AEGN 9.30.2013 10Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
 
 
For the quarterly period ended September 30, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
 
 
For the transition period from                                                              to                                                                     
Commission File Number: 0-10786
Aegion Corporation
(Exact name of registrant as specified in its charter)
Delaware
 
45-3117900
(State or other jurisdiction of incorporation or organization) 
 
(I.R.S. Employer Identification No.)
 
 
 
17988 Edison Avenue, Chesterfield, Missouri
 
63005-1195
(Address of principal executive offices) 
 
(Zip Code)
 
 
 
(636) 530-8000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer ¨
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
There were 38,374,118 shares of common stock, $.01 par value per share, outstanding at October 25, 2013.




TABLE OF CONTENTS

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

2


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

 
For the Quarters Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
$
307,665

 
$
262,867

 
$
775,741

 
$
745,236

Cost of revenues
238,254

 
199,936

 
599,625

 
567,514

Gross profit
69,411

 
62,931

 
176,116

 
177,722

Operating expenses
47,956

 
42,351

 
130,112

 
125,314

Earnout reversal
(2,844
)
 
(6,892
)
 
(2,844
)
 
(6,892
)
Acquisition-related expenses
2,267

 
607

 
4,175

 
2,594

Operating income
22,032

 
26,865

 
44,673

 
56,706

Other income (expense):
 
 
 
 
 
 
 
Interest expense
(5,454
)
 
(2,481
)
 
(10,033
)
 
(7,591
)
Interest income
40

 
86

 
158

 
230

Other
(522
)
 
(237
)
 
6,561

 
(1,169
)
Total other expense
(5,936
)
 
(2,632
)
 
(3,314
)
 
(8,530
)
Income before taxes on income
16,096

 
24,233

 
41,359

 
48,176

Taxes on income
3,164

 
5,064

 
7,985

 
11,862

Income before equity in earnings of affiliated companies
12,932

 
19,169

 
33,374

 
36,314

Equity in earnings of affiliated companies
1,691

 
2,001

 
3,903

 
4,389

Income from continuing operations
14,623

 
21,170

 
37,277

 
40,703

Loss from discontinued operations
(558
)
 
(435
)
 
(6,456
)
 
(880
)
Net income
14,065

 
20,735

 
30,821

 
39,823

Non-controlling interests
(127
)
 
(1,191
)
 
(959
)
 
(2,057
)
Net income attributable to Aegion Corporation
$
13,938

 
$
19,544

 
$
29,862

 
$
37,766

 
 
 
 
 
 
 
 
Earnings per share attributable to Aegion Corporation:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Income from continuing operations
$
0.37

 
$
0.51

 
$
0.94

 
$
0.98

Loss from discontinued operations
(0.01
)
 
(0.01
)
 
(0.17
)
 
(0.02
)
Net income
$
0.36

 
$
0.50

 
$
0.77

 
$
0.96

Diluted:
 
 
 
 
 
 
 
Income from continuing operations
$
0.37

 
$
0.50

 
$
0.93

 
$
0.97

Loss from discontinued operations
(0.01
)
 
(0.01
)
 
(0.17
)
 
(0.02
)
Net income
$
0.36

 
$
0.49

 
$
0.76

 
$
0.95


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

3


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
 
For the Quarters Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
14,065

 
$
20,735

 
$
30,821

 
$
39,823

Other comprehensive income:
 
 
 
 
 
 
 
Currency translation adjustments
(1,093
)
 
4,708

 
(11,447
)
 
4,432

Pension activity, net of tax
8

 
(8
)
 
16

 
(10
)
Deferred loss on hedging activity, net of tax(1)
(484
)
 
(86
)
 
(333
)
 
(220
)
Total comprehensive income
12,496

 
25,349

 
19,057

 
44,025

Less: comprehensive income attributable to noncontrolling interests
(290
)
 
(1,533
)
 
(840
)
 
(2,393
)
Comprehensive income attributable to Aegion Corporation
$
12,206

 
$
23,816

 
$
18,217

 
$
41,632

__________________________
(1) 
Amounts presented net of tax of $345 and $56 for the quarters ended September 30, 2013 and 2012, respectively, and $219 and $143 for the nine months ended September 30, 2013 and 2012, respectively.

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

4


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share amounts)
 
September 30, 2013
 
December 31, 2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
126,687

 
$
133,676

Restricted cash
523

 
382

Receivables, net
238,585

 
232,854

Retainage
31,392

 
30,172

Costs and estimated earnings in excess of billings
93,443

 
67,740

Inventories
61,764

 
59,123

Prepaid expenses and other current assets
32,724

 
27,728

Current assets of discontinued operations
12,365

 
8,986

Total current assets
597,483

 
560,661

Property, plant & equipment, less accumulated depreciation
187,294

 
183,163

Other assets
 
 
 
Goodwill
334,416

 
272,294

Identified intangible assets, less accumulated amortization
212,506

 
159,629

Investments
10,920

 
19,181

Deferred income tax assets
7,731

 
7,989

Other assets
13,241

 
8,153

Total other assets
578,814

 
467,246

Non-current assets of discontinued operations
1,242

 
6,824

Total Assets
$
1,364,833

 
$
1,217,894

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Accounts payable
$
85,091

 
$
74,724

Accrued expenses
88,393

 
79,580

Billings in excess of costs and estimated earnings
24,953

 
31,552

Current maturities of long-term debt and line of credit
26,879

 
33,775

Current liabilities of discontinued operations
2,401

 
4,885

Total current liabilities
227,717

 
224,516

Long-term debt, less current maturities
366,469

 
221,848

Deferred income tax liabilities
37,140

 
39,790

Other non-current liabilities
11,354

 
15,620

Total liabilities
642,680

 
501,774

 
 
 
 
(See Commitments and Contingencies: Note 7)


 


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

 
—

Common stock, $.01 par – shares authorized 125,000,000; shares issued and outstanding 38,576,118 and 38,952,561, respectively
386

 
390

Additional paid-in capital
244,189

 
257,209

Retained earnings
456,319

 
426,457

Accumulated other comprehensive income
3,615

 
15,260

Total stockholders’ equity
704,509

 
699,316

Non-controlling interests
17,644

 
16,804

Total equity
722,153

 
716,120

Total Liabilities and Equity
$
1,364,833

 
$
1,217,894

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

5


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
(in thousands, except number of shares)
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Non-
Controlling
Interests
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
BALANCE, December 31, 2011
39,352,375

 
$
394

 
$
260,680

 
$
373,796

 
$
5,862

 
$
8,257

 
$
648,989

Net income
—

 
—

 
—

 
37,766

 
—

 
2,057

 
39,823

Issuance of common stock upon stock option exercises, including tax benefit
26,776

 
1

 
562

 
—

 
—

 
—

 
563

Restricted shares issued
266,715

 
3

 
—

 
—

 
—

 
—

 
3

Issuance of shares pursuant to restricted stock units
14,446

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of shares pursuant to deferred stock unit awards
34,132

 
—

 
—

 
—

 
—

 
—

 
—

Forfeitures of restricted shares
(30,599
)
 
—

 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(384,890
)
 
(5
)
 
(6,349
)
 
—

 
—

 
—

 
(6,354
)
Equity-based compensation expense
—

 
—

 
5,246

 
—

 
—

 
—

 
5,246

Investment by non-controlling interests
—

 
—

 
—

 
—

 
—

 
4,939

 
4,939

Currency translation adjustment and derivative transactions, net
—

 
—

 
—

 
—

 
3,866

 
336

 
4,202

BALANCE, September 30, 2012
39,278,955

 
$
393

 
$
260,139

 
$
411,562

 
$
9,728

 
$
15,589

 
$
697,411

 
 
 
 
 
 
 
 
 
 
 
 
 
 
BALANCE, December 31, 2012
38,952,561

 
$
390

 
$
257,209

 
$
426,457

 
$
15,260

 
$
16,804

 
$
716,120

Net income
—

 
—

 
—

 
29,862

 
—

 
959

 
30,821

Issuance of common stock upon stock option exercises, including tax benefit
29,511

 
—

 
899

 
—

 
—

 
—

 
899

Restricted shares issued
431,877

 
4

 
—

 
—

 
—

 
—

 
4

Issuance of shares pursuant to restricted stock units
11,112

 
—

 
—

 
—

 
—

 
—

 
—

Issuance of shares pursuant to deferred stock unit awards
5,313

 
—

 
—

 
—

 
—

 
—

 
—

Forfeitures of restricted shares
(20,704
)
 
—

 
—

 
—

 
—

 
—

 
—

Repurchase of common stock
(833,552
)
 
(8
)
 
(19,009
)
 
—

 
—

 
—

 
(19,017
)
Equity-based compensation expense
—

 
—

 
5,090

 
—

 
—

 
—

 
5,090

Currency translation adjustment and derivative transactions, net
—

 
—

 
—

 
—

 
(11,645
)
 
(119
)
 
(11,764
)
BALANCE, September 30, 2013
38,576,118

 
$
386

 
$
244,189

 
$
456,319

 
$
3,615

 
$
17,644

 
$
722,153


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

6


AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)
 
For the Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
30,821

 
$
39,823

Loss from discontinued operations
6,456

 
880

 
37,277

 
40,703

Adjustments to reconcile to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,126

 
28,743

Gain on sale of fixed assets
(815
)
 
(246
)
Equity-based compensation expense
5,090

 
5,246

Deferred income taxes
(1,523
)
 
(1,800
)
Equity in earnings of affiliated companies
(3,903
)
 
(4,389
)
Debt issuance costs
1,964

 
—

Earnout reversal
(2,844
)
 
(6,892
)
Gain on sale of interests in German joint venture
(11,771
)
 
—

Loss on foreign currency transactions
1,700

 
138

Other
(159
)
 
(913
)
Changes in operating assets and liabilities (net of acquisitions):
 
 
 
Restricted cash
(142
)
 
(359
)
Return on equity of affiliated companies
4,027

 
5,002

Receivables net, retainage and costs and estimated earnings in excess of billings
(11,144
)
 
3,760

Inventories
(3,416
)
 
(6,333
)
Prepaid expenses and other assets
(5,044
)
 
(2,624
)
Accounts payable and accrued expenses
2,932

 
(3,980
)
Other operating
198

 
1,773

Net cash provided by operating activities of continuing operations
41,553

 
57,829

Net cash provided by (used in) operating activities of discontinued operations
(10,179
)
 
863

Net cash provided by operating activities
31,374

 
58,692

 
 
 
 
Cash flows from investing activities:
 
 
 
Capital expenditures
(20,079
)
 
(33,710
)
Proceeds from sale of fixed assets
1,856

 
3,399

Patent expenditures
(469
)
 
(420
)
Sale of interests in German joint venture
18,300

 
—

Receipt of cash from Hockway sellers due to final net working capital adjustments
—

 
1,048

Purchase of Brinderson, net of cash acquired
(143,763
)
 
—

Purchase of Fyfe Latin America, net of cash acquired
—

 
(3,048
)
Purchase of Fyfe Asia, net of cash acquired
—

 
(39,415
)
Payment to Fyfe North America sellers for final net working capital adjustments
—

 
(532
)
Net cash used in investing activities of continuing operations
(144,155
)
 
(72,678
)
Net cash provided by (used in) investing activities of discontinued operations
774

 
(1,002
)
Net cash used in investing activities
(143,381
)
 
(73,680
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock upon stock option exercises, including tax effects
903

 
840

Repurchase of common stock
(19,017
)
 
(6,354
)
Investments from noncontrolling interests
—

 
4,939

Payment of earnout related to acquistion of CRTS, Inc.
(2,112
)
 
—

Credit facility financing fees
(5,013
)
 
—

Proceeds on notes payable
1,541

 
5,608

Principal payments on notes payable
—

 
(890
)
Proceeds from line of credit
—

 
26,000

Proceeds from long-term debt
385,500

 
983

Principal payments on long-term debt
(249,125
)
 
(18,750
)
Net cash provided by financing activities
112,677

 
12,376

Effect of exchange rate changes on cash
(7,659
)
 
(2,203
)
Net decrease in cash and cash equivalents for the period
(6,989
)
 
(4,815
)
Cash and cash equivalents, beginning of period
133,676

 
106,129

Cash and cash equivalents, end of period
$
126,687

 
$
101,314

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

7


AEGION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    GENERAL
The accompanying unaudited consolidated financial statements of Aegion Corporation and its subsidiaries (collectively, “Aegion” or the “Company”) reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of September 30, 2013 and the results of operations and statements of comprehensive income for the quarters and nine-month periods ended September 30, 2013 and 2012 and the statements of equity and cash flows for the nine-month periods ended September 30, 2013 and 2012. The unaudited consolidated financial statements 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 2012 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 27, 2013. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.
The results of operations for the quarter and nine-month period ended September 30, 2013 are not necessarily indicative of the results to be expected for the full year.
Acquisitions/Strategic Initiatives/Divestitures
Energy and Mining Segment
On July 1, 2013, the Company acquired the equity interests of Brinderson, L.P., a California limited partnership, General Energy Services, a California corporation, and Brinderson Constructors, Inc., a California corporation (collectively, “Brinderson”). The cash purchase price at closing was $147.6 million (subject to working capital adjustments) and funded by borrowings under the Company’s new $650.0 million senior secured credit facility as discussed in Note 5 of this report. Brinderson is a leading integrated service provider of maintenance, construction, engineering and turnaround activities for the upstream and downstream oil and gas markets. Primarily focused on serving large oil and gas customers in California, Brinderson’s competitive advantages include its industry-leading safety record, a strong reputation for reliability and quality and comprehensive solutions needed for upstream oil field and downstream major refinery maintenance, repairs and retrofits. These core competencies position Brinderson to meet the growing demand for non-discretionary operating and maintenance expenditures.
During the second quarter of 2013, the Company’s Board of Directors approved a plan of liquidation for its Bayou Welding Works (“BWW”) business in an effort to improve the Company’s overall financial performance and align the operations with its long-term strategic initiatives. BWW provided specialty welding and fabrication services from its facility in New Iberia, Louisiana. Financial results for BWW were part of the Company’s Energy and Mining segment for financial reporting purposes. BWW ceased bidding new work and substantially completed all ongoing projects during the second quarter of 2013. As a result of the closure of BWW, Aegion recognized a pre-tax, non-cash charge of approximately $3.9 million ($2.4 million after-tax, or $0.06 per diluted share) to reflect the impairment of goodwill and intangible assets. The Company also recognized additional non-cash impairment charges for equipment and other assets of approximately $1.1 million on a pre-tax basis ($0.7 million on an after-tax basis, or $0.02 per diluted share), which also was recorded in the second quarter of 2013. The Company expects the cash liquidation value to approximate net asset value. Net asset value is determined using recorded amounts for assets and liabilities, which are based on Level 3 inputs as defined in Note 10 of this report. The Company also incurred cash charges to exit the business of approximately $0.1 million on a pre-tax and post-tax basis, which included property, equipment and vehicle lease termination and buyout costs, employee termination benefits and retention incentives, among other ancillary shut-down expenses.
In June 2011, the Company acquired all of the outstanding stock of CRTS, Inc. (“CRTS”). The purchase price at closing included a provision whereby CRTS shareholders would able to earn up to an additional $15.0 million upon the achievement of certain performance targets over the three-year period ending December 31, 2013 (the “CRTS earnout”). During the third quarter of 2013 and 2012, the Company reversed $2.8 million and $5.9 million, respectively, related to the CRTS earnout. In each year, operating results have been below the target amounts in the purchase agreement. As of September 30, 2013, the Company calculated the fair value of the contingent consideration arrangement to be $1.1 million, which is based on Level 3 inputs as defined in Note 10 of this report.
In March 2012, the Company organized United Special Technical Services LLC (“USTS”), a joint venture located in the Sultanate of Oman between United Pipeline Systems and Special Technical Services LLC, an Omani company (“STS”), for the purpose of executing pipeline, piping and of flow line high-density polyethylene lining services throughout the Middle East and

8


Northern Africa. The Company holds a fifty-one percent (51%) equity interest in USTS and STS holds the remaining forty-nine percent (49%) equity interest. USTS initiated operations in the second quarter of 2012.
Starting in February 2014, and solely during the month of January in each calendar year thereafter, the Company’s equity partner in Bayou Coating, L.L.C. (“Bayou Coating”), Stupp Brothers Inc. (“Stupp”), has the option to acquire: (i) the assets of Bayou Coating at book value as of the end of the prior fiscal year, or (ii) the Company’s equity interests in Bayou Coating at forty-nine percent (49%) of the book value of Bayou Coating, as of the end of the prior fiscal year, with such book value to be determined on the basis of Bayou Coating’s federal information tax return for such fiscal year. During 2013, the Company received an indication from Stupp that it intends to exercise the equity interest option in January 2014. In connection with this indication, in the second quarter of 2013, the Company recognized a non-cash charge of $2.7 million ($1.8 million post-tax) related to the goodwill allocated to the joint venture as part of the purchase price accounting associated with the Company’s 2009 acquisition of The Bayou Companies, LLC (“Bayou”). The non-cash charge represents the Company’s current estimate of the difference between the carrying value of the investment on the Company’s balance sheet and the amount the Company may receive in connection with the exercise. The Company is currently evaluating and gathering more information regarding additional potential financial impacts associated with the exercise of this option. The Company does not expect any additional material impacts to its consolidated balance sheet related to Stupp’s exercise of this option.
Water and Wastewater Segment
In June 2013, the Company sold its fifty percent (50%) interest in Insituform Rohrsanierungstechniken GmbH (“Insituform-Germany”), held through its indirect subsidiary, Insituform Technologies Limited (UK), to Per Aarsleff A/S, a Danish company (“Aarsleff”). Insituform-Germany, a company that was jointly owned by Aegion and Aarsleff, is active in the business of no-dig pipe rehabilitation in Germany, Slovakia and Hungary. The sale price was €14 million, approximately $18.3 million. The sale resulted in a gain on the sale of approximately $11.3 million (net of $0.5 million of transaction expenses) recorded in other income (expense) on the consolidated statement of operations. In connection with the sale, Insituform-Germany also entered into a tube supply agreement with the Company whereby Insituform-Germany will purchase on an annual basis at least GBP 2.3 million, approximately $3.6 million, of felt cured-in-place pipe (“CIPP”) liners during the two-year period from June 26, 2013 to June 30, 2015.
Commercial and Structural Segment
In April 2012, the Company purchased Fyfe Group LLC’s Asian operations (“Fyfe Asia”), which included all of the equity interests of Fyfe Asia Pte. Ltd, a Singaporean entity (and its interest in two joint ventures located in Borneo and Indonesia), Fyfe (Hong Kong) Limited, Fibrwrap Construction (M) Sdn Bhd, a Malaysian entity, Fyfe Japan Co. Ltd and Fibrwrap Construction Pte. Ltd and Technologies & Art Pte. Ltd., Singaporean entities. Customers in India and China will be served through an exclusive product supply and license agreement. Fyfe Asia provides Fibrwrap® installation services throughout Asia, as well as provides product and engineering support to installers and applicators of fiber reinforced polymer systems in Asia. The cash purchase price at closing was $40.7 million. The purchase price was funded out of the Company’s cash balances and by borrowing $18.0 million against the Company’s line of credit.
In January 2012, the Company purchased Fyfe Group LLC’s Latin American operations (“Fyfe LA”), which included all of the equity interests of Fyfe Latin America S.A., a Panamanian entity (and its interest in various joint ventures located in Peru, Costa Rica, Chile and Colombia), Fyfe – Latin America S.A. de C.V., an El Salvadorian entity, and Fibrwrap Construction Latin America S.A., a Panamanian entity. Fyfe LA provides Fibrwrap® installation services throughout Latin America, as well as product and engineering support to installers and applicators of fiber reinforced polymer systems in Latin America. The cash purchase price at closing was $2.3 million and funded out of the Company’s cash balances. During the first quarter of 2012, the Company paid the sellers an additional $1.1 million based on a preliminary working capital adjustment. An annual payout can be earned based on the achievement of certain performance targets in each year over the three-year period ending December 31, 2014. No annual payout has been earned to date as the performance targets have not been met. As of September 30, 2013, the Company calculated the fair value of the contingent consideration arrangement to be $0.3 million, which is based on Level 3 inputs as defined in Note 10 of this report.

9


Purchase Price Accounting
The Company accounts for its acquisitions in accordance with FASB ASC 805, Business Combinations. The Company records finite-lived intangible assets at their determined fair value related to customer relationships, backlog, trade names and trademarks and patents and other acquired technologies. The acquisitions generally result in goodwill related to, among other things, growth opportunities and synergies. The goodwill associated with the Brinderson acquisition is deductible for tax purposes. The Company completed its accounting for Fyfe LA and Fyfe Asia during the quarters ended December 31, 2012 and March 31, 2013, respectively. During the third quarter of 2013, the Company included its preliminary accounting for Brinderson.
The Fyfe LA, Fyfe Asia and Brinderson acquisitions made the following contributions to the Company’s revenues and profits during the quarters and nine months ended September 30, 2013 and 2012 (in thousands):
 
Quarters Ended
September 30, 2013
 
Quarters Ended
September 30, 2012
 
Brinderson
 
Fyfe Asia/
Fyfe LA
 
Brinderson
 
Fyfe Asia/
Fyfe LA
Revenues
$
47,948

 
$
4,574

 
$
—

 
$
3,985

Net income (1)
1,225

 
149

 
—

 
179


 
Nine Months Ended
September 30, 2013
 
Nine Months Ended
September 30, 2012
 
Brinderson
 
Fyfe Asia/
Fyfe LA
 
Brinderson
 
Fyfe Asia/
Fyfe LA
Revenues
$
47,948

 
$
12,530

 
$
—

 
$
8,457

Net income (1)
1,225

 
519

 
—

 
135

_____________________
(1) 
Net income includes an allocation of corporate expenses that is not necessarily an indication of the entity’s operations on a stand alone basis.
The following unaudited pro forma summary presents combined information of the Company as if the Fyfe LA, Fyfe Asia and Brinderson acquisitions had occurred on January 1, 2012 (in thousands):

Quarters Ended
September 30,
 
Nine Months Ended
September 30,
 
2013
 
2012
 
2013
 
2012
Revenues
   n/a (1)
 
$
316,984

 
$
885,842

 
$
905,282

Net income (2)
   n/a (1)
 
22,401

 
40,889

 
44,758

_____________________
(1) 
Amounts are presented in the unaudited consolidated statement of operations for the quarter ended September 30, 2013.
(2) 
Includes pro-forma adjustments for purchase price depreciation and amortization as if those intangibles were recorded as of January 1 of the year preceding the respective acquisition date.
Total cash consideration recorded to acquire Fyfe Asia was $40.1 million. This amount included purchase price at closing of $40.7 million less a final working capital adjustment of $0.6 million. Total cash consideration recorded to acquire Brinderson at its acquisition date was $147.6 million (subject to working capital adjustments).

10


The following table summarizes the fair value of identified assets and liabilities of the Brinderson and Fyfe Asia acquisitions at their respective acquisition dates (in thousands):

Brinderson

Fyfe Asia
Cash
$
3,842

 
$
1,303

Receivables and cost and estimated earnings in excess of billings
28,353

 
9,022

Prepaid expenses and other current assets
655

 
1,262

Property, plant and equipment
6,848

 
938

Identified intangible assets
60,210

 
14,130

Other assets
1,071

 
—

Accounts payable, accrued expenses and billings in excess of cost and estimated earnings
(16,072
)
 
(4,109
)
Deferred tax liabilities
—

 
(2,410
)
Total identifiable net assets
$
84,907

 
$
20,136



 
 
Total consideration recorded
147,605

 
40,144

Less: total identifiable net assets
84,907

 
20,136

Goodwill at September 30, 2013
$
62,698

 
$
20,008

The following adjustments were made during the first quarter of 2013 relative to the acquisition of Fyfe Asia as the Company finalized its purchase price accounting (in thousands):
Total identifiable net assets at December 31, 2012
$
20,342

Accounts payable, accrued expenses and billings in excess of cost and estimated earnings
206

Total identifiable net assets at September 30, 2013
$
20,136


 
Goodwill at December 31, 2012
$
19,802

Increase in goodwill related to acquisition
206

Goodwill at September 30, 2013
$
20,008


2.    ACCOUNTING POLICIES
Revenues
Revenues include construction, engineering and installation revenues that are recognized using the percentage-of-completion method of accounting in the ratio of costs incurred to estimated final costs. Revenues from change orders, extra work and variations in the scope of work are recognized when it is probable that they will result in additional contract revenue and when the amount can be reliably estimated. During the first nine months of 2013, the Company recorded revenue related to claims in its discontinued operations, which has been determined to be probable and reasonably estimated. The amount of this revenue is immaterial to the Company’s consolidated financial statements. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and equipment costs. The Company expenses all pre-contract costs in the period these costs are incurred. Since the financial reporting of these contracts depends on estimates, which are assessed continually during the term of these contracts, recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. If material, the effects of any changes in estimates are disclosed in the notes to the consolidated financial statements. When estimates indicate that a loss will be incurred on a contract, a provision for the expected loss is recorded in the period in which the loss becomes evident. Revenues from change orders, extra work and variations in the scope of work are recognized when it is probable that they will result in additional contract revenue and when the amount can be reliably estimated. Any revenue recognized is only to the extent costs have been recognized in the period. Additionally, the Company expenses all costs for unpriced change orders in the period in which they are incurred.
Foreign Currency Translation
For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are

11


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 income (loss) in total stockholders’ equity. Net foreign exchange transaction gains (losses) are included in other income (expense) in the consolidated statements of operations.
The Company’s accumulated other comprehensive income 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.
As of September 30, 2013 and 2012, the Company had $2.1 million and $8.5 million, respectively, related to currency translation adjustments, $1.3 million and $0.9 million, respectively, related to derivative transactions and $0.2 million and $0.3 million, respectively, related to pension activity in accumulated other comprehensive income.
Investments in Affiliated Companies
In June 2013, the Company sold its fifty percent (50%) interest in Insituform-Germany to Aarsleff. Insituform-Germany, a company that was jointly owned by Aegion and Aarsleff, is active in the business of no-dig pipe rehabilitation in Germany, Slovakia and Hungary. The sale price was €14 million, approximately $18.3 million. The sale resulted in a gain on the sale of approximately $11.3 million (net of $0.5 million of transaction expenses) recorded in other income (expense) on the consolidated statement of operations. In connection with the sale, Insituform-Germany also entered into a tube supply agreement with the Company whereby Insituform-Germany will purchase on an annual basis at least GBP 2.3 million, approximately $3.6 million, of felt cured-in-place pipe (“CIPP”) liners during the two-year period from June 26, 2013 to June 30, 2015.
The Company, through its subsidiary, Insituform Technologies Netherlands BV, owns a forty-nine percent (49%) equity interest in WCU Corrosion Technologies Pte. Ltd. (“WCU”). WCU offers the Company’s Tite Liner® process in the oil and gas sector and onshore corrosion services in Asia and Australia.
The Company, through its subsidiary, The Bayou Companies, LLC, owns a forty-nine percent (49%) equity interest in Bayou Coating. Bayou Coating provides pipe coating services from its facility in Baton Rouge, Louisiana, and is adjacent to and services the Stupp pipe mill in Baton Rouge.
Investments in entities in which the Company does not have control or is not the primary beneficiary of a variable interest entity, and for which the Company has 20% to 50% ownership or has the ability to exert significant influence, are accounted for by the equity method. At September 30, 2013 and December 31, 2012, the investments in affiliated companies on the Company’s consolidated balance sheets were $10.9 million and $19.2 million, respectively.
Net income presented below for the nine-month periods ended September 30, 2013 and 2012 includes Bayou Coating’s forty-one percent (41%) interest in Delta Double Jointing, LLC (“Bayou Delta”), which is eliminated for purposes of determining the Company’s equity in earnings of affiliated companies because Bayou Delta is consolidated in the Company’s financial statements as a result of its additional ownership through another Company subsidiary.
The Company’s equity in earnings of affiliated companies for all periods presented below includes acquisition-related depreciation and amortization expense and is net of income taxes associated with these earnings. Financial data for these investments in affiliated companies are summarized in the following table (in thousands):
 
Nine Months Ended September 30,
Income statement data
2013 (1)
 
2012
Revenue
$
75,986

 
$
102,407

Gross profit
21,753

 
28,620

Net income
13,624

 
15,382

Equity in earnings of affiliated companies
3,903

 
4,389

_____________________
(1)    Includes the financial data of Insituform-Germany through the date of its sale in June 2013.
Investments in Variable Interest Entities
The Company evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation.
The Company’s overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps:
•
determine whether the entity meets the criteria to qualify as a VIE; and
•
determine whether the Company is the primary beneficiary of the VIE.

12


In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include:
•
the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders;
•
the nature of the Company’s involvement with the entity;
•
whether control of the entity may be achieved through arrangements that do not involve voting equity;
•
whether there is sufficient equity investment at risk to finance the activities of the entity; and
•
whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns.
If the Company identifies a VIE based on the above considerations, it then performs the second step and evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments:
•
whether the entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and
•
whether the entity has the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.
Based on its evaluation of the above factors and judgments, as of September 30, 2013, the Company consolidated any VIEs in which it was the primary beneficiary. Also, as of September 30, 2013, the Company had significant interests in certain VIEs primarily through its joint venture arrangements for which the Company was not the primary beneficiary. There have been no changes in the status of the Company’s VIE or primary beneficiary designations during 2013.
Financial data for consolidated variable interest entities are summarized in the following table (in thousands):
Balance sheet data
September 30, 2013
 
December 31, 2012
Current assets
$
52,896

 
$
65,251

Non-current assets
52,264

 
47,086

Current liabilities
37,162

 
45,604

Non-current liabilities
22,326

 
23,169

 
Nine Months Ended September 30,
Income statement data
2013
 
2012
Revenue
$
62,650

 
$
74,313

Gross profit
10,179

 
11,361

Net income
2,040

 
1,391

The Company’s non-consolidated variable interest entities are accounted for using the equity method of accounting and discussed further under “Investments in Affiliated Companies” above.
Newly Adopted Accounting Pronouncements
ASU No. 2013-1 updates standard ASU No. 2011-11 and provides guidance to implement the balance sheet offsetting disclosures that require the presentation of gross and net information about transactions that are (1) offset in the financial statements or (2) subject to an enforceable master netting arrangement or similar agreement, regardless of whether the transactions are actually offset in the statement of financial position. The disclosure requirements are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. Refer to Note 10 for discussion of the new accounting pronouncement.
ASU No. 2013-2 generally provides guidance to improve the reporting of reclassifications out of accumulated other comprehensive income to various components in the income statement. This standard requires an entity to present either parenthetically on the face of the financial statements or in the notes, significant amounts reclassified from each component of accumulated other comprehensive income and the income statement line items affected by the reclassification. ASU 2013-2 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company evaluated this pronouncement effective January 1, 2013 and determined reclassifications out of accumulated other comprehensive income to various components in the income statement is immaterial to the financial statements to the Company. Refer to Note 10 for discussion of the new accounting pronouncement.

13



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

Quarters Ended
September 30,
 
Nine Months Ended September 30,

2013
 
2012
 
2013
 
2012
Weighted average number of common shares used for basic EPS
38,672,441

 
39,285,484

 
38,836,276

 
39,253,373

Effect of dilutive stock options and restricted and deferred stock unit awards
398,932

 
319,745

 
392,349

 
306,241

Weighted average number of common shares and dilutive potential common stock used in dilutive EPS
39,071,373


39,605,229


39,228,625


39,559,614

The Company excluded 159,639 and 252,348 stock options for the quarters ended September 30, 2013 and 2012, respectively, and 159,639 and 252,348 stock options for the nine-month periods ended September 30, 2013 and 2012, respectively, from the diluted earnings per share calculations for the Company’s common stock because they were anti-dilutive as their exercise prices were greater than the average market price of common shares for each period.

4.    GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table presents a reconciliation of the beginning and ending balances of the Company’s goodwill at January 1, 2013 and September 30, 2013 (in millions):
 
Energy
and
Mining (1)(2)
 
North American
Water and
Wastewater
 
International
Water and
Wastewater
 
Commercial
and Structural (3)
 
Total
Beginning balance at January 1, 2013
$
76.7

 
$
101.9

 
$
28.1

 
$
65.6

 
$
272.3

Additions to goodwill through acquisitions
62.7

 
—

 
—

 
0.2

 
62.9

Foreign currency translation
(0.4
)
 
0.9

 
(1.0
)
 
(0.3
)
 
(0.8
)
Goodwill at end of period (4)
$
139.0

 
$
102.8

 
$
27.1

 
$
65.5

 
$
334.4

__________________________
(1) 
During the second quarter of 2013, the Company approved a plan of liquidation with respect to BWW and, in connection therewith, recorded a write-down of the $1.4 million of goodwill associated with BWW, which operation now is reported as discontinued. Consequently, the goodwill associated with BWW is no longer included in this table. Additionally, all prior year balances have been retrospectively adjusted. For further information, see Note 9 contained within this report.
(2) 
During 2013, the Company recorded an increase of goodwill of $62.7 million related to the Brinderson acquisition.
(3) 
During 2013, the Company recorded an increase of goodwill of $0.2 million related to the Fyfe Asia acquisition.
(4) 
The Company does not have any accumulated impairment charges.

14


Intangible Assets
Intangible assets at September 30, 2013 and December 31, 2012 were as follows (in thousands):
 
As of September 30, 2013 (1)(2)
 
As of December 31, 2012
 
Weighted Average Useful Lives (Years)
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net Carrying Amount
License agreements
7
 
$
3,921

 
$
(2,945
)
 
$
976

 
$
3,925

 
$
(2,821
)
 
$
1,104

Backlog
0
 
4,749

 
(4,749
)
 
—

 
4,756

 
(4,756
)
 
—

Leases
13
 
2,073

 
(436
)
 
1,637

 
2,067

 
(331
)
 
1,736

Trademarks
17
 
21,362

 
(4,091
)
 
17,271

 
21,290

 
(3,317
)
 
17,972

Non-competes
5
 
1,140

 
(731
)
 
409

 
710

 
(710
)
 
—

Customer relationships
14
 
182,774

 
(25,133
)
 
157,641

 
123,301

 
(18,912
)
 
104,389

Patents and acquired technology
18
 
59,890

 
(25,318
)
 
34,572

 
55,672

 
(21,244
)
 
34,428

 
 
 
$
275,909

 
$
(63,403
)
 
$
212,506

 
$
211,721

 
$
(52,091
)
 
$
159,629

__________________________
(1)
During the second quarter of 2013, the Company approved a plan of liquidation with respect to BWW and, in connection therewith, recorded a write-down of the $2.5 million of intangible assets associated with BWW, which operation now is reported as discontinued. Consequently, the intangible assets and accumulated amortization associated with BWW are no longer included in this table. Additionally, all prior year balances have been retrospectively adjusted. For further information, see Note 9 contained within this report.
(2)
During the third quarter of 2013, the Company recorded $59.8 million in customer relationships to be amortized over a weighted average life of 15 years and $0.4 million in non-compete agreements to be amortized over a weighted average life of 5 years related to the acquisition of Brinderson, as discussion in Note 1 of this report.
Amortization expense was $3.6 million and $2.6 million for each of the quarters ended September 30, 2013 and 2012, respectively, and $8.8 million and $8.1 million for the nine-month periods ended September 30, 2013 and 2012, respectively. Estimated amortization expense by year is as follows (in thousands):
2013
 
$
12,476

2014
 
14,583

2015
 
14,590

2016
 
14,564

2017
 
14,543


5.    LONG-TERM DEBT AND CREDIT FACILITY
Financing Arrangements
In July 2013, in connection with the Brinderson acquisition, the Company entered into a new $650.0 million senior secured credit facility (the “New Credit Facility”) with a syndicate of banks. Bank of America, N.A. served as the administrative agent. Merrill Lynch Pierce Fenner & Smith Incorporated, JPMorgan Securities LLC and U.S. Bank National Association acted as joint lead arrangers and joint book managers in the syndication of the new credit facility. The New Credit Facility consists of a $300.0 million five-year revolving line of credit and a $350.0 million five-year term loan facility, each with a maturity date of July 1, 2018. The Company borrowed the entire term loan and drew $35.5 million against the revolving line of credit from the New Credit Facility on July 1, 2013 for the following purposes: (1) to pay the $147.6 million cash purchase price for the Company’s acquisition of Brinderson, L.P., which closed on July 1, 2013; (2) to retire $232.3 million in indebtedness outstanding under the Company’s prior credit facility; and (3) to fund expenses associated with the New Credit Facility and the Brinderson acquisition. Additionally, the Company used $7.0 million of its cash on hand to fund these transactions. This New Credit Facility replaced the Company’s $500.0 million credit facility entered into on August 31, 2011 (the “Old Credit Facility”).
Generally, interest will be charged on the principal amounts outstanding under the New Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from 1.25% to 2.25% depending on the Company’s consolidated leverage ratio. The Company can also opt for an interest rate equal to a base rate (as defined in the credit documents) plus an applicable rate, which also is based on the Company’s consolidated leverage ratio. The applicable one month LIBOR borrowing rate (LIBOR plus Company’s applicable rate) as of September 30, 2013 was approximately 2.21%.

15


The Company’s total indebtedness at September 30, 2013 consisted of $345.6 million outstanding from the $350.0 million term loan under the New Credit Facility, $35.5 million on the line of credit under the New Credit Facility and $0.3 million of third party notes and bank debt. Additionally, the Company and Wasco Coatings UK Ltd. (“Wasco Energy”), a subsidiary of Wah Seong Corporation, loaned Bayou Wasco Insulation, LLC (“Bayou Wasco”), a joint venture between the Company and Wasco Energy, an aggregate of $14.0 million for the purchase of capital assets in 2012 and 2013, of which $6.9 million (representing funds loaned by Wasco Energy) was designated in the consolidated financial statements as third-party debt. In connection with the formation of Bayou Perma-Pipe Canada, Ltd. (“BPPC”), the Company and Perma-Pipe Canada, Inc. loaned BPPC an aggregate of $8.0 million for the purchase of capital assets and for operating purposes. Additionally, during January 2012, the Company and Perma-Pipe Canada, Inc. agreed to loan BPPC an additional $6.2 million for the purchase of capital assets increasing the total to $14.2 million. Of such amount, $5.0 million was designated in the Company’s consolidated financial statements as third-party debt at September 30, 2013.
As of September 30, 2013, the Company had $18.7 million in letters of credit issued and outstanding under the New Credit Facility. Of such amount, $10.4 million was collateral for the benefit of certain of our insurance carriers and $8.3 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.
The Company’s total indebtedness at December 31, 2012 consisted of $218.8 million outstanding from an original $250 million term loan under the Old Credit Facility, $26.0 million on the line of credit under the Old Credit Facility and $0.1 million of third party notes and bank debt. Additionally, the Company and Wasco Energy loaned Bayou Wasco $11.0 million for the purchase of capital assets in 2012, of which $5.5 million (representing funds loaned by Wasco Energy) was designated in the consolidated financial statements as third-party debt. In connection with the formation of BPPC, the Company and Perma-Pipe Canada, Inc. loaned BPPC an aggregate of $8.0 million for the purchase of capital assets and for operating purposes. Additionally, during January 2012, the Company and Perma-Pipe Canada, Inc. agreed to loan BPPC an additional $6.2 million for the purchase of capital assets increasing the total to $14.2 million. As of December 31, 2012, $4.1 million of the additional $6.2 million had been funded. As of December 31, 2012, $5.2 million of such total amount (representing funds loaned by Perma-Pipe Canada Inc.) was designated in the consolidated financial statements as third-party debt.
At September 30, 2013 and December 31, 2012, the estimated fair value of the Company’s long-term debt was approximately $385.8 million and $253.6 million, respectively. Fair value was estimated using market rates for debt of similar risk and maturity and a discounted cash flow model, which are based on Level 3 inputs as defined in Note 10 of this report.
In July 2013, the Company entered into an interest rate swap agreement, for a notional amount of $175.0 million that is set to expire in July 2016. The notional amount of this swap mirrors the amortization of a $175.0 million portion of the Company’s $350.0 million term loan drawn from the New Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 0.87% calculated on the amortizing $175.0 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the amortizing $175.0 million notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $175.0 million portion of the Company’s term loan from the New 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 will be accounted for as a cash flow hedge.
The New 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 New 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 New Credit Facility defined income. The initial maximum amount was not to initially exceed 3.75 to 1.00 and will decrease periodically at scheduled reporting periods to not more that 3.50 to 1.00 beginning with the quarter ending June 30, 2014. At September 30, 2013, the Company’s consolidated financial leverage ratio was 2.64 to 1.00 and, using the New Credit Facility defined income, the Company had the capacity to borrow up to approximately $163.6 million of additional debt.
•
Consolidated fixed charge coverage ratio compares New Credit Facility defined income to New Credit Facility defined fixed charges with a minimum permitted ratio of not less than 1.25 to 1.00. At September 30, 2013, the Company’s fixed charge ratio was 1.85 to 1.00.
At September 30, 2013, the Company was in compliance with all of its debt and financial covenants as required under the New Credit Facility.


16


6.    STOCKHOLDERS’ EQUITY AND EQUITY COMPENSATION
Share Repurchase Plan
In December 2012, the Company’s Board of Directors authorized the repurchase of up to $5.0 million of the Company’s common stock to be made during 2013. This amount represented the then maximum open market repurchases authorized in any calendar year under the terms of the Old Credit Facility. In May 2013, prior to the Company entering into the New Credit Facility, the Company’s Board of Directors authorized the repurchase of up to an additional $10.0 million of the Company’s common stock to be made during the balance of the 2013 calendar year. The Company simultaneously executed an amendment to the Old Credit Facility to allow for this additional repurchase. In September 2013, after the Company entered into the New Credit Facility, the Company’s Board of Directors authorized the repurchase of up to an additional $10.0 million of the Company’s common stock to be made during the balance of the 2013 calendar year. This amount represented half of the potential maximum open market repurchases authorized in any calendar year under the terms of the New Credit Facility given the covenants currently applicable to the Company. Once repurchased, the Company immediately retires the shares.
In addition to the open market repurchases, the Company also is authorized to purchase up to $10.0 million of the Company’s common stock in each calendar year in connection with the Company’s equity compensation programs for employees and directors. The participants in the Company’s equity plans may surrender shares of previously issued common stock in satisfaction of tax obligations arising from the vesting of restricted stock awards under such plans, in connection with the exercise of stock option awards and with the lapse of restricted periods of deferred stock unit awards. The deemed price paid is the closing price of the Company’s common stock on the Nasdaq Global Select Market on the date that the restricted stock vests, the shares of the Company’s common stock are surrendered in exchange for stock option exercises or the lapse of the restricted periods of deferred stock unit awards.
During the first nine months of 2013, the Company acquired 782,260 shares of the Company’s common stock for $17.8 million ($22.79 average price per share) through the three open market repurchase programs discussed above and 51,292 shares of the Company’s common stock for $1.2 million ($23.32 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock, exercise of stock options and distribution of deferred stock units. Once repurchased, the Company immediately retired all such shares.
Equity-Based Compensation Plans
At September 30, 2013, the Company had two active equity-based compensation plans under which awards may be made, including stock appreciation rights, restricted shares of common stock, performance awards, stock options and stock units. The Company’s 2013 Employee Equity Incentive Plan (the “2013 Employee Plan”) has 2,895,000 shares of the Company’s common stock reserved for issuance and, at September 30, 2013, 2,840,257 shares of common stock were available for issuance. The Company’s 2011 Non-Employee Director Equity Incentive Plan (“2011 Director Plan”) has 250,000 shares of the Company’s common stock registered for issuance and, at September 30, 2013, 168,390 shares of common stock were available for issuance.
Stock Awards
Stock awards, which include shares of restricted stock, restricted stock units and restricted performance 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 restricted performance units causes the reversal of all previous expense recorded as a reduction of current period expense.

17


A summary of stock award activity during the nine-month period ended September 30, 2013 follows:
 
Stock Awards
 
Weighted
Average
Award Date
Fair Value
Outstanding at January 1, 2013
701,918

 
$
19.42

Restricted shares awarded
431,877

 
24.09

Restricted stock units awarded
112,401

 
25.11

Restricted shares distributed
(274,028
)
 
19.03

Restricted stock units distributed
(11,112
)
 
20.70

Restricted shares forfeited
(20,704
)
 
21.41

Restricted stock units forfeited
(54,481
)
 
20.38

Outstanding at September 30, 2013
885,871

 
$
22.42

Expense associated with stock awards was $2.8 million and $3.0 million in the nine months ended September 30, 2013 and 2012, respectively. Unrecognized pre-tax expense of $10.1 million related to stock awards is expected to be recognized over the weighted average remaining service period of 2.1 years for awards outstanding at September 30, 2013.
Expense associated with stock awards was $0.8 million for each of the quarters ended September 30, 2013 and 2012.
Deferred Stock Unit Awards
Deferred stock units generally are awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date and generally are fully vested on the date of grant. The expense related to the issuance of deferred stock units is recorded as of the date of the award.
A summary of deferred stock unit activity during the nine-month period ended September 30, 2013 follows:

Deferred
Stock
Units

Weighted
Average
Award Date
Fair Value
Outstanding at January 1, 2013
181,518

 
$
19.06

Awarded
39,876

 
22.33

Shares distributed
(5,313
)
 
22.67

Forfeited
(714
)
 
24.00

Outstanding at September 30, 2013
215,367


$
19.56

There was no expense associated with awards of deferred stock units for the quarters ended September 30, 2013 and 2012. Expense associated with awards of deferred stock units for the nine months ended September 30, 2013 and 2012 was $0.9 million and $0.7 million, respectively.
Stock Options
Stock options on the Company’s common stock are awarded from time to time to executive officers and certain key employees of the Company. Stock options granted generally have a term of seven to ten years and an exercise price equal to the market value of the underlying common stock on the date of grant.

18


A summary of stock option activity during the nine-month period ended September 30, 2013 follows:

Shares

Weighted
Average
Exercise
Price
Outstanding at January 1, 2013
1,223,618

 
$
18.49

Granted
29,025

 
25.11

Exercised
(29,511
)
 
20.14

Canceled/Expired
(7,729
)
 
24.52

Outstanding at September 30, 2013
1,215,403


$
18.57

Exercisable at September 30, 2013
940,317

 
$
17.89

Expense associated with stock option grants was $0.4 million and $0.5 million in the quarters ended September 30, 2013 and 2012, respectively. In the nine months ended September 30, 2013 and 2012, the Company recorded expense of $1.4 million and $1.6 million, respectively, related to stock option grants. Unrecognized pre-tax expense of $1.5 million related to stock option grants is expected to be recognized over the weighted average remaining contractual term of 1.5 years for awards outstanding at September 30, 2013.
Financial data for stock option exercises are summarized in the following table (in thousands):

Nine Months Ended September 30,

2013
 
2012
Amount collected from stock option exercises
$
738

 
$
480

Total intrinsic value of stock option exercises
131

 
106

Tax benefit of stock option exercises recorded in additional paid-in-capital
55

 
17

Aggregate intrinsic value of outstanding stock options
6,983

 
3,263

Aggregate intrinsic value of exercisable stock options
5,962

 
2,966

The intrinsic value calculations are based on the Company’s closing stock price of $23.72 and $19.16 on September 30, 2013 and 2012, respectively.
The Company uses a binomial option-pricing model for valuation purposes to reflect the features of stock options granted. The fair value of stock options awarded during the nine-month periods ended September 30, 2013 and 2012 were estimated at the date of grant based on the assumptions presented in the table below. Volatility, expected term and dividend yield assumptions were based on the Company’s historical experience. The risk-free rate was based on a U.S. treasury note with a maturity similar to the option grant’s expected term.

Nine Months Ended September 30,

2013
 
2012

Range

Weighted Average

Range

Weighted Average
Grant-date fair value
$12.92
 
$12.92
 
$8.14 - $8.19
 
$8.19
Volatility
49.8%
 
49.8%
 
43.0% - 45.2%
 
45.1%
Expected term (years)
7.0
 
7.0
 
7.0
 
7.0
Dividend yield
—%
 
—%
 
—%
 
—%
Risk-free rate
1.1%
 
1.1%
 
1.0% - 1.5%
 
1.5%

7.    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.

19


Purchase Commitments
The Company had no material purchase commitments at September 30, 2013.
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, 2013 on its consolidated balance sheet.

8.    SEGMENT REPORTING
The Company operates in three distinct markets: energy and mining; water and wastewater; and commercial and structural services. Management organizes the Company around differences in products and services, as well as by geographic areas. Within the water and wastewater market, the Company operates in two distinct geographies: North America and internationally outside of North America. As such, the Company is organized into four reportable segments: Energy and Mining; North American Water and Wastewater; International Water and Wastewater; and Commercial and Structural. Each segment is regularly reviewed and evaluated separately.
During the first quarter of 2013, the Company re-organized its Water and Wastewater businesses to bring all of its operations under one central leadership team. The Company hired a Senior Vice President - Global Water and Wastewater and a Vice President of International Water and Wastewater. The Vice President of International Water and Wastewater is responsible for the European Water and Wastewater operations as well as the Asia-Pacific Water and Wastewater operations and reports directly to the Senior Vice President - Global Water and Wastewater. In connection with this management re-organization, the Company combined its European Water and Wastewater and Asia-Pacific Water and Wastewater reportable segments into one reportable segment titled International Water and Wastewater. All future filings will combine these previously reported segments into one.
During the third quarter of 2013, the Company acquired Brinderson. Brinderson is a leading integrated service provider of maintenance, construction, engineering and turnaround activities for the upstream and downstream oil and gas markets. For reportable segment purposes, management reports Brinderson in the Company’s Energy and Mining segment.
The quarter and nine months ended September 30, 2013 results include $2.3 million and $4.2 million, respectively, for costs incurred related to the Company’s acquisition of Brinderson and other acquisition targets the Company is no longer pursuing. The quarter and nine months ended September 30, 2012 results include $0.6 million and $2.6 million, respectively, for costs incurred related to the acquisitions of Fyfe LA and Fyfe Asia. The Company recorded these costs under “Acquisition-related expenses” on its consolidated statements of operations.
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. Financial results for discontinued operations have been removed for all periods presented. The Company evaluates performance based on stand-alone operating income (loss).

20


Financial information by segment was as follows (in thousands):
 
Quarters Ended
September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Energy and Mining
$
168,708

 
$
137,386

 
$
385,991

 
$
377,610

North American Water and Wastewater
95,997

 
77,818

 
261,616

 
231,647

International Water and Wastewater
26,152

 
27,766

 
80,064

 
80,712

Commercial and Structural
16,808

 
19,897

 
48,070

 
55,267

Total revenues
$
307,665

 
$
262,867

 
$
775,741

 
$
745,236

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Energy and Mining
$
37,118

 
$
33,710

 
$
87,678

 
$
93,466

North American Water and Wastewater
21,357

 
17,183

 
55,786

 
48,850

International Water and Wastewater
5,116

 
2,890

 
15,424

 
9,603

Commercial and Structural
5,820

 
9,148

 
17,228

 
25,803

Total gross profit
$
69,411

 
$
62,931

 
$
176,116

 
$
177,722

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
Energy and Mining
$
12,874

 
$
21,426

 
$
24,481

 
$
42,902

North American Water and Wastewater
10,328

 
6,289

 
23,010

 
16,361

International Water and Wastewater
(257
)
 
(3,195
)
 
(1,338
)
 
(7,542
)
Commercial and Structural
(913
)
 
2,345

 
(1,480
)
 
4,985

Total operating income
$
22,032

 
$
26,865

 
$
44,673

 
$
56,706

The following table summarizes revenues, gross profit and operating income (loss) by geographic region (in thousands):
 
Quarters Ended
September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
United States
$
202,353

 
$
162,427

 
$
496,544

 
$
472,059

Canada
56,026

 
47,141

 
131,172

 
130,900

Europe
20,605

 
21,455

 
65,592

 
62,398

Other foreign
28,681

 
31,844

 
82,433

 
79,879

Total revenues
$
307,665

 
$
262,867

 
$
775,741

 
$
745,236

 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
United States
$
43,838

 
$
40,375

 
$
111,006

 
$
121,487

Canada
14,351

 
13,352

 
31,753

 
33,995

Europe
4,769

 
5,332

 
15,453

 
15,107

Other foreign
6,453

 
3,872

 
17,904

 
7,133

Total gross profit
$
69,411

 
$
62,931

 
$
176,116

 
$
177,722

 
 
 
 
 
 
 
 
Operating income (loss):
 
 
 
 
 
 
 
United States
$
8,941

 
$
16,422

 
$
16,067

 
$
35,552

Canada
10,397

 
9,069

 
20,622

 
20,928

Europe
1,106

 
1,691

 
3,928

 
3,789

Other foreign
1,588

 
(317
)
 
4,056

 
(3,563
)
Total operating income
$
22,032

 
$
26,865

 
$
44,673

 
$
56,706



21


9.    DISCONTINUED OPERATIONS
During the second quarter of 2013, the Company’s Board of Directors approved a plan of liquidation for its BWW business in an effort to improve the Company’s overall financial performance and align the operations with its long-term strategic initiatives. BWW provided specialty welding and fabrication services from its facility in New Iberia, Louisiana. Financial results for BWW were part of the Company’s Energy and Mining segment for financial reporting purposes.
BWW ceased bidding new work and substantially completed all ongoing projects during the second quarter of 2013. As a result of the closure of BWW, Aegion recognized a pre-tax, non-cash charge of approximately $3.9 million ($2.4 million after-tax, or $0.06 per diluted share) to reflect the impairment of goodwill and intangible assets. The Company also recognized additional non-cash impairment charges for equipment and other assets of approximately $1.1 million on a pre-tax basis ($0.7 million on an after-tax basis, or $0.02 per diluted share), which also was recorded in the second quarter of 2013. The Company expects the cash liquidation value to approximate net asset value as shown in the table below. Net asset value is determined using recorded amounts for assets and liabilities, which are based on Level 3 inputs as defined in Note 10 of this report. The Company also incurred cash charges to exit the business of approximately $0.1 million on a pre-tax and post-tax basis, which included property, equipment and vehicle lease termination and buyout costs, employee termination benefits and retention incentives, among other ancillary shut-down expenses.
The discontinuation of BWW signified a triggering event for the Bayou reporting unit goodwill. The Company updated its analysis of the Bayou reporting unit as of the date of discontinuation. In its previous Bayou reporting unit analysis on October 1, 2012, the Company tested the Bayou reporting unit as a whole, which included the carrying value and future cash flows associated with the BWW business. In the updated analysis associated with this triggering event, the Company removed any carrying value associated with BWW (as it was tested separately) and updated its income projections to reflect the removal of BWW and the current future cash flows of the Bayou reporting unit. Additionally, the Company updated the data points associated with the market approach. In this analysis, it was determined that the Bayou reporting unit did not result in an impairment at the date of discontinuation.
Operating results for discontinued operations are summarized as follows (in thousands):

Quarters Ended September 30,
 
Nine Months Ended September 30,

2013
 
2012
 
2013
 
2012
Revenues
$
744

 
$
2,288

 
$
8,864

 
$
8,045

Gross profit (loss)
(837
)
 
(157
)
 
(4,077
)
 
164

Operating expenses
210

 
556

 
1,828

 
1,466

Closure charges of welding business
—

 
—

 
5,019

 
—

Operating loss
(1,047
)
 
(723
)
 
(10,924
)
 
(1,302
)
Loss before tax benefits
(1,047
)
 
(741
)
 
(10,742
)
 
(1,500
)
Tax benefits
489

 
306

 
4,286

 
620

Net loss
(558
)
 
(435
)
 
(6,456
)
 
(880
)

22


Balance sheet data for discontinued operations was as follows (in thousands):

September 30, 2013
 
December 31, 2012
Restricted cash
$
1,193

 
$
1,192

Receivables, net
9,552

 
4,380

Costs and estimated earnings in excess of billings
1,543

 
2,775

Inventories
—

 
386

Prepaid expenses and other current assets
77

 
253

Property, plant and equipment, less accumulated depreciation
1,242

 
2,803

Other assets
—

 
4,021

Total assets
$
13,607


$
15,810

Accounts payable
$
1,644

 
$
3,225

Accrued expenses
757

 
1,660

Total liabilities
$
2,401


$
4,885


10.    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, gain or loss is recorded in the consolidated statements of operations upon settlement of the hedge. All of the Company’s hedges that are designated as hedges for accounting purposes were highly effective; therefore, no notable amounts of hedge ineffectiveness were recorded in the Company’s consolidated statements of operations for the outstanding hedged balance. During each of the quarters and nine months ended September 30, 2013 and 2012, the Company recorded less than $0.1 million as a gain on the consolidated statements of operations in the other income (expense) line item upon settlement of the cash flow hedges. At September 30, 2013, the Company recorded a net deferred gain of $0.1 million related to the cash flow hedges in other current assets and other comprehensive income on the consolidated balance sheets and on the foreign currency translation adjustment and derivative transactions line of the consolidated statements of equity. The Company presents derivative instruments in the consolidated financial statements on a gross basis. The gross and net difference of derivative instruments are considered to be immaterial to the financial position presented in the financial statements.
The Company engages in regular inter-company trade activities with, and receives royalty payments from its wholly-owned Canadian entities, paid in Canadian Dollars, rather than the Company’s functional currency, U.S. Dollars. In order to reduce the uncertainty of the U.S. Dollar settlement amount of that anticipated future payment from the Canadian entities, the Company uses forward contracts to sell a portion of the anticipated Canadian Dollars to be received at the future date and buys U.S. Dollars.
In July 2013, the Company replaced its interest rate swap agreement with a notional amount of $83.0 million with an interest rate swap agreement with a notional amount of $175.0 million, which is set to expire in July 2016. The notional amount of this swap mirrors the amortization of a $175.0 million portion of the Company’s $350.0 million term loan drawn from the New Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 0.87% calculated on the amortizing $175.0 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the amortizing $175.0 million notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $175.0 million portion of the Company’s term loan from the New 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 will be accounted for as a cash flow hedge.

23


The following table provides a summary of the fair value amounts of our derivative instruments, all of which are Level 2 (as defined below) inputs (in thousands):
Designation of Derivatives
 
Balance Sheet Location
 
September 30,
2013
 
December 31,
2012
Derivatives Designated as Hedging Instruments:
 
 
 
 
Forward Currency Contracts
 
Prepaid expenses and other current assets
 
$
11

 
$
—

 
 
Total Assets
 
$
11

 
$
—

 
 
 
 
 
 
 
Forward Currency Contracts
 
Accrued expenses
 
$
—

 
$
9

Interest Rate Swaps
 
Other non-current liabilities
 
1,336

 
764

 
 
Total Liabilities
 
$
1,336

 
$
773

 
 
 
 
 
 
 
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
Forward Currency Contracts
 
Prepaid expenses and other current assets
 
$
583

 
$
—

 
 
Total Assets
 
$
583

 
$
—

 
 
 
 
 
 
 
Forward Currency Contracts
 
Accrued Expenses
 
$
—

 
$
585

 
 
 
 
 
 
 
 
 
Total Derivative Assets
 
$
594

 
$
—

 
 
Total Derivative Liabilities
 
1,336

 
1,358

 
 
Total Net Derivative Asset (Liability)
 
$
742

 
$
1,358

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

Total Fair Value at
September 30, 2013

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

Significant Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Assets:







Forward Currency Contracts
$
594

 
$
—

 
$
594

 
$
—

Total
$
594

 
$
—

 
$
594

 
$
—









Liabilities:







Interest Rate Swap
$
1,336

 
$
—

 
$
1,336


$
—

Total
$
1,336


$
—


$
1,336


$
—


24



Total Fair Value at
December 31, 2012

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

Significant Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Liabilities:







Forward Currency Contracts
$
594


$
—


$
594


$
—

Interest Rate Swap
764


—


764


—

Total
$
1,358


$
—


$
1,358


$
—

The following table summarizes the Company’s derivative positions at September 30, 2013:

Position

Notional
Amount

Weighted
Average
Remaining
Maturity
In Years

Average
Exchange
Rate
Canadian Dollar/USD
Sell
 
$
13,001,124

 
0.2
 
1.03
Singapore Dollar/USD
Sell
 
$
1,979,368

 
0.2
 
1.26
Hong Kong Dollar/USD
Sell
 
$
1,570,093

 
0.2
 
7.75
Australian Dollar/USD
Sell
 
$
3,579,286

 
0.2
 
0.93
USD/British Pound
Sell
 
£
1,900,000

 
0.7
 
0.84
EURO/British Pound
Sell
 
£
8,000,000

 
0.9
 
1.61
Interest Rate Swap
 
 
$
172,812,500

 
2.8
 
 
The Company had no transfers between Level 1, 2 or 3 inputs during the nine-month period ended September 30, 2013. Certain financial instruments are required to be recorded at fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our 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 are based on Level 2 inputs as previously defined.

25


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, 2012.
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, 2012.

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, 2012, as filed with the Securities and Exchange Commission on February 27, 2013, and in our subsequent Quarterly Reports on Form 10-Q, 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 periodic 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
We are a global leader in infrastructure protection and maintenance, providing proprietary technologies and services: (i) to protect against the corrosion of industrial pipelines; (ii) to rehabilitate and strengthen water, wastewater, energy and mining piping systems and buildings, bridges, tunnels and waterfront structures; and (iii) to utilize integrated professional services in engineering, procurement, construction, maintenance, and turnaround services for a broad range of energy related industries. Our business activities include manufacturing, distribution, maintenance, construction, installation, coating and insulation, cathodic protection, research and development and licensing. Our acquisition of Brinderson, L.P. and related entities (“Brinderson”) on July 1, 2013 opens new markets for us through the maintenance, engineering and construction services for downstream and upstream facilities in the North America oil and gas market. Our products and services are currently utilized and performed in more than 100 countries across six continents. We believe that the depth and breadth of our products and services platform make us a leading “one-stop” provider for the world’s infrastructure rehabilitation and protection needs.
Our Company is primarily built on the premise that it is possible to use technology to extend the structural design life and maintain, if not improve, the performance of a pipe. We’re proving today that this expertise can be applied in a variety of markets to protect pipelines in oil, gas, mining, wastewater, water applications and extending this to the rehabilitation of commercial structures. Many types of infrastructure must be protected from the corrosive and abrasive materials that pass through or near them. Our expertise in non-disruptive corrosion engineering and abrasion protection is now wide-ranging, opening new markets for growth. We have a long history of product development and intellectual property management. We manufacture most of the engineered solutions we create as well as the specialized equipment required to install them. Finally, decades of experience give us an advantage in understanding municipal, energy, mining, industrial and commercial customers. Strong customer relationships and brand recognition allow us to support the expansion of existing and innovative technologies into new high growth end markets.
We originally incorporated in Delaware in 1980 to act as the exclusive United States licensee of the Insituform® cured-in-place pipe (“CIPP”) process, which Insituform’s founder invented in 1971. The Insituform® CIPP process served as the first trenchless technology for rehabilitating sewer pipelines and has enabled municipalities and private industry to avoid the extraordinary expense and extreme disruption that can result from conventional “dig-and-replace” methods. For over 40 years,

26


we have maintained our leadership position in the CIPP market from manufacturing, to technological innovations and market share.
In order to strengthen our ability to service the emerging demands of the infrastructure protection market and to better position our Company for sustainable growth, we embarked on a diversification strategy in 2009 to expand our product and service portfolio and our geographical reach. Through a series of strategic initiatives and complementary acquisitions, we now possess one of the broadest portfolios of cost-effective solutions for rehabilitating and maintaining aging or deteriorating infrastructure and protecting new infrastructure from corrosion worldwide.
We are organized into four reportable segments: Energy and Mining; North American Water and Wastewater; International Water and Wastewater; and Commercial and Structural. We regularly review and evaluate our reportable segments. Market changes between the segments are typically independent of each other, unless a macroeconomic event affects the water and wastewater rehabilitation markets, the oil, mining and gas markets and the commercial and structural markets concurrently. These changes exist for a variety of reasons, including, but not limited to, local economic conditions, weather-related issues and levels of government funding.
Our long-term strategy consists of:
•
expanding our position in the growing and profitable energy and mining sector through organic growth, selective acquisitions of companies, formation of strategic alliances and by conducting complimentary product and technology acquisitions;
•
growing market opportunities in the commercial and structural infrastructure sector through (i) continued customer acceptance of current products and technologies; (ii) expansion of our product and service offerings with respect to protection, rehabilitation and restoration of a broader group of infrastructure assets; and (iii) leveraging our premier brand and experience of successfully innovating and delivering technologies and services through selective acquisitions of companies and technologies and through strategic alliances;
•
expanding all of our businesses in key emerging markets such as Asia and the Middle East; and
•
optimizing our water and wastewater rehabilitation operations by; (i) improving project execution, cost management practices, including the reduction of redundant fixed costs, and product mix; (ii) identifying opportunities to streamline key management functions and processes to improve our profitability; and (iii) strongly emphasizing higher return manufacturing operations.

Acquisitions/Strategic Initiatives/Divestitures
See Notes 1 and 9 to the consolidated financial statements contained in this report for a detailed discussion regarding acquisitions, strategic initiatives and divestitures.


27


Results of Operations – Quarters and Nine-Month Periods Ended September 30, 2013 and 2012
Overview – Consolidated Results
Key financial data for our consolidated operations, as updated for discontinued operations, was as follows:
(dollars in thousands)
Quarters Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
307,665

 
$
262,867

 
$
44,798

 
17.0
 %
Gross profit
69,411

 
62,931

 
6,480

 
10.3

Gross profit margin
22.6
%
 
23.9
%
 
n/a

 
(130
)bp
Operating expenses
47,956

 
42,351

 
5,605

 
13.2

Earnout reversal
(2,844
)
 
(6,892
)
 
(4,048
)
 
(58.7
)
Acquisition-related expenses
2,267

 
607

 
1,660

 
273.5

Operating income
22,032

 
26,865

 
(4,833
)
 
(18.0
)
Operating margin
7.2
%
 
10.2
%
 
n/a

 
(300
)bp
Income from continuing operations
14,623

 
21,170

 
(6,547
)
 
(30.9
)
(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
775,741

 
$
745,236

 
$
30,505

 
4.1
 %
Gross profit
176,116

 
177,722

 
(1,606
)
 
(0.9
)
Gross profit margin
22.7
%
 
23.8
%
 
n/a

 
(110
)bp
Operating expenses
130,112

 
125,314

 
4,798

 
3.8

Earnout reversal
(2,844
)
 
(6,892
)
 
(4,048
)
 
(58.7
)
Acquisition-related expenses
4,175

 
2,594

 
1,581

 
60.9

Operating income
44,673

 
56,706

 
(12,033
)
 
(21.2
)
Operating margin
5.8
%
 
7.6
%
 
n/a

 
(180
)bp
Income from continuing operations
37,277

 
40,703

 
(3,426
)
 
(8.4
)
Consolidated income from continuing operations was $14.6 million for the quarter ended September 30, 2013 compared to $21.2 million in the prior year quarter. The decrease in consolidated income from continuing operations for the third quarter of 2013 was primarily the result of increased acquisition-related expenses incurred in 2013 of $1.7 million and the $4.0 million pre-tax difference in earnout reversals between the two periods. Operating income, excluding earnout and acquisition-related expense, increased by $0.9 million, or 4.3%, due principally to improvements in our global water and wastewater businesses, specifically North America and Asia. In North America, we experienced a 23% revenue growth in the third quarter of 2013 compared to the third quarter of 2012 from improved backlog and a shift to more large diameter projects, which have allowed us to leverage our operating structure to improve the operating margin from 8.1% in the third quarter of 2012 to 10.8% in the third quarter of 2013. In Asia, improvements were driven by significantly lower operating losses in Singapore as major loss producing projects have substantially been completed, along with successful project execution on projects in Malaysia during 2013. Partially offsetting these increases were declines in our Energy and Mining and Commercial and Structural segments. Within Energy and Mining, the decline compared to the third quarter of 2012 was primarily related to low backlog levels in our coating operations in the United States, lower profitability in our Canadian cathodic protection operations and less contribution from the large Moroccan project, which was substantially completed in the third quarter of 2013. Brinderson, which was acquired on July 1, 2013, contributed $2.6 million in operating income in the third quarter of 2013. Excluding acquisition-related costs, our Commercial and Structural segment declined $3.4 million, or 136.4%, quarter over quarter due to lower workable backlog, isolated project performance issues and project delays in North America and Asia.
For the first nine months of 2013, consolidated income from continuing operations decreased $3.4 million, or 8.4%, compared to the first nine months of 2012. The decrease was attributable to declines in our Energy and Mining and Commercial and Structural segments and the impact of severe weather related delays throughout the first quarter of 2013 and into parts of the second quarter of 2013 throughout all of our segments. Partially offsetting these declines were increases in our global water and wastewater

28


businesses, profit generated during the third quarter of 2013 by Brinderson and the $7.9 million (post-tax) gain on sale we recognized in the second quarter of 2013 in connection with the sale of our 50% interest in our German joint venture.
For the third quarter of 2013 compared to the same quarter of 2012, revenues increased $44.8 million, or 17.0%. For the nine months ended September 30, 2013 revenues increased $30.5 million, or 4.1%, compared to the prior year period. These increases were primarily due to the addition of Brinderson, which contributed $47.9 million in revenues during the third quarter of 2013. Exclusive of Brinderson, revenues decreased during the nine months ended September 30, 2013 compared to the prior year period primarily due to lower workable backlog levels within our Commercial and Structural segment and our Energy and Mining segment’s coating operations coupled with project and weather delays throughout North America.
For the third quarter of 2013 compared to the same quarter of 2012, operating expenses increased $5.6 million, or 13.2%. For the nine-month period ended September 30, 2013, operating expenses increased $4.8 million, or 3.8%, compared to the prior year period. Again, these increases were primarily due to the addition of Brinderson, which contributed $5.9 million in operating expenses during the third quarter of 2013, partially offset by decreased incentive compensation and operational efficiencies gained in our cathodic protection operations as well as continued improvements in leveraging our fixed cost structure in our North American Water and Wastewater operation.

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. The Company assumes that these signed contracts are funded. For its government or municipal contracts, the Company’s customers generally obtain funding through local budgets or pre-approved bond financing. The Company has not undertaken a process to verify funding status of these contracts and, therefore, cannot reasonably estimate what portion, if any, of its contracts in backlog have not been funded. However, the Company has 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 and projects where we have been advised that we are the low bidder, but have not formally been awarded the contract. The following table sets forth our consolidated backlog by segment (in millions):
 
September 30,
2013
 
June 30,
2013
 
December 31,
2012
 
September 30,
2012
Energy and Mining (1)
$
172.5

 
$
193.0

 
$
240.8

 
$
246.9

North American Water and Wastewater
241.7

 
221.1

 
185.0

 
167.3

International Water and Wastewater
43.0

 
44.1

 
56.6

 
55.6

Commercial and Structural
48.2

 
52.2

 
50.8

 
46.7

Total hard backlog
505.4

 
510.4

 
533.2

 
516.5

Brinderson(2)
209.2

 
—

 
—

 
—

Total backlog
$
714.6

 
$
510.4

 
$
533.2

 
$
516.5

(1)
All periods presented exclude Bayou Welding Works (“BWW”) backlog, as this business was discontinued in the second quarter of 2013.
(2)
Brinderson backlog represents expected unrecognized revenues to be realized under long-term Master Service Agreements (“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 Energy and Mining and Commercial and Structural segments, certain contracts are performed through our variable interest entities, in which we own a controlling portion of the entity. As of September 30, 2013, 9.9% and 0.4% of our Energy and Mining hard backlog and Commercial and Structural backlog, respectively, related to these variable interest entities. With the exception of Brinderson, 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.
Within our Water and Wastewater segments, all of our projects are performed through our wholly-owned subsidiaries and a substantial majority of those projects are fixed price contracts with individual municipalities across the world.


29


Energy and Mining Segment
Key financial data for our Energy and Mining segment, as updated for discontinued operations, was as follows:
(dollars in thousands)
Quarters Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
168,708

 
$
137,386

 
$
31,322

 
22.8
 %
Gross profit
37,118

 
33,710

 
3,408

 
10.1

Gross profit margin
22.0
%
 
24.5
%
 
n/a

 
(250
)bp
Operating expenses
24,821

 
19,176

 
5,645

 
29.4

Earnout reversal
(2,844
)
 
(6,892
)
 
(4,048
)
 
(58.7
)
Acquisition-related expenses
2,267

 
—

 
2,267

 
         n/m
Operating income
12,874

 
21,426

 
(8,552
)
 
(39.9
)
Operating margin
7.6
%
 
15.6
%
 
n/a

 
(800
)bp
(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
385,991

 
$
377,610

 
$
8,381

 
2.2
 %
Gross profit
87,678

 
93,466

 
(5,788
)
 
(6.2
)
Gross profit margin
22.7
%
 
24.8
%
 
n/a

 
(210
)bp
Operating expenses
61,866

 
57,456

 
4,410

 
7.7

Earnout reversal
(2,844
)
 
(6,892
)
 
(4,048
)
 
(58.7
)
Acquisition-related expenses
4,175

 
—

 
4,175

 
         n/m
Operating income
24,481

 
42,902

 
(18,421
)
 
(42.9
)
Operating margin
6.3
%
 
11.4
%
 
n/a

 
(510
)bp
Revenues
Revenues in our Energy and Mining segment increased by $31.3 million, or 22.8%, in the third quarter of 2013 compared to the third quarter of 2012. This increase was primarily due to our acquisition of Brinderson, which contributed $47.9 million in revenues during the third quarter of 2013. Exclusive of Brinderson, revenues decreased $16.6 million, or 12.1%, primarily due to low production at our coating operations in New Iberia, Louisiana where revenues fell $10.9 million, or 43.8%. This decrease was due to a lack of project activity available in the market, coupled with certain projects shifting to 2014. Our industrial lining operations revenues fell $9.7 million, or 22.9%, compared to the third quarter of 2012. This operation has experienced more difficult market conditions in certain of its international markets, notably with mining customers, along with significantly less revenue from our large project in Morocco, which decreased $8.9 million, or 65.6%, compared to the third quarter of 2012 as this project was substantially completed in the third quarter of 2013. Partially offsetting these declines was a $3.0 million, or 65.7%, increase in the revenues from our robotic coating operations due to the start of the Wasit gas field project in Saudi Arabia.
Revenues increased by $8.4 million, or 2.2%, for the nine months ended September 30, 2013 compared to the prior year period primarily due to the addition of Brinderson, which contributed $47.9 million in additional revenues. Exclusive of Brinderson, revenues decreased by $39.6 million, or 10.5%, in the nine months ended September 30, 2013 compared to the prior year period primarily due to reduced revenue in our industrial linings operations in Morocco as the project nears completion, lower revenue at our coating operations in New Iberia, Louisiana, due to aforementioned factors, and lower revenues in our robotic coatings operations due to the delays on the Wasit gas field project. In Morocco, revenues declined $18.0 million, or 53.3%, as work has slowed down and the project was substantially completed in the third quarter of 2013. Additionally, our industrial linings operations experienced weakness in Mexico and South America compared to the prior year period. Collectively, revenue in these markets declined by $12.7 million, or 40.4%. Our robotic coating operations recognized $4.9 million less revenues in the first nine months of 2013 compared to the prior year period. These declines were partially offset by $6.7 million, or 4.1%, growth from our cathodic protection operations due to stronger market conditions in 2013, particularly in Canada, certain regional markets in the United States, and the Middle East.
Our Energy and Mining segment contract backlog, excluding Brinderson, at September 30, 2013 was $172.5 million, which represented a $20.5 million, or 10.6%, decrease compared to June 30, 2013 and a $74.4 million, or 30.1%, decrease compared to September 30, 2012. Backlog for our industrial linings operations declined sequentially and on a year-over-year basis primarily due to our substantial completion of the Moroccan project, which represented 36.8% of our industrial linings backlog at September

30


30, 2012, but only 3.3% of our industrial linings backlog as of September 30, 2013. Excluding the project in Morocco, our Energy and Mining segment contract backlog at September 30, 2013 was $170.6 million, which represented a $17.2 million, or 9.2%, decrease compared to June 30, 2013 and a $46.3 million, or 21.3%, decrease compared to September 30, 2012. The decreases were due to a temporary curtailment in capital and maintenance expenditures for our industrial linings operations coupled with depressed backlog for our coating operations in New Iberia, Louisiana because of timing of pipe coating activity supporting oil and gas offshore projects in the Gulf of Mexico.
Brinderson backlog represents estimated revenues to be generated under long-term MSAs and other signed contracts. If the remaining term of the arrangements exceeds 12 months, the unrecognized revenue attributable to such arrangements included in backlog are limited to only the next 12 months of expected revenues. At the date of acquisition, July 1, 2013, this backlog was $201.0 million and has increased 4.1% during the third quarter of 2013 to $209.2 million at September 30, 2013.
Gross Profit and Gross Profit Margin
Gross profit in our Energy and Mining segment increased by $3.4 million, or 10.1%, in the third quarter of 2013 compared to the third quarter of 2012. Gross profit decreased by $5.8 million, or 6.2%, for the nine months ended September 30, 2013 compared to nine months ended September 30, 2012. Brinderson contributed $8.5 million of gross profit and 17.7% gross margins in the third quarter of 2013. Gross margins declined by 250 basis points to 22.0% during the third quarter of 2013. The primary drivers of the decline in gross margins from the same period in the prior year were the addition of Brinderson’s lower profit margin work, project wind-down activities in Morocco and the third quarter of 2012 containing a large, higher gross profit concrete job for our coating operations in New Iberia, Louisiana that was not present during the third quarter of 2013. Gross profit on the industrial lining work in Morocco declined $2.7 million, or 183.0%, compared to the third quarter of 2012 and the coating operations in New Iberia, Louisiana declined $3.0 million, or 147.5%. Partially offsetting these declines were improved results from our robotic coating operations due to the large project in Saudi Arabia (Wasit), which increased its activity during the third quarter of 2013. For the nine months ended September 30, 2013, however, gross profit from our robotic coating operations decreased $5.9 million, or 57.5%, due to customer-directed delays on the Wasit project and other large projects being moved into 2014.
We believe the end markets for our Energy and Mining segment remain robust. Project delays and timing of project activity for the coatings operations in the Gulf of Mexico and linings operations in some international markets have slowed the momentum in 2013. For the fourth quarter of 2013, we expect (i) a pick up in production in November 2013 of the large robotic project for the offshore Wasit gas field; (ii) growth from our cathodic protection operations, specifically in Canada, from capital investments in North America and growth in new geographies for engineered pipeline integrity systems; (iii) higher margins for the projects expected to be completed in our industrial linings operation with the completion of the lower margin Morocco project; (iv) the seasonally strongest quarter of the year for our coating operations in Canada; and (v) increased contributions from Brinderson due to expected strong maintenance and turnaround service increases.
Beyond 2013, we anticipate continued healthy global markets will lead to expansion within existing geographies for our corrosion engineering and industrial lining platforms as well as new geographies, specifically in Asia and the Middle East. We believe that continued strong commodity prices coupled with ever increasing demand for maintenance spending in the sector, more significant opportunities in offshore pipeline development, particularly in the Gulf of Mexico, along with growth in our businesses situated in the key infrastructure spend areas of Canada, the Middle East and South America, provide us significant growth opportunities well into the future. The outlook for Brinderson is very robust with renewals and new bid opportunities for the western region of the United States upstream and downstream oil and gas markets. In addition, Brinderson is pursuing opportunities to expand its services in the West Texas Permian Basin region.
Operating Expenses
Operating expenses in our Energy and Mining segment increased by $5.6 million, or 29.4%, in the third quarter of 2013, and by $4.4 million, or 7.7%, in the nine months ended September 30, 2013 compared to the prior year periods. Brinderson added $5.9 million of operating expenses during the third quarter of 2013 and the operating expenses from our industrial lining operations increased $0.4 million, or 17.8%, during the third quarter of 2013 due to international expansion and to provide additional project support to the Moroccan project. Offsetting these increases were declines from improved cost efficiencies in our cathodic protection operations. As a percentage of revenues, our Energy and Mining operating expenses were 14.7% and 16.0% for the quarter and nine-month period ended September 30, 2013, respectively, compared to 14.0% and 15.2% in the comparable periods in 2012, respectively.
Additionally, during the third quarters of 2013 and 2012, we reversed $2.8 million and $5.9 million, respectively, of the contractual earnouts related to CRTS. In each year, operating results have been below the target amounts in the purchase agreement, mostly due to delays we have experienced with the Wasit project.
Operating Income and Operating Margin
Lower gross margins and higher operating expenses led to an operating income decrease of $8.6 million, or 39.9%, to $12.9 million in the third quarter of 2013 compared to $21.4 million in the third quarter of 2012. In the nine-month period ended

31


September 30, 2013, operating income decreased by $18.4 million, or 42.9%, to $24.5 million compared to $42.9 million in the prior year period. Operating margin was 7.6% and 6.3% in the quarter and nine-month period ended September 30, 2013, respectively.

North American Water and Wastewater Segment
Key financial data for our North American Water and Wastewater segment was as follows:
(dollars in thousands)
Quarters Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
95,997

 
$
77,818

 
$
18,179

 
23.4
%
Gross profit
21,357

 
17,183

 
4,174

 
24.3

Gross profit margin
22.2
%
 
22.1
%
 
n/a

 
10
bp
Operating expenses
11,029

 
10,894

 
135

 
1.2

Operating income
10,328

 
6,289

 
4,039

 
64.2

Operating margin
10.8
%
 
8.1
%
 
n/a

 
270
bp
(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
261,616

 
$
231,647

 
$
29,969

 
12.9
%
Gross profit
55,786

 
48,850

 
6,936

 
14.2

Gross profit margin
21.3
%
 
21.1
%
 
n/a

 
20
bp
Operating expenses
32,776

 
32,489

 
287

 
0.9

Operating income
23,010

 
16,361

 
6,649

 
40.6

Operating margin
8.8
%
 
7.1
%
 
n/a

 
170
bp
Revenues
Revenues increased by $18.2 million, or 23.4%, for our North American Water and Wastewater segment in the third quarter of 2013 compared to the third quarter of 2012. The growth came from increased volume across all geographies. Specifically, several crews were added during the quarter (capitalizing on record backlog levels) and large-diameter footage increased more than 100% compared to the prior year quarter.
For the nine months ended September 30, 2013, revenues increased by $30.0 million, or 12.9%, compared to the comparable period in 2012 due to growth in all regions. We also had a favorable project mix from our manufacturing facility shipping 128% more large diameter tube than the prior year period.
Contract backlog in our North American Water and Wastewater segment at September 30, 2013 was a record $241.7 million, a $20.6 million, or 9.3%, increase from backlog at June 30, 2013 and a $74.4 million, or 44.5%, increase from backlog at September 30, 2012. This segment won multiple large projects during the quarter in the Midwest and West regions of the United States. We expect backlog in Canada to remain steady in the coming quarters due to seasonality; however, domestic market activity and bidding performance is expected to remain strong for the remainder of 2013 and into 2014.
Gross Profit and Gross Profit Margin
Gross profit in our North American Water and Wastewater segment increased $4.2 million, or 24.3%, in the third quarter of 2013 compared to the third quarter of 2012. Gross margin percentages increased to 22.2% in the third quarter of 2013 from 22.1% in the third quarter of 2012. The gross margin improvement of 10 basis points was primarily due to improved project mix during the quarter, which shifted to more medium and large diameter work. Additionally, we have maintained our bidding discipline and have experienced continued success in our enhanced project management structure. For the nine months ended September 30, 2013, gross profit increased $6.9 million, or 14.2%, compared to the prior year period primarily due to the reasons previously mentioned.
Operating Expenses
Operating expenses in our North American Water and Wastewater segment increased by $0.1 million, or 1.2%, during the third quarter of 2013 compared to the third quarter of 2012. As a percentage of revenues, operating expenses were 11.5% in the third quarter of 2013 compared to 14.0% in the third quarter of 2012. Operating expenses in the nine months ended September 30, 2013 increased by $0.3 million, or 0.9%, compared to the prior year period. Operating expenses as a percentage of revenues were

32


12.5% in the nine months ended September 30, 2013, compared to 14.0% in the nine months ended September 30, 2012. Despite increased volumes, operating expenses have been flat due to efficiencies gained over the last two years in project management along with operational and administrative realignments.
Operating Income and Operating Margin
Higher gross margin percentages, coupled with increased revenues led to a $4.0 million, or 64.2%, increase in operating income in our North American Water and Wastewater segment in the third quarter of 2013 compared to the third quarter of 2012. The North American Water and Wastewater operating margin increased to 10.8% in the third quarter of 2013 compared to 8.1% in the third quarter of 2012. In the nine-month period ended September 30, 2013, operating income increased by $6.6 million, or 40.6%, to $23.0 million compared to $16.4 million in the prior year period. Operating margin was 8.8% and 7.1% in the nine months ended September 30, 2013 and 2012, respectfully.

International Water and Wastewater Segment
Key financial data for our International Water and Wastewater segment was as follows:
(dollars in thousands)
Quarters Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
26,152

 
$
27,766

 
$
(1,614
)
 
(5.8
)%
Gross profit
5,116

 
2,890

 
2,226

 
77.0

Gross profit margin
19.6
 %
 
10.4
 %
 
n/a

 
920
bp
Operating expenses
5,373

 
5,640

 
(267
)
 
(4.7
)
Acquisition-related expenses
—

 
445

 
(445
)
 
          n/m
Operating loss
(257
)
 
(3,195
)
 
2,938

 
92.0

Operating margin
(1.0
)%
 
(11.5
)%
 
n/a

 
1,050
bp
(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
80,064

 
$
80,712

 
$
(648
)
 
(0.8
)%
Gross profit
15,424

 
9,603

 
5,821

 
60.6

Gross profit margin
19.3
 %
 
11.9
 %
 
n/a

 
740
bp
Operating expenses
16,762

 
16,700

 
62

 
0.4

Acquisition-related expenses
—

 
445

 
(445
)
 
          n/m
Operating loss
(1,338
)
 
(7,542
)
 
6,204

 
82.3

Operating margin
(1.7
)%
 
(9.3
)%
 
n/a

 
760
bp
Revenues
Our International Water and Wastewater segment revenues decreased $1.6 million, or 5.8%, during the third quarter of 2013 compared to the third quarter of 2012. Our operations in France and Switzerland experienced a weaker 2013 due to a number of project delays and sustained recessionary impacts. In addition, the prior year revenues included projects in Singapore, which have been substantially concluded during the early part of 2013. We also experienced lower volumes in several of our Asian markets and certain markets in Europe related to third party tube sales. Offsetting these decreases, was $1.1 million of work in Malaysia during the quarter compared to no activity in the prior year period and increased volume in Australia related to a large project in Queensland.
Revenues in our International Water and Wastewater segment decreased $0.6 million, or 0.8%, during the first nine months of 2013 compared to prior year period. In the first nine months of 2013, we experienced lower volumes in several of our Asian markets including Singapore, where we have substantially completed the legacy projects, and India, where there has been no new project activity in the last year. Offsetting these decreases was $4.6 million of work in Malaysia compared to no activity in the prior year period and growth across the contracting markets in Netherlands and Spain.
Contract backlog in our International Water and Wastewater segment was $43.0 million at September 30, 2013. This represented a decrease of $1.1 million, or 2.5%, compared to June 30, 2013 and a decrease of $12.6 million, or 22.7%, compared to September 30, 2012. These decreases were primarily due to current year installation production in Spain, the Netherlands and

33


Malaysia. Backlog levels in Australia remain relatively flat as the Sydney contracts are being replaced with work in Queensland. We believe we will secure additional work in our key operational areas in the coming months.
Gross Profit and Gross Profit Margin
Gross profit in our International Water and Wastewater segment increased $2.2 million, or 77.0%, to $5.1 million during the third quarter of 2013 compared to the third quarter of 2012. The increase was primarily due to reduction of the large losses in Singapore from 2012. During the quarter, we reduced losses in Singapore by $1.5 million compared to the third quarter of 2012. We also increased gross profit from our Australia and Malaysia operations by $1.3 million and $0.6 million, respectively, during the quarter. Partially offsetting these improvements were decreases in gross profit related to project delays in France and the Netherlands and poor project execution in the United Kingdom. For the nine months ended September 30, 2013, gross profit increased $5.8 million, or 60.6%, primarily due to a $4.0 million reduction in losses from Singapore and gross profit realized on the new 2013 work in Malaysia.
In Asia, we are poised to see improved results as we continue our progress on projects in Malaysia, intelligently expand our opportunities in India and execute on new projects in Australia. In Europe, our prospects for growth are more moderate, but still positive, as we expand our third party product sales market share, and continue to optimize our operational capabilities in select contracting markets in Western Europe.
Operating Expenses
Operating expenses in our International Water and Wastewater segment decreased by $0.3 million, or 4.7%, to $5.4 million during the third quarter of 2013 compared to the third quarter of 2012 due to continued cost containment efforts. Operating expenses as a percentage of revenues were 20.5% in the third quarter of 2013 compared to 20.3% in the third quarter of 2012. Operating expenses increased $0.1 million, or 0.4%, to $16.8 million during the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012. Operating expenses as a percentage of revenues were 20.9% in the nine months ended September 30, 2013, compared to 20.7% in the nine months ended September 30, 2012. Operating expenses in Europe and Asia have been steady as new investments in operational management have been offset by savings from the reduced operations in Singapore and realignment of operations in certain European countries.
Operating Income (Loss) and Operating Margin
A 920 basis point improvement in gross margins, driven by lower losses in Singapore and high-margin work in Malaysia, led to a $2.9 million improvement of quarterly losses in the third quarter of 2013 compared to the third quarter of 2012. International Water and Wastewater operating margins improved 1,050 basis points to (1.0)% in the third quarter of 2013 compared to (11.5)% in the third quarter of 2012. In the nine-month period ended September 30, 2013, operating loss decreased by $6.2 million, or 82.3%, compared to the prior year period. Operating margin was (1.7)% and (9.3)% in the nine months ended September 30, 2013 and 2012, respectfully.

Commercial and Structural Segment
Key financial data for our Commercial and Structural segment was as follows:
(dollars in thousands)
Quarters Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
16,808

 
$
19,897

 
$
(3,089
)
 
(15.5
)%
Gross profit
5,820

 
9,148

 
(3,328
)
 
(36.4
)
Gross profit margin
34.6
 %
 
46.0
%
 
n/a

 
(1,140
)bp
Operating expenses
6,733

 
6,641

 
92

 
1.4

Acquisition-related expenses
—

 
162

 
(162
)
 
        n/m
Operating income (loss)
(913
)
 
2,345

 
(3,258
)
 
(138.9
)
Operating margin
(5.4
)%
 
11.8
%
 
n/a

 
(1,720
)bp

34


(dollars in thousands)
Nine Months Ended September 30,
 
Increase (Decrease)
 
2013
 
2012
 
$
 
%
Revenues
$
48,070

 
$
55,267

 
$
(7,197
)
 
(13.0
)%
Gross profit
17,228

 
25,803

 
(8,575
)
 
(33.2
)
Gross profit margin
35.8
 %
 
46.7
%
 
n/a

 
(1,090
)bp
Operating expenses
18,708

 
18,669

 
39

 
0.2

Acquisition-related expenses
—

 
2,149

 
(2,149
)
 
        n/m
Operating income (loss)
(1,480
)
 
4,985

 
(6,465
)
 
(129.7
)
Operating margin
(3.1
)%
 
9.0
%
 
n/a

 
(1,210
)bp
Revenues
Revenues in our Commercial and Structural segment decreased $3.1 million, or 15.5%, during the third quarter of 2013 compared to the third quarter of 2012. Our North American operations declined $5.7 million primarily due to lower workable backlog and customer driven project delays. Partially offsetting this decrease was a $2.0 million increase in our Canadian operations due to a large material order and a $0.6 million increase in our Asian operations. Revenues in our Commercial and Structural segment declined $7.2 million, or 13.0%, during the nine-month period ended September 30, 2013 compared to the prior year period primarily due to the lower workable backlog and project delays previously mentioned.
Contract backlog in our Commercial and Structural segment was $48.2 million at September 30, 2013. This represented a decrease of $4.0 million, or 7.7%, compared to June 30, 2013 and an increase of $1.5 million, or 3.2%, compared to September 30, 2012. Compared to June 30, 2013, backlog has decreased in all geographies. North American backlog decreased as the bid table has been slower to develop than we anticipated. In Asia, backlog slightly decreased due to the backlog burn of current projects and delays in new project releases. We anticipate an increase in the number of project opportunities, both domestically and internationally, including pipeline projects, which will be bid in the coming months, including in our international markets.
Gross Profit and Gross Profit Margin
Gross profit in our Commercial and Structural segment decreased $3.3 million, or 36.4%, during the third quarter of 2013 compared to the third quarter of 2012, primarily as a result of lower backlog levels, including reduced levels of higher margin pipeline projects, coupled with project performance issues. Partially offsetting this decline was a $1.0 million increase from our Canadian operations from revenue growth. Gross profit in our Commercial and Structural segment decreased $8.6 million, or 33.2%, during the nine-month period ended September 30, 2013 compared to the prior year period, due to the same reasons mentioned earlier. Gross profit margins declined 1,090 basis points during the first nine months of 2013 due to the project performance issues and the lower margin mix compared to the first nine months of 2012. We are focused on investments in sales, engineering and operations to increase our growth opportunities and improve backlog and execution capabilities, including the elimination of project performance issues.
Operating Expense
Operating expenses in our Commercial and Structural segment increased by $0.1 million, or 1.4%, during the third quarter of 2013 compared to the third quarter of 2012. For the nine-month periods ended September 30, 2013 and 2012, our operating expenses were essentially the same, despite the full year inclusion of operating expenses from Fyfe Group LLC’s Asian operations (“Fyfe Asia”). The nine-month period ended September 30, 2012 also included $2.1 million of expenses related to the acquisitions of Fyfe Asia and Fyfe Group LLC’s Latin American operations (“Fyfe LA”). Operating expenses as a percentage of revenues were 40.1% in the third quarter of 2013 compared to 33.4% in the third quarter of 2012. Operating expenses as a percentage of revenues were 38.9% and 33.8% in the nine-month periods ended September 30, 2013 and 2012, respectively. Our operating expense as a percentage of revenue is higher in this segment compared to our other segments due to the investments being made in this segment to build the infrastructure necessary to achieve our growth objectives.
Operating Income (Loss) and Operating Margin
The revenue decline, partially offset by no acquisition expense, led to a $3.3 million decrease in operating income during the third quarter of 2013 compared to the third quarter of 2012 and a $6.5 million decrease in operating income in the nine-month period ended September 30, 2013 compared to the prior year period. Commercial and Structural operating margins declined to (5.4)% in the third quarter of 2013 compared to 11.8% in the third quarter of 2012. Operating margin was (3.1)% and 9.0% in the nine months ended September 30, 2013 and 2012, respectfully.


35


Other Income (Expense)
Interest Income and Expense
Interest income was essentially flat in the quarter and nine-month period ended September 30, 2013 compared to the same periods in 2012. Interest expense increased by $3.0 million and $2.4 million in the quarter and nine-month period ended September 30, 2013 compared to the same periods in 2012 as principal balances increased year over year due to the July 1, 2013 acquisition of Brinderson.
Other Income (Expense)
Other expense increased by $0.3 million in the quarter ended September 30, 2013 compared to the quarter ended September 30, 2012 due to higher foreign currency losses resulting from the revaluation of certain asset and liability balances. Other income increased $7.7 million in the nine months ended September 30, 2013 compared to the prior year period due to the $11.3 million gain recognized on the sale of our fifty percent (50%) interest in our German joint venture in the second quarter of 2013. Partially offsetting this increase was a non-cash charge of $2.7 million related to the write-down of the investment in our Bayou joint venture as part of the purchase price accounting associated with our 2009 acquisition of The Bayou Companies, LLC (“Bayou”). The non-cash charge represents our current estimate of the difference between the carrying value of the investment on our balance sheet and the amount we may receive in connection with the exercise option (as discussed in Note 1 to the consolidated financial statements in this report).

Taxes on Income
Taxes on income decreased by $1.9 million during the third quarter of 2013 compared to the third quarter of 2012. Taxes on income decreased by $3.9 million during the nine-month period ended September 30, 2013 compared to the nine-month period ended September 30, 2012. Our effective tax rate was 19.7% and 19.3% in the quarter and nine-months ended September 30, 2013, respectively, compared to 20.9% and 24.6% in the corresponding periods in 2012. The quarter and nine-month periods ended September 30, 2013 had lower effective tax rates primarily due to a lower percentage of income from the United States, which has a higher tax rate.

Equity in Earnings of Affiliated Companies
Equity in earnings of affiliated companies was $1.7 million and $2.0 million in the third quarters of 2013 and 2012, respectively. Equity in earnings of affiliated companies was $3.9 million and $4.4 million in the nine-month periods ended September 30, 2013 and 2012, respectively. The decreases during 2013 were primarily due to no third quarter results from our former German joint venture following its sale in the second quarter of 2013, partially offset by increased project activity from Bayou Coating, L.L.C., our pipe coating joint venture in Baton Rouge, Louisiana.

Non-controlling Interests
Income attributable to non-controlling interests was $0.1 million and $1.2 million in the third quarters of 2013 and 2012, respectively. Income attributable to non-controlling interests was $1.0 million and $2.1 million in the nine-month periods ended Septembers 30, 2013 and 2012, respectively. These decreases were due to lower results from our joint ventures in Morocco and Mexico.

Loss from Discontinued Operations
Loss from discontinued operations was $0.6 million and $0.4 million in the quarters ended September 30, 2013 and 2012, respectively. Loss from discontinued operations was $6.5 million and $0.9 million in the nine months ended September 30, 2013 and 2012, respectfully. Our BWW business ceased bidding new work and substantially completed all ongoing projects during the second quarter of 2013. As a result of the closure of this business, we recognized a pre-tax, non-cash charge of approximately $3.9 million ($2.4 million after-tax, or $0.06 per diluted share), to reflect the impairment of goodwill and intangible assets. The Company also recognized additional non-cash impairment charges for equipment and other assets of approximately $1.1 million on a pre-tax basis ($0.7 million on an after-tax basis; $0.02 per diluted share), which also was recorded in the second quarter of 2013.


36


Liquidity and Capital Resources
Cash and Equivalents

September 30, 2013

December 31,
2012

(in thousands)
Cash and cash equivalents
$
126,687

 
$
133,676

Restricted cash
523

 
382

Restricted cash held in escrow relates to 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, potential acquisitions, working capital, debt service and share repurchases. During the first nine months of 2013, capital expenditures were primarily for our new insulation facility in Louisiana and for supporting growth in our Energy and Mining operations, along with equipment needed to expand our operational capability in the Middle East. For the full year of 2013, we expect decreased levels of capital expenditures compared to 2012 due to the completion of the two large capital projects in our coating operations. We spent a total of $23.6 million on these projects in 2012, which was partially funded by our joint venture partners, and anticipate a total spend in 2013 for these projects of $3.8 million.
At September 30, 2013, our cash balances were located worldwide for working capital and support needs. Given our extensive international operations, approximately 58.2% of our cash is denominated in currencies other than the United States dollar. We manage our worldwide cash requirements by reviewing available funds among the many subsidiaries through which we conduct our business and the cost effectiveness with which those funds can be accessed. The repatriation of cash balances from certain of our subsidiaries could have adverse tax consequences or be subject to regulatory capital requirements; however, those balances are generally available without legal restrictions to fund ordinary business operations. With few exceptions, U.S. income taxes, net of applicable foreign tax credits, have not been provided on undistributed earnings of international subsidiaries. Our intention is to permanently reinvest these earnings.
Our primary source of cash is operating activities. We occasionally borrow under our line of credit’s available capacity to fund operating activities, including working capital investments. Our operating activities include the collection of accounts receivable as well as the ultimate billing and collection of costs and estimated earnings in excess of billings. At September 30, 2013, we believe our net accounts receivable and our costs and estimated earnings in excess of billings as reported on our consolidated balance sheet are fully collectible. At September 30, 2013, we had certain net receivables (as discussed in the following paragraph) that we believe will be collected but are being disputed by the customer in some manner, which has impacted or may meaningfully impact the timing of collection or require us to invoke our contractual rights to an arbitration or mediation process, or take legal action. 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.
As of September 30, 2013, we had approximately $12.2 million in receivables related to certain projects in Hong Kong, Texas, Georgia and India that have been delayed in payment. We are in various stages of discussions, arbitration and/or litigation with the project clients regarding such receivables. Additionally, we had $6.1 million of receivables with a single customer associated with a large fabrication project at our Bayou Welding Works business and recorded within discontinued operations. These receivables have been outstanding for various periods dating back to 2009 through 2013. As of September 30, 2013, we had not reserved or written-off any of the balances related to these receivables, as management believes that these receivables are fully collectible. In each of the above instances, the customer has failed to meet its payment obligations in the timeframe set forth in the respective contracts. The Company believes that it has performed its obligations pursuant to such contracts. The Company believes the likelihood of success in each of these cases is probable and the Company is vigorously defending its position. As of December 31, 2012, we had approximately $16.0 million in receivables related to these projects. During the nine-month period ended September 30, 2013, we collected approximately $1.7 million of the receivables associated with the projects in India, and $0.7 million in Hong Kong.
Management believes that these outstanding receivables are fully collectible and a significant portion of the receivables will be collected within the next twelve months.

37


Cash Flows from Operations
Cash flows from operating activities of continuing operations provided $41.6 million in the first nine months of 2013 compared to $57.8 million provided in the first nine months of 2012. The decrease in operating cash flow from 2013 to 2012 was primarily related to lower net income and certain increases in working capital.
We used $12.6 million of cash for working capital during the nine-month period ended September 30, 2013 compared to $2.8 million used in the comparable period of 2012. The primary component of our working capital increase during the nine-month period ended September 30, 2013 was slower collections on receivables compared to the prior year period, especially in our international operations and Energy and Mining segment due to timing of collections. We expect to improve collections and achieve higher operating cash flows during the fourth quarter of 2013. Excluding the change in receivables, the other elements of working capital used $1.4 million in the nine-month period ended September 30, 2013 compared to $6.5 million used in the prior year period. Also, in the first nine months of 2013, we incurred $4.2 million in acquisition-related expenses compared to $2.6 million in the first nine months of 2012.
Unrestricted cash decreased to $126.7 million at September 30, 2013 from $133.7 million at December 31, 2012.
Cash Flows from Investing Activities
Investing activities from continuing operations used $144.2 million and $72.7 million of cash in the nine-month periods ended September 30, 2013 and 2012, respectively. We used $20.1 million in cash for capital expenditures in the first nine months of 2013 compared to $33.7 million in the prior year period. The higher capital expenditures during 2012 were primarily for our Bayou Wasco Insulation, LLC (“Bayou Wasco”) and BPPC joint ventures. During the first nine months of 2013, we sold our equity interests in our German joint venture for a total sale price of €14 million (approximately $18.3 million) and used $143.8 million to acquire Brinderson (net of cash acquired). In the first nine months of 2013 and 2012, $1.0 million of non-cash capital expenditures were included in accounts payable and accrued expenditures. Capital expenditures in the first nine months of 2013 and 2012 were partially offset by $1.9 million and $3.4 million, respectively, in proceeds received from asset disposals. During 2012, we used $39.4 million to acquire Fyfe Asia (net of cash acquired) and $3.0 million to acquire Fyfe LA (net of cash acquired).
We anticipate up to approximately $30.0 million to be spent in 2013 on capital expenditures to support our global operations.
Cash Flows from Financing Activities
Cash flows from financing activities provided $112.7 million during the first nine months of 2013 compared to $12.4 million provided in the first nine months of 2012. During 2013, we entered into a new credit facility and borrowed $147.6 million to fund the purchase of Brinderson and used $5.0 million for facility financing fees. During the first nine months of 2012, we borrowed $26.0 million to fund the purchase of Fyfe Asia and for working capital and joint venture investments. Through the first nine months of 2013, we used $19.0 million of cash to repurchase 833,552 shares of our common stock through open market purchases and in connection with our equity compensation programs as discussed in Note 6 contained in this report. Additionally, in the first nine months of 2013 and 2012, we used cash of $16.9 million and $18.8 million, respectively, to pay down the principal balance of our term loans as discussed in Note 5 contained in this report.
Long-Term Debt
In July 2013, in connection with closing the Brinderson acquisition, we entered into a new $650.0 million senior secured credit facility (the “New Credit Facility”) with a syndicate of banks. Bank of America, N.A. served as the administrative agent. Merrill Lynch Pierce Fenner & Smith Incorporated, JPMorgan Securities LLC and U.S. Bank National Association acted as joint lead arrangers and joint book managers in the syndication of the New Credit Facility. The New Credit Facility consists of a $300.0 million five-year revolving line of credit and a $350.0 million five-year term loan facility, each with a maturity date of July 1, 2018. We borrowed the entire term loan and drew $35.5 million against the revolving line of credit from the New Credit Facility on July 1, 2013 for the following purposes: (1) to pay the $147.6 million cash purchase price for our acquisition of Brinderson, L.P., which closed on July 1, 2013; (2) to retire $232.3 million in indebtedness outstanding under our prior credit facility; and (3) to fund expenses associated with the New Credit Facility and the Brinderson acquisition. Additionally, we used $7.0 million of cash on hand to fund these transactions. This New Credit Facility replaced our $500.0 million credit facility entered into on August 31, 2011 (the “Old Credit Facility”).
Generally, interest will be charged on the principal amounts outstanding under the New Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from 1.25% to 2.25% depending on our consolidated leverage ratio. We can also opt for an interest rate equal to a base rate (as defined in the credit documents) plus an applicable rate, which also is based on our consolidated leverage ratio. The applicable one month LIBOR borrowing rate (LIBOR plus our applicable rate) as of September 30, 2013 was approximately 2.21%.
Our total indebtedness at September 30, 2013 consisted of $345.6 million outstanding from the $350.0 million term loan under the New Credit Facility, $35.5 million on the line of credit under the New Credit Facility and $0.3 million of third party

38


notes and bank debt. Additionally, we and Wasco Coatings UK Ltd. (“Wasco Energy”) loaned Bayou Wasco $14.0 million for the purchase of capital assets in 2012 and 2013, of which $6.9 million was designated in the consolidated financial statements as third-party debt. In connection with the formation of BPPC, we and Perma-Pipe Canada, Inc. loaned BPPC an aggregate of $8.0 million for the purchase of capital assets and for operating purposes. Additionally, during January 2012, we and Perma-Pipe Canada, Inc. agreed to loan BPPC an additional $6.2 million for the purchase of capital assets increasing the total to $14.2 million. Of such amount, $5.0 million was designated in our consolidated financial statements as third-party debt at September 30, 2013.
As of September 30, 2013, we had $18.7 million in letters of credit issued and outstanding under the New Credit Facility. Of such amount, $10.4 million was collateral for the benefit of certain of our insurance carriers and $8.3 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.
In July 2013, we entered into an interest rate swap agreement for a notional amount of $175.0 million that is set to expire in July 2016. The notional amount of this swap mirrors the amortization of a $175.0 million portion of our $350.0 million term loan drawn from the New Credit Facility. The swap requires us to make a monthly fixed rate payment of 0.87% calculated on the amortizing $175.0 million notional amount, and provides that we receive a payment based upon a variable monthly LIBOR interest rate calculated on the amortizing $175.0 million notional amount. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $175.0 million portion of our term loan from the New 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 will be accounted for as a cash flow hedge.
Our New Credit Facility is subject to certain financial covenants, including a consolidated financial leverage ratio and consolidated fixed charge coverage ratio. At September 30, 2013, based upon the financial covenants, we had the capacity to borrow up to approximately $163.6 million of additional debt under our New Credit Facility. See Note 5 to the financial statements contained in this report for further discussion on our debt covenants. We were in compliance with all covenants at September 30, 2013.
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. We expect cash generated from operations to improve throughout the remainder of 2013 due to anticipated increased profitability, improved working capital management initiatives and additional cash flows generated from businesses acquired in 2011, 2012 and 2013.

Disclosure of Contractual Obligations and Commercial Commitments
We have entered into various contractual obligations and commitments in the course of our ongoing operations and financing strategies. Contractual obligations are considered to represent known future cash payments that we are required to make under existing contractual arrangements, such as debt and lease agreements. These obligations may result from both general financing activities or from commercial arrangements that are directly supported by related revenue-producing activities. Commercial commitments represent contingent obligations, which become payable only if certain pre-defined events were to occur, such as funding financial guarantees. See Note 7 to the consolidated financial statements contained in this report for further discussion regarding our commitments and contingencies.

39


The following table provides a summary of our contractual obligations and commercial commitments as of September 30, 2013. This table includes cash obligations related to principal outstanding under existing debt agreements and operating leases (in thousands):
 
Payments Due by Period
Cash Obligations (1) (2) (3) (4) (5)
Total
 
2013
 
2014
 
2015
 
2016
 
2017
 
Thereafter
Long-term debt and notes payable
$
393,348

 
$
4,376

 
$
21,875

 
$
33,441

 
$
35,656

 
$
35,000

 
$
263,000

Interest on long-term debt
35,278

 
2,226

 
8,524

 
7,715

 
7,165

 
6,366

 
3,282

Operating leases
48,831

 
4,579

 
15,531

 
11,847

 
7,430

 
4,537

 
4,907

Total contractual cash obligations
$
477,457

 
$
11,181

 
$
45,930

 
$
53,003

 
$
50,251

 
$
45,903

 
$
271,189

___________________
(1) 
Cash obligations are not discounted. See Notes 5 and 7 to the consolidated financial statements contained in this report regarding our long-term debt and credit facility and commitments and contingencies, respectively.
(2) 
Interest on long-term debt was calculated using the current annualized rate on our long-term debt as discussed in Note 5 to the consolidated financial statements contained in this report.
(3) 
At September 30, 2013, we had $1.3 million in earnout and contingent liabilities that are expected to be paid out in the first quarter of 2014.
(4) 
Liabilities related to Financial Accounting Standards Board Accounting Standards Codification 740, Income Taxes, have not been included in the table above because we are uncertain as to if or when such amounts may be settled.
(5) 
There were no material purchase commitments at September 30, 2013.

Off-Balance Sheet Arrangements
We use various structures for the financing of operating equipment, including borrowings and operating leases. All debt is presented in the balance sheet. Our future commitments were $477.5 million at September 30, 2013. We have no other off-balance sheet financing arrangements or commitments. See Note 7 to the consolidated financial statements contained in this report regarding commitments and contingencies.

Recently Adopted Accounting Pronouncements
See Note 2 to the consolidated financial statements contained in this report.

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, 2013 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, 2013 was variable rate debt. We partially mitigate interest rate risk through interest rate swap agreements, which are used to hedge the volatility of monthly LIBOR rate movement of our debt.
At September 30, 2013, the estimated fair value of our long-term debt was approximately $385.8 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, 2013 would result in a $3.8 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, 2013, a substantial portion of our cash and cash equivalents

40


was denominated in foreign currencies, and a hypothetical 10.0% change in currency exchange rates could result in an approximate $7.2 million impact to our equity through accumulated other comprehensive income.
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, 2013, there were no material foreign currency hedge instruments outstanding. See Note 10 to the consolidated financial statements contained in this report for additional information and disclosures regarding our derivative financial instruments.
Commodity Risk
We have exposure to the effect of limitations on supply and changes in commodity pricing relative to a variety of raw materials that we purchase and use in our operating activities, most notably resin, iron ore, chemicals, staple fiber, fuel, metals and pipe. We manage this risk by entering into agreements with certain suppliers utilizing a request for proposal, or RFP, 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.
Iron ore inventory balances are managed according to our anticipated volume of concrete weight coating projects. We obtain the majority of our iron ore from a limited number of suppliers, and pricing can be volatile. Iron ore is typically purchased near the start of each project. Concrete weight coating revenue accounts for a small percentage of our overall revenues.
The primary products and raw materials used by our Commercial and Structural segment 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.

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, 2013. Based upon and as of the date of this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls 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.
The scope of management’s evaluation did not include our recent acquisition of Brinderson.
There were no other changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


41


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

Item 1A. Risk Factors
Other than described below, there have been no material changes to the risk factors described in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012.
We are subject to a number of restrictive debt covenants under our line of credit facility.
In July 2013, the Company entered into a new $650.0 million senior secured credit facility (the “New Credit Facility”) with a syndicate of banks. Bank of America, N.A. served as the administrative agent. Merrill Lynch Pierce Fenner & Smith Incorporated, JPMorgan Securities LLC and U.S. Bank National Association acted as joint lead arrangers and joint book managers in the syndication of the new credit facility. The New Credit Facility replaced our $500.0 million credit facility entered into on August 31, 2011 (the "Old Credit Facility"). The New Credit Facility consists of a $300.0 million five-year revolving line of credit and a $350.0 million five-year term loan facility, each with a maturity date of July 1, 2018. At September 30, 2013, $345.6 million of the term loan was outstanding and $35.5 million on the line of credit was outstanding. Our New Credit Facility contains certain restrictive covenants, which restrict our ability to, among other things, incur additional indebtedness, incur certain liens on our assets or sell assets, make investments and make other restricted payments. Our credit facility also requires us to maintain specified financial ratios under certain conditions and satisfy financial condition tests. Our ability to meet those financial ratios and tests and otherwise comply with our financial covenants may be affected by the factors described in Item 1A in our Annual Report on Form 10-K for the year ended December 31, 2012 and other factors outside our control, and we may not be able to continue to meet those ratios, tests and covenants. Our ability to generate sufficient cash from operations to meet our debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, business and other factors beyond our control. A breach of any of these covenants, ratios, tests or restrictions, as applicable, or any inability to pay interest on, or principal of, our outstanding debt as it becomes due could result in an event of default. Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable.
At September 30, 2013 and December 31, 2012, we were in compliance with all of our debt covenants as required under the New Credit Facility and Old Credit Facility, respectively. If we are unable to comply with the restrictive covenants in the future, we would be required to obtain amendments or waivers from our lenders or secure another source of financing. If our current lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis. In addition, these restrictive covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions and taking advantage of attractive business opportunities.
Our operations could be adversely impacted by the recent enactment of legislation in California related to labor that may be used for certain of our operations.
In response to recent high profile refinery accidents, the State of California enacted Senate Bill 54 that introduces new requirements for contracts entered into on or after January 1, 2014 by outside contractors performing construction, demolition, installation or maintenance services at certain covered facilities, primarily refineries. Among these requirements, and subject to certain exceptions, the new statute may require outside contractors, including certain of our subsidiaries with operations in California, to pay workers at the applicable prevailing wage rate and to utilize workers that are graduates of certified apprenticeship programs or otherwise meet the statute’s requirements. Compliance with the new statute may increase the cost of labor for our operations in California and may increase the complexity of the regulatory environment in which we operate and the related cost of compliance, which could have an adverse impact on our operations.


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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 2013 (1) (4)
 
125,165

 
$
22.76

 
124,163

 
$
2,169,389

February 2013 (1) (4)
 
66,073

 
23.19

 
18,100

 
1,759,575

March 2013 (1) 
 
8,800

 
22.87

 
8,800

 
1,558,081

April 2013 (2) (4)
 
71,713

 
22.03

 
70,869

 
—

May 2013 (2) (4)
 
267,559

 
22.77

 
266,800

 
4,310,286

June 2013 (2)
 
157,000

 
22.71

 
157,000

 
357,555

July 2013 (2) (4)
 
16,081

 
23.27

 
15,367

 
—

August 2013
 
—

 
—

 
—

 
—

September 2013 (3)
 
121,161

 
23.27

 
121,161

 
7,180,115

Total
 
833,552

 
$
22.81

 
782,260

 
$
7,180,115

_________________________________
(1) 
In December 2012, our board of directors authorized the repurchase of up to $5.0 million of our common stock to be made during 2013. This amount constituted the then maximum open market repurchases currently authorized in any calendar year under the terms of the Credit Facility. Once repurchased, we immediately retired the shares.
(2) 
In May 2013, our board of directors authorized the repurchase of up to $10.0 million of our common stock to be made during the balance of the 2013 calendar year. We simultaneously executed an amendment to the Old Credit Facility to allow for the repurchase. Once repurchased, we immediately retired the shares.
(3) 
In September 2013, our board of directors authorized the repurchase of up to an additional $10.0 million of our common stock to be made during the balance of the 2013 calendar year. This amount represented half of the potential maximum open market repurchases authorized in any calendar year under the terms of the New Credit Facility given the covenants currently applicable to the Company. Once repurchased, we immediately retire the shares.
(4) 
In connection with approval of our Old Credit Facility and New Credit Facility, our board of directors approved the purchase of up to $5.0 million and $10.0 million, respectively, of our common stock in each calendar year in connection with our equity compensation programs for employees and directors. The total number of shares purchased includes shares surrendered to us to pay the exercise price and/or to satisfy tax withholding obligations in connection with stock swap exercises of employee stock options and/or the vesting of restricted stock issued to employees and directors, totaling 51,292 shares for the nine months ended September 30, 2013. 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 vested or the stock option was exercised. Once repurchased, we immediately retired the shares.

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

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
AEGION CORPORATION
 
 
Date: October 31, 2013
/s/ David A. Martin
 
David A. Martin
 
Senior Vice President and Chief Financial Officer
 
(Principal Financial Officer and Principal Accounting Officer)

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INDEX TO EXHIBITS
These exhibits are numbered in accordance with the Exhibit Table of Item 601 of Regulation S-K.
10.1
Credit Agreement, dated as of July 1, 2013, among Aegion Corporation, the Guarantors and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 to the current report on Form 8-K filed on July 5, 2013).
 
 
10.2
First Amendment to Equity Purchase Agreement, dated as of June 30, 2013, by and between Energy & Mining Holding Company, LLC and Tim W. Carr, Southpac Trust International, Inc. and Richard B. Fontaine, Trustees of the BCSD Trust dated 1/28/93, as amended and restated (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed on July 5, 2013).
 
 
31.1
Certification of J. Joseph Burgess pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
31.2
Certification of David A. Martin pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
32.1
Certification of J. Joseph Burgess pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
32.2
Certification of David A. Martin pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed herewith.
 
 
101.INS
XBRL Instance Document*
 
 
101.SCH
XBRL Taxonomy Extension Schema Document*
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document*
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document*
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document*
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document*
*
In accordance with Rule 406T under Regulation S-T, the XBRL-related information in Exhibit 101 shall be deemed “furnished” and not “filed”.

45