisition and divestiture expenses |
67 | 1,611 | (1,544 | ) | (95.8 | )% | ||||||||||
| Restructuring and related charges |
455 | 35 | 420 | 1200.0 | % | |||||||||||
| Operating income |
2,362 | 8,299 | (5,937 | ) | (71.5 | )% | ||||||||||
| Operating margin |
3.1 | % | 7.9 | % | N/A | (480)bp |
||||||||||
| (dollars in thousands) |
Nine Months Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ |
% |
|||||||||||||
| Revenues |
$ | 217,996 | $ | 300,118 | $ | (82,122 | ) | (27.4 | )% | |||||||
| Gross profit |
46,797 | 74,524 | (27,727 | ) | (37.2 | )% | ||||||||||
| Gross profit margin |
21.5 | % | 24.8 | % | N/A | (330)bp |
||||||||||
| Operating expenses |
43,832 | 52,181 | (8,349 | ) | (16.0 | )% | ||||||||||
| Impairment of assets held for sale |
2,950 | — | 2,950 | N/M |
||||||||||||
| Acquisition and divestiture expenses |
125 | 1,777 | (1,652 | ) | (93.0 | )% | ||||||||||
| Restructuring and related charges |
3,151 | 352 | 2,799 | 795.2 | % | |||||||||||
| Operating income (loss) |
(3,261 | ) | 20,214 | (23,475 | ) | (116.1 | )% | |||||||||
| Operating margin |
(1.5 | )% | 6.7 | % | N/A | (820)bp |
||||||||||
“N/A” represents not applicable.
“N/M” represents not meaningful.
Revenues
Revenues decreased $29.7 million, or 28.1%, in the third quarter of 2019 compared to the third quarter of 2018. The decrease was primarily due to: (i) a $8.5 million decrease in revenues related to our pipe coating and insulation operation, which was divested in the third quarter of 2018; (ii) decreased revenue from our coating services operation, which benefited in the third quarter of 2018 from large project activity in the Middle East; (iii) decreased project activities in our North American cathodic protection operations, primarily in Canada; and (iv) decreased international revenues from certain international industrial linings and cathodic protection operations as we exit or divest non-core operations as part of the 2017 Restructuring.
Revenues decreased $82.1 million, or 27.4%, in the first nine months of 2019 compared to the first nine months of 2018. The decrease was primarily due to the same factors impacting the changes in the third quarter of 2019 compared to the third quarter of 2018. The decrease in revenues related to our divested pipe coating and insulation operation was $26.3 million.
Gross Profit and Gross Profit Margin
Gross profit decreased $9.2 million, or 34.8%, and gross profit margin declined 230 basis points in the third quarter of 2019 compared to the third quarter of 2018. As part of our restructuring efforts, we recognized charges of $0.6 million in the third quarter of 2018. Excluding restructuring charges, gross profit decreased $9.8 million, or 36.1%, in the third quarter of 2019 compared to the third quarter of 2018 primarily due to: (i) a $0.3 million decrease in gross profit related to our divested pipe coating and insulation operation; (ii) lower revenues and gross margins associated with our coating services operation, most notably in the Middle East, as larger projects contributing to the prior year results were completed; and (iii) lower revenues and gross profit associated with our Canadian cathodic protection operations as noted above.
Gross profit decreased $27.7 million, or 37.2%, and gross profit margin declined 330 basis points in the first nine months of 2019 compared to the first nine months of 2018. As part of our restructuring efforts, we recognized charges of $0.6 million in each of the first nine months of 2019 and 2018. The decrease in gross profit was primarily due to: (i) a $5.0 million decrease in gross profit related to our divested pipe coating and insulation operation; (ii) lower revenues and gross margins associated with our coating services operation, as noted above; (iii) lower revenues and gross profit associated with our Canadian cathodic protection operations; and (iv) decreased gross profit from certain international industrial linings and cathodic protection operations as we exit or divest non-core operations as part of the 2017 Restructuring. Gross profit and gross profit margin were also negatively impacted by our U.S. cathodic protection operations, which experienced lower revenues, project delays and other inefficiencies, but was more than offset by increased revenues and strong operational performance from the U.S. and Middle East industrial linings operations.
Operating Expenses
Operating expenses decreased $2.1 million, or 12.9%, in the third quarter of 2019 compared to the third quarter of 2018. As part of our restructuring efforts, we recognized charges of $0.3 million and $0.4 million in the third quarters of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses decreased $2.0 million, or 12.5%, in the third quarter of 2019 compared to the third quarter of 2018. Operating expenses decreased primarily due to: (i) a $0.9 million decrease related to our divested pipe coating and insulation operation; (ii) cost savings achieved in connection with our 2017 Restructuring actions; and (iii) lower incentive compensation expense.
Operating expenses as a percentage of revenues were 18.9% in the third quarter of 2019 compared to 15.6% in the third quarter of 2018. Excluding restructuring charges, operating expenses as a percentage of revenues were 18.5% in the third quarter of 2019 compared to 15.2% in the third quarter of 2018. The increase, as a percentage of revenues, was primarily driven by the lower revenues generated from our coating services operation during the third quarter of 2019 as compared to the same period in 2018.
Operating expenses decreased $8.3 million, or 16.0%, in the first nine months of 2019 compared to the first nine months of 2018. As part of our restructuring efforts, we recognized charges of $0.6 million and $1.9 million in the first nine months of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses decreased $7.0 million, or 14.0%, in the first nine months of 2019 compared to the first nine months of 2018. Operating expenses decreased mainly due to the same factors impacting the changes in operating expenses in the third quarter of 2019 compared to the third quarter of 2018. Operating expenses as a percentage of revenues were 20.1% in the first nine months of 2019 compared to 17.4% in the first nine months of 2018. Excluding restructuring charges, operating expenses as a percentage of revenues were 19.8% in the first nine months of 2019 compared to 16.8% in the first nine months of 2018. The increase, as a percentage of revenues, was primarily driven by the lower revenues generated from our coating services operation, as noted above.
Operating Income (Loss) and Operating Margin
Operating income decreased $5.9 million to $2.4 million in the third quarter of 2019 compared $8.3 million in the third quarter of 2018. Operating margin declined to 3.1% in the third quarter of 2019 compared to 7.9% in the third quarter of 2018. Included in operating income are: (i) restructuring charges of $0.8 million and $1.0 million in the third quarters of 2019 and 2018, 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 $0.1 million in the third quarter of 2019 and $1.6 million in the third quarter of 2018.
Excluding the above items, operating income decreased $7.7 million to $3.2 million in the third quarter of 2019 compared to $10.9 million in the third quarter of 2018 and operating margin declined to 4.2% in the third quarter of 2019 compared to 10.4% in the third quarter of 2018. The decreases in operating income and operating margin were primarily the result of: (i) lower revenues and related gross profit generated from our coating service operation in the Middle East; (ii) lower revenues and gross profit associated with our North American cathodic protection operations; and (iii) decreased contributions from certain international industrial linings and cathodic protection operations as we exit or divest non-core operations as part of the 2017 Restructuring. These decreases were partially offset by increased revenues and strong operational performance from the U.S. and Middle East industrial linings operations.
Operating income decreased $23.5 million to a loss of $3.3 million in the first nine months of 2019 compared to income of $20.2 million in the first nine months of 2018. Operating margin declined to (1.5)% in the first nine months of 2019 compared to 6.7% in the first nine months of 2018. Included in operating income (loss) are: (i) restructuring charges of $4.3 million and $2.8 million in the first nine months of 2019 and 2018, respectively; (ii) acquisition and divestiture related expenses of $0.1 million and $1.8 million in the first nine months of 2019 and 2018, respectively; and (iii) impairment charges of $3.0 million in the nine months ended September 30, 2019 related to assets held for sale.
Excluding the above items, operating income decreased $20.7 million, or 83.4%, to $4.1 million in the first nine months of 2019 compared to $24.8 million in the first nine months of 2018, and operating margin declined to 1.9% in the first nine months of 2019 compared to 8.3% in the first nine months of 2018. The decreases in operating income and operating margin were primarily the result of: (i) lower revenues and related gross profit generated from our coating service operation in the Middle East; (ii) lower revenues and decreased project performance in our North American cathodic protection operations; (iii) decreased contributions from certain international industrial linings and cathodic protection operations as we exit or divest non-core operations as part of the 2017 Restructuring; and (iv) a $1.0 million decrease in operating income related to our divested pipe coating and insulation operation. These decreases were partially offset by increased revenues and strong operational performance from the U.S. and Middle East industrial linings operations.
Energy Services Segment
Key financial data for Energy Services was as follows:
| (dollars in thousands) |
Quarters Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ |
% |
|||||||||||||
| Revenues |
$ | 76,801 | $ | 78,374 | $ | (1,573 | ) | (2.0 | )% | |||||||
| Gross profit |
9,991 | 8,127 | 1,864 | 22.9 | % | |||||||||||
| Gross profit margin |
13.0 | % | 10.4 | % | N/A | 260bp |
||||||||||
| Operating expenses |
7,660 | 7,671 | (11 | ) | (0.1 | )% | ||||||||||
| Restructuring and related charges |
74 | — | 74 | N/M |
||||||||||||
| Operating income |
2,257 | 456 | 1,801 | 395.0 | % | |||||||||||
| Operating margin |
2.9 | % | 0.6 | % | N/A | 230bp |
||||||||||
| (dollars in thousands) |
Nine Months Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ |
% |
|||||||||||||
| Revenues |
$ | 243,368 | $ | 248,612 | $ | (5,244 | ) | (2.1 | )% | |||||||
| Gross profit |
30,701 | 29,913 | 788 | 2.6 | % | |||||||||||
| Gross profit margin |
12.6 | % | 12.0 | % | N/A | 60bp |
||||||||||
| Operating expenses |
23,108 | 23,832 | (724 | ) | (3.0 | )% | ||||||||||
| Restructuring and related charges |
114 | — | 114 | N/M |
||||||||||||
| Operating income |
7,479 | 6,081 | 1,398 | 23.0 | % | |||||||||||
| Operating margin |
3.1 | % | 2.4 | % | N/A | 70bp |
||||||||||
“N/A” represents not applicable.
“N/M” represents not meaningful.
Revenues
Revenues decreased $1.6 million, or 2.0%, in the third quarter of 2019 compared to the third quarter of 2018. The decrease was due to lower construction activity in the current year period from a more selective project bidding process. This decrease was partially offset by a higher volume of maintenance services activity and increased labor rates at refineries that were transitioned last year to comply with California labor laws. Revenues from turnaround services also improved slightly in the third quarter of 2019 compared to the third quarter of 2018.
Revenues decreased $5.2 million, or 2.1%, in the first nine months of 2019 compared to the first nine months of 2018. The decrease was due primarily to lower turnaround and construction activities compared to the record revenues achieved in the prior year period. These decreases were partially offset by a higher volume of maintenance services activity as described above.
Gross Profit and Gross Profit Margin
Gross profit increased $1.9 million, or 22.9%, in the third quarter of 2019 compared to the third quarter of 2018 and gross profit margin improved 260 basis points in the third quarter of 2019 compared to the third quarter of 2018. The increases in gross profit and gross profit margin were primarily due to higher revenues associated with maintenance service activities and an improved mix of higher margin services. Also, gross profit and gross profit margin during the third quarter of 2018 was negatively impacted by project performance issues on one large construction services project.
Gross profit increased $0.8 million, or 2.6%, and gross profit margin improved 60 basis points in the first nine months of 2019 compared to the first nine months of 2018. The increases in gross profit and gross profit margin were primarily due to the same factors impacting the changes in the third quarter of 2019. In addition, despite lower revenues from turnaround services, gross profit margin associated with these services improved from the prior year period due to increased project efficiencies.
Operating Expenses
Operating expenses in the third quarter of 2019 were consistent as compared to the third quarter of 2018. Operating expenses as a percentage of revenues were 10.0% in the third quarter of 2019 compared to 9.8% in the third quarter of 2018 primarily due to the decrease in revenues noted above.
Operating expenses in the first nine months of 2019 decreased $0.7 million, or 3.0%, compared to the first nine months of 2018. The decrease was primarily due to lower variable costs associated with decreased turnaround and construction activity as well as higher prior year costs to support the labor transitions at refineries to comply with labor laws in California. Operating expenses as a percentage of revenues were 9.5% in the first nine months of 2019 compared to 9.6% in the first nine months of 2018.
Operating Income and Operating Margin
Operating income increased $1.8 million, or 395.0%, to $2.3 million in the third quarter of 2019 compared to $0.5 million in the third quarter of 2018, primarily due to the increased maintenance activities and improved gross profit margins discussed above. Operating margin improved to 2.9% in the third quarter of 2019 compared to 0.6% in the third quarter of 2018.
Operating income increased $1.4 million, or 23.0%, to $7.5 million in the first nine months of 2019 compared to $6.1 million in the first nine months of 2018. Operating margin improved to 3.1% in the first nine months of 2019 compared to 2.4% in the first nine months of 2018. The increases in operating income and operating margin were driven by increased maintenance services activities, improved gross profit margins and lower operating expenses discussed above.
Corporate
Key financial data for Corporate was as follows:
| (dollars in thousands) |
Quarter Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ |
% |
|||||||||||||
| Revenues |
$ | — | $ | — | $ | — | — | % | ||||||||
| Gross profit |
— | — | — | — | ||||||||||||
| Gross profit margin |
N/A | N/A | N/A | N/A | ||||||||||||
| Operating expenses |
6,657 | 5,770 | 887 | 15.4 | % | |||||||||||
| Acquisition and divestiture expenses |
1,273 | 3,064 | (1,791 | ) | (58.5 | )% | ||||||||||
| Restructuring and related charges |
416 | — | 416 | N/M |
||||||||||||
| Operating loss |
(8,346 | ) | (8,834 | ) | 488 | (5.5 | )% | |||||||||
| Operating margin |
N/A | N/A | N/A | N/A | ||||||||||||
| (dollars in thousands) |
Nine Months Ended September 30, |
Increase (Decrease) |
||||||||||||||
| 2019 |
2018 |
$ |
% |
|||||||||||||
| Revenues |
$ | — | $ | — | $ | — | — | % | ||||||||
| Gross profit |
— | — | — | — | ||||||||||||
| Gross profit margin |
N/A | N/A | N/A | N/A | ||||||||||||
| Operating expenses |
20,941 | 20,685 | 256 | 1.2 | % | |||||||||||
| Acquisition and divestiture expenses |
1,631 | 3,882 | (2,251 | ) | (58.0 | )% | ||||||||||
| Restructuring and related charges |
523 | 320 | 203 | 63.4 | % | |||||||||||
| Operating loss |
(23,095 | ) | (24,887 | ) | 1,792 | (7.2 | )% | |||||||||
| Operating margin |
N/A | N/A | N/A | N/A | ||||||||||||
“N/A” represents not applicable.
Operating Expenses
Operating expenses increased $0.9 million, or 15.4%, in the third quarter of 2019 compared to the third quarter of 2018. As part of our restructuring efforts, we recognized charges of $0.7 million and $0.3 million in the third quarters of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses increased $0.4 million, or 7.6%, in the third quarter of 2019 compared to the third quarter of 2018. This increase was primarily due to higher incentive compensation expense, partially offset by cost reduction initiatives and lower medical and prescription drug expenses as a result of improved claims history and changes to the structure of our medical plan to reduce costs. Corporate operating expenses as a percentage of consolidated revenues were 2.2% in the third quarter of 2019 compared to 1.7% in the third quarter of 2018.
Operating expenses in the first nine months of 2019 increased $0.3 million, or 1.2% compared to the first nine months of 2018. As part of our restructuring efforts, we recognized charges of $1.9 million and $0.6 million in the first nine months of 2019 and 2018, respectively. Excluding restructuring charges, operating expenses decreased $1.1 million, or 5.6%, in the first nine months of 2019 compared to the same period in 2018. The decrease in operating expenses was primarily due to reduced spending and other cost reduction initiatives as a result of the 2017 Restructuring and lower medical and prescription drug expenses described above, partially offset by higher incentive compensation expense. Corporate operating expenses as a percentage of consolidated revenues were 2.3% in the first nine months of 2019 compared to 2.1% in the first nine months of 2018.
Other Income (Expense)
Interest Income and Expense
Interest income increased $0.1 million in the third quarter of 2019 compared to the prior year quarter primarily due to interest received on the $8.0 million note receivable acquired in the Bayou sale during the third quarter of 2018. Interest expense decreased $0.4 million in the third quarter of 2019 compared to the prior year quarter primarily due to reduced loan principal balances during the third quarter of 2019 compared to the third quarter of 2018.
Interest income increased $0.6 million in the first nine months of 2019 compared to the prior year period primarily due to interest received on the note receivable mentioned above. Interest expense decreased $2.6 million in the first nine months of 2019 compared to the same period in the prior year. During the first nine months of 2018, we recognized expenses of $1.8 million related to certain arrangement and other fees associated with amending our credit facility as well as the write-off of previously unamortized deferred financing costs. Excluding these expenses, interest expense decreased as compared to same period in the prior year due to reduced loan principal balances.
Other Expense
Other expense was $5.2 million and $9.3 million in the quarters ended September 30, 2019 and 2018, respectively. As part of our restructuring efforts, we recognized charges of $5.3 million in the third quarter of 2019 related to the dissolution of certain restructured entities including the release of cumulative currency translation adjustments resulting from those disposals. The remaining amounts primarily consisted of net foreign currency transaction gains. For the quarter ended September 30, 2018, we incurred charges of $8.7 million related to the loss on sale of our pipe coating and insulation business in Louisiana. The remaining expenses primarily consisted of net foreign currency transaction losses.
Other expense was $6.9 million and $10.0 million in the nine months ended September 30, 2019 and 2018, respectively. We recognized charges of $6.5 million in the first nine months of 2019 related to the dissolution of certain restructured entities including the release of cumulative currency translation adjustments resulting from those disposals. The remaining expenses primarily consisted of foreign currency transaction losses. For the nine months ended September 30, 2018, we incurred charges of $8.7 million related to the loss on sale of our pipe coating and insulation business. The remaining balance primarily consisted of foreign currency transaction losses.
Taxes on Income (Loss)
The tax benefit on pre-tax income in the third quarter of 2019 was $0.1 million compared to a tax benefit of $0.2 million on a pre-tax loss in the third quarter of 2018. Our effective tax rate was a benefit of 1.8% on pre-tax income in the quarter ended September 30, 2019 compared to a benefit of 1,275% on a pre-tax loss in the quarter ended September 30, 2018. The effective rate for the third quarter of 2019 was positively impacted by a $1.7 million return-to-provision true-up primarily related to foreign tax credits applied to the mandatory deemed repatriation from the Tax Cuts and Jobs Act (“TCJA”). This adjustment provided a 27.0% benefit to the effective tax rate during the third quarter of 2019. Partially offsetting this were negative impacts from: (i) significant pre-tax charges related to currency translation adjustments, which were not deductible for tax purposes; and (ii) valuation allowances recorded on certain net operating losses in foreign jurisdictions for which no income tax benefits are expected to be recognized. During the third quarter of 2018, the effective tax rate was positively impacted by a $1.5 million adjustment to the mandatory deemed repatriation tax on foreign earnings, partially offset by valuation allowances recorded on certain net operating losses in foreign jurisdictions for which no income tax benefits are expected to be recognized.
Tax expense on the pre-tax loss in the first nine months of 2019 was $3.4 million compared to tax expense of $1.7 million on pre-tax income in the first nine months of 2018. Our effective tax rate was 143.3% on a pre-tax loss in the nine months ended September 30, 2019 compared to 22.9% on pre-tax income in the nine months ended September 30, 2018. The effective tax rate for the nine months ended September 30, 2019 was negatively impacted by: (i) significant pre-tax charges primarily related to impairments of held for sale assets and currency translation adjustments, which were not deductible for tax purposes; (ii) a $2.1 million charge for foreign withholding taxes on the repatriation of foreign earnings; and (iii) valuation allowances recorded on certain net operating losses in foreign jurisdictions for which no income tax benefits are expected to be recognized. Partially offsetting the negative factors was the $1.7 million of return-to-provision true-ups noted in the quarterly discussion above. The effective tax rate for the nine months ended September 30, 2018 was impacted by the same factors impacting the effective tax rate in the third quarter of 2018, but also benefited by a $1.5 million discrete item related to employee share-based awards that vested during the first quarter of 2018. Together, the adjustment to the repatriation tax and the discrete item had a 39.3% benefit to the effective tax rate during the first nine months of 2018.
Non-controlling Interests
Income attributable to non-controlling interests was $0.3 million in the quarter ended September 30, 2019 compared to $0.6 million in the quarter ended September 30, 2018. In the third quarter of 2019, income was primarily driven from our Corrosion Protection joint venture in Oman and our Infrastructure Solutions joint ventures in Asia, partially offset by losses from our Corrosion Protection joint venture in Saudi Arabia. In the third quarter of 2018, income was primarily driven from our Corrosion Protection joint ventures in Oman, South Africa and Louisiana, and our Infrastructure Solutions joint ventures in Asia.
Income attributable to non-controlling interests was $0.5 million in each of the first nine months of 2019 and 2018. In the nine months ended September 30, 2019, income from our joint ventures in Oman and Asia were partially offset by losses from our joint ventures in Saudi Arabia, South Africa and Mexico. In the nine months ended September 30, 2018, profitability from our joint ventures in Oman, South Africa and Louisiana, and our Infrastructure Solutions joint ventures in Asia were partially offset by losses from our Corrosion Protection joint venture in Mexico.
Liquidity and Capital Resources
Cash and Cash Equivalents
| (in thousands) |
September 30, 2019 |
December 31, 2018 |
||||||
| Cash and cash equivalents |
$ | 51,981 | $ | 83,527 | ||||
| Restricted cash |
2,615 | 1,359 | ||||||
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 for bank undertakings in Europe.
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 and share repurchases.
During the first nine months of 2019, capital expenditures were primarily used to: (i) support our Infrastructure Solutions North American CIPP business and expand our Corrosion Protection businesses in the Middle East; and (ii) boost our information systems platform with upgrades to our enterprise resource planning system. For 2019, we anticipate that we will spend approximately $25.0 to $30.0 million for capital expenditures, which is slightly below that in 2018.
In December 2018, our board of directors authorized the open market repurchase of up to two million shares of our common stock. The program did not establish a time period in which the repurchases had to be made. That authorization is now limited to $32.0 million in 2019 due to the December 2018 amendment to our Credit Facility. 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. During the fist nine months of 2019, we acquired 1,426,916 shares of our common stock for $24.9 million ($17.46 average price per share) through the open market repurchase program discussed above. In addition, we repurchased 158,815 shares of our common stock for $3.2 million ($20.52 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock units and performance units, and the exercises of employee stock options. Any shares repurchased during 2019 are expected to be funded primarily through available cash. Once repurchased, we promptly retire such shares.
As part of our 2017 Restructuring, we utilized cash of $9.7 million during the first nine months of 2019 and $33.0 million in cumulative cash payments since 2017 related to employee severance, extension of benefits, employment assistance programs, early lease and contract termination and other restructuring related costs as we exit our non-pipe related contract applications for the Tyfo® system in North America, right-size our cathodic protection services operations in North America, take actions to further optimize operations within North America, including measures to reduce consolidated operating costs, and divest or otherwise exit multiple additional international businesses. Cumulatively, we have incurred both cash and non-cash charges of $157.6 million, of which $86.4 million relates to goodwill and long-lived asset impairment charges recorded in 2017 as part of exiting the non-pipe FRP contracting market in North America. We expect to incur additional cash charges of less than $5 million related to the 2017 Restructuring. We could also incur additional non-cash charges primarily associated with the release of cumulative currency translation adjustments and losses on the closure or liquidation of international entities.
At September 30, 2019, our cash balances were located worldwide for working capital and support needs. Approximately $31.3 million, or 57.3%, of our cash was denominated in currencies other than the United States dollar as of September 30, 2019. 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. At this time, we do not intend to distribute earnings in a taxable manner, and therefore, intend to limit distributions to: (i) earnings previously taxed in the U.S.; (ii) earnings that would qualify for the 100 percent dividends received deduction provided in the Tax Cuts and Jobs Act; or (iii) earnings that would not result in significant foreign taxes. As a result, we did not recognize a deferred tax liability on any remaining undistributed foreign earnings at September 30, 2019.
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 contract assets. At September 30, 2019, we believed our net accounts receivable and our contract assets, 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 believe any of these receivables are no longer collectible, we would increase our allowance for bad debts through a charge to earnings.
Cash Flows from Operations
Cash flows from operating activities provided $31.7 million in the first nine months of 2019 compared to $14.0 million provided in the first nine months of 2018. The increase in operating cash flow from the prior year period was primarily due to lower working capital usage as we used $12.3 million of cash during the first nine months of 2019 compared to $43.6 million used in the first nine months of 2018. Partially offsetting this positive variance was lower operating income during the first nine months of 2019 as compared to the first nine months of 2018, exclusive of significant non-cash charges in both periods. Cash flows during the nine months ended September 30, 2019 and 2018 were negatively impacted by $9.7 million and $9.4 million, respectively, in cash payments related to our restructuring activities.
Cash Flows from Investing Activities
Cash flows from investing activities used $20.4 million during the first nine months of 2019 compared to $7.5 million provided during the first nine months of 2018. We used $21.4 million in cash for capital expenditures in the first nine months of 2019 compared to $22.2 million in the prior year period. In the first nine months of 2019 and 2018, $0.9 million of non-cash capital expenditures were included in accounts payable and accrued expenses in both periods. Capital expenditures in the first nine months of 2019 and 2018 were partially offset by $1.3 million and $1.0 million, respectively, in proceeds received from asset disposals. During the first nine months of 2018, we received $37.9 million in the sale of Bayou and we used $9.0 million for two smaller acquisitions.
Cash Flows from Financing Activities
Cash flows from financing activities used $40.6 million during the first nine months of 2019 compared to $58.4 million used in the first nine months of 2018. During the first nine months of 2019 and 2018, we used net cash of $27.2 million and $18.6 million, respectively, to repurchase 1,585,731 and 772,898 shares, respectively, of our common stock through open market purchases and in connection with our equity compensation programs as discussed in Note 9 to the consolidated financial statements contained in this report. During the first nine months of 2019, we had net borrowings of $8.0 million on our line of credit to fund domestic working capital needs. Additionally, during the first nine months of 2019, we used cash of $19.7 million to pay down the principal balance of our term loans. During the first nine months of 2018, we had net repayments of $19.0 million on our line of credit, which included a $35.0 million repayment from the proceeds received on the sale of Bayou less borrowings of $16.0 million to fund domestic working capital needs. Additionally during the first nine months of 2018, we used cash of $19.7 million to pay down the principal balance of our term loan and used cash of $2.5 million to amend our original credit facility, as discussed in Note 8 to the consolidated financial statements contained in this report.
Long-Term Debt
In October 2015, the Company entered into an amended and restated $650.0 million senior secured credit facility with a syndicate of banks. In February 2018 and December 2018, the Company amended this facility (the “amended Credit Facility”). Following the sale of Bayou, the amended Credit Facility consists of a $275.0 million five-year revolving line of credit and a $308.4 million five-year term loan facility, each with a maturity date in February 2023.
Our indebtedness at September 30, 2019 consisted of $262.5 million outstanding from the term loan under the amended Credit Facility and $39.0 million on the line of credit under the amended Credit Facility. Additionally, the Company had $0.7 million of debt held by its joint ventures (representing funds loaned by its joint venture partners).
As of September 30, 2019, we had $25.2 million in letters of credit issued and outstanding under the amended Credit Facility. Of such amount, $12.3 million was collateral for the benefit of certain of our insurance carriers and $12.9 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 original 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.
On March 12, 2018, we entered into an interest rate swap forward agreement that begins in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap will require us to make a monthly fixed rate payment of 2.937% calculated on the then amortizing notional amount (scheduled to be $170.6 million in October 2020), and provides for us to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $170.6 million notional amount. The receipt of the monthly LIBOR-based payment will offset the variable monthly LIBOR-based interest cost on a corresponding $170.6 million portion of our term loan from the amended Credit Facility. This interest rate swap will be used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and accounted for as a cash flow hedge.
The amended 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, 2019 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 8 to the consolidated financial statements contained in this report for additional information and disclosures regarding our long-term debt.
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, 2018. See Note 11 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. Our annual impairment assessment date is October 1, 2019. 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, 2019 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, 2019 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 amended Credit Facility.
At September 30, 2019, the estimated fair value of our long-term debt was approximately $311.5 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, 2019 would result in a $0.8 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, 2019, a substantial portion of our cash and cash equivalents was denominated in foreign currencies, and a hypothetical 10% change in currency exchange rates could result in an approximate $3.0 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, 2019, there were no material foreign currency hedge instruments outstanding. See Note 13 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, 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, 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.
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, 2019. 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.
Changes in Internal Control Over Financial Reporting
In the first quarter of 2019, we implemented new controls as part of our efforts to adopt FASB ASC 842. These new controls relate to: (i) gathering, monitoring and assessing the necessary lease data; and (ii) a new third-party software as a system to capture, calculate and properly account for leases under FASB ASC 842. There were no other changes in our internal control over financial reporting that occurred during the nine months ended September 30, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II—OTHER INFORMATION
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.
There have been no material changes to the risk factors described in Items 1A in our Annual Report on Form 10-K for the year ended December 31, 2018.
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 2019 (1) (2) |
232,134 | $ | 17.96 | 222,901 | 1,777,099 | |||||||||||
| February 2019 (1) (2) |
280,640 | 19.86 | 137,107 | 1,639,992 | ||||||||||||
| March 2019 (1) (2) |
262,215 | 17.07 | 262,035 | 1,377,957 | ||||||||||||
| April 2019 (1) (2) |
184,846 | 19.09 | 184,162 | 1,193,795 | ||||||||||||
| May 2019 (1) (2) |
286,721 | 15.84 | 286,721 | 907,074 | ||||||||||||
| June 2019 (1) (2) |
181,160 | 15.88 | 181,160 | 725,914 | ||||||||||||
| July 2019 (1) (2) | 74,939 | 17.96 | 70,330 | 655,584 | ||||||||||||
| August 2019 (1) (2) | 55,576 | 19.19 | 55,000 | 600,584 | ||||||||||||
| September 2019 (1) (2) | 27,500 | 20.36 | 27,500 | 573,084 | ||||||||||||
| Total |
1,585,731 | $ | 17.75 | 1,426,916 | — | |||||||||||
| (1) |
In December 2018, our board of directors authorized the open market repurchase of up to two million shares of our common stock beginning January 1, 2019. Any shares repurchased are pursuant to one or more 10b5-1 plans. The program expires on the earlier of the repurchase by the Company of two million shares of common stock pursuant to the program or the board of directors’ termination of the program. In December 2018, we amended our senior secured credit facility, which limits the open market repurchase of our common stock to be made during 2019 to $32.0 million. We began repurchasing shares under this program in January 2019 and repurchased 1,426,916 shares of our common stock during the first nine months of 2019. Once repurchased, we promptly retired 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. 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. During the first nine months of 2019, 48,409 shares were surrendered in connection with stock swap transactions and 110,406 shares were surrendered in connection with 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 units or performance units vested. Once repurchased, we promptly retired the shares. |
Item 4. Mine Safety Disclosures.
Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this quarterly report on Form 10-Q.
As previously disclosed, we have entered into Executive Change in Control Severance Agreements (as amended, the “Continuity Agreements”) with each of Charles R. Gordon, our President and Chief Executive Officer, David F. Morris, our Executive Vice President and Chief Financial Officer, Mark A. Menghini, our Senior Vice President and General Counsel, Stephen P. Callahan, our Senior Vice President, Global Human Resources and HS&E, Kenneth L. Young, our Senior Vice President, Treasury and Tax and John L. Heggemann, our Senior Vice President, Corporate Controller and Chief Accounting Officer. Effective as of October 31, 2019, we and each of these executive officers entered into an amendment (the “Amendment”) to such officer’s applicable Continuity Agreement to amend the definition of “Good Reason” in the Continuity Agreements as set forth in the Amendment. The foregoing is qualified in its entirety by reference to the Amendment, a form of which is attached hereto as Exhibit 10.1, and is incorporated herein by reference.
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.
INDEX TO EXHIBITS
These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
| 10.1 | Form of Amendment to Change in Control Severance Agreement, dated as of October 31, 2019, between Aegion Corporation and each of Charles R. Gordon, David F. Morris, Mark A. Menghini, Stephen P. Callahan, Kenneth L. Young and John L. Heggemann, filed herewith.(1) |
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| 31.1 |
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| 31.2 |
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| 32.1 |
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| 32.2 |
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| 95 |
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| 101.INS |
Inline XBRL Instance Document (the Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)* |
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| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document* |
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| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document* |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document* |
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| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document* |
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| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document* |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* 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, contract or arrangement. |
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.
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AEGION CORPORATION |
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| Date: November 1, 2019 |
/s/ David F. Morris |
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David F. Morris |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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