The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f).
Under the supervision and with the participation of Company management, including the Chief Executive Officer (the principal executive officer) and the Chief Financial Officer (the principal financial officer), an evaluation was performed of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In performing this evaluation, management employed the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013).
Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in its report which appears herein.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Aegion Corporation combines innovative technologies with market leading expertise to maintain, rehabilitate and strengthen pipelines and other infrastructure around the world. For 50 years, the Company has played a pioneering role in finding transformational solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. The Company also maintains the efficient operation of refineries and other industrial facilities and provides innovative solutions for the strengthening of buildings, bridges and other structures. Aegion is committed to Stronger. Safer. Infrastructure®. The Company believes that the depth and breadth of its products and services platform make Aegion a leading “one-stop” provider for the world’s infrastructure rehabilitation and protection needs.
The Company is primarily built on the premise that it is possible to use technology to extend the structural design life and maintain, if not improve, the performance of infrastructure, mostly pipe. The Company is proving that this expertise can be applied in a variety of markets to protect pipelines in oil, gas, mining, wastewater and water applications and extending this to the rehabilitation and maintenance of commercial structures and the provision of professional services in energy-related industries. Many types of infrastructure must be protected from the corrosive and abrasive materials that pass through or near them. The Company’s expertise in non-disruptive corrosion engineering and abrasion protection is now wide-ranging, opening new markets for growth. The Company has a long history of product development and intellectual property management. The Company manufactures most of the engineered solutions it creates as well as the specialized equipment required to install them. Finally, decades of experience give the Company an advantage in understanding municipal, energy, mining, industrial and commercial customers. Strong customer relationships and brand recognition allow the Company to support the expansion of existing and innovative technologies into new high growth markets.
The Company’s predecessor was originally incorporated in Delaware in 1980 to act as the exclusive United States licensee of the Insituform® cured-in-place pipe (“CIPP”) process, which Insituform’s founder invented in 1971. The Insituform® CIPP process served as the first trenchless technology for rehabilitating sewer pipelines and has enabled municipalities and private industry to avoid the extraordinary expense and extreme disruption that can result from conventional “dig-and-replace” methods. For 50 years, the Company has maintained its leadership position in the CIPP market from manufacturing to technological innovations and market share.
In order to strengthen the Company’s ability to service the emerging demands of the infrastructure protection market and to better position the Company for sustainable growth, the Company embarked on a diversification strategy in 2009 to expand its product and service portfolio and its geographical reach. Through a series of strategic initiatives and key acquisitions, the Company now possesses a broad portfolio of cost-effective solutions for rehabilitating and maintaining aging or deteriorating infrastructure, protecting new infrastructure from corrosion worldwide and providing integrated professional services in engineering, procurement, construction, maintenance, and turnaround services for oil and natural gas companies, primarily in the midstream and downstream markets.
Recognizing that the breadth of offerings expanded beyond the Company’s flagship Insituform® brand, which constituted less than half of the Company’s revenues in 2011, the Company reorganized Insituform Technologies, Inc. (“Insituform”), the parent company at the time, into a new holding company structure in October 2011. Aegion became the new parent company and Insituform became a wholly-owned subsidiary of Aegion. Aegion reflects the Company’s mission of extending its leadership capabilities to furnish products and services to provide: (i) long-term protection for water and wastewater pipes, oil and gas pipelines and infrastructure as well as commercial and governmental structures and transportation infrastructure; and (ii) integrated professional services to energy companies.
Strategic Initiatives/Acquisitions/Divestitures
Pending Merger
On February 16, 2021, the Company entered into a definitive merger agreement with affiliates of New Mountain Capital, L.L.C., a leading growth-oriented investment firm headquartered in New York. The transaction is valued at approximately $963 million, or $26.00 per common share, and was unanimously approved by the Company’s board of directors. Upon completion of the transaction, Aegion will become a private company and shares of Aegion common stock will no longer be listed on any public market. The merger is expected to close in the second quarter of 2021, subject to customary closing conditions, including, among other things, approval under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) and approval of the Company’s stockholders. In connection with the merger, any unvested restricted stock units and performance stock units will become fully vested at the time of the completed transaction and convert into the right to receive a cash payment equal to the per share transaction valuation. This conversion could be material. The merger agreement also includes customary termination provisions for both parties, subject, in certain circumstances, to the payment by the Company of a termination fee of $30,000,000.
Discontinued Operations
In December 2020, the Company’s board of directors approved a divestiture plan for the Energy Services reportable segment (“Energy Services”). This decision reflects an advancement of the Company’s strategy to expand its focus on core water and wastewater markets, while reducing its exposure to the oil and gas markets. The results of the former Energy Services segment are presented as discontinued operations and have been excluded from both continuing operations and segment results for the years ended December 31, 2020, 2019 and 2018. The Company has classified Energy Services’s assets and liabilities as held for sale on the Consolidated Balance Sheets at December 31, 2020 and 2019. See Note 6.
Restructuring Activities
In 2017, the Company’s board of directors approved a comprehensive global realignment and restructuring plan (the “Restructuring”) intended to generate more predictable and sustainable long‐term earnings growth, which included, among other things, actions to reduce upstream oil & gas exposure, the exit or divestiture of multiple smaller international businesses, the restructuring of unprofitable businesses in North America and other efforts to right‐size underperforming businesses and reduce corporate and other operating costs. See further discussion in Note 4.
Infrastructure Solutions Segment (“Infrastructure Solutions”)
In February 2020, the Company sold its Spanish CIPP contracting entity, Insituform Technologies Iberica, S.A. (“Insituform Spain”), to Lajusocarley S.L. In connection with the sale, the Company entered into a five-year tube supply agreement whereby Insituform Spain will buy felt liners exclusively from the Company. Insituform Spain is also entitled to use the Insituform® trade name in Spain based on a trademark license granted for the same five-year time period. The Company had classified Insituform Spain’s assets and liabilities as held for sale on the Consolidated Balance Sheet at December 31, 2019. See Note 6.
In January 2020, the Company sold its Australian CIPP contracting entity, Insituform Pacific Pty Limited (“Insituform Australia”), to Insituform Holdings Pty Ltd, an entity affiliated with Killard Infrastructure Pty Ltd. In connection with the sale, the Company entered into a five-year tube supply agreement whereby Insituform Australia, under its new ownership, will buy liners exclusively from the Company. Insituform Australia is also entitled to use the Insituform® trade name in Australia based on a trademark license granted for the same five-year time period. The Company had classified Insituform Australia’s assets and liabilities as held for sale on the Consolidated Balance Sheet at December 31, 2019. See Note 6.
During 2019, the Company initiated plans to sell its contracting business in Northern Ireland, Environmental Techniques Limited (“Environmental Techniques”). Accordingly, the Company has classified the assets and liabilities of this business as held for sale on the Consolidated Balance Sheets at December 31, 2020 and 2019. The Company temporarily suspended the sales process for Environmental Techniques due to COVID-19 and expects to recommence the process during the second half of 2021. See Note 6.
In October 2019, the Company sold its CIPP contracting operations of Insituform Netherlands to GMB Rioleringstechnieken B.V., a Dutch company (“GMB”). In connection with the sale, the Company entered into a five-year tube supply agreement whereby GMB will buy liners from the Company.
In November 2018, the Company sold substantially all of the fixed assets and inventory from its CIPP operations in Denmark. In connection with the sale, the Company entered into a five-year exclusive tube-supply agreement whereby the buyers will purchase Insituform® CIPP liners from the Company. The buyers are also entitled to use the Insituform® trade name based on a trademark license granted for the same five-year time period.
Corrosion Protection Segment (“Corrosion Protection”)
In October 2019, the Company sold its fifty-five percent (55%) interest in United Mexico, its Mexican Tite Liner® joint venture, to its joint venture partner, Miller Pipeline de Mexico, S.A. de C.V., a Mexican company (“Miller”). Miller owned the remaining forty-five percent (45%) interest in United Mexico. In connection with the sale, the Company entered into a long-term license agreement pursuant to which United Mexico will be the exclusive licensee in Mexico with respect to certain trademarks, patents and other intellectual property relating to the Company’s pipe lining business.
In August 2018, the Company sold substantially all of the assets of its wholly-owned subsidiary, The Bayou Companies, LLC and its fifty-one percent (51%) interest in Bayou Wasco Insulation, LLC. The sale price was $46 million, consisting of $38 million paid in cash at closing and $8 million in a fully secured, two-year loan payable to Aegion. During 2020, the loan was extended and now has a maturity date in March 2021. Cash proceeds, net of customary closing costs, were used to repay outstanding borrowings on the Company’s line of credit. The sale resulted in a pre-tax loss of $7.0 million during 2018, which was included in “Other expense” in the Consolidated Statements of Operations.
In May 2018, the Company acquired the operations of Hebna Inc., Hebna Canada Inc. and Hebna Corporation (collectively “Hebna”), for a purchase price of $6.0 million, which included goodwill of $2.7 million, intangible assets of $2.4 million, and property, plant and equipment of $0.9 million. The transaction was funded from a combination of domestic and international cash balances, with fifty percent (50%) of the purchase price being paid by the Company’s joint venture in Oman, in which the Company is a fifty-one percent (51%) partner. Hebna provides pipeline lining services, including compressed-fit lining, slip-lining, liner and free-standing pipe fusing, pipeline assessment and integrity management, pipeline pigging and calibration, and roto-lining services primarily in the United States, Canada and Middle East.
2. ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and majority-owned subsidiaries in which the Company is deemed to be the primary beneficiary. All significant intercompany transactions and balances have been eliminated.
Accounting Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Accumulated Other Comprehensive Loss
As set forth below, the Company’s accumulated other comprehensive loss is comprised of three main components: (i) currency translation; (ii) derivatives; and (iii) gains and losses associated with the Company’s defined benefit plan in the United Kingdom (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Currency translation adjustments (1)
|
|
$
|
(19,760
|
)
|
|
$
|
(27,241
|
)
|
Derivative hedging activity
|
|
|
(9,018
|
)
|
|
|
(4,522
|
)
|
Pension activity
|
|
|
(1,069
|
)
|
|
|
(931
|
)
|
Total accumulated other comprehensive loss
|
|
$
|
(29,847
|
)
|
|
$
|
(32,694
|
)
|
(1)
|
During 2020 and 2019, as a result of selling or disposing of certain international entities, $0.3 million and $10.9million, respectively, was reclassified out of accumulated other comprehensive loss to “Other expense” in the Consolidated Statements of Operations.
|
For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are translated into U.S. dollars using average exchange rates. The cumulative translation adjustment resulting from changes in exchange rates are included in the Consolidated Balance Sheets as a component of “Accumulated other comprehensive loss” in total stockholders’ equity. Net foreign exchange transaction losses of $0.8 million, $0.5 million and $0.6 million for 2020, 2019 and 2018, respectively, are included in “Other expense” in the Consolidated Statements of Operations.
Research and Development
The Company expenses research and development costs as incurred. Research and development costs of $4.9 million, $6.4 million and $5.6 million for 2020, 2019 and 2018, respectively, are included in “Operating expenses” in the Consolidated Statements of Operations.
Taxation
The Company provides for estimated income taxes payable or refundable on current year income tax returns as well as the estimated future tax effects attributable to temporary differences and carryforwards, based upon enacted tax laws and tax rates, and in accordance with FASB ASC 740, Income Taxes (“FASB ASC 740”). FASB ASC 740 also requires that a valuation allowance be recorded against any deferred tax assets that are not likely to be realized in the future. The determination is based on the Company’s ability to generate future taxable income and, at times, is dependent on its ability to implement strategic tax initiatives to ensure full utilization of recorded deferred tax assets. Should the Company not be able to implement the necessary tax strategies, it may need to record valuation allowances for certain deferred tax assets, including those related to foreign income tax benefits. Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowances recorded against net deferred tax assets.
In accordance with FASB ASC 740, tax benefits from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. In addition, this recognition model includes a measurement attribute that measures the position as the largest amount of tax that is greater than 50% likely of being realized upon ultimate settlement in accordance with FASB ASC 740. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The Company recognizes tax liabilities in accordance with FASB ASC 740 and adjusts these liabilities when judgment changes as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. While the Company believes the resulting tax balances as of December 31, 2019 and 2018 were appropriately accounted for in accordance with FASB ASC 740, the ultimate outcome of such matters could result in favorable or unfavorable adjustments to the consolidated financial statements and such adjustments could be material.
Earnings per Share
Earnings per share have been calculated using the following share information:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Weighted average number of common shares used for basic EPS
|
|
|
30,731,882
|
|
|
|
31,130,222
|
|
|
|
32,345,382
|
|
Effect of dilutive stock options and restricted and deferred stock unit awards
|
|
|
509,253
|
|
|
|
—
|
|
|
|
—
|
|
Weighted average number of common shares and dilutive potential common stock used for dilutive EPS
|
|
|
31,241,135
|
|
|
|
31,130,222
|
|
|
|
32,345,382
|
|
The Company excluded 529,539 and 652,621 restricted and deferred stock units in 2019 and 2018, respectively, from the diluted earnings per share calculation for the Company’s common stock because of the reported net loss from continuing operations for the periods. The Company excluded 4,049 stock options in 2018 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 the period.
Purchase Price Accounting
The Company accounts for its acquisitions in accordance with FASB ASC 805, Business Combinations. The base cash purchase price plus the estimated fair value of any non-cash or contingent consideration given for an acquired business is allocated to the assets acquired (including identified intangible assets) and liabilities assumed based on the estimated fair values of such assets and liabilities. The excess of the total consideration over the aggregate net fair values assigned is recorded as goodwill. Contingent consideration, if any, is recognized as a liability as of the acquisition date with subsequent adjustments recorded in the consolidated statements of operations. Indirect and general expenses related to business combinations are expensed as incurred.
The Company typically determines the fair value of tangible and intangible assets acquired in a business combination using independent valuations that rely on management’s estimates of inputs and assumptions that a market participant would use. Key assumptions include cash flow projections, growth rates, asset lives, and discount rates based on an analysis of weighted average cost of capital.
Classification of Current Assets and Current Liabilities
The Company includes in current assets and current liabilities certain amounts realizable and payable under construction contracts that may extend beyond one year. The construction periods on projects undertaken by the Company generally range from less than one month to 24 months.
Cash, Cash Equivalents and Restricted Cash
The Company classifies highly liquid investments with original maturities of 90 days or less as cash equivalents. Recorded book values are reasonable estimates of fair value for cash and cash equivalents.
Cash, cash equivalents and restricted cash reported within the Consolidated Balance Sheets and Consolidated Statements of Cash Flows are as follows (in thousands):
|
|
December 31,
|
|
Balance sheet data
|
|
2020
|
|
|
2019
|
|
Cash and cash equivalents
|
|
$
|
94,848
|
|
|
$
|
64,874
|
|
Restricted cash
|
|
|
765
|
|
|
|
1,348
|
|
Cash, cash equivalents and restricted cash
|
|
$
|
95,613
|
|
|
$
|
66,222
|
|
Restricted cash held in escrow primarily relates to funds reserved for legal requirements, deposits made in lieu of retention on specific projects performed for municipalities and state agencies, or advance customer payments and compensating balances for bank undertakings in Europe. Restricted cash related to operations is similar to retainage, and is, therefore, classified as a current asset, consistent with the Company’s policy on retainage.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or net realizable value. Actual cost is used to value raw materials and supplies. Standard cost, which approximates actual cost, is used to value work-in-process, finished goods and construction materials. Standard cost includes direct labor, raw materials and manufacturing overhead based on normal capacity. For certain businesses within our Corrosion Protection segment, the Company uses actual costs or average costs for all classes of inventory.
Retainage
Many of the contracts under which the Company performs work contain retainage provisions. Retainage refers to that portion of revenue earned by the Company but held for payment by the customer pending satisfactory completion of the project. The Company generally invoices its customers periodically as work is completed. Under ordinary circumstances, collection from municipalities is made within 60 to 90 days of billing. In most cases, 5% to 15% of the contract value is withheld by the municipal owner pending satisfactory completion of the project. Collections from other customers are generally made within 30 to 45 days of billing. Unless reserved, the Company believes that all amounts retained by customers under such provisions are fully collectible. Retainage on active contracts is classified as a current asset regardless of the term of the contract. Retainage is generally collected within one year of the completion of a contract, although collection can extend beyond one year from time to time. As of December 31, 2020, retainage receivables aged greater than 365 days approximated 14% of the total retainage balance and collectability was assessed as described in the allowance for doubtful accounts section below.
Credit Losses
The Company is exposed to credit losses primarily through sales of products and services. The Company’s expected loss allowance methodology for accounts receivable, including retainage, is developed using historical collection experience, current and future economic and market conditions and a review of the current status of customers’ trade accounts receivables. Due to the short-term nature of such receivables, the estimate of amount of accounts receivable that may not be collected is based on aging of the accounts receivable balances and the financial condition of customers. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. The Company’s monitoring activities include timely account reconciliation, dispute resolution, payment confirmation, consideration of customers’ financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectable.
Long-Lived Assets
Property, plant and equipment and other identified intangibles (primarily customer relationships, patents and acquired technologies, trademarks, licenses and non-compete agreements) are recorded at cost, net of accumulated depreciation, amortization and impairment, and, except for goodwill, are depreciated or amortized on a straight-line basis over their estimated useful lives. Changes in circumstances such as technological advances, changes to the Company’s business model or changes in the Company’s capital strategy can result in the actual useful lives differing from the Company’s estimates. If the Company determines that the useful life of its property, plant and equipment or its identified intangible assets should be shortened, the Company would depreciate or amortize the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing depreciation or amortization expense.
Long-lived assets, including property, plant and equipment and other intangibles, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Such impairment tests are based on a comparison of undiscounted cash flows to the recorded value of the asset. The estimate of cash flow is based upon, among other things, assumptions about expected future operating performance. The Company’s estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If an impairment is determined to exist, any related impairment loss is calculated based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal.
Impairment Review – Third Quarter 2020
The oil and gas industry experienced an unprecedented disruption during 2020 as a result of a combination of factors, including the substantial decline in global demand for oil caused by the COVID-19 pandemic. These market conditions significantly impacted a portion of the Company’s business, with a more severe impact to the refinery industry on the United States West Coast. Customers in the Energy Services reporting unit revised their capital and maintenance budgets in order to adjust spending levels in response to the lower commodity prices and lower fuel demand, and the Company experienced significant activity reductions and pricing pressure for its services, which management expects to continue for the foreseeable future. Given the prolonged uncertainty, management performed a market assessment of the Energy Services reporting unit during the third quarter of 2020 and concluded that sustained low oil prices and lower fuel demand would continue to create market challenges for the foreseeable future, including a continued reduction in spending by certain of our customers in 2020 and into 2021. As a result, the Company determined a triggering event had occurred and evaluated the fair value of long-lived assets in its Energy Services reporting unit in accordance with FASB ASC 360, Property, Plant and Equipment (“FASB ASC 360”).
The assets of an asset group represent the lowest level for which identifiable cash flows can be determined independent of other groups of assets and liabilities. The Energy Services asset group was the only at-risk asset group reviewed for impairment. The Company developed internal forward business plans under the guidance of local and regional leadership to determine the undiscounted expected future cash flows derived from Energy Services’ long-lived assets. Such were based on management’s best estimates considering the likelihood of various outcomes. Based on the internal projections, the Company determined that the sum of the undiscounted expected future cash flows for the Energy Services asset group exceeded the carrying value of the assets and no impairment was recorded.
Impairment Review – Fourth Quarter 2020
In December 2020, the Company’s board of directors approved a plan to sell its Energy Services operating segment. The decision to divest the segment represented a triggering event and the Company evaluated the fair value of the Energy Services disposal group in accordance with FASB ASC 360 and determined fair value exceeded carrying value less costs to sell; thus, no impairment was recorded.
The fair value estimates described above were determined using similar inputs as the fourth quarter 2020 Energy Services goodwill impairment analysis discussed below.
Goodwill
Under FASB ASC 350, Goodwill and Other (“FASB ASC 350”), the Company conducts an impairment test of goodwill on an annual basis or when events or changes in circumstances indicate that the carrying value of goodwill may not be recoverable. An impairment charge will be recognized to the extent that the fair value of a reporting unit is less than its carrying value. Factors that could potentially trigger an impairment review include (but are not limited to):
|
•
|
significant underperformance of a segment relative to expected, historical or forecasted operating results;
|
|
•
|
significant negative industry or economic trends;
|
|
•
|
significant changes in the strategy for a segment including extended slowdowns in the segment’s market;
|
|
•
|
a decrease in market capitalization below the Company’s book value; and
|
|
•
|
a significant change in regulations.
|
Whether during the annual impairment assessment or during a trigger-based impairment review, the Company estimates the fair value of its reporting units and compares such fair value to the carrying value of those reporting units to determine if there are any indications of goodwill impairment.
Fair value of reporting units is estimated using a combination of two valuation methods: a market approach and an income approach with each method given equal weight in estimating the fair value assigned to each reporting unit. Absent an indication of fair value from a potential buyer or similar specific transaction, the Company believes the use of these two methods provides a reasonable estimate of a reporting unit’s fair value. Assumptions common to both methods are operating plans and economic outlooks, which are used to forecast future revenues, earnings and after-tax cash flows for each reporting unit. These assumptions are applied consistently for both methods.
The market approach estimates fair value by first determining earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples for comparable publicly-traded companies with similar characteristics of the reporting unit. The EBITDA multiples for comparable companies are based upon current enterprise value. The enterprise value is based upon current market capitalization and includes a control premium. The Company believes this approach is appropriate because it provides a fair value estimate using multiples from entities with operations and economic characteristics comparable to its reporting units.
The income approach is based on forecasted future (debt-free) cash flows that are discounted to present value using factors that consider timing and risk of future cash flows. The Company believes this approach is appropriate because it provides a fair value estimate based upon the reporting unit’s expected long-term operating cash flow performance. Discounted cash flow projections are based on financial forecasts developed from operating plans and economic outlooks, revenue growth rates, EBITDA growth, estimates of future expected changes in operating margins, terminal value growth rates, future capital expenditures and changes in working capital requirements. Estimates of discounted cash flows may differ from actual cash flows due to, among other things, changes in economic conditions, changes to business models, changes in the Company’s weighted average cost of capital, or changes in operating performance.
The discount rate applied to the estimated future cash flows is one of the most significant assumptions utilized under the income approach. The Company determines the appropriate discount rate for each of its reporting units based on the weighted average cost of capital (“WACC”) for each individual reporting unit. The WACC takes into account both the pre-tax cost of debt and cost of equity (including the risk-free rate on twenty year U.S. Treasury bonds), and certain other company-specific and market-based factors. As each reporting unit has a different risk profile based on the nature of its operations, the WACC for each reporting unit is adjusted, as appropriate, to account for company-specific risks. Accordingly, the WACC for each reporting unit may differ.
Impairment Review – Third Quarter 2020
Given the prolonged uncertainty in the oil and gas markets and the market assessment of the Energy Services reporting unit discussed above, the Company evaluated the goodwill of its Energy Services reporting unit during the third quarter of 2020 and determined that a triggering event had occurred. As such, the Company engaged a third-party valuation firm and performed a goodwill impairment review for its Energy Services reporting unit. In accordance with the provisions of FASB ASC 350, the Company determined the fair value of the reporting unit and compared such fair value to the carrying value of the reporting unit. For the Energy Services reporting unit, carrying value exceeded fair value by 31.3%.
Significant assumptions used in the Company’s goodwill review included discount rate, revenue growth rates, operating margins, EBITDA growth, terminal value growth rate and peer group EBITDA multiples.
The values derived from both the income approach and the market approach decreased from the October 1, 2019 annual goodwill impairment analysis. The fair value for the Energy Services reporting unit decreased $67.8 million, or 44.0%, from the previous analysis. The impairment analysis assumed a weighted average cost of capital of 15.0%, which is higher than the 13.0% utilized in the October 1, 2019 review, primarily due to increased company-specific risk factors related to uncertainties in the timing of recovery for the refinery industry on the United States West Coast. Offsetting the increase in company-specific risk factors were declining risk-free rates on twenty-year U.S. Treasury bonds. The impairment analysis also assumed an annual revenue growth rate of 3.2%, which was reduced from 3.4% used in the October 1, 2019 review primarily due to an expected continuation of reduced spending by certain customers in 2020 and into 2021. Expected gross margins decreased more than 100 basis points, particularly in the short and intermediate term, primarily due to pricing pressures for maintenance work and continued uncertainty in the demand for higher-margin construction and turnaround projects.
Based on the impairment analysis, the Company determined that recorded goodwill at the Energy Services reporting unit was impaired by $39.4 million, which was recorded to “Goodwill impairment” in the Consolidated Statement of Operations during the third quarter of 2020. As of September 30, 2020, the Company had remaining Energy Services goodwill of $7.3 million. See discussion below and in Note 6 for goodwill testing performed on the Energy Services disposal group during the fourth quarter of 2020.
Annual Impairment Assessment – October 1, 2020
The Company had six reporting units for purposes of assessing goodwill at October 1, 2020 as follows: Municipal Pipe Rehabilitation, Fyfe, Corrpro, United Pipeline Systems, Coating Services and Energy Services.
Significant assumptions used in the Company’s October 2020 goodwill review included: (i) discount rates ranging from 12.7% to 15.7%; (ii) annual revenue growth rates generally ranging from 2.2% to 8.9%; (iii) EBITDA growth; (iv) operating margin stability in the short term related to certain reporting units affected by COVID-19 and the Restructuring, but slightly increased operating margins long term; and (v) peer group EBITDA multiples.
The Company’s assessment of each reporting unit’s fair value in relation to its respective carrying value yielded: (i) no reporting units with a fair value below carrying value; (ii) one reporting unit with a fair value within 10 percent of its carrying value; and (iii) one reporting unit with a fair value within 15 percent of its carrying value. The reporting unit with a fair value within 10 percent of its carrying value was the Energy Services reporting unit, which recorded a partial goodwill impairment and adjusted its carrying value to fair value during the third quarter of 2020. The reporting unit with a fair value within 15 percent of its carrying value was the Fyfe reporting unit, which had $9.8 million of goodwill recorded at the impairment testing date. During 2020, the Fyfe reporting unit was negatively affected by COVID-19 and the impact it had on worldwide construction industries as well as extended stay-at-home orders and economic downturns in certain international operations. Projected cash flows were based on improvements in the construction industry during 2021 and into 2022, especially in certain Asian markets. If these assumptions do not materialize in a manner consistent with the Company’s expectations, there is risk of impairment to recorded goodwill.
Impairment Review – Fourth Quarter 2020
In December 2020, the Company’s board of directors approved a plan to sell its Energy Services operating segment. The decision to divest the segment represented a triggering event for the Energy Services reporting unit (disposal group) goodwill. See further discussion in Note 6.
Fair Value Measurements
FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value and establishes a framework for measuring and disclosing fair value instruments. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
|
•
|
Level 1 – defined as quoted prices in active markets for identical instruments;
|
|
•
|
Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable;
|
|
•
|
Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
|
The Company uses these levels of hierarchy to measure the fair value of certain financial instruments on a recurring basis, such as for derivative instruments; on a non-recurring basis, such as for acquisitions and impairment testing; for disclosure purposes, such as for long-term debt; and for other applications, as discussed in their respective footnotes. Changes in assumptions or estimation methods could affect the fair value estimates. Other financial instruments including notes payable are recorded at cost, which approximates fair value, and is based on Level 2 inputs as previously defined. The Company had no transfers between Level 1, 2 or 3 inputs during 2020, 2019 or 2018.
Investments in Variable Interest Entities
The Company evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation. There were no changes in the Company’s VIEs during 2020.
Financial data for consolidated variable interest entities are summarized in the following tables (in thousands):
|
|
December 31,
|
|
Balance sheet data
|
|
2020
|
|
|
|
2019
|
|
Current assets
|
|
$
|
24,876
|
|
|
$
|
18,304
|
|
Non-current assets
|
|
|
7,513
|
|
|
|
7,635
|
|
Current liabilities
|
|
|
10,932
|
|
|
|
8,261
|
|
Non-current liabilities
|
|
|
3,279
|
|
|
|
1,962
|
|
|
|
Years Ended December 31,
|
|
Statement of operations data
|
|
|
2020
|
|
|
|
2019(1)
|
|
|
|
2018(1)(2)
|
|
Revenue
|
|
$
|
31,930
|
|
|
$
|
28,403
|
|
|
$
|
49,809
|
|
Gross profit
|
|
|
10,862
|
|
|
|
9,508
|
|
|
|
9,898
|
|
Net (income) loss attributable to Aegion Corporation
|
|
|
1,209
|
|
|
|
(1,100
|
)
|
|
|
(1,374
|
)
|
(1)
|
Includes activity from our Tite Liner® joint venture in Mexico, which was sold during the fourth quarter of 2019.
|
(2)
|
Includes activity from our pipe coating and insulation joint venture in Louisiana, which was sold during the third quarter of 2018.
|
Accounting Standards Updates
In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective immediately and can be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2022. The Company adopted this standard, the impact of which was not material on the Company’s consolidated financial statements.
In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for the Company’s fiscal year beginning January 1, 2021, including interim periods within that fiscal year. Early adoption is permitted. The Company early-adopted this standard effective January 1, 2020, the impact of which was not material on the Company’s consolidated financial statements.
In August 2018, the FASB issued Accounting Standards Update No. 2018-13, Fair Value Measurement: Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for Level 1, Level 2 and Level 3 instruments in the fair value hierarchy. The guidance was effective for the Company’s fiscal year beginning January 1, 2020, including interim periods within that fiscal year. The Company adopted this standard effective January 1, 2020, the impact of which was not material on the Company’s consolidated financial statements.
In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Measurement of Credit Losses on Financial Instruments, which changes the way in which entities estimate and present credit losses for most financial assets, including accounts receivable. The guidance was effective for the Company’s fiscal year beginning January 1, 2020, including interim periods within that fiscal year. For the Company’s trade receivables, certain other receivables and certain other financial instruments, the Company is required to use a new forward-looking “expected” credit loss model based on historical loss rates that replaced the previous “incurred” credit loss model, which generally results in earlier recognition of allowances for credit losses. The Company adopted this standard effective January 1, 2020, the impact of which was not material on the Company’s consolidated financial statements.
3. REVENUES
On January 1, 2018, the Company adopted FASB ASC 606, Revenue from Contracts with Customers (“FASB ASC 606”) for all contracts that were not completed using the modified retrospective transition method. The Company recorded a net reduction to opening retained earnings of $0.3 million as of January 1, 2018 due to the cumulative impact of adopting FASB ASC 606, with the impact primarily related to royalty license fee revenues.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in FASB ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For contracts in which construction, engineering and installation services are provided, there is generally a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. The bundle of goods and services represents the combined output for which the customer has contracted. For product sales contracts with multiple performance obligations where each product is distinct, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good in the contract. For royalty license agreements whereby intellectual property is transferred to the customer, there is a single performance obligation as the license is not separately identifiable from the other goods and services in the contract.
The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenues from products and services transferred to customers over time accounted for 90.2%, 89.4% and 91.3% of revenues for the years ended December 31, 2020, 2019 and 2018, respectively. Revenues from construction, engineering and installation services are recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress toward satisfying performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, general and administrative expenses. Revenues from maintenance contracts are structured such that the Company has the right to consideration from a customer in an amount that corresponds directly with the performance completed to date. Therefore, the Company utilizes the practical expedient in FASB ASC 606-55-255, which allows the Company to recognize revenue in the amount to which it has the right to invoice. Applying this practical expedient, the Company is not required to disclose the transaction price allocated to remaining performance obligations under these agreements. Revenues from royalty license arrangements are recognized either at contract inception when the license is transferred or when the royalty has been earned, depending on whether the contract contains fixed consideration. Revenues from stand-alone product sales are recognized at a point in time, when control of the product is transferred to the customer. Revenues from these types of contracts accounted for 9.8%, 10.6% and 8.7% of revenues for the years ended December 31, 2020, 2019 and 2018, respectively.
On December 31, 2020, the Company had $463.8 million of remaining performance obligations from construction, engineering and installation services. The Company estimates that approximately $448.8 million, or 96.8%, of the remaining performance obligations at December 31, 2020 will be realized as revenues in the next 12 months.
Contract Estimates
Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract, and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that sometimes span multiple years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.
The Company’s contracts do not typically contain variable consideration or other provisions that increase or decrease the transaction price. In rare situations where the transaction price is not fixed, the Company estimates variable consideration at the most likely amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. For royalty license agreements, the Company applies the sales-based and usage-based royalty exception and recognizes royalties at the later of: (i) when the subsequent sale or usage occurs; or (ii) the satisfaction or partial satisfaction of the performance obligation to which some or all of the sales-or usage-based royalty has been allocated. For contracts in which a portion of the transaction price is retained and paid after the good or service has been transferred to the customer, the Company does not recognize a significant financing component. The primary purpose of the retainage payment is often to provide the customer with assurance that the Company will perform its obligations under the contract, rather than to provide financing to the customer.
The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available.
Revenue by Category
The following tables summarize revenues by segment and geography (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
443,196
|
|
|
$
|
129,533
|
|
|
$
|
572,729
|
|
Canada
|
|
|
69,190
|
|
|
|
49,063
|
|
|
|
118,253
|
|
Europe
|
|
|
23,782
|
|
|
|
13,469
|
|
|
|
37,251
|
|
Other foreign
|
|
|
26,403
|
|
|
|
53,128
|
|
|
|
79,531
|
|
Total revenues
|
|
$
|
562,571
|
|
|
$
|
245,193
|
|
|
$
|
807,764
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
427,220
|
|
|
$
|
159,408
|
|
|
$
|
586,628
|
|
Canada
|
|
|
65,370
|
|
|
|
57,663
|
|
|
|
123,033
|
|
Europe
|
|
|
49,157
|
|
|
|
15,121
|
|
|
|
64,278
|
|
Other foreign
|
|
|
49,050
|
|
|
|
62,898
|
|
|
|
111,948
|
|
Total revenues
|
|
$
|
590,797
|
|
|
$
|
295,090
|
|
|
$
|
885,887
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Geographic region:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
430,187
|
|
|
$
|
200,397
|
|
|
$
|
630,584
|
|
Canada
|
|
|
62,292
|
|
|
|
71,320
|
|
|
|
133,612
|
|
Europe
|
|
|
54,567
|
|
|
|
12,227
|
|
|
|
66,794
|
|
Other foreign
|
|
|
57,075
|
|
|
|
109,796
|
|
|
|
166,871
|
|
Total revenues
|
|
$
|
604,121
|
|
|
$
|
393,740
|
|
|
$
|
997,861
|
|
The following tables summarize revenues by segment and contract type (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed fee
|
|
$
|
513,187
|
|
|
$
|
162,334
|
|
|
$
|
675,521
|
|
Time and materials
|
|
|
—
|
|
|
|
52,713
|
|
|
|
52,713
|
|
Product sales
|
|
|
49,353
|
|
|
|
30,146
|
|
|
|
79,499
|
|
License fees
|
|
|
31
|
|
|
|
—
|
|
|
|
31
|
|
Total revenues
|
|
$
|
562,571
|
|
|
$
|
245,193
|
|
|
$
|
807,764
|
|
|
|
Year Ended December 31, 2019
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed fee
|
|
$
|
523,042
|
|
|
$
|
203,887
|
|
|
$
|
726,929
|
|
Time and materials
|
|
|
—
|
|
|
|
65,084
|
|
|
|
65,084
|
|
Product sales
|
|
|
67,512
|
|
|
|
26,119
|
|
|
|
93,631
|
|
License fees
|
|
|
243
|
|
|
|
—
|
|
|
|
243
|
|
Total revenues
|
|
$
|
590,797
|
|
|
$
|
295,090
|
|
|
$
|
885,887
|
|
|
|
Year Ended December 31, 2018
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed fee
|
|
$
|
556,642
|
|
|
$
|
296,217
|
|
|
$
|
852,859
|
|
Time and materials
|
|
|
—
|
|
|
|
58,372
|
|
|
|
58,372
|
|
Product sales
|
|
|
45,030
|
|
|
|
39,151
|
|
|
|
84,181
|
|
License fees
|
|
|
2,449
|
|
|
|
—
|
|
|
|
2,449
|
|
Total revenues
|
|
$
|
604,121
|
|
|
$
|
393,740
|
|
|
$
|
997,861
|
|
Contract Balances
The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets and contract liabilities on the Consolidated Balance Sheets. Contract assets represent work performed that could not be billed either due to contract stipulations or the required contractual documentation has not been finalized. Substantially all unbilled amounts are expected to be billed and collected within one year.
For fixed fee and time-and-materials based contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. For some royalty license arrangements, minimum amounts are billed over the license term as quarterly royalty amounts are determined. This results in contract assets as the Company recognizes revenue for the license when the license is transferred to the customer at contract inception. The Company’s contract liabilities consist of advance payments, billings in excess of revenue recognized and deferred revenue.
The Company’s contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Advance payments, billings in excess of revenue recognized and deferred revenue are each classified as current.
Net contract assets (liabilities) consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2020 (1)
|
|
|
2019 (2)
|
|
Contract assets – current
|
|
$
|
44,026
|
|
|
$
|
42,973
|
|
Contract liabilities – current
|
|
|
(37,569
|
)
|
|
|
(37,517
|
)
|
Net contract assets
|
|
$
|
6,457
|
|
|
$
|
5,456
|
|
(1)
|
Amounts exclude contract assets of $9.3 million and contract liabilities of $0.2 million that were classified as held for sale at December 31, 2020 (see Note 6).
|
(2)
|
Amounts exclude contract assets of $13.5 million and contract liabilities of less than $0.2 million that were classified as held for sale at December 31, 2019 (see Note 6).
|
Included in the change of total net contract assets was a $1.1 million increase in contract assets, primarily related to the timing between work performed on open contracts and contractual billing terms, and a $0.1 million increase in contract liabilities, primarily related to the timing of customer advances on certain contracts.
Substantially all of the $37.5 million and $32.3 million contract liabilities balances at December 31, 2019 and December 31, 2018, respectively, were recognized in revenues during 2020 and 2019, respectively.
Impairment losses recognized on receivables and contract assets were not material during 2020, 2019 and 2018.
4. RESTRUCTURING
On July 28, 2017, the Company’s board of directors approved the Restructuring. As part of the Restructuring, the Company announced plans to: (i) divest the Company’s pipe coating and insulation businesses in Louisiana, The Bayou Companies, LLC and Bayou Wasco Insulation, LLC (collectively “Bayou”); (ii) exit all non-pipe related contract applications for the Tyfo® system in North America; (iii) right-size the cathodic protection services operation in Canada and the CIPP businesses in Australia and Denmark; and (iv) reduce corporate and other operating costs.
During 2018 and 2019, the Company’s board of directors approved additional actions with respect to the Restructuring, which included the decisions to: (i) divest the Australia and Denmark CIPP businesses; (ii) take actions to further optimize operations within North America, including measures to reduce consolidated operating costs; and (iii) divest or otherwise exit multiple additional international businesses, including: (a) the Company’s cathodic protection installation activities in the Middle East, including Corrpower International Limited, the Company’s cathodic protection materials manufacturing and production joint venture in Saudi Arabia; (b) United Pipeline de Mexico S.A. de C.V., the Company’s Tite Liner® joint venture in Mexico (“United Mexico”); (c) the Company’s Tite Liner® businesses in Brazil and Argentina; (d) Aegion South Africa Proprietary Limited, the Company’s Tite Liner® and CIPP joint venture in the Republic of South Africa; and (e) the Company’s CIPP contract installation operations in England, the Netherlands, Spain and Northern Ireland.
The Company completed the divestitures of Bayou and the Denmark CIPP business in 2018. The Company also completed the divestitures of the Netherlands CIPP business and its Tite Liner® joint venture in Mexico in 2019, as well as the shutdown of activities for the CIPP business in England. The Company completed the divestitures of CIPP operations in Australia and Spain in early 2020 (see Note 1). Remaining shutdown activities include Corrosion Protection entities in Argentina and South Africa, which are expected to be completed in the first half of 2021. Additionally, the exit of the Company’s cathodic protection installation activities in the Middle East is substantially complete, though management expects minimal wind-down activities will extend through the first half of 2021 related to a small number of projects remaining in backlog. The sale of the Northern Ireland contracting operation was temporarily suspended due to COVID-19, but the Company expects to recommence the sale process during the second half of 2021.
As part of efforts to optimize the cathodic protection operations in North America, management initiated plans during the fourth quarter of 2019 to further downsize operations in the U.S., including the closure of three branch offices and the exit of capital intensive drilling activities at four branch offices. These actions included a reduction of approximately 20% of the cathodic protection domestic workforce and an exit of drilling activities that contributed approximately 20% to our cathodic protection domestic revenues in 2019. Management expects these actions to improve our cathodic protection cost structure in the U.S., eliminate unprofitable results in certain parts of the business and reduce consolidated annual expenses for the business overall. Also during 2019, the Company reduced corporate headcount and took other actions to reduce corporate costs.
Although not part of the original outlined restructuring plan, during 2020, the Company executed additional headcount reductions and office closings across the Company related to business slowdowns and to balance the effects of COVID-19. The Company also implemented further actions at its cathodic protection operations in North America to reduce exposure to construction activities, including additional headcount reductions and office closures. Additionally, the Company dissolved its specialty turnaround services business, P2S ServTech, LLC (“P2S”), which is reported within discontinued operations.
Total pre-tax restructuring and related impairment charges since the Restructuring’s inception were $188.7 million ($171.6 million post-tax) and consisted of cash charges totaling $57.3 million and non-cash charges totaling $131.4 million. Cash charges included employee severance, retention, extension of benefits, employment assistance programs, early lease and contract termination costs and other restructuring charges associated with the restructuring efforts described above. Non-cash charges included (i) $86.4 million related to goodwill and long-lived asset impairment charges recorded in 2017 as part of exiting the non-pipe FRP contracting market in North America, and (ii) $45.0 million related to allowances for accounts receivable, write-offs of inventory and long-lived assets, impairment of goodwill and definite-lived intangible assets, release of cumulative currency translation adjustments as well as net losses on the disposal of both domestic and international entities. The Company reduced headcount by approximately 830 employees as a result of these actions.
The Company continues to monitor the impact COVID-19 is having on the oil refining markets in the United States and stay-at-home or other restrictive orders in certain of the Company’s international operations. The Company is prepared to proactively respond to the situation and may take further restructuring actions as warranted. The Company expects to incur approximately $2 million of additional cash charges in 2021 related to this program. It could also incur additional non-cash charges primarily associated with the release of cumulative currency translation adjustments and losses on the closure or liquidation of international businesses
During 2020, 2019 and 2018, the Company recorded pre-tax restructuring charges as follows (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
|
Infrastructure
Solutions
|
|
|
Corrosion
Protection
|
|
|
Corporate
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
Severance and benefit related costs
|
|
$
|
29
|
|
|
$
|
3,673
|
|
|
$
|
324
|
|
|
$
|
4,026
|
|
|
$
|
571
|
|
|
$
|
4,597
|
|
Contract termination costs
|
|
|
66
|
|
|
|
(166
|
)
|
|
|
—
|
|
|
|
(100
|
)
|
|
|
199
|
|
|
|
99
|
|
Relocation and other moving costs
|
|
|
99
|
|
|
|
137
|
|
|
|
—
|
|
|
|
236
|
|
|
|
34
|
|
|
|
270
|
|
Other restructuring costs (1)
|
|
|
(1,626
|
)
|
|
|
5,864
|
|
|
|
2,879
|
|
|
|
7,117
|
|
|
|
4,654
|
|
|
|
11,771
|
|
Total pre-tax restructuring charges
|
|
$
|
(1,432
|
)
|
|
$
|
9,508
|
|
|
$
|
3,203
|
|
|
$
|
11,279
|
|
|
$
|
5,458
|
|
|
$
|
16,737
|
|
(1)
|
Includes charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals, release of cumulative currency translation adjustments and other restructuring-related costs in connection with optimizing the cathodic protection operations in North America, exiting the CIPP operations in Europe, disposing of certain international businesses and other cost savings initiatives. Amounts also include goodwill and definite-lived intangible asset impairments related to exiting a small business in discontinued operations.
|
|
|
Year Ended December 31, 2019
|
|
|
|
Infrastructure
Solutions
|
|
|
Corrosion
Protection
|
|
|
Corporate
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
Severance and benefit related costs
|
|
$
|
938
|
|
|
$
|
3,179
|
|
|
$
|
1,685
|
|
|
$
|
5,802
|
|
|
$
|
553
|
|
|
$
|
6,355
|
|
Contract termination costs
|
|
|
601
|
|
|
|
1,089
|
|
|
|
98
|
|
|
|
1,788
|
|
|
|
234
|
|
|
|
2,022
|
|
Relocation and other moving costs
|
|
|
190
|
|
|
|
408
|
|
|
|
—
|
|
|
|
598
|
|
|
|
55
|
|
|
|
653
|
|
Other restructuring costs (1)
|
|
|
13,642
|
|
|
|
4,592
|
|
|
|
4,258
|
|
|
|
22,492
|
|
|
|
819
|
|
|
|
23,311
|
|
Total pre-tax restructuring charges
|
|
$
|
15,371
|
|
|
$
|
9,268
|
|
|
$
|
6,041
|
|
|
$
|
30,680
|
|
|
$
|
1,661
|
|
|
$
|
32,341
|
|
(1)
|
Includes charges primarily related to certain wind-down costs, inventory obsolescence, fixed asset disposals, release of cumulative currency translation adjustments and other restructuring-related costs in connection with exiting or divesting the CIPP operations in Europe and Australia, exiting the cathodic protection operations in the Middle East and right-sizing the cathodic protection services operation in North America.
|
|
|
Year Ended December 31, 2018
|
|
|
|
Infrastructure
Solutions
|
|
|
Corrosion
Protection
|
|
|
Corporate
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total
|
|
Severance and benefit related costs
|
|
$
|
3,038
|
|
|
$
|
1,094
|
|
|
$
|
170
|
|
|
$
|
4,302
|
|
|
$
|
234
|
|
|
$
|
4,536
|
|
Contract termination costs
|
|
|
1,999
|
|
|
|
25
|
|
|
|
150
|
|
|
|
2,174
|
|
|
|
—
|
|
|
|
2,174
|
|
Relocation and other moving costs
|
|
|
184
|
|
|
|
—
|
|
|
|
—
|
|
|
|
184
|
|
|
|
—
|
|
|
|
184
|
|
Other restructuring costs (1)
|
|
|
13,311
|
|
|
|
7,936
|
|
|
|
1,317
|
|
|
|
22,564
|
|
|
|
28
|
|
|
|
22,592
|
|
Total pre-tax restructuring charges
|
|
$
|
18,532
|
|
|
$
|
9,055
|
|
|
$
|
1,637
|
|
|
$
|
29,224
|
|
|
$
|
262
|
|
|
$
|
29,486
|
|
(1)
|
Includes charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals and other restructuring-related costs in connection with exiting non-pipe-related contract applications for the Tyfo® system in North America, divesting the CIPP operations in Australia and Denmark, and exiting the cathodic protection operations in the Middle East. Amounts also include goodwill and definite-lived intangible asset impairments related to Denmark and definite-lived intangible asset impairments related to the cathodic protection operations in the Middle East.
|
Restructuring costs from continuing operations that were related to severance, other termination benefit costs and early contract termination costs were $4.2 million, $8.2 million and $6.7 million in 2020, 2019 and 2018, respectively, and are reported on a separate line in the Consolidated Statements of Operations.
The following tables summarize restructuring charges recognized in 2020, 2019 and 2018 as presented in their affected line in the Consolidated Statements of Operations (in thousands):
|
|
Year Ended December 31, 2020
|
|
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Corporate
|
|
|
Continuing Operations
|
|
|
Discontinued Operations
|
|
|
Total (1)
|
|
Cost of revenues
|
|
$
|
69
|
|
|
$
|
1,952
|
|
|
$
|
—
|
|
|
$
|
2,021
|
|
|
$
|
—
|
|
|
$
|
2,021
|
|
Operating expenses
|
|
|
(357
|
)
|
|
|
3,947
|
|
|
|
2,360
|
|
|
|
5,950
|
|
|
|
—
|
|
|
|
5,950
|
|
Restructuring and related charges
|
|
|
194
|
|
|
|
3,644
|
|
|
|
324
|
|
|
|
4,162
|
|
|
|
—
|
|
|
|
4,162
|
|
Other expense (2)
|
|
|
(1,338
|
)
|
|
|
(35
|
)
|
|
|
519
|
|
|
|
(854
|
)
|
|
|
—
|
|
|
|
(854
|
)
|
Loss from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,458
|
|
|
|
5,458
|
|
Total pre-tax restructuring charges
|
|
$
|
(1,432
|
)
|
|
$
|
9,508
|
|
|
$
|
3,203
|
|
|
$
|
11,279
|
|
|
$
|
5,458
|
|
|
$
|
16,737
|
|
(1)
|
Total pre-tax restructuring charges include cash charges of $12.0 million and non-cash charges of $4.7 million. Cash charges consist of charges incurred during the year that will be settled in cash, either during the current period or future periods.
|
(2)
|
Includes charges related to the (gain) loss on disposal of restructured entities, including the release of cumulative currency translation adjustments resulting from those disposals.
|
|
|
Year Ended December 31, 2019
|
|
|
|
Infrastructure
Solutions
|
|
|
Corrosion
Protection
|
|
|
Corporate
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total (1)
|
|
Cost of revenues
|
|
$
|
469
|
|
|
$
|
1,869
|
|
|
$
|
—
|
|
|
$
|
2,338
|
|
|
$
|
—
|
|
|
$
|
2,338
|
|
Operating expenses
|
|
|
5,349
|
|
|
|
1,131
|
|
|
|
3,444
|
|
|
|
9,924
|
|
|
|
—
|
|
|
|
9,924
|
|
Restructuring and related charges
|
|
|
1,729
|
|
|
|
4,676
|
|
|
|
1,783
|
|
|
|
8,188
|
|
|
|
—
|
|
|
|
8,188
|
|
Other expense (2)
|
|
|
7,824
|
|
|
|
1,592
|
|
|
|
814
|
|
|
|
10,230
|
|
|
|
—
|
|
|
|
10,230
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,661
|
|
|
|
1,661
|
|
Total pre-tax restructuring charges
|
|
$
|
15,371
|
|
|
$
|
9,268
|
|
|
$
|
6,041
|
|
|
$
|
30,680
|
|
|
$
|
1,661
|
|
|
$
|
32,341
|
|
(1)
|
Total pre-tax restructuring charges include cash charges of $19.5 million and non-cash charges of $12.8 million. Cash charges consist of charges incurred during the year that will be settled in cash, either during the current period or future periods.
|
(2)
|
Includes charges related to the loss on disposal of restructured entities, including the release of cumulative currency translation adjustments resulting from those disposals.
|
|
|
Year Ended December 31, 2018
|
|
|
|
Infrastructure
Solutions
|
|
|
Corrosion
Protection
|
|
|
Corporate
|
|
|
Continuing
Operations
|
|
|
Discontinued
Operations
|
|
|
Total (1)
|
|
Cost of revenues
|
|
$
|
1,281
|
|
|
$
|
600
|
|
|
$
|
—
|
|
|
$
|
1,881
|
|
|
$
|
—
|
|
|
$
|
1,881
|
|
Operating expenses
|
|
|
7,291
|
|
|
|
4,547
|
|
|
|
1,317
|
|
|
|
13,155
|
|
|
|
—
|
|
|
|
13,155
|
|
Goodwill impairment
|
|
|
1,389
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,389
|
|
|
|
—
|
|
|
|
1,389
|
|
Definite-lived intangible asset impairment
|
|
|
870
|
|
|
|
1,299
|
|
|
|
—
|
|
|
|
2,169
|
|
|
|
—
|
|
|
|
2,169
|
|
Restructuring and related charges
|
|
|
5,221
|
|
|
|
1,119
|
|
|
|
320
|
|
|
|
6,660
|
|
|
|
—
|
|
|
|
6,660
|
|
Other expense (2)
|
|
|
2,480
|
|
|
|
1,490
|
|
|
|
—
|
|
|
|
3,970
|
|
|
|
—
|
|
|
|
3,970
|
|
Income from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
262
|
|
|
|
262
|
|
Total pre-tax restructuring charges
|
|
$
|
18,532
|
|
|
$
|
9,055
|
|
|
$
|
1,637
|
|
|
$
|
29,224
|
|
|
$
|
262
|
|
|
$
|
29,486
|
|
(1)
|
Total pre-tax restructuring charges include cash charges of $12.1 million and non-cash charges of $17.4 million. Cash charges consist of charges incurred during the year that will be settled in cash, either during the current period or future periods.
|
(2)
|
Includes charges related to the loss on disposal of restructured entities, including the release of cumulative currency translation adjustments resulting from those disposals.
|
The following tables summarize restructuring activity during 2020, 2019 and 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilized in 2020
|
|
|
|
|
|
|
|
Reserves at December 31, 2019
|
|
|
2020 Charge to Income
|
|
|
Foreign Currency Translation
|
|
|
Cash(1)
|
|
|
Non-Cash(2)
|
|
|
Reserves at December 31, 2020
|
|
Severance and benefit related costs
|
|
$
|
4,389
|
|
|
$
|
4,597
|
|
|
$
|
(30
|
)
|
|
$
|
7,179
|
|
|
$
|
—
|
|
|
$
|
1,777
|
|
Contract termination costs
|
|
|
953
|
|
|
|
99
|
|
|
|
(7
|
)
|
|
|
1,020
|
|
|
|
—
|
|
|
|
25
|
|
Relocation and other moving costs
|
|
|
367
|
|
|
|
270
|
|
|
|
1
|
|
|
|
515
|
|
|
|
—
|
|
|
|
123
|
|
Other restructuring costs
|
|
|
2,379
|
|
|
|
11,771
|
|
|
|
35
|
|
|
|
7,302
|
|
|
|
4,801
|
|
|
|
2,082
|
|
Total pre-tax restructuring charges
|
|
$
|
8,088
|
|
|
$
|
16,737
|
|
|
$
|
(1
|
)
|
|
$
|
16,016
|
|
|
$
|
4,801
|
|
|
$
|
4,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilized in 2019
|
|
|
|
|
|
|
|
Reserves at December 31, 2018
|
|
|
2019 Charge to Income
|
|
|
Foreign Currency Translation
|
|
|
Cash(1)
|
|
|
Non-Cash(2)
|
|
|
Reserves at December 31, 2019
|
|
Severance and benefit related costs
|
|
$
|
1,742
|
|
|
$
|
6,355
|
|
|
$
|
(11
|
)
|
|
$
|
3,697
|
|
|
$
|
—
|
|
|
$
|
4,389
|
|
Contract termination costs
|
|
|
359
|
|
|
|
2,022
|
|
|
|
(20
|
)
|
|
|
1,408
|
|
|
|
—
|
|
|
|
953
|
|
Relocation and other moving costs
|
|
|
—
|
|
|
|
653
|
|
|
|
(3
|
)
|
|
|
283
|
|
|
|
—
|
|
|
|
367
|
|
Other restructuring costs
|
|
|
311
|
|
|
|
23,311
|
|
|
|
(4
|
)
|
|
|
8,457
|
|
|
|
12,782
|
|
|
|
2,379
|
|
Total pre-tax restructuring charges
|
|
$
|
2,412
|
|
|
$
|
32,341
|
|
|
$
|
(38
|
)
|
|
$
|
13,845
|
|
|
$
|
12,782
|
|
|
$
|
8,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Utilized in 2018
|
|
|
|
|
|
|
|
Reserves at December 31, 2017
|
|
|
2018 Charge to Income
|
|
|
Foreign Currency Translation
|
|
|
Cash(1)
|
|
|
Non-Cash(2)
|
|
|
Reserves at December 31, 2018
|
|
Severance and benefit related costs
|
|
$
|
3,864
|
|
|
$
|
4,536
|
|
|
$
|
(69
|
)
|
|
$
|
6,589
|
|
|
$
|
—
|
|
|
$
|
1,742
|
|
Contract termination costs
|
|
|
650
|
|
|
|
2,174
|
|
|
|
(19
|
)
|
|
|
2,446
|
|
|
|
—
|
|
|
|
359
|
|
Relocation and other moving costs
|
|
|
—
|
|
|
|
184
|
|
|
|
—
|
|
|
|
184
|
|
|
|
—
|
|
|
|
—
|
|
Other restructuring costs
|
|
|
675
|
|
|
|
22,592
|
|
|
|
(3
|
)
|
|
|
5,581
|
|
|
|
17,372
|
|
|
|
311
|
|
Total pre-tax restructuring charges
|
|
$
|
5,189
|
|
|
$
|
29,486
|
|
|
$
|
(91
|
)
|
|
$
|
14,800
|
|
|
$
|
17,372
|
|
|
$
|
2,412
|
|
(1)
|
Refers to cash utilized to settle charges during the year.
|
(2)
|
Includes non-cash charges from discontinued operations of $3.6 million, $0.1 million and zero in 2020, 2019 and 2018, respectively.
|
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Credit Losses
Activity in the allowance for doubtful accounts is summarized as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Balance, beginning of year
|
|
$
|
6,404
|
|
|
$
|
9,546
|
|
|
$
|
5,428
|
|
Provision for expected credit losses, net of recoveries (1)
|
|
|
500
|
|
|
|
(1,930
|
)
|
|
|
8,188
|
|
Amounts written off and adjustments
|
|
|
(2,900
|
)
|
|
|
(1,212
|
)
|
|
|
(4,070
|
)
|
Balance, end of year
|
|
$
|
4,004
|
|
|
$
|
6,404
|
|
|
$
|
9,546
|
|
(1)
|
The Company recorded bad debt expense (reversals) of $0.5 million, less than ($0.1) million and $5.3 million in 2020, 2019 and 2018, respectively, as part of the restructuring efforts (see Note 4) and was primarily due to the exiting of certain low-return businesses mainly in foreign locations.
|
Inventories
Inventories are summarized as follows (in thousands):
|
|
December 31,
|
|
|
|
2020(1)
|
|
|
2019
|
|
Raw materials and supplies
|
|
$
|
21,770
|
|
|
$
|
27,415
|
|
Work-in-process
|
|
|
5,377
|
|
|
|
5,739
|
|
Finished products
|
|
|
8,413
|
|
|
|
14,937
|
|
Construction materials
|
|
|
9,329
|
|
|
|
9,102
|
|
Total
|
|
$
|
44,889
|
|
|
$
|
57,193
|
|
Property, Plant and Equipment
Property, plant and equipment consisted of the following (in thousands):
|
|
Estimated Useful Lives
|
|
|
December 31,
|
|
|
|
(Years)
|
|
|
2020
|
|
|
2019
|
|
Land and land improvements
|
|
|
|
|
|
|
$
|
7,851
|
|
|
$
|
6,703
|
|
Buildings and improvements
|
|
5
|
—
|
40
|
|
|
|
48,190
|
|
|
|
49,084
|
|
Machinery and equipment
|
|
4
|
—
|
10
|
|
|
|
139,844
|
|
|
|
131,956
|
|
Furniture and fixtures
|
|
3
|
—
|
10
|
|
|
|
31,188
|
|
|
|
31,860
|
|
Autos and trucks
|
|
3
|
—
|
10
|
|
|
|
45,768
|
|
|
|
45,496
|
|
Construction in progress
|
|
|
|
|
|
|
|
5,557
|
|
|
|
7,236
|
|
|
|
|
|
|
|
|
|
278,398
|
|
|
|
272,335
|
|
Less – Accumulated depreciation
|
|
|
|
|
|
|
|
(185,498
|
)
|
|
|
(177,449
|
)
|
Property, plant & equipment, less accumulated depreciation
|
|
|
|
|
|
|
$
|
92,900
|
|
|
$
|
94,886
|
|
Depreciation expense from continuing operations was $19.3 million, $19.3 million and $21.0 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Accrued Expenses
Accrued expenses consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Vendor and other accrued expenses
|
|
$
|
17,152
|
|
|
$
|
26,313
|
|
Estimated casualty and healthcare liabilities
|
|
|
10,624
|
|
|
|
10,702
|
|
Job costs
|
|
|
13,416
|
|
|
|
12,041
|
|
Accrued compensation
|
|
|
17,112
|
|
|
|
17,045
|
|
Income taxes payable
|
|
|
1,360
|
|
|
|
1,751
|
|
Total
|
|
$
|
59,664
|
|
|
$
|
67,852
|
|
6. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE
Discontinued Operations
In December 2020, the Company’s board of directors approved a plan to sell its Energy Services operating segment. This disposal represents a strategic shift to further reduce Aegion’s oil and gas exposure and drive greater focus on the Company’s portfolio of pipeline rehabilitation technologies. Energy Services has historically been a separate reportable segment with exclusive operations in the United States. The decision to divest the segment represented a triggering event for the goodwill and long-lived assets of the disposal group. As such, the Company engaged a third-party valuation firm and performed a goodwill impairment review.
There were no material changes in significant assumptions as compared to the third quarter 2020 review discussed in Note 2 other than to the discount rate. The impairment analysis assumed a weighted average cost of capital of 17.0%, which is higher than the 15.0% utilized in the third quarter 2020 review, primarily due to increased company-specific risk factors related to uncertainties in the timing of recovery for the refinery industry on the United States West Coast. In accordance with the provisions of FASB ASC 350, the Company determined the fair value of the reporting unit (disposal group) and compared such fair value to the carrying value of the reporting unit (disposal group). For the Energy Services reporting unit (disposal group), carrying value exceeded fair value. As a result, the Company determined that recorded goodwill at the Energy Services reporting unit (disposal group) was fully impaired and recognized a pre-tax, non-cash charge of $7.3 million during the fourth quarter of 2020, which was recorded to “Net income (loss) from discontinued operations” in the Consolidated Statement of Operations. After the impairment to goodwill, the fair value of the Energy Services disposal group approximated fair value less cost to sell. The Company expects to incur between $2 million and $3 million in cash charges in 2021 to divest Energy Services.
In accordance with FASB ASC 205, Presentation of Financial Statements – Discontinued Operations (“FASB ASC 205”), the results of the former Energy Services segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the years ended December 31, 2020, 2019 and 2018. Financial information included in net income (loss) from discontinued operations for the former Energy Services segment is as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
271,529
|
|
|
$
|
328,048
|
|
|
$
|
335,707
|
|
Cost of revenues
|
|
|
247,453
|
|
|
|
286,814
|
|
|
|
294,160
|
|
Gross profit
|
|
|
24,076
|
|
|
|
41,234
|
|
|
|
41,547
|
|
Operating expenses
|
|
|
28,455
|
|
|
|
30,652
|
|
|
|
31,675
|
|
Goodwill impairment
|
|
|
47,977
|
|
|
|
—
|
|
|
|
—
|
|
Definite-lived intangible asset impairment
|
|
|
957
|
|
|
|
—
|
|
|
|
—
|
|
Restructuring and related charges
|
|
|
804
|
|
|
|
842
|
|
|
|
234
|
|
Operating income (loss)
|
|
|
(54,117
|
)
|
|
|
9,740
|
|
|
|
9,638
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense(1)
|
|
|
(3,308
|
)
|
|
|
(2,644
|
)
|
|
|
(2,618
|
)
|
Total other expense
|
|
|
(3,308
|
)
|
|
|
(2,644
|
)
|
|
|
(2,618
|
)
|
Income (loss) before taxes on income
|
|
|
(57,425
|
)
|
|
|
7,096
|
|
|
|
7,020
|
|
Taxes (benefit) on income (loss)
|
|
|
(2,269
|
)
|
|
|
2,554
|
|
|
|
1,161
|
|
Net income (loss) from discontinued operations
|
|
$
|
(55,156
|
)
|
|
$
|
4,542
|
|
|
$
|
5,859
|
|
|
(1)
|
The Company allocated interest expense, including a portion of the settlement amount from the Company's interest rate swaps, to its discontinued operations based on carrying value at December 31, 2020.
|
Assets Held for Sale
During 2018 and 2019, the Company initiated plans to sell several entities as part of its ongoing strategic actions intended to generate higher returns and more predictable and sustainable long-term earnings growth. Within Infrastructure Solutions, the Company initiated plans to divest its international CIPP contracting businesses: Insituform Australia, Insituform Netherlands, Insituform Spain and Environmental Techniques. During 2019, the Company sold the contracting operations of Insituform Netherlands (see Note 1). During the first quarter of 2020, the Company completed sale transactions for Insituform Australia and Insituform Spain (see Note 1). Before the COVID-19 pandemic, the Company was in various stages of discussions with third parties for Environmental Techniques. Although the sale process has been temporarily suspended, the Company expects to recommence the process during the second half of 2021. Within Corrosion Protection, the Company initiated plans to divest its interests in United Mexico, Corrpower and Aegion South Africa. During 2019, the Company completed a sale transaction for United Mexico (see Note 1). Also during 2019, the Company ended its negotiations with potential buyers for Corrpower and Aegion South Africa. Accordingly, the relevant assets and liabilities for each of these entities was removed from held for sale and accounted for as held and used. These entities are now being exited as part of the Restructuring. See Note 4.
During 2019, the Company’s board of directors approved the action to sell several parcels of land located near its corporate headquarters. After unsuccessful targeted attempts to sell the land in 2019 and 2020, the Company determined the land no longer met the held for sale requirements of FASB ASC 205. As a result, the land was reclassified as held and used at December 31, 2020 and measured in accordance with FASB ASC 360, resulting in an impairment charge of $1.3 million during the fourth quarter of 2020 based on management’s estimate of fair value less cost to sell.
During 2019, the Company recorded an impairment of assets held for sale of $23.4 million in the Consolidated Statement of Operations. Impairment charges of $17.6 million were recorded for Insituform Australia, Insituform Spain and Insituform Netherlands, which are reported within the Infrastructure Solutions reportable segment, $2.9 million were recorded for Corrpower and United Mexico, which are reported within the Corrosion Protection reportable segment, and $2.9 million were recorded in Corporate based on management’s then estimate of fair value less cost to sell.
The relevant asset and liability balances at December 31, 2020 and 2019 are accounted for as held for sale and measured at the lower of carrying value or fair value less cost to sell. In the event the Company is unable to sell the assets and liabilities or sells them at a price or on terms that are less favorable than currently anticipated, the Company could incur impairment charges or a loss on disposal. In accordance with FASB ASC 205, the relevant asset and liability balances of Energy Services are presented as held for sale at December 31, 2020 and 2019.
The following table provides the components of assets and liabilities held for sale (in thousands):
|
|
December 31,
|
|
|
|
|
2020(1)
|
|
|
|
2019(2)
|
|
Assets held for sale:
|
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
$
|
26,901
|
|
|
$
|
43,256
|
|
Retainage
|
|
|
203
|
|
|
|
518
|
|
Contract assets
|
|
|
9,330
|
|
|
|
13,469
|
|
Inventories
|
|
|
60
|
|
|
|
2,097
|
|
Prepaid expenses and other current assets
|
|
|
2,652
|
|
|
|
3,379
|
|
Total current assets
|
|
|
39,146
|
|
|
|
62,719
|
|
Property, plant & equipment, less accumulated depreciation
|
|
|
7,962
|
|
|
|
17,167
|
|
Goodwill
|
|
|
2,640
|
|
|
|
52,201
|
|
Intangible assets, less accumulated amortization
|
|
|
33,718
|
|
|
|
38,481
|
|
Operating lease assets
|
|
|
8,734
|
|
|
|
11,546
|
|
Other non-current assets
|
|
|
650
|
|
|
|
663
|
|
Impairment of assets held for sale
|
|
|
—
|
|
|
|
(13,978
|
)
|
Total assets held for sale
|
|
$
|
92,850
|
|
|
$
|
168,799
|
|
|
|
|
|
|
|
|
|
|
Liabilities held for sale:
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,211
|
|
|
$
|
8,688
|
|
Accrued expenses
|
|
|
20,927
|
|
|
|
16,707
|
|
Operating lease liabilities
|
|
|
2,301
|
|
|
|
1,775
|
|
Contract liabilities
|
|
|
165
|
|
|
|
167
|
|
Total current liabilities
|
|
|
28,604
|
|
|
|
27,337
|
|
Operating lease liabilities
|
|
|
7,348
|
|
|
|
10,368
|
|
Other non-current liabilities
|
|
|
196
|
|
|
|
195
|
|
Total liabilities held for sale
|
|
$
|
36,148
|
|
|
$
|
37,900
|
|
|
(1)
|
Includes Energy Services and Environmental Techniques.
|
|
(2)
|
Includes Energy Services, Environmental Techniques, Insituform Australia, Insituform Spain and land held at Corporate.
|
7. LEASES
Effective January 1, 2019, the Company adopted FASB ASC 842 using the adoption-date transition provision rather than at the earliest comparative period presented in the financial statements. Therefore, the Company recognized and measured leases existing at January 1, 2019 but without retrospective application. The Company also elected the package of practical expedients not to reassess prior conclusions related to contracts containing leases, lease classification and initial direct costs and the lessee practical expedient to combine lease and non-lease components. The Company also made a policy election to not recognize right-of-use assets and lease liabilities for short-term leases for all asset classes. The impact of FASB ASC 842 on the Consolidated Balance Sheet beginning January 1, 2019 was through the recognition of operating lease assets and corresponding operating lease liabilities of $70.5 million. No impact was recorded to the Consolidated Statement of Operations or beginning retained earnings.
The Company’s operating lease portfolio includes operational field locations, administrative offices, equipment, vehicles and information technology equipment. The majority of the Company’s leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more. Right-of-use assets are presented within “Operating lease assets” on the Consolidated Balance Sheet. The current portion of operating lease liabilities are presented within “Accrued expenses”, and the non-current portion of operating lease liabilities are presented within “Operating lease liabilities” on the Consolidated Balance Sheet.
Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term at inception. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 1, 2019. A portion of the Company’s real estate, equipment and vehicle leases is subject to periodic changes in the Consumer Price Index, LIBOR or other market index. The changes to these indexes are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. Because most leases do not provide an explicit rate of return, the Company utilizes its incremental secured borrowing rate on a lease-by-lease basis in determining the present value of lease payments at the commencement date of the lease.
The following table presents the components of lease expense (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Operating lease cost
|
|
$
|
19,750
|
|
|
$
|
22,235
|
|
Short-term lease cost
|
|
|
24,607
|
|
|
|
25,382
|
|
Total lease cost
|
|
$
|
44,357
|
|
|
$
|
47,617
|
|
Supplemental cash flow information related to leases was as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
$
|
19,083
|
|
|
$
|
22,144
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
$
|
7,708
|
|
|
$
|
18,879
|
|
Supplemental balance sheet information related to leases was as follows (in thousands):
|
|
December 31,
|
|
|
|
|
2020 (1)
|
|
|
|
2019 (2)
|
|
Operating leases:
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
$
|
52,421
|
|
|
$
|
60,246
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
14,147
|
|
|
$
|
14,204
|
|
Other liabilities
|
|
|
38,724
|
|
|
|
46,059
|
|
Total operating lease liabilities
|
|
$
|
52,871
|
|
|
$
|
60,263
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years)
|
|
|
4.85
|
|
|
|
5.74
|
|
Weighted-average discount rate
|
|
|
4.96
|
%
|
|
|
5.71
|
%
|
|
(1)
|
Amounts exclude operating lease assets of $8.7 million, accrued expenses of $2.3 million and other liabilities of $7.3 million that were classified as held for sale at December 31, 2020 (see Note 5).
|
|
(2)
|
Amounts exclude operating lease assets of $11.5 million, accrued expenses of $1.8 million and other liabilities of $10.4 million that were classified as held for sale at December 31, 2019 (see Note 5).
|
Operating lease liabilities under non-cancellable leases were as follows (in thousands):
|
|
December 31, 2020
|
|
2021
|
|
$
|
16,380
|
|
2022
|
|
|
13,536
|
|
2023
|
|
|
10,784
|
|
2024
|
|
|
7,511
|
|
2025
|
|
|
4,415
|
|
Thereafter
|
|
|
6,965
|
|
Total undiscounted operating lease liabilities
|
|
|
59,591
|
|
Less: Imputed interest
|
|
|
(6,720
|
)
|
Total discounted operating lease liabilities
|
|
$
|
52,871
|
|
8. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The following table presents a reconciliation of the beginning and ending balances of goodwill (in thousands):
|
|
Infrastructure Solutions
|
|
|
Corrosion Protection
|
|
|
Total
|
|
Balance, December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
$
|
244,521
|
|
|
$
|
76,383
|
|
|
$
|
320,904
|
|
Accumulated impairment losses
|
|
|
(62,848
|
)
|
|
|
(45,400
|
)
|
|
|
(108,248
|
)
|
Goodwill, net
|
|
|
181,673
|
|
|
|
30,983
|
|
|
|
212,656
|
|
2019 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
(137
|
)
|
|
|
563
|
|
|
|
426
|
|
Reclassification to assets held for sale (1)
|
|
|
(4,224
|
)
|
|
|
—
|
|
|
|
(4,224
|
)
|
Balance, December 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
240,160
|
|
|
|
76,946
|
|
|
|
317,106
|
|
Accumulated impairment losses
|
|
|
(62,848
|
)
|
|
|
(45,400
|
)
|
|
|
(108,248
|
)
|
Goodwill, net
|
|
|
177,312
|
|
|
|
31,546
|
|
|
|
208,858
|
|
2020 Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
|
|
|
1,559
|
|
|
|
248
|
|
|
|
1,807
|
|
Balance, December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
241,719
|
|
|
|
77,194
|
|
|
|
318,913
|
|
Accumulated impairment losses
|
|
|
(62,848
|
)
|
|
|
(45,400
|
)
|
|
|
(108,248
|
)
|
Goodwill, net
|
|
$
|
178,871
|
|
|
$
|
31,794
|
|
|
$
|
210,665
|
|
(1)
|
During 2019, the Company classified certain assets of its CIPP contracting operation in Europe as held for sale (see Note 6).
|
Intangible Assets
Intangible assets consisted of the following (in thousands):
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
|
|
Weighted Average Useful Lives (Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
License agreements
|
|
|
—
|
|
|
$
|
3,894
|
|
|
$
|
(3,894
|
)
|
|
$
|
—
|
|
|
$
|
3,894
|
|
|
$
|
(3,824
|
)
|
|
$
|
70
|
|
Leases
|
|
|
—
|
|
|
|
864
|
|
|
|
(864
|
)
|
|
|
—
|
|
|
|
864
|
|
|
|
(777
|
)
|
|
|
87
|
|
Trademarks
|
|
|
8.4
|
|
|
|
14,758
|
|
|
|
(7,459
|
)
|
|
|
7,299
|
|
|
|
14,688
|
|
|
|
(6,695
|
)
|
|
|
7,993
|
|
Non-competes
|
|
|
2.3
|
|
|
|
1,561
|
|
|
|
(1,008
|
)
|
|
|
553
|
|
|
|
1,556
|
|
|
|
(784
|
)
|
|
|
772
|
|
Customer relationships
|
|
|
5.7
|
|
|
|
95,058
|
|
|
|
(56,602
|
)
|
|
|
38,456
|
|
|
|
94,865
|
|
|
|
(50,104
|
)
|
|
|
44,761
|
|
Patents and acquired technology
|
|
|
6.9
|
|
|
|
39,756
|
|
|
|
(27,195
|
)
|
|
|
12,561
|
|
|
|
39,288
|
|
|
|
(25,096
|
)
|
|
|
14,192
|
|
Total intangible assets
|
|
|
—
|
|
|
$
|
155,891
|
|
|
$
|
(97,022
|
)
|
|
$
|
58,869
|
|
|
$
|
155,155
|
|
|
$
|
(87,280
|
)
|
|
$
|
67,875
|
|
Amortization expense from continuing operations was $9.4 million, $9.4 million and $9.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Estimated amortization expense for the years ended December 31, 2021, 2022, 2023, 2024 and 2025 is $9.4 million, $9.4 million, $9.4 million, $9.4 million and $8.5 million, respectively.
9. LONG-TERM DEBT AND CREDIT FACILITY
Long-term debt consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Term note, due February 27, 2023, annualized rates of 2.00% and 4.09%, respectively
|
|
$
|
221,717
|
|
|
$
|
253,750
|
|
Line of credit, 2.00% and 4.01%, respectively
|
|
|
—
|
|
|
|
24,000
|
|
Other notes with interest rates from 3.3% to 7.8%
|
|
|
750
|
|
|
|
770
|
|
Subtotal
|
|
|
222,467
|
|
|
|
278,520
|
|
Less – Current maturities of long-term debt
|
|
|
25,811
|
|
|
|
32,803
|
|
Less – Unamortized loan costs
|
|
|
2,668
|
|
|
|
2,088
|
|
Total
|
|
$
|
193,988
|
|
|
$
|
243,629
|
|
Required principal payments for each of the next five years are summarized as follows (in thousands):
|
|
December 31, 2020
|
|
2021
|
|
$
|
25,811
|
|
2022
|
|
|
30,844
|
|
2023
|
|
|
165,812
|
|
2024
|
|
|
—
|
|
2025
|
|
|
—
|
|
Thereafter
|
|
|
—
|
|
Total
|
|
$
|
222,467
|
|
Financing Arrangements
In October 2015, the Company entered into an amended and restated $650.0 million senior secured credit facility with a syndicate of banks. In February 2018, December 2018, April 2020 and November 2020, the Company amended this facility (the “amended Credit Facility”). At December 31, 2020, the amended Credit Facility consisted of a $175.0 million revolving line of credit and a $308.4 million term loan facility, each with a maturity date in February 2023.
In April 2020, the Company amended its credit facility to provide additional liquidity and to ensure ongoing debt covenant compliance as a proactive measure to manage the potential impacts of COVID-19 on the Company’s business and the uncertainties associated with the duration of the pandemic. In November 2020, based on management’s revised confidence with future cash flows, the Company further amended its credit facility to secure more favorable interest rates and maintain flexibility to manage through downside risk. Through these amendments, the amended Credit Facility now includes more flexible financial covenants and allows for the add-back of certain restructuring and divestiture charges. The amended Credit Facility also places certain limits on the Company’s open market share repurchase program and repurchases of common stock in connection with the Company’s equity compensation programs for employees. See Note 9.
During 2020 the Company paid expenses of $2.2 million associated with the amended Credit Facility, $1.7 million related to up-front lending fees and $0.5 million related to third-party arranging fees and expenses, the latter of which was recorded in “Interest expense” in the Consolidated Statement of Operations in 2020. In addition, the Company had $1.9 million in unamortized loan costs associated with the amended Credit Facility, of which $0.2 million was written off and recorded in “Interest expense” in the Consolidated Statement of Operations in 2020. During 2018, the Company paid expenses of $3.1 million associated with the amended Credit Facility, $1.4 million related to up-front lending fees and $1.7 million related to third-party arranging fees and expenses, the latter of which was recorded in “Interest expense” in the Consolidated Statement of Operations in 2018. In addition, the Company had $2.4 million in unamortized loan costs associated with the original Credit Facility, of which $0.6 million was written off and recorded in “Interest expense” in the Consolidated Statement of Operations in 2018.
Based on the 2020 amendments, interest is charged on the principal amounts outstanding under the amended Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from 1.25% to 3.25% depending on the Company’s consolidated leverage ratio. The amended Credit Facility also provides a 25 basis point floor for the base LIBOR rate. The applicable LIBOR borrowing rate (LIBOR plus Company’s applicable rate) as of December 31, 2020 was approximately 2.00%
The Company’s indebtedness at December 31, 2020 consisted of $221.7 million outstanding from the term loan under the amended Credit Facility. Additionally, the Company had $0.7 million of debt held by its joint ventures (representing funds loaned by its joint venture partners). During 2020, the Company repaid $24.0 million on the line of credit as a result of focused working capital management and strong operating cash flows.
As of December 31, 2020, the Company had $30.8 million in letters of credit issued and outstanding under the amended Credit Facility. Of such amount, $11.2 million was collateral for the benefit of certain of the Company’s insurance carriers and $19.6 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.
The Company’s indebtedness at December 31, 2019 consisted of $253.8 million outstanding from the term loan under the amended Credit Facility, $24.0 million on the line of credit under the amended Credit Facility and $0.8 million of third-party notes and bank debt. During 2019, the Company had net repayments of $0.7 million on the line of credit due to improved domestic working capital management.
At December 31, 2020 and 2019, the estimated fair value of the Company’s long-term debt was approximately $219.2 million and $286.8 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 2.
In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $262.5 million, which expired in October 2020. The notional amount of this swap mirrored the amortization of a $262.5 million portion of the Company’s $350.0 million term loan drawn from the original Credit Facility. The swap required the Company to make a monthly fixed rate payment of 1.46% calculated on the amortizing $262.5 million notional amount, and provided for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $262.5 million notional amount. The receipt of the monthly LIBOR-based payment offset a variable monthly LIBOR-based interest cost on a corresponding $262.5 million portion of the Company’s term loan from the original Credit Facility. This interest rate swap was used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and was accounted for as a cash flow hedge. See Note 15.
In March 2018, the Company entered into an interest rate swap forward agreement that began in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 2.937% calculated on the amortizing $170.6 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $170.6 million notional amount. The receipt of the monthly LIBOR-based payment offsets the variable monthly LIBOR-based interest cost on a corresponding $170.6 million portion of the Company’s term loan from the amended Credit Facility. After considering the impact of the interest rate swap agreement, the effective borrowing rate on the Company’s term note as of December 31, 2020 was approximately 4.09%. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge. See Note 15.
The amended Credit Facility is subject to certain financial covenants, including a consolidated financial leverage ratio and consolidated fixed charge coverage ratio. Subject to the specifically defined terms and methods of calculation as set forth in the amended Credit Facility’s credit agreement, the financial covenant requirements, as of December 31, 2020, were defined as follows:
|
•
|
Consolidated financial leverage ratio, as amended, compares consolidated funded indebtedness to amended Credit Facility defined income with a maximum amount not to exceed 3.50 to 1.00. At December 31, 2020, the Company’s consolidated financial leverage ratio was 2.32 to 1.00 and, using the amended Credit Facility defined income, the Company had the capacity to borrow up to $118.2 million of additional debt.
|
|
|
|
|
•
|
Consolidated fixed charge coverage ratio, as amended, compares amended Credit Facility defined income to amended Credit Facility defined fixed charges with a minimum permitted ratio of not less than 1.15 to 1.00. At December 31, 2020, the Company’s fixed charge ratio was 1.40 to 1.00.
|
At December 31, 2020, the Company was in compliance with all of its financial covenants as required under the amended Credit Facility.
10. STOCKHOLDERS’ EQUITY
Share Repurchase Plan
In December 2019, the Company’s board of directors authorized the open market repurchase of up to an additional two million shares of the Company’s common stock upon completion of the two million share repurchase program approved by the board of directors in December 2018. As of December 31, 2020, 125,975 shares remained to be repurchased under the 2018 program and an additional two million shares under the 2019 program. Any shares repurchased are pursuant to one or more trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. From March 2020 to October 2020, the Company’s board of directors suspended the applicable 10b5-1 trading plans for the current open market repurchase program to increase liquidity and improve financial flexibility in light of COVID-19. Effective in November 2020, the amended Credit Facility limits open market repurchases of the Company’s common stock to: (i) unlimited if the Company’s consolidated financial leverage ratio is less than 2.50 to 1.00; and (ii) $40.0 million per year while the Company’s consolidated financial leverage ratio is greater than or equal to 2.50 to 1.00. Effective February 16, 2021, the Company terminated the open market share repurchase program. See Note 17.
The Company is also authorized to repurchase 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. The participants in the Company’s equity plans may surrender shares of common stock in satisfaction of tax obligations arising from the vesting of restricted stock and restricted stock unit awards under such plans and in connection with the exercise of stock option 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 or restricted stock unit vests or the shares of the Company’s common stock are surrendered in exchange for stock option exercises. With regard to stock option awards, the option holder may elect a “net, net” exercise in connection with the exercise of employee stock options such that the option holder receives a number of shares equal to the built-in gain in the option shares divided by the market price of the Company’s common stock on the date of exercise, less a number of shares equal to the taxes due upon the exercise of the option divided by the market price of the Company’s common stock on the date of exercise. The shares of Company common stock surrendered to the Company for taxes due on the exercise of the option are deemed repurchased by the Company.
During 2020, the Company acquired 381,677 shares of the Company’s common stock for $6.6 million ($17.16 average price per share) through the open market repurchase program discussed above and 122,292 shares of the Company’s common stock for $2.5 million ($20.57 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock units and performance units. Once repurchased, the Company immediately retired all such shares. During 2020, the Company did not acquire any of the Company’s common stock in connection with “net, net” exercises of employee stock options.
During 2019, the Company acquired 1,492,348 shares of the Company’s common stock for $26.3 million ($17.64 average price per share) through the open market repurchase programs, 151,234 shares of the Company’s common stock for $3.1 million ($20.26 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock units and performance units, and 48,409 shares of the Company’s common stock for $1.0 million ($20.52 average price per share) in connection with “net, net” exercises of employee stock options. Once repurchased, the Company immediately retired all such shares.
During 2018, the Company acquired 949,464 shares of the Company’s common stock for $20.3 million ($21.36 average price per share) through open market repurchase programs and 228,068 shares of the Company’s common stock for $5.5 million ($24.08 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock and restricted stock units. Once repurchased, the Company immediately retired all such shares. During 2018, the Company did not acquire any of the Company’s common stock in connection with “net, net” exercises of employee stock options.
Equity-Based Compensation Plans
Employee Plans
In April 2016, the Company’s stockholders approved the 2016 Employee Equity Incentive Plan, which was amended in 2017 by the First Amendment to the 2016 Employee Equity Incentive Plan (as amended, the “2016 Employee Plan”). In April 2018, the Company’s stockholders approved the Second Amendment to the 2016 Employee Equity Incentive Plan, which increased by 1,700,000 the number of shares of the Company’s common stock reserved and available for issuance in connection with awards issued under the 2016 Employee Plan. The 2016 Employee Plan, which replaced the 2013 Employee Equity Incentive Plan, provides for equity-based compensation awards, including restricted shares of common stock, performance awards, stock options, stock units and stock appreciation rights. The 2016 Employee Plan is administered by the compensation committee of the board of directors, which determines eligibility, timing, pricing, amount and other terms or conditions of awards. As of December 31, 2020, 1,451,672 shares of the Company’s common stock were available for issuance under the 2016 Employee Plan.
Director Plans
In April 2016, the Company’s stockholders approved the 2016 Non-Employee Director Equity Incentive Plan (the “2016 Director Plan”), which replaced the 2011 Non-Employee Director Equity Incentive Plan. In April 2019, the Company’s stockholders approved an amendment and restatement of the 2016 Director Plan, which among other things, increased by 300,000 the number of shares of the Company’s common stock reserved and available for issuance in connection with awards issued under the 2016 Director Plan. The 2016 Director Plan provides for equity-based compensation awards, including non-qualified stock options and stock units. The board of directors administers the 2016 Director Plan and has the authority to establish, amend and rescind any rules and regulations related to the 2016 Director Plan. As of December 31, 2020, 250,980 shares of the Company’s common stock were available for issuance under the 2016 Director Plan.
Prior to the 2016 Director Plan, the board of directors administered the 2011 Non-Employee Director Equity Plan (“2011 Director Plan”), the 2006 Non-Employee Director Equity Plan (“2006 Director Plan”) and the 2001 Non-Employee Director Equity Plan (“2001 Director Plan”), all of which contained substantially the same provisions as the current plan. At December 31, 2020, there were 163,973 deferred stock units outstanding under the 2016 Director Plan, 51,842 deferred stock units outstanding under the 2011 Director Plan, 29,529 deferred stock units outstanding under the 2006 Director Plan and 19,125 deferred stock units outstanding under the 2001 Director Equity Plan.
Activity and related expense associated with these plans are described in Note 11.
11. EQUITY-BASED COMPENSATION
Stock Awards
Stock awards, which include shares of restricted stock, restricted stock units and performance stock units, are awarded from time to time to executive officers and certain key employees of the Company. Stock award compensation is recorded based on the award date fair value and charged to expense ratably through the requisite service period. The forfeiture of unvested restricted stock, restricted stock units and performance stock units causes the reversal of all previous expense recorded as a reduction of current period expense.
A summary of stock award activity is as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Stock Awards
|
|
|
Weighted Average Award Date Fair Value
|
|
|
Stock Awards
|
|
|
Weighted Average Award Date Fair Value
|
|
|
Stock Awards
|
|
|
Weighted Average Award Date Fair Value
|
|
Outstanding, beginning of year
|
|
|
1,034,964
|
|
|
$
|
23.20
|
|
|
|
1,143,205
|
|
|
$
|
23.26
|
|
|
|
1,428,878
|
|
|
$
|
21.53
|
|
Period Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units awarded
|
|
|
420,377
|
|
|
|
19.87
|
|
|
|
325,321
|
|
|
|
20.02
|
|
|
|
281,567
|
|
|
|
24.13
|
|
Performance stock units awarded
|
|
|
131,755
|
|
|
|
22.96
|
|
|
|
146,367
|
|
|
|
22.78
|
|
|
|
219,943
|
|
|
|
23.25
|
|
Restricted shares distributed
|
|
|
—
|
|
|
|
—
|
|
|
|
(76,686
|
)
|
|
|
18.26
|
|
|
|
—
|
|
|
|
—
|
|
Restricted stock units distributed
|
|
|
(297,322
|
)
|
|
|
20.50
|
|
|
|
(237,416
|
)
|
|
|
18.83
|
|
|
|
(312,182
|
)
|
|
|
17.47
|
|
Performance stock units distributed
|
|
|
(71,541
|
)
|
|
|
28.18
|
|
|
|
(111,155
|
)
|
|
|
25.85
|
|
|
|
(296,909
|
)
|
|
|
21.55
|
|
Restricted stock units forfeited
|
|
|
(93,696
|
)
|
|
|
18.17
|
|
|
|
(74,075
|
)
|
|
|
22.09
|
|
|
|
(90,896
|
)
|
|
|
21.79
|
|
Performance stock units forfeited
|
|
|
(80,930
|
)
|
|
|
27.19
|
|
|
|
(80,597
|
)
|
|
|
25.30
|
|
|
|
(87,196
|
)
|
|
|
25.95
|
|
Outstanding, end of year
|
|
|
1,043,607
|
|
|
$
|
22.40
|
|
|
|
1,034,964
|
|
|
$
|
23.20
|
|
|
|
1,143,205
|
|
|
$
|
23.26
|
|
Expense associated with stock awards was $8.9 million, $7.0 million and $6.8 million in 2020, 2019 and 2018, respectively. Unrecognized pre-tax expense of $9.8 million related to stock awards is expected to be recognized over the weighted average remaining service period of 1.9 years for awards outstanding at December 31, 2020.
Deferred Stock Unit Awards
Deferred stock units are generally awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date. Historically, awards were fully vested, and fully expensed, on the date of grant. Beginning in April 2019, as a result of the amendment and restatement of the 2016 Director Plan discussed above, the expense related to the issuance of deferred stock units is based on the award date fair value and charged to expense ratably through the requisite service period, which is generally one year. The forfeiture of unvested deferred stock units causes the reversal of all previous expense to be recorded as a reduction of current period expense.
A summary of deferred stock unit activity is as follows:
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
|
|
Deferred
Stock
Units
|
|
|
Weighted
Average
Award Date
Fair Value
|
|
|
Deferred
Stock
Units
|
|
|
Weighted
Average
Award Date
Fair Value
|
|
|
Deferred
Stock
Units
|
|
|
Weighted
Average
Award Date
Fair Value
|
|
Outstanding, beginning of year
|
|
|
253,340
|
|
|
$
|
20.71
|
|
|
|
287,350
|
|
|
$
|
20.80
|
|
|
|
269,977
|
|
|
$
|
20.14
|
|
Period Activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awarded
|
|
|
70,426
|
|
|
|
14.59
|
|
|
|
50,174
|
|
|
|
19.64
|
|
|
|
45,681
|
|
|
|
23.72
|
|
Distributed
|
|
|
(59,297
|
)
|
|
|
21.66
|
|
|
|
(84,184
|
)
|
|
|
20.38
|
|
|
|
(28,308
|
)
|
|
|
19.22
|
|
Outstanding, end of year
|
|
|
264,469
|
|
|
$
|
18.87
|
|
|
|
253,340
|
|
|
$
|
20.71
|
|
|
|
287,350
|
|
|
$
|
20.80
|
|
Expense associated with awards of deferred stock units was $1.0 million, $0.7 million and $1.1 million in 2020, 2019 and 2018, respectively. Unrecognized pre-tax expense of $0.3 million related to deferred stock unit awards is expected to be recognized over the weighted average remaining service period of 0.3 years for awards outstanding at December 31, 2020.
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.
A summary of stock option activity is as follows:
|
Years Ended December 31,
|
|
|
2019
|
|
|
2018
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
|
Shares
|
|
|
Weighted Average Exercise Price
|
|
Outstanding, beginning of year
|
|
52,783
|
|
|
$
|
18.11
|
|
|
|
126,680
|
|
|
$
|
23.06
|
|
Exercised
|
|
(52,783
|
)
|
|
|
18.11
|
|
|
|
—
|
|
|
|
—
|
|
Canceled/Expired
|
|
—
|
|
|
|
—
|
|
|
|
(73,897
|
)
|
|
|
26.60
|
|
Outstanding, end of year
|
|
—
|
|
|
$
|
—
|
|
|
|
52,783
|
|
|
$
|
18.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, end of year
|
|
—
|
|
|
$
|
—
|
|
|
|
52,783
|
|
|
$
|
18.11
|
|
In 2020, 2019 and 2018, there were no expenses related to stock options as all issued stock options were fully vested.
Financial data for stock option exercises are summarized in the following table (in thousands):
|
Years Ended December 31,
|
|
|
2019
|
|
|
2018
|
|
Amount received from stock option exercises
|
$
|
956
|
|
|
$
|
—
|
|
Total intrinsic value of stock option exercises (1)
|
|
129
|
|
|
|
—
|
|
Tax expense (benefit) of stock option exercises recorded in income tax expense
|
|
312
|
|
|
|
(1,556
|
)
|
Aggregate intrinsic value of outstanding stock options
|
|
—
|
|
|
|
—
|
|
Aggregate intrinsic value of exercisable stock options
|
|
—
|
|
|
|
—
|
|
(1) Calculation was based on a weighted average market price of the Company’s stock at the time of exercise of $20.55 for the year ended December 31, 2019.
12. TAXES ON INCOME
Income (loss) before taxes (benefit) was as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Domestic
|
|
$
|
10,454
|
|
|
$
|
(3,469
|
)
|
|
$
|
1,122
|
|
Foreign
|
|
|
19,613
|
|
|
|
(16,511
|
)
|
|
|
(5,187
|
)
|
Total
|
|
$
|
30,067
|
|
|
$
|
(19,980
|
)
|
|
$
|
(4,065
|
)
|
Provisions (benefits) for taxes on income (loss) consisted of the following components (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(1,683
|
)
|
|
$
|
(3,116
|
)
|
|
$
|
(4,902
|
)
|
Foreign
|
|
|
5,010
|
|
|
|
5,705
|
|
|
|
6,025
|
|
State
|
|
|
794
|
|
|
|
49
|
|
|
|
(722
|
)
|
Subtotal
|
|
|
4,121
|
|
|
|
2,638
|
|
|
|
401
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(421
|
)
|
|
|
(994
|
)
|
|
|
58
|
|
Foreign
|
|
|
704
|
|
|
|
(199
|
)
|
|
|
(1,531
|
)
|
State
|
|
|
863
|
|
|
|
2,565
|
|
|
|
(221
|
)
|
Subtotal
|
|
|
1,146
|
|
|
|
1,372
|
|
|
|
(1,694
|
)
|
Total tax provision
|
|
$
|
5,267
|
|
|
$
|
4,010
|
|
|
$
|
(1,293
|
)
|
The reconciliation between the U.S. federal statutory income tax rate of 21% for 2020, 2019 and 2018 and the Company’s income tax provision is as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Income taxes (benefit) at U.S. federal statutory tax rate
|
|
$
|
6,315
|
|
|
$
|
(4,196
|
)
|
|
$
|
(854
|
)
|
Increase (decrease) in taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in the balance of the valuation allowance for deferred tax assets allocated to foreign income tax expense
|
|
|
38
|
|
|
|
806
|
|
|
|
590
|
|
Change in the balance of the valuation allowance for deferred tax assets allocated to domestic income tax expense
|
|
|
(1,256
|
)
|
|
|
3,025
|
|
|
|
(564
|
)
|
State income taxes, net of federal income tax benefit
|
|
|
1,051
|
|
|
|
2,033
|
|
|
|
(791
|
)
|
Divestitures
|
|
|
(501
|
)
|
|
|
5,613
|
|
|
|
2,133
|
|
Meals and entertainment
|
|
|
271
|
|
|
|
442
|
|
|
|
482
|
|
Changes in taxes previously accrued
|
|
|
45
|
|
|
|
(1,557
|
)
|
|
|
(573
|
)
|
Foreign tax rate differences
|
|
|
(176
|
)
|
|
|
(643
|
)
|
|
|
1,301
|
|
Share-based compensation
|
|
|
572
|
|
|
|
358
|
|
|
|
(1,427
|
)
|
Goodwill impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
291
|
|
Recognition of uncertain tax positions
|
|
|
(504
|
)
|
|
|
(717
|
)
|
|
|
(218
|
)
|
Deemed mandatory repatriation
|
|
|
—
|
|
|
|
—
|
|
|
|
(842
|
)
|
Other matters
|
|
|
(588
|
)
|
|
|
(1,154
|
)
|
|
|
(821
|
)
|
Total tax provision
|
|
$
|
5,267
|
|
|
$
|
4,010
|
|
|
$
|
(1,293
|
)
|
Effective tax rate
|
|
|
17.5
|
%
|
|
|
(20.1
|
%)
|
|
|
31.8
|
%
|
Deferred taxes are recognized for temporary differences between the financial reporting bases and tax bases of assets and liabilities based on enacted tax rates expected to be in effect when such amounts are realized or settled. However, deferred tax assets are recognized only to the extent that it is more likely than not that they will be realized based upon consideration of available evidence, including future reversals of existing taxable temporary differences, future projected taxable income, the length of the tax asset carryforward periods, and tax planning strategies.
Net deferred taxes consisted of the following (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
Foreign tax credit carryforwards
|
|
$
|
6,152
|
|
|
$
|
4,101
|
|
General business credit carryforwards
|
|
|
1,485
|
|
|
|
844
|
|
Net operating loss carryforwards
|
|
|
15,546
|
|
|
|
19,079
|
|
Accrued expenses
|
|
|
15,047
|
|
|
|
15,119
|
|
Operating lease liabilities
|
|
|
15,820
|
|
|
|
17,360
|
|
Other
|
|
|
5,999
|
|
|
|
7,587
|
|
Total gross deferred income tax assets
|
|
|
60,049
|
|
|
|
64,090
|
|
Less valuation allowance
|
|
|
(43,424
|
)
|
|
|
(34,247
|
)
|
Net deferred income tax assets
|
|
|
16,625
|
|
|
|
29,843
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
Property, plant and equipment
|
|
|
(4,625
|
)
|
|
|
(5,689
|
)
|
Intangible assets
|
|
|
(1,009
|
)
|
|
|
(12,203
|
)
|
Operating lease assets
|
|
|
(15,464
|
)
|
|
|
(17,198
|
)
|
Other
|
|
|
(5,423
|
)
|
|
|
(4,791
|
)
|
Total deferred income tax liabilities
|
|
|
(26,521
|
)
|
|
|
(39,881
|
)
|
Net deferred income tax liabilities
|
|
$
|
(9,896
|
)
|
|
$
|
(10,038
|
)
|
The Company’s tax assets and liabilities, netted by taxing location, are in the following captions in the balance sheets (in thousands):
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Noncurrent deferred income tax assets, net
|
|
$
|
448
|
|
|
$
|
1,216
|
|
Noncurrent deferred income tax liabilities, net
|
|
|
(10,344
|
)
|
|
|
(11,254
|
)
|
Net deferred income tax liabilities
|
|
$
|
(9,896
|
)
|
|
$
|
(10,038
|
)
|
The Company’s deferred tax assets at December 31, 2020 included $15.5 million in federal, state and foreign net operating loss (“NOL”) carryforwards. These NOLs include $9.0 million, which if not used will expire between the years 2021 and 2040, and $6.5 million that have no expiration dates. The Company also has deferred tax amounts related to foreign tax credit carryforwards of $6.2 million, of which, $0.9 million will expire in 2026 if not used, $3.7 million will expire in 2029 if not used, $1.5 million will expire in 2030 if not used and $0.1 million have no expiration date. The Company also has deferred tax amounts related to general business credit carryforwards of $1.5 million, of which, $0.2 million will expire in 2038 if not used, $0.8 million will expire in 2039 if not used and $0.5 million will expire in 2040 if not used.
For financial reporting purposes, a valuation allowance of $43.4 million has been recognized at December 31, 2020 to reduce the deferred tax assets related to certain federal, state and foreign net operating loss carryforwards and other assets, for which it is more likely than not that the related tax benefits will not be realized, due to uncertainties as to the timing and amounts of future taxable income. The valuation allowance at December 31, 2019 was $34.2 million.
As of December 31, 2020, a valuation allowance has been recorded to record only the portion of the deferred tax asset that is more likely than not to be realized. The amount of the deferred tax asset considered realizable; however, could be adjusted if estimates of future taxable income during the carryforward period are reduced or increased or if objective negative evidence in the form of cumulative losses is no longer present and additional weight may be given to subjective evidence such as our projections for growth.
Activity in the valuation allowance is summarized as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Balance, at beginning of year
|
|
$
|
34,247
|
|
|
$
|
28,451
|
|
|
$
|
29,782
|
|
Additions
|
|
|
14,677
|
|
|
|
8,789
|
|
|
|
1,879
|
|
Reversals
|
|
|
(6,571
|
)
|
|
|
(6,776
|
)
|
|
|
(2,102
|
)
|
Other adjustments
|
|
|
1,071
|
|
|
|
3,783
|
|
|
|
(1,108
|
)
|
Balance, at end of year
|
|
$
|
43,424
|
|
|
$
|
34,247
|
|
|
$
|
28,451
|
|
As a result of the deemed mandatory repatriation provisions in the Tax Cuts and Jobs Act (“TCJA”), the Company included $206.7 million of undistributed earnings in income subject to U.S. tax at reduced tax rates. Certain provisions within the TCJA effectively transition the U.S. to a territorial system and eliminates deferral on U.S. taxation for certain amounts of income that are not taxed at a minimum level. At this time, the Company does not intend to distribute earnings in a taxable manner; and therefore, intends to limit distributions to: (i) earnings previously taxed in the U.S.; (ii) earnings that would qualify for the 100 percent dividends received deduction provided in the TCJA; or (iii) earnings that would not result in significant foreign taxes. As a result, the Company has not recognized a deferred tax liability on any remaining undistributed foreign earnings as of December 31, 2020.
FASB ASC 740, Income Taxes (“FASB ASC 740”), prescribes a more-likely-than-not threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FASC ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure of uncertain tax positions in financial statements.
A reconciliation of the beginning and ending balance of unrecognized tax benefits is as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Balance, at beginning of year
|
|
$
|
1,384
|
|
|
$
|
1,955
|
|
|
$
|
2,229
|
|
Additions for tax positions of prior years
|
|
|
51
|
|
|
|
9
|
|
|
|
8
|
|
Lapse in statute of limitations
|
|
|
(451
|
)
|
|
|
(587
|
)
|
|
|
(264
|
)
|
Foreign currency translation
|
|
|
7
|
|
|
|
7
|
|
|
|
(18
|
)
|
Balance, at end of year, total tax provision
|
|
$
|
991
|
|
|
$
|
1,384
|
|
|
$
|
1,955
|
|
The total amount of unrecognized tax benefits, if recognized, that would affect the effective tax rate was $0.3 million at December 31, 2020.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. During the years ended December 31, 2020, 2019 and 2018, approximately $0.2 million was expensed for interest and penalties in each year.
The Company believes that it is reasonably possible that the total amount of unrecognized tax benefits will change in 2021. The Company has certain tax return years subject to statutes of limitation that will expire within twelve months. Unless challenged by tax authorities, the expiration of those statutes of limitation is expected to result in the recognition of uncertain tax positions in the amount of approximately $0.9 million.
The Company is subject to taxation in the United States, various states and foreign jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign examinations by tax authorities for years before 2016.
13. 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.
Purchase Commitments
The Company had no material purchase commitments at December 31, 2020.
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 December 31, 2020 on its consolidated balance sheet.
Retirement Plans
Approximately 948 of our U.S. employees participate in multi-employer retirement plans. Substantially all of the Company’s remaining U.S. employees are eligible to participate in one of the Company’s sponsored defined contribution savings plans, which are qualified plans under the requirements of Section 401(k) of the Internal Revenue Code. Company contributions to the domestic plans were $3.0 million, $5.2 million and $5.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. From April 2020 to November 2020, the Company suspended Company contributions to increase liquidity and improve financial flexibility in light of COVID-19.
Certain foreign subsidiaries maintain various other defined contribution retirement plans. Company contributions to such plans for the years ended December 31, 2020, 2019 and 2018 were $0.3 million, $0.8 million and $1.1 million, respectively.
In connection with the Company’s 2009 acquisition of Corrpro, the Company assumed an obligation associated with a contributory defined benefit pension plan sponsored by a subsidiary of Corrpro located in the United Kingdom. Employees of this Corrpro subsidiary no longer accrue benefits under the plan; however, Corrpro continues to be obligated to fund prior period benefits. Both the pension expense and funding requirements for the years ended December 31, 2020, 2019 and 2018 were immaterial to the Company’s consolidated financial position and results of operations. The plan assets and benefit obligation at December 31, 2020 were approximately $10.2 million and $9.5 million, respectively. The Company used a discount rate of 1.3% for the evaluation of the pension liability. The Company recorded an asset associated with the overfunded status of this plan of approximately $0.7 million, which is included in other long-term assets on the consolidated balance sheet. The plan assets and benefit obligation at December 31, 2019 approximated $9.1 million and $8.2 million, respectively. Plan assets consist of investments in equity and debt securities as well as cash, which are primarily Level 2 inputs as defined in Note 2.
14. SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two operating segments, which are also its reportable segments: Infrastructure Solutions and Corrosion Protection. The Company’s operating segments correspond to its management organizational structure. Each operating segment has leadership that reports to the chief operating decision manager (“CODM”). The operating results and financial information reported by each segment are evaluated separately, regularly reviewed and used by the CODM to evaluate segment performance, allocate resources and determine management incentive compensation. In December 2020, the Company’s board of directors approved a plan to sell its Energy Services operating segment (see Note 6). As a result, the operating results of the former Energy Services segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the years ended December 31, 2020, 2019 and 2018. Additionally, the relevant asset and liability balances of Energy Services are presented as held for sale at December 31, 2020, 2019 and 2018.
The following disaggregated financial results have been prepared using a management approach that is consistent with the basis and manner with which management internally disaggregates financial information for the purpose of making internal operating decisions. The Company evaluates performance based on stand-alone operating income (loss), which includes acquisition and divestiture expenses and restructuring charges, if applicable.
Financial information by segment was as follows (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions
|
|
$
|
562,571
|
|
|
$
|
590,797
|
|
|
$
|
604,121
|
|
Corrosion Protection
|
|
|
245,193
|
|
|
|
295,090
|
|
|
|
393,740
|
|
Total revenues
|
|
$
|
807,764
|
|
|
$
|
885,887
|
|
|
$
|
997,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions
|
|
$
|
144,213
|
|
|
$
|
144,074
|
|
|
$
|
132,411
|
|
Corrosion Protection
|
|
|
52,246
|
|
|
|
60,927
|
|
|
|
92,968
|
|
Total gross profit
|
|
$
|
196,459
|
|
|
$
|
205,001
|
|
|
$
|
225,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions (1)
|
|
$
|
78,098
|
|
|
$
|
42,079
|
|
|
$
|
37,509
|
|
Corrosion Protection (2)
|
|
|
(6,133
|
)
|
|
|
(5,635
|
)
|
|
|
16,283
|
|
Corporate (3)
|
|
|
(30,977
|
)
|
|
|
(35,211
|
)
|
|
|
(33,783
|
)
|
Total operating income
|
|
|
40,988
|
|
|
|
1,233
|
|
|
|
20,009
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense (4)
|
|
|
(12,483
|
)
|
|
|
(11,358
|
)
|
|
|
(14,709
|
)
|
Interest income
|
|
|
1,125
|
|
|
|
1,038
|
|
|
|
516
|
|
Other (5)
|
|
|
437
|
|
|
|
(10,893
|
)
|
|
|
(9,881
|
)
|
Total other expense
|
|
|
(10,921
|
)
|
|
|
(21,213
|
)
|
|
|
(24,074
|
)
|
Income (loss) before taxes (benefit) on income (loss)
|
|
$
|
30,067
|
|
|
$
|
(19,980
|
)
|
|
$
|
(4,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions
|
|
$
|
511,606
|
|
|
$
|
508,226
|
|
|
$
|
500,977
|
|
Corrosion Protection
|
|
|
238,566
|
|
|
|
278,694
|
|
|
|
279,106
|
|
Corporate and other
|
|
|
58,425
|
|
|
|
39,794
|
|
|
|
50,098
|
|
Assets held for sale
|
|
|
92,850
|
|
|
|
168,799
|
|
|
|
162,236
|
|
Total assets
|
|
$
|
901,447
|
|
|
$
|
995,513
|
|
|
$
|
992,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures: (6)
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions
|
|
$
|
10,103
|
|
|
$
|
10,679
|
|
|
$
|
12,730
|
|
Corrosion Protection
|
|
|
5,654
|
|
|
|
11,437
|
|
|
|
9,754
|
|
Corporate
|
|
|
802
|
|
|
|
3,219
|
|
|
|
4,977
|
|
Total capital expenditures
|
|
$
|
16,559
|
|
|
$
|
25,335
|
|
|
$
|
27,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization: (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
Infrastructure Solutions
|
|
$
|
14,174
|
|
|
$
|
13,773
|
|
|
$
|
16,758
|
|
Corrosion Protection
|
|
|
12,007
|
|
|
|
12,487
|
|
|
|
11,874
|
|
Corporate
|
|
|
2,521
|
|
|
|
2,413
|
|
|
|
2,112
|
|
Total depreciation and amortization
|
|
$
|
28,702
|
|
|
$
|
28,673
|
|
|
$
|
30,744
|
|
(1)
|
Operating income for 2020 includes: (i) $0.1 million of restructuring reversals (see Note 4); (ii) $0.4 million of costs primarily related to the planned divestiture of certain international operations; and (iii) $1.1 million of impairment reversals related to assets held for sale. Operating income for 2019 includes: (i) $7.5 million of restructuring charges (see Note 4); (ii) $1.0 million of costs primarily related to the planned divestiture of certain international operations; and (iii) $17.6 million of impairment charges to assets held for sale (see Note 6). Operating income for 2018 includes: (i) $16.1 million of restructuring charges (see Note 4); and (ii) $0.4 million of cost incurred related to the disposition of Denmark.
|
(2)
|
Operating loss for 2020 includes $9.5 million of restructuring charges (see Note 4). Operating loss for 2019 includes: (i) $7.7 million of restructuring charges (see Note 4); (ii) $0.1 million of divestiture costs; and (iii) $2.9 million of impairment charges to assets held for sale (see Note 6). Operating income for 2018 includes: (i) $7.6 million of restructuring charges (see Note 4); and (ii) $2.5 million of costs incurred related to the divestiture of Bayou.
|
(3)
|
Operating loss for 2020 includes: (i) $2.7 million of restructuring charges (see Note 4); (ii) $3.2 million of divestiture costs; and (iii) $1.3 million of impairment charges related to assets held for sale (see Note 6). Operating loss for 2019 includes: (i) $5.2 million of restructuring charges (see Note 4); (ii) $2.2 million of costs primarily related to the planned divestiture of certain international operations; and (iii) $2.9 million of impairment charges to assets held for sale (see Note 6). Operating loss for 2018 includes $1.6 million of restructuring charges (see Note 4) and $4.1 million of divestiture costs.
|
(4)
|
Interest expense for 2020 includes $0.7 million of third-party arranging fees, expenses and the write-off of unamortized loan costs associated with the amended Credit Facility (see Note 9). Interest expense for 2018 includes $2.3 million of third-party arranging fees, expenses and the write-off of unamortized loan costs associated with the amended Credit Facility (see Note 9).
|
(5)
|
Other expense for 2020 includes gains of $0.9 million related to restructuring (see Note 4). Other expense for 2019 includes $10.2 million of restructuring charges (see Note 4). Other expense for 2018 includes charges of $7.0 million related to the loss on the sale of Bayou (see Note 1) and $4.0 million of restructuring charges (see Note 4).
|
(6)
|
Capital expenditures from our discontinued operations were $3.0 million, $3.4 million and $3.1 million in 2020, 2019 and 2018, respectively.
|
(7)
|
Depreciation and amortization from our discontinued operations were $6.8 million, $7.5 million and $7.1 million in 2020, 2019 and 2018, respectively.
|
The following table summarizes revenues, gross profit, operating income (loss) and long-lived assets by geographic region (in thousands):
|
|
Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
2018
|
|
Revenues: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
572,729
|
|
|
$
|
586,628
|
|
|
$
|
630,584
|
|
Canada
|
|
|
118,253
|
|
|
|
123,033
|
|
|
|
133,612
|
|
Europe
|
|
|
37,251
|
|
|
|
64,278
|
|
|
|
66,794
|
|
Other foreign
|
|
|
79,531
|
|
|
|
111,948
|
|
|
|
166,871
|
|
Total revenues
|
|
$
|
807,764
|
|
|
$
|
885,887
|
|
|
$
|
997,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
139,308
|
|
|
$
|
134,471
|
|
|
$
|
136,477
|
|
Canada
|
|
|
24,360
|
|
|
|
22,183
|
|
|
|
22,823
|
|
Europe
|
|
|
11,437
|
|
|
|
14,849
|
|
|
|
8,379
|
|
Other foreign
|
|
|
21,354
|
|
|
|
33,498
|
|
|
|
57,700
|
|
Total gross profit
|
|
$
|
196,459
|
|
|
$
|
205,001
|
|
|
$
|
225,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss): (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
18,817
|
|
|
$
|
(3,528
|
)
|
|
$
|
(9,464
|
)
|
Canada
|
|
|
11,849
|
|
|
|
7,460
|
|
|
|
9,482
|
|
Europe
|
|
|
6,230
|
|
|
|
(11,363
|
)
|
|
|
(10,599
|
)
|
Other foreign
|
|
|
4,092
|
|
|
|
8,664
|
|
|
|
30,590
|
|
Total operating income
|
|
$
|
40,988
|
|
|
$
|
1,233
|
|
|
$
|
20,009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-lived assets: (1)(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
89,487
|
|
|
$
|
83,225
|
|
|
$
|
105,978
|
|
Canada
|
|
|
7,817
|
|
|
|
7,462
|
|
|
|
7,725
|
|
Europe
|
|
|
3,073
|
|
|
|
3,336
|
|
|
|
8,295
|
|
Other foreign
|
|
|
1,413
|
|
|
|
10,192
|
|
|
|
6,662
|
|
Total long-lived assets
|
|
$
|
101,790
|
|
|
$
|
104,215
|
|
|
$
|
128,660
|
|
(1)
|
Attributed to the country of origin.
|
(2)
|
Long-lived assets do not include goodwill, intangible assets, operating lease assets or deferred tax assets.
|
15. 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 either the settlement of cash flow hedges or the outstanding hedged balance. At December 31, 2020 and 2019, the Company’s cash flow hedges were in a net deferred loss position of $9.0 million and $4.6 million, respectively. The change during the period was due to unfavorable movements in short-term interest rates relative to the hedged position. The Company presents derivative instruments in the consolidated financial statements on a gross basis. Deferred losses were recorded in other non-current liabilities and other comprehensive income (loss) on the Consolidated Balance Sheets. The net periodic change of the Company’s cash flow hedges was recorded on the foreign currency translation adjustment and derivative transactions line of the Consolidated Statements of Equity.
The Company also engages in regular inter-company trade activities and receives royalty payments from certain of its wholly-owned entities, paid in local currency, rather than the Company’s functional currency, U.S. Dollars. The Company utilizes foreign currency forward exchange contracts to mitigate the currency risk associated with the anticipated future payments from certain of its international entities. No contracts were utilized during 2020. During 2019 and 2018, losses of $0.2 million and $0.5 million, respectively, were recorded upon settlement of foreign currency forward exchange contracts. Gains and losses of this nature are recorded to “Other income (expense)” in the Consolidated Statements of Operations.
In October 2015, the Company entered into an interest rate swap agreement for a notional amount of $262.5 million, which expired in October 2020. The notional amount of this swap mirrored the amortization of a $262.5 million portion of the Company’s $350.0 million term loan drawn from the original Credit Facility. The swap required the Company to make a monthly fixed rate payment of 1.46% calculated on the amortizing $262.5 million notional amount and provided for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated by amortizing the $262.5 million same notional amount. The receipt of the monthly LIBOR-based payment offset a variable monthly LIBOR-based interest cost on a corresponding $262.5 million portion of the Company’s term loan from the original Credit Facility. This interest rate swap was used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and was accounted for as a cash flow hedge.
In March 2018, the Company entered into an interest rate swap forward agreement that began in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 2.937% calculated on the amortizing $170.6 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $170.6 million notional amount. The receipt of the monthly LIBOR-based payment offsets the variable monthly LIBOR-based interest cost on a corresponding $170.6 million portion of the Company’s term loan from the amended Credit Facility. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge.
The following table summarizes the Company’s derivative positions at December 31, 2020:
|
|
Position
|
|
|
Notional Amount
|
|
|
Weighted Average Remaining Maturity In Years
|
|
|
Average Exchange Rate
|
|
Interest Rate Swap
|
|
|
—
|
|
|
$
|
166,287,598
|
|
|
|
2.2
|
|
|
|
—
|
|
The following table summarizes the fair value amounts of the Company’s derivative instruments, all of which are Level 2 inputs as defined in Note 2 (in thousands):
|
|
|
|
|
December 31,
|
|
Designation of Derivatives
|
|
Balance Sheet Location
|
|
2020
|
|
|
2019
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Other non-current assets
|
|
$
|
-
|
|
|
$
|
261
|
|
|
|
Total Assets
|
|
$
|
-
|
|
|
$
|
261
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Rate Swaps
|
|
Other non-current liabilities
|
|
$
|
9,018
|
|
|
$
|
4,899
|
|
|
|
Total Liabilities
|
|
$
|
9,018
|
|
|
$
|
4,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Derivative Assets
|
|
$
|
-
|
|
|
$
|
261
|
|
|
|
Total Derivative Liabilities
|
|
|
9,018
|
|
|
|
4,899
|
|
|
|
Total Net Derivative Liability
|
|
$
|
(9,018
|
)
|
|
$
|
(4,638
|
)
|
16. SUBSEQUENT EVENT
On February 16, 2021, the Company entered into a definitive merger agreement with affiliates of New Mountain Capital, L.L.C., a leading growth-oriented investment firm headquartered in New York. The transaction is valued at approximately $963 million, or $26.00 per common share, and was unanimously approved by the Company’s board of directors. Upon completion of the transaction, Aegion will become a private company and shares of Aegion common stock will no longer be listed on any public market. The merger is expected to close in the second quarter of 2021, subject to customary closing conditions, including, among other things, approval under the HSR Act and approval of the Company’s stockholders. In connection with the merger, any unvested restricted stock units and performance stock units will become fully vested at the time of the completed transaction and convert into the right to receive a cash payment equal to the per share transaction valuation. This conversion could be material. The merger agreement also includes customary termination provisions for both parties, subject, in certain circumstances, to the payment by the Company of a termination fee of $30,000,000.
As a result of the agreement, the Company terminated the open market share repurchase program effective February 16, 2021. For the period January 1, 2021 through February 15, 2021, the Company acquired 39,501 shares of the Company’s common stock for $0.8 million ($19.84 average price per share).