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AEGN > SEC Filings for AEGN > Form 10-Q on 1-Aug-2013All Recent SEC Filings

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Form 10-Q for AEGION CORP


1-Aug-2013

Quarterly Report


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, providing proprietary technologies and services to protect against the corrosion of industrial pipelines and for the rehabilitation and strengthening of sewer, water, energy and mining piping systems and buildings, bridges, tunnels and waterfront structures. Our business activities include manufacturing, distribution, 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, 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

? streamlining 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

We operate in three distinct markets: energy and mining; water and wastewater; and commercial and structural services. Management organizes itself around differences in products and services, as well as by geographic areas. Within the water and wastewater market, we operate in two distinct geographies: North America and internationally outside of North America. As such, we 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, we re-organized our Water and Wastewater businesses to bring all of its operations under one central leadership team. We 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, we combined our European Water and Wastewater and Asia-Pacific Water and Wastewater reportable segments into one reportable segment titled International Water and Wastewater and all future filings will combine these previously reported segments into one.

Energy and Mining Segment

Starting in January 2014, and solely during the month of January in each calendar year thereafter, our 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 fiscal year, with such book value to be determined on the basis of Bayou Coating's federal information tax return for such fiscal year. We have received preliminary indication from Stupp that it intends to exercise the option in January 2014. Stupp has not indicated which option method it intends to exercise (acquire assets or equity interests). In connection with this preliminary indication, we have 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 our 2009 acquisition of The Bayou Companies L.L.C. ("Bayou"). The non-cash charge represents the Company's 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. We are currently evaluating and gathering more information regarding additional potential financial impacts associated with the exercise of this option. We do not expect any additional material impacts on our consolidated balance sheet.


During the second quarter of 2013, our Board of Directors approved a plan of liquidation for our Bayou Welding Works ("BWW") business in an effort to improve our overall financial performance and align the operations with our 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 our 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, 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. We 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. We expect a liquidation value of as much as $9.9 million in cash from the disposal of the business and its assets, including working capital. We also will incur cash charges to exit the business of up to approximately $0.1 million on a pre-tax and post-tax basis, or $0.01 per share, which will include property, equipment and vehicle lease termination and buyout costs, employee termination benefits and retention incentives, among other ancillary shut-down expenses.

In March 2012, we organized United Special Technical Services LLC ("USTS"), a joint venture located in the Sultanate of Oman between our United Pipeline Systems division and Special Technical Services LLC ("STS"), for the purpose of executing pipeline, piping and flow line high-density polyethylene lining services throughout the Middle East and Northern Africa. We hold 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.

Water and Wastewater Segment

In June 2013, we sold our fifty percent (50%) interest in Insituform Rohrsanierungstechniken GmbH ("Insituform-Germany"), held through our 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 US $18.3 million. The sale resulted in a gain on the sale of approximately $11.3 million.

Commercial and Structural Segment

On April 5, 2012, we purchased Fyfe Group'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. The cash purchase price at closing was $40.7 million and also included the patent portfolio of Fyfe Asia. The purchase price was funded out of our cash balances and by borrowing $18.0 million against our line of credit. Fyfe Asia is included in our Commercial and Structural reportable segment.

On January 4, 2012, we purchased Fyfe Group'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. The purchase price was $2.3 million in cash at closing with the sellers able to earn an additional payout both annually upon achievement of certain performance targets in each year over the three-year period ending December 31, 2014 and upon completion of 2011 and 2012 audited financials based upon a multiple of EBITDA calculation. During the first quarter of 2012, we paid the sellers an additional $1.1 million based on a preliminary working capital adjustment. Fyfe LA provides Fibrwrap installation services throughout Latin America, as well as product and engineering support to installers and applicators of the fiber reinforced polymer systems in Latin America. The purchase price was funded out of our cash balances. Fyfe LA is included in our Commercial and Structural reportable segment.

See Notes 1 and 9 to the financial statements contained in this report for further discussion regarding these acquisitions and divestitures.


Results of Operations - Quarters and Six-Month Periods Ended June 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):



(dollars in thousands)                    Quarters Ended June 30,            Increase (Decrease)
                                           2013              2012             $               %
Revenues                               $    242,100       $  254,490     $    (12,390 )         (4.9 )%
Gross profit                                 58,568           62,219           (3,651 )         (5.9 )
Gross profit margin                           24.2%            24.4%              n/a            (20 )bp
Operating expenses                           40,837           42,153           (1,316 )         (3.1 )
Acquisition-related expenses                  1,908            1,412              496           35.1
Operating income                             15,823           18,654           (2,831 )        (15.2 )
Operating margin                               6.5%             7.3%              n/a            (80 )bp
Income from continuing operations            18,190           11,751            6,439           54.8



                                          Six Months Ended June 30,            Increase (Decrease)
                                           2013               2012              $               %
Revenues                               $     468,076       $   482,368     $    (14,292 )         (3.0 )%
Gross profit                                 106,705           114,790           (8,085 )         (7.0 )
Gross profit margin                            22.8%             23.8%              n/a           (100 )bp
Operating expenses                            82,156            82,962             (806 )         (1.0 )
Acquisition-related expenses                   1,908             1,987              (79 )         (4.0 )
Operating income                              22,641            29,841           (7,200 )        (24.1 )
Operating margin                                4.8%              6.2%              n/a           (140 )bp
Income from continuing operations             21,822            18,669            3,153           16.9

Consolidated income from continuing operations was $18.2 million for the quarter ended June 30, 2013 compared to $11.8 million in the prior year quarter. The increase in consolidated income from continuing operations for the second quarter of 2013 was a result of the sale of our 50% interest in our joint venture in Germany, which resulted in a gain of $7.9 million (post-tax), partially offset by a non-cash charge of $1.8 million (post-tax) to write down our investment in our Bayou Coating joint venture and acquisition-related expenses of $1.1 million (post-tax). Operating income, excluding acquisition-related expense, declined by $2.3 million, or 11.6%, due to declines in our Energy and Mining and Commercial and Structural segments. Within Energy and Mining, the decline compared to the second quarter of 2012 was primarily related to low backlog levels in our coating operations and continued project delays on our large projects in Morocco and for the Wasit gas field. Excluding acquisition-related costs, our Commercial and Structural segment declined by $2.1 million, or 76.8%, due to lower workable backlog, isolated performance issues and project delays in its North American operations. Partially offsetting these declines were improvements in our global water and wastewater businesses, specifically North America. In North America, we successfully executed several large diameter projects during the second quarter of 2013 and saw a shift to more medium and large diameter work, which are higher margin projects.

For the first six months of 2013, consolidated income from continuing operations increased $3.2 million, or 16.9%, compared to the first six months of 2012. Again, the increase can be attributable to the gain on the sale of our interests in our German joint venture, partially offset by declines in our Energy and Mining and Commercial and Structural segments. Additionally, we experienced severe weather related delays throughout the first quarter of 2013 and into parts of the second quarter of 2013 throughout all of our segments.

For the second quarter of 2013 compared to the same quarter of 2012, revenues decreased $12.4 million, or 4.9%. For the six months ended June 30, 2013 revenues decreased $14.3 million, or 3.0%, compared to the prior year period. These decreases were primarily due to project and weather delays throughout North America coupled with lower workable backlog levels within our Commercial and Structural segment and our Energy and Mining segment's coating operations. Additionally, in the second quarter of 2013, revenues from our industrial linings operations declined by $10.8 million, or 26.3%, due to lower revenues recorded from our large project in Morocco. Our global water and wastewater business improved due to strong backlog positions in North America and growth of our operations in Spain and Malaysia.


For the second quarter of 2013 compared to the same quarter of 2012, operating expenses decreased $1.3 million, or 3.1%. For the six-month period ended June 30, 2013, operating expenses declined $0.8 million, or 1.0%, compared to the prior year period. These decreases were primarily due to 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. Partially offsetting these declines were increases in International Water and Wastewater segment as well as our industrial linings operations as we have continued to expand our presence internationally.

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):

                                            June 30,       March 31,      December 31,       June 30,
                                              2013           2013             2012             2012
Energy and Mining (1)                      $    193.0     $     207.7     $       240.8     $    245.2
North American Water and Wastewater             221.1           172.2             185.0          158.2
International Water and Wastewater               44.1            49.4              56.6           57.0
Commercial and Structural                        52.2            49.4              50.8           29.5
Total                                      $    510.4     $     478.7     $       533.2     $    489.9

(1) All periods presented exclude BWW backlog.

Although backlog represents only those contracts 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 June 30, 2013, 11.2% and 1.1% of our Energy and Mining and Commercial and Structural, respectively, backlog related to these variable interest entities. Additionally, a substantial majority of our contracts are fixed price contracts with individual private businesses 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.


Energy and Mining Segment



Key financial data for our Energy and Mining segment, as updated for
discontinued operations, was as follows (in thousands):



(dollars in thousands)
                                                                     2013 vs. 2012
                                 Quarters Ended June 30,          Increase (Decrease)
                                   2013             2012             $              %
Revenues                       $    108,592       $ 127,900     $    (19,308 )     (15.1 )%
Gross profit                         26,294          32,969           (6,675 )     (20.2 )
Gross profit margin                   24.2%           25.8%              n/a        (160 )bp
Operating expenses                   18,230          19,221             (991 )      (5.2 )
Acquisition-related expenses          1,908               -            1,908         n/m
Operating income                      6,156          13,748           (7,592 )     (55.2 )
Operating margin                       5.7%           10.7%              n/a        (500 )bp

(dollars in thousands)
                                                                       2013 vs. 2012
                                 Six Months Ended June 30,          Increase (Decrease)
                                   2013               2012             $              %
Revenues                       $     217,283       $  240,224     $    (22,941 )      (9.5 )%
Gross profit                          50,560           59,757           (9,197 )     (15.4 )
Gross profit margin                    23.3%            24.9%              n/a        (160 )bp
Operating expenses                    37,045           38,281           (1,236 )      (3.2 )
Acquisition-related expenses           1,908                -            1,908         n/m
Operating income                      11,607           21,476           (9,869 )     (46.0 )
Operating margin                        5.3%             8.9%              n/a        (360 )bp

Revenues

Revenues in our Energy and Mining segment decreased by $19.3 million, or 15.1%, in the second quarter of 2013 compared to the second quarter of 2012. The primary driver of this decline was lower revenues from our industrial lining operations, specifically less revenue from our large project in Morocco. Revenues for this project decreased $8.5 million, or 61.3%, compared to the second quarter of 2012. Revenues for our coating operations and our robotic coating operations declined $5.7 million, or 22.6%, and $3.6 million, or 52.1%, respectively. These revenue declines relate to two large projects, for which a portion of the work has now been moved into 2014 as a result of customer driven scheduling changes. Partially offsetting these declines was a $0.7 million, or 1.2%, growth in our cathodic protection operations.

Revenues decreased by $22.9 million, or 9.5%, for the six months ended June 30, . . .

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