XFRA:IT3A Aegion Corp Class A Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2012                                                                                                                              

or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                                                                           to                                                                            

Commission File Number: 0-10786

Aegion Corporation

(Exact name of registrant as specified in its charter)
 
 
Delaware
45-3117900
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
17988 Edison Avenue, Chesterfield, Missouri
63005-1195
(Address of principal executive offices)
(Zip Code)
 
 
(636) 530-8000 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer þ                                                              Accelerated filer ¨
 
Non-accelerated filer ¨                                                                Smaller reporting company ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

There were 39,259,210 shares of common stock, $.01 par value per share, outstanding at April 23, 2012.
 


 
 

 

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements (Unaudited):  
     
 
Consolidated Statements of Operations for the Quarters Ended March 31, 2012 and 2011
3
     
 
Consolidated Statements of Comprehensive Income for the Quarters Ended March 31, 2012 and 2011
4
     
 
Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011
5
     
 
Consolidated Statements of Equity for the Quarters Ended March 31, 2012 and 2011
6
     
 
Consolidated Statements of Cash Flows for the Quarters Ended March 31, 2012 and 2011
7
     
 
Notes to Consolidated Financial Statements
8
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations 25
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk 36
     
Item 4.
Controls and Procedures 37
     
PART II—OTHER INFORMATION
 
     
Item 1.
Legal Proceedings 37
     
Item 1A.
Risk Factors 37
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 6.
Exhibits 38
     
SIGNATURE
39
     
INDEX TO EXHIBITS
40
 
 
2

 
 
PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 (in thousands, except per share amounts)

   
For the Quarters Ended March 31,
 
   
2012
   
2011
 
             
Revenues
  $ 230,594     $ 210,587  
Cost of revenues
    177,910       169,413  
Gross profit
    52,684       41,174  
Operating expenses
    41,210       35,685  
Acquisition-related expenses
    575        
Operating income
    10,899       5,489  
Other income (expense):
               
Interest expense
    (2,400 )     (1,993 )
Interest income
    68       85  
Other
    413       (466 )
Total other expense
    (1,919 )     (2,374 )
Income before taxes on income
    8,980       3,115  
Taxes on income
    2,483       841  
Income before equity in earnings of affiliated companies
    6,497       2,274  
Equity in earnings of affiliated companies
    652       853  
Net income
    7,149       3,127  
Non-controlling interests
    (425 )     (121 )
Net income attributable to Aegion Corporation
  $ 6,724     $ 3,006  
                 
Earnings per share attributable to Aegion Corporation:
               
Basic:
  $ 0.17     $ 0.08  
Diluted:
  $ 0.17     $ 0.08  
 
The accompanying notes are an integral part of the consolidated financial statements.

 
3

 
 
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
For the Quarters Ended March 31,
 
   
2012
   
2011
 
             
Net income
  $ 7,149     $ 3,127  
Other Comprehensive Income:
               
Foreign currency translation adjustments, net of tax
    3,302       5,576  
Total comprehensive income
    10,451       8,703  
Less: comprehensive income attributable to noncontrolling interests
    (762 )     (195 )
Comprehensive income attributable to Aegion Corporation
  $ 9,689     $ 8,508  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
4

 
 
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 (Unaudited)
(in thousands, except share amounts)

   
March 31,
   
December 31,
 
   
2012
   
2011
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 130,450     $ 106,129  
Restricted cash
    759       82  
Receivables, net
    209,213       228,313  
Retainage
    36,518       33,933  
Costs and estimated earnings in excess of billings
    77,672       67,683  
Inventories
    55,566       54,540  
Prepaid expenses and other current assets
    26,042       27,305  
Total current assets
    536,220       517,985  
Property, plant & equipment, less accumulated depreciation
    170,740       168,945  
Other assets
               
Goodwill
    251,275       249,888  
Identified intangible assets, less accumulated amortization
    148,761       149,655  
Investments
    27,508       26,680  
Deferred income tax assets
    5,612       5,418  
Other assets
    5,478       6,393  
Total other assets
    438,634       438,034  
                 
Total Assets
  $ 1,145,594     $ 1,124,964  
                 
Liabilities and Equity
               
Current liabilities
               
Accounts payable
    72,874       72,326  
Accrued expenses
    61,322       69,417  
Billings in excess of costs and estimated earnings
    20,443       24,435  
Current maturities of long-term debt and line of credit
    25,987       26,541  
Total current liabilities
    180,626       192,719  
Long-term debt, less current maturities
    243,697       222,868  
Deferred income tax liabilities
    39,262       38,167  
Other non-current liabilities
    22,472       22,221  
Total liabilities
    486,057       475,975  
                 
Equity
               
Common stock, $.01 par – shares authorized 125,000,000; shares issued and outstanding 39,261,072 and 39,352,375, respectively
    393       394  
Additional paid‑in capital
    256,858       260,680  
Retained earnings
    380,520       373,796  
Accumulated other comprehensive income
    8,827       5,862  
Total stockholders' equity
    646,598       640,732  
Non-controlling interests
    12,939       8,257  
Total equity
    659,537       648,989  
                 
Total Liabilities and Equity
  $ 1,145,594     $ 1,124,964  
 
(See Commitments and Contingencies: Note 7)
 
The accompanying notes are an integral part of the consolidated financial statements.

 
5

 
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited)
 (In thousands, except number of shares)

    Common Stock     Additional
Paid-In
    Retained     Accumulated
Other
Comprehensive
    Non-
Controlling
    Total  
    Shares    
Amount
   
Capital
   
Earnings
   
Income
   
Interests
   
Equity
 
                                           
BALANCE, December 31, 2010
    39,246,015     $ 392     $ 251,578     $ 347,249     $ 18,113     $ 9,375     $ 626,707  
Net income
                      3,006             121       3,127  
Issuance of common stock including tax benefit
    98,516       1       2,639                         2,640  
Restricted shares issued
    164,253       2                               2  
Issuance of shares pursuant to deferred stock unit awards
    1,308                                      
Forfeitures of restricted stock
    (17,216 )                                    
Equity based compensation expense
                1,827                         1,827  
Investment by non-controlling interests
                                  141       141  
Distribution to non-controlling interests
                                  (776 )     (776 )
Currency translation adjustment and derivative transactions
                            5,502       74       5,576  
BALANCE, March 31, 2011
    39,492,876     $ 395     $ 256,044     $ 350,255     $ 23,615     $ 8,935     $ 639,244  

BALANCE, December 31, 2011
    39,352,375     $ 394     $ 260,680     $ 373,796     $ 5,862     $ 8,257     $ 648,989  
Net income
                      6,724             425       7,149  
Issuance of common stock including tax benefit
    11,623       1       670                         671  
Restricted shares issued
    251,054       2                               2  
Issuance of shares pursuant to restricted stock unit awards
    11,936                                      
Issuance of shares pursuant to deferred stock unit awards
    8,937                                      
Forfeitures of restricted stock
    (7,825 )                                    
Repurchase of common stock
    (367,028 )     (4 )     (6,033 )                       (6,037 )
Equity based compensation expense
                1,541                         1,541  
Investment by non-controlling interests
                                  3,920       3,920  
Currency translation adjustment and derivative transactions
                            2,965       337       3,302  
BALANCE, March 31, 2012
    39,261,072     $ 393     $ 256,858     $ 380,520     $ 8,827     $ 12,939     $ 659,537  

The accompanying notes are an integral part of the consolidated financial statements.
 
6

 
 
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)

   
For the Quarters
Ended March 31,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
Net income
  $ 7,149     $ 3,127  
Adjustments to reconcile to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    9,783       7,502  
(Gain) loss on sale of fixed assets
    13       (17 )
Equity-based compensation expense
    1,541       1,827  
Deferred income taxes
    836       (1,159 )
Equity in earnings of affiliated companies
    (652 )     (853 )
(Gain) loss on foreign currency transactions
    (843 )     13  
Other
    1,172       (330 )
Changes in operating assets and liabilities:
               
Restricted cash
    (677 )     521  
Return on equity method investments
          3,110  
Receivables net, retainage and costs and estimated earnings in excess of billings
    11,371       5,183  
Inventories
    126       (881 )
Prepaid expenses and other assets
    2,353       1,292  
Accounts payable and accrued expenses
    (13,308 )     (22,741 )
Other operating
    319       (1,195 )
Net cash provided by (used in) operating activities
    19,183       (4,601 )
                 
Cash flows from investing activities:
               
Capital expenditures
    (11,447 )     (3,692 )
Proceeds from sale of fixed assets
    2,714       141  
Patent expenditures
    (219 )     (286 )
Receipt of cash from Hockway sellers due to final net working capital adjustments
    1,048        
Purchase of Fyfe Latin America, net of cash acquired
    (3,048 )      
Purchase of Fyfe North America
    (532 )      
Net cash used in investing activities
    (11,484 )     (3,837 )
                 
Cash flows from financing activities:
               
Proceeds from issuance of common stock, including tax effects
    671       2,639  
Investments from noncontrolling interests
    3,920       141  
Distributions/dividends to noncontrolling interests
          (776 )
Repurchase of common stock
    (6,037 )      
Principal payments on notes payable
    (633 )      
Proceeds from line of credit
    26,000        
Proceeds from long-term debt
    983        
Principal payments on long-term debt
    (6,250 )     (2,500 )
Other financing activities
          (87 )
Net cash provided by (used in) financing activities
    18,654       (583 )
Effect of exchange rate changes on cash
    (2,032 )     1,535  
Net increase (decrease) in cash and cash equivalents for the period
    24,321       (7,486 )
Cash and cash equivalents, beginning of period
    106,129       114,829  
Cash and cash equivalents, end of period
  $ 130,450     $ 107,343  

The accompanying notes are an integral part of the consolidated financial statements.
 
 
7

 

AEGION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1.     GENERAL

The accompanying unaudited consolidated financial statements of Aegion Corporation and its subsidiaries (collectively, “Aegion” or the “Company”) reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of March 31, 2012 and the results of operations, comprehensive income, statements of equity and cash flows for the three months ended March 31, 2012 and 2011. The unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2011 Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 28, 2012. Additionally, certain prior year amounts have been reclassified to conform to the current year presentation.

The results of operations for the quarter ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year.

Acquisitions/Strategic Initiatives

Energy and Mining Segment Expansion

In April 2011, the Company organized a joint venture, Bayou Wasco Insulation, LLC (“Bayou Wasco”), to provide insulation services primarily for projects located in the United States, Central America, the Gulf of Mexico and the Caribbean. The Company holds a fifty-one percent (51%) majority interest in Bayou Wasco, while Wasco Energy Ltd., a subsidiary of Wah Seong Corporation Berhad (“Wasco Energy”), owns the remaining interest. Bayou Wasco is expected to commence providing insulation services by late 2012.

In April 2011, the Company also expanded its Corrpro Companies (“Corrpro”) and United Pipeline Systems (“UPS”) operations in Asia and Australia through its joint venture, WCU Corrosion Technologies Pte. Ltd., located in Singapore (“WCU”). WCU offers the Company’s Tite Liner® process in the oil and gas sector and onshore corrosion services, in each of Asia and Australia. The Company holds a forty-nine percent (49%) ownership interest in WCU, while Wasco Energy owns the remaining interest. WCU immediately began marketing its products and services.

In June 2011, the Company created a joint venture in Saudi Arabia between Corrpro and Saudi Trading & Research Co., Ltd. (“STARC”). Based in Al-Khobar, Saudi Arabia since 1992, STARC delivers a wide range of products and services for its clients in the oil, gas, power and desalination industries. The joint venture, Corrpower International Limited (“Corrpower”), which is seventy percent (70%) owned by Corrpro and thirty percent (30%) owned by STARC, will provide a fully integrated corrosion protection product and service offering to government and private sector clients throughout the Kingdom of Saudi Arabia, including engineering, product and material sales, construction, installation, inspection, monitoring and maintenance. The joint venture will serve as a platform for the continued expansion of the Company’s Energy and Mining group in the Middle East. Corrpower commenced providing corrosion protections services in early 2012.

In June 2011, the Company acquired all of the outstanding stock of CRTS, Inc., an Oklahoma company (“CRTS”). CRTS delivers patented and proprietary internal and external coating services and equipment for new pipeline construction projects from offices in North America, the Middle East and South America. The purchase price was $24.0 million in cash at closing with CRTS shareholders able to earn up to an additional $15.0 million upon the achievement of certain performance targets over the three-year period ending December 31, 2013 (the “CRTS earnout”). The purchase price paid at closing was funded by borrowings against the Company’s prior line of credit.

In August 2011, the Company purchased the assets of Hockway Limited and the capital stock of Hockway Middle East FZE, based in the United Kingdom and United Arab Emirates, respectively (collectively, “Hockway”). Hockway was established in the United Kingdom in 1975 to service the cathodic protection requirements of British engineers working in the Middle East. In 2009, Hockway established operations in Dubai, United Arab Emirates. Hockway provides both onshore and offshore cathodic protection services in addition to manufacturing a wide array of cathodic protection products. The purchase price was $4.6 million in cash at closing with Hockway shareholders able to earn up to an additional $1.5 million upon the achievement of certain performance targets over the three-year period ending December 31, 2013 (the “Hockway earnout”). The purchase price was funded out of the Company’s cash balances.
 
 
8

 
 
In October 2011, the Company organized UPS-Aptec Limited, a joint venture in the United Kingdom between United Pipeline Systems International, Inc., a subsidiary of the Company (“UPS-International”), and Allied Pipeline Technologies, SA (“APTec”). UPS-International owns fifty-one percent (51%) of the joint venture and APTec owns the remaining forty-nine percent (49%). On October 21, 2011, the joint venture was awarded a $67.3 million contract for the installation of high-density polyethylene (HDPE) liners in approximately 135 miles of slurry pipelines located in Morocco. The project began in the fourth quarter of 2011 and is expected to be completed by early 2013.

In March 2012, the Company organized United Special Technical Services LLC (“USTS”), a joint venture located in the Sultanate of Oman between United Pipeline Systems and Special Technical Services LLC (“STS”) for the purpose of executing pipeline, piping and flowline high-density polyethylene lining services throughout the Middle East and Northern Africa. Pursuant to the agreement, the Company will hold a fifty-one percent (51%) equity interest in USTS and STS will hold the other forty-nine percent (49%) equity interest. USTS initiated operations in the second quarter of 2012.

The Company believes its recent acquisitions of CRTS and Hockway and the Bayou Wasco, WCU, Corrpower, UPS-APTec Limited and USTS joint ventures will accelerate the Company’s Energy and Mining group’s growth throughout the Middle East and Northern Africa and strengthen the technical resources of the Energy and Mining platform.

New Commercial and Structural Reportable Segment

On August 31, 2011, the Company purchased the North American business of Fyfe Group, LLC (“Fyfe NA”) for a purchase price at closing of $115.8 million (subject to working capital adjustments calculated from an agreed upon target), which was funded by borrowings under the Company’s new credit facility as discussed in Note 5. The Company also was granted a one-year exclusive negotiating right to acquire Fyfe Group’s Asian, European and Latin American operations at a purchase price to be agreed upon by the parties at the time of exercise of the right. Fyfe NA, based in San Diego, California, is a pioneer and industry leader in the development, manufacture and installation of fiber reinforced polymer (FRP) systems for the structural repair, strengthening and restoration of pipelines (water, wastewater, oil and gas), buildings (commercial, federal, municipal, residential and parking structures), bridges and tunnels, and waterfront structures. Fyfe NA has a comprehensive portfolio of patented and other proprietary technologies and products, including its Tyfo® Fibrwrap® System, the first and most comprehensive carbon fiber solution on the market that complies with 2009 International Building Code requirements. Fyfe NA’s product and service offering also includes pipeline rehabilitation, concrete repair, epoxy injection, corrosion mitigation and specialty coatings services. This purchase resulted in a new reportable segment for the Company, the Commercial and Structural segment.

On January 4, 2012, the Company purchased Fyfe Group’s Latin American operations (“Fyfe LA”), which included all of the equity interests of Fyfe Latin America S.A., a Panamanian entity (and its interest in various joint ventures located in Peru, Costa Rica, Chile and Colombia), Fyfe – Latin America S.A. de C.V., an El Salvador entity, and Fibrwrap Construction Latin America S.A., a Panamanian entity. The cash purchase price at closing was $2.3 million. During the first quarter of 2012, we paid the sellers an additional $1.1 million based on the preliminary working capital adjustment. The sellers have the ability to earn up to an additional $0.8 million of proceeds based on reaching certain performance targets in the year ending December 31, 2012 and upon completion of 2011 and 2012 audited financials based upon a multiple of earnings before interest, taxes, depreciation and amortization (“EBITDA”) calculation. The Company recorded $0.1 million as its fair value estimate of this liability. Additionally, an annual payout can be earned based on the achievement of certain performance targets over the three-year period ending December 31, 2014 (the “Fyfe LA earnout”). The Company recorded $0.7 million as its fair value estimate of the Fyfe LA earnout liability. Fyfe LA provides Fibrwrap installation services throughout Latin America, as well as provides product and engineering support to installers and applicators of the FRP systems in Latin America. The purchase price was funded out of the Company’s cash balances. Fyfe LA is included in the Company’s Commercial and Structural reportable segment.

On April 5, 2012, the Company purchased Fyfe Group’s Asian operations (“Fyfe Asia”), which is based in Singapore, including its operations in Singapore, Hong Kong, Malaysia, Japan, Indonesia and Brunei. Customers in India and China will be served through an exclusive product supply and license agreement. The purchase price was $40.7 million. The acquisition also includes the patent portfolio of Fyfe Asia. Fyfe Asia will continue to actively research and develop improved products and processes for the structural repair, strengthening and restoration of buildings, bridges and other infrastructure using advanced composites. The purchase price was funded out of the Company’s cash balances and by borrowing $18.0 million against the Company’s line of credit. The Company has not completed its initial assessment of purchase price accounting for this entity due to the timing of the acquisition.

The Company is in negotiations to acquire Fyfe Group’s European operations (“Fyfe Europe”) pursuant to the one-year exclusive negotiating right provided as part of the Fyfe NA transaction. The Company currently expects this transaction to close by September 30, 2012.
 
 
9

 
 
Purchase Price Accounting

The Company has substantially completed its accounting for the CRTS, Hockway and Fyfe NA acquisitions and completed its initial accounting for Fyfe LA in accordance with the guidance included in FASB ASC 805, Business Combinations (“FASB ASC 805”). The Company has recorded finite-lived intangible assets at their preliminarily determined fair value related to non-compete agreements, customer relationships, backlog, trade names and trademarks and patents and other acquired technologies. The acquisitions resulted in goodwill related to, among other things, growth opportunities. The goodwill associated with the CRTS, Hockway Limited and Fyfe LA acquisitions are not deductible for tax purposes. The goodwill associated with the Fyfe NA acquisition is deductible for tax purposes. Additionally, the Company recorded expenses of $0.6 million for costs incurred related to the acquisitions of Fyfe LA and Fyfe Asia in the quarter ended March 31, 2012.

The contingent consideration arrangements previously discussed require the Company to pay the former shareholders of CRTS, Hockway and Fyfe LA, respectively, additional payouts based on the achievement of certain performance targets over their respective three-year periods. The potential undiscounted amount of all future payments that the Company could be required to make under the contingent consideration arrangements is between $0 and $17.3 million. As of March 31, 2012, the Company calculated the fair value of the contingent consideration arrangement to be $14.8 million for CRTS, $1.5 million for Hockway and $0.8 million in total for Fyfe LA. In accordance with FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), the Company determined that the CRTS earnout, Hockway earnout and Fyfe LA earnout are derived from significant unobservable inputs (“Level 3 inputs”). Key assumptions include the use of a discount rate and a probability-adjusted level of profit derived from each entity.

CRTS contributed $6.7 million and $1.2 million, respectively, of revenue and profits during for the quarter ended March 31, 2012. Hockway contributed $0.7 million and $0.1 million, respectively, of revenue and losses for the quarter ended March 31, 2012. Fyfe NA contributed $14.3 million and $1.0 million, respectively, of revenue and profits for the quarter ended March 31, 2012. Fyfe LA contributed $0.3 million and less than $0.1 million, respectively, of revenue and losses for the 87-day period ended March 31, 2012 (from date of acquisition). The following unaudited pro forma summary presents combined information of the Company as if these acquisitions had occurred on January 1, of the year preceding its acquisition (in thousands):

   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
             
Revenues
  $ 230,593     $ 221,470  
Net income(1)
    6,724       3,390  

 
(1)
Includes pro-forma adjustments for purchase price depreciation and amortization as if those intangibles were recorded as of January 1, of the year preceding its acquisition.

The following table summarizes the consideration recorded to acquire each business at its respective acquisition date (in thousands):

   
CRTS
   
Hockway(1)
   
Fyfe NA(2)
   
Fyfe LA(3)
   
Total
 
Cash
  $ 24,000     $ 3,552     $ 118,118     $ 3,349     $ 149,019  
Estimated fair value of earnout payments and final payments owed to shareholders
    14,760       1,454             820       17,034  
Total consideration recorded
  $ 38,760     $ 5,006     $ 118,118     $ 4,169     $ 166,053  

 
(1)
Includes the cash purchase price at closing of $4.6 million plus a final working capital adjustment of $1.0 million, which was returned to the Company in the first quarter of 2012.
 
(2)
Includes the cash purchase price at closing of $115.8 million plus a preliminary working capital adjustment to the sellers of $2.3 million, of which $1.8 million was paid in 2011 and $0.5 million was paid in 2012.
 
(3)
Includes the cash purchase price at closing of $2.3 million and an additional $1.1 million payment during the first quarter of 2012 based on a preliminary working capital adjustment to the sellers.

 
10

 

The Company has completed an initial purchase price accounting of the CRTS, Hockway, Fyfe NA and Fyfe LA acquisitions. As the Company completes its final accounting for these acquisitions, there may be changes, some of which may be material, to this initial accounting. The following table summarizes the preliminary fair value of identified assets and liabilities of the acquisitions at their respective acquisition dates, based on the initial analyses (in thousands):

   
CRTS
   
Hockway
   
Fyfe NA
   
Fyfe LA
 
Cash
  $ 361     $ 536     $ 1,096     $ 301  
Receivables and cost and estimated earnings in excess of billings
    2,365       2,341       16,019       576  
Inventories
    21       623       5,977       514  
Prepaid expenses and other current assets
    175       228       792       75  
Property, plant and equipment
    5,350       324       1,064       90  
Identified intangible assets
    26,220       2,200       53,768       1,402  
Accounts payable, accrued expenses and billings in excess of cost and estimated earnings
    (2,830 )     (1,767 )     (3,642 )     (505 )
Deferred tax liabilities
    (11,395 )                  
Total identifiable net assets
  $ 20,267     $ 4,485     $ 75,074     $ 2,453  
                                 
Total consideration recorded
  $ 38,760     $ 5,006     $ 118,118     $ 4,169  
Less: total identifiable net assets
    20,267       4,485       75,074       2,453  
Goodwill at March 31, 2012
  $ 18,493     $ 521     $ 43,044     $ 1,716  

The following adjustments were made during the quarter ended March 31, 2012, after the transactions’ respective acquisition dates as the Company continued its purchase price accounting:

   
Hockway
   
Fyfe NA
 
Total identifiable net assets at December 31, 2011
  $ 4,078     $ 75,074  
Receivables and cost and estimated earnings in excess of billings
    348        
Accounts payable, accrued expenses and billings in excess of cost and estimated earnings
    59        
Total identifiable net assets at March 31, 2012
    4,485       75,074  
                 
Goodwill at December 31, 2011
  $ 1,982     $ 43,239  
Decrease in goodwill related to acquisitions
    (1,461 )     (195 )
Goodwill at March 31, 2012
  $ 521     $ 43,044  

2.      ACCOUNTING POLICIES

Revenues

Revenues include construction, engineering and installation revenues that are recognized using the percentage-of-completion method of accounting in the ratio of costs incurred to estimated final costs. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools and equipment costs. Since the financial reporting of these contracts depends on estimates, which are assessed continually during the term of these contracts, recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are reflected in the period in which the facts that give rise to the revision become known. When estimates indicate that a loss will be incurred on a contract, a provision for the expected loss is recorded in the period in which the loss becomes evident. Revenues from change orders, extra work and variations in the scope of work are recognized when it is probable that they will result in additional contract revenue and when the amount can be reliably estimated.

Bayou is party to certain contracts that provide for multiple value-added coating and welding services to customer pipe for use in pipelines in the energy and mining industries, which the Company considers to be multiple deliverables. The Company recognizes revenue for each deliverable as a separate unit of accounting under the accounting guidance of FASB ASC 605, Revenue Recognition (“FASB ASC 605”). Each service, or deliverable, the Company provides under these contracts could be performed without the other services. Additionally, each service has a readily determined selling price and qualifies as a separate unit of accounting. Performance of each of the deliverables is observable due to the nature of the services. Customer inspection typically occurs at the completion of each service before another service is performed.
 
 
11

 
 
Foreign Currency Translation

For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are translated into U.S. dollars using average exchange rates. The cumulative translation adjustment resulting from changes in exchange rates are included in the consolidated balance sheets as a component of accumulated other comprehensive income (loss) in total stockholders’ equity. Net foreign exchange transaction gains (losses) are included in other income (expense) in the consolidated statements of operations.

The Company’s accumulated other comprehensive income is comprised of three main components: (i) currency translation; (ii) derivatives; and (iii) gains and losses associated with the Company’s defined benefit plan in the United Kingdom. The significant majority of the activity during any given period is related to the currency translation adjustment.

Investments in Affiliated Companies

The Company holds one-half of the equity interests in Insituform Rohrsanierungstechniken GmbH (“Insituform-Germany”), through our indirect subsidiary, Insituform Technologies Limited (UK). The Company, through its subsidiary, The Bayou Companies, LLC, owns a forty-nine percent (49%) equity interest in Bayou Coating, L.L.C. (“Bayou Coating”).

Investments in entities in which the Company does not have control or is not the primary beneficiary of a variable interest entity, and for which the Company has 20% to 50% ownership and has the ability to exert significant influence are accounted for by the equity method. At March 31, 2012 and December 31, 2011, the investments in affiliated companies on the Company’s consolidated balance sheet were $27.5 million and $26.7 million, respectively.

Net income presented below for the quarter ended March 31 2012 and 2011 includes Bayou Coating’s forty-one percent (41%) interest in Delta Double Jointing LLC (“Bayou Delta”), which is eliminated for purposes of determining the Company’s equity in earnings of affiliated companies because Bayou Delta is consolidated in the Company’s financial statements as a result of its additional ownership through another subsidiary. The Company’s equity in earnings of affiliated companies for all periods presented below includes acquisition-related depreciation and amortization expense and is net of income taxes associated with these earnings.

Financial data for these investments in affiliated companies for the quarters ended March 31, 2012 and 2011 are summarized in the following table (in thousands):

Income statement data
 
2012
   
2011
 
             
Revenue
  $ 27,625     $ 28,642  
Gross profit
    7,023       7,366  
Net income
    2,974       3,549  
Equity in earnings of affiliated companies
    652       853  

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 (“FASB ASC 810”).

The Company’s overall methodology for evaluating transactions and relationships under the VIE requirements includes the following two steps:

 
• 
determine whether the entity meets the criteria to qualify as a VIE; and
 
• 
determine whether the Company is the primary beneficiary of the VIE.

In performing the first step, the significant factors and judgments that the Company considers in making the determination as to whether an entity is a VIE include:

 
the design of the entity, including the nature of its risks and the purpose for which the entity was created, to determine the variability that the entity was designed to create and distribute to its interest holders;
 
the nature of the Company’s involvement with the entity;
 
whether control of the entity may be achieved through arrangements that do not involve voting equity;
 
whether there is sufficient equity investment at risk to finance the activities of the entity; and
 
whether parties other than the equity holders have the obligation to absorb expected losses or the right to receive residual returns.
 
 
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If the Company identifies a VIE based on the above considerations, it then performs the second step and evaluates whether it is the primary beneficiary of the VIE by considering the following significant factors and judgments:

 
whether the entity has the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and
 
whether the entity has the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity.

Based on its evaluation of the above factors and judgments, as of March 31, 2012, the Company consolidated any VIEs in which it was the primary beneficiary. Also, as of March 31, 2012, the Company had significant interests in certain VIEs primarily through its joint venture arrangements for which the Company was not the primary beneficiary. There have been no changes in the status of the Company’s VIE or primary beneficiary designations that occurred during 2012.

Financial data for consolidated variable interest entities for the quarters ended March 31, 2012 and 2011 are summarized in the following table (in thousands):

Income statement data
 
2012
   
2011
 
             
Revenue
  $ 17,252     $ 13,879  
Gross profit
    2,854       1,850  
Net income
    633       29  

The Company’s non-consolidated variable interest entities are accounted for under the equity method of accounting and discussed further in the “Investments in Affiliated Companies” section of Note 2 of this report.

Newly Adopted Accounting Pronouncements
 
ASU No. 2011-04 generally provides a uniform framework for fair value measurements and related disclosures between GAAP and International Financial Reporting Standards (“IFRS”). Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04 became effective for interim and annual periods beginning on or after December 15, 2011. The adoption of this update did not have a material impact on the Company in the quarter ended March 31, 2012.
 
ASU No. 2011-05 amends existing guidance by allowing only two options for presenting the components of net income and other comprehensive income: (1) in a single continuous financial statement (statement of comprehensive income), or (2) in two separate but consecutive financial statements (consisting of an income statement followed by a separate statement of other comprehensive income). Also, items that are reclassified from other comprehensive income to net income must be presented on the face of the financial statements; however, this portion of the guidance has been deferred. ASU No. 2011-05 requires retrospective application, and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company adopted this update in the quarter ended March 31, 2012 and added a separate statement of comprehensive income, but the adoption did not have an impact on the Company’s results of operations.
 
ASU No. 2011-08, which updates the guidance in ASC Topic 350, Intangibles – Goodwill & Other, affects all entities that have goodwill reported in their financial statements. The amendments in ASU 2011-08 permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in ASC Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. If, after assessing the totality of events or circumstances, an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary. Under the amendments in this update, an entity is no longer permitted to carry forward its detailed calculation of a reporting unit’s fair value from a prior year as previously permitted under ASC Topic 350. This guidance became effective for interim and annual goodwill impairment tests performed for fiscal year 2012 with early adoption permitted. The Company adopted this update in the quarter ended March 31, 2012 and the adoption of this update did not have a material impact on the Company.
 
 
13

 
 
3.     SHARE INFORMATION

Earnings per share have been calculated using the following share information:

   
Three Months Ended
 
   
March 31,
 
   
2012
   
2011
 
Weighted average number of common shares used for basic EPS
    39,196,634       39,272,011  
Effect of dilutive stock options and restricted shares subject to performance restrictions
    301,484       433,655  
Weighted average number of common shares and dilutive potential common stock used in
dilutive EPS
    39,498,118       39,705,666  
 
The Company excluded 291,356 and 4,000 stock options for the quarters ended March 31, 2012 and 2011, respectively, from the diluted earnings per share calculations for the Company’s common stock because they were anti-dilutive as their exercise prices were greater than the average market price of common shares for the period.

4.     GOODWILL AND INTANGIBLE ASSETS

Goodwill

Our recorded goodwill by reporting segment was as follows at March 31, 2012 and December 31, 2011 (in millions):

   
2012
   
2011
 
Energy and Mining
  $ 76.4     $ 77.4  
North American Water and Wastewater
    101.9       101.8  
European Water and Wastewater
    22.4       21.8  
Asia-Pacific Water and Wastewater
    5.8       5.7  
Commercial and Structural
    44.8       43.2  
Total goodwill
  $ 251.3     $ 249.9  

The following table presents a reconciliation of the beginning and ending balances of the Company’s goodwill at March 31, 2012 and December 31, 2011 (in millions):

   
2012
   
2011
 
Beginning balance (January 1, 2012 and 2011, respectively)
  $ 249.9     $ 190.1  
Additions to goodwill through acquisitions(1)(2)
    0.1       63.7  
Foreign currency translation
    1.3       (3.9 )
Goodwill at end of period(3)
  $ 251.3     $ 249.9  

 
(1)
During the first quarter of 2012, the Company recorded goodwill of $1.7 million related to the acquisition of Fyfe LA and decreases of $1.5 million and $0.2 million in goodwill related to the 2011 acquisitions of Hockway and Fyfe NA.
 
(2)
During the year ended December 31, 2011, the Company recorded goodwill of $18.5 million related to the acquisition of CRTS, $2.0 million related to the acquisition of Hockway and $43.2 million related to the acquisition of Fyfe NA as discussed in Note 1.
 
(3)
The Company does not have any accumulated impairment charges.

 
14

 

Intangible Assets

Intangible assets at March 31, 2012 and December 31, 2011 were as follows (in thousands):

   
As of March 31, 2012 (1)
   
As of December 31, 2011
 
   
Weighted Average Useful Lives (Years)
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
   
Gross Carrying Amount
   
Accumulated Amortization
   
Net Carrying Amount
 
License agreements
    8     $ 3,924     $ (2,698 )   $ 1,226     $ 3,922     $ (2,654 )   $ 1,268  
Backlog
    0       4,655       (4,157 )     498       4,651       (3,705 )     946  
Leases
    16       2,067       (120 )     1,947       2,067       (183 )     1,884  
Trademarks
    13       21,418       (2,392 )     19,026       21,396       (2,141 )     19,255  
Non-competes
    0       740       (740 )           740       (729 )     11  
Customer relationships
    16       104,495       (12,541 )     91,954       102,963       (10,970 )     91,993  
Patents and acquired technology
    18       53,889       (19,779 )     34,110       53,906       (19,608 )     34,298  
            $ 191,188     $ (42,427 )   $ 148,761     $ 189,645     $ (39,990 )   $ 149,655  

 
(1)
During the quarter ended March 31, 2012, the Company recorded $1.4 million in customer relationships to be amortized over a weighted average life of twenty years related to the acquisitions discussed in Note 1.

Amortization expense was $2.7 million and $1.2 million for the quarters ended March 31, 2012 and 2011, respectively. Estimated amortization expense by year is as follows (in thousands):

2012
  $ 10,434  
2013
    9,616  
2014
    9,616  
2015
    9,616  
2016
    9,615  

5.     LONG-TERM DEBT AND CREDIT FACILITY

Financing Arrangements

On August 31, 2011, the Company entered into a new $500.0 million credit facility (the “New Credit Facility”) with a syndicate of banks, with Bank of America, N.A. serving as the administrative agent and JPMorgan Chase Bank, N.A. serving as the syndication agent. The New Credit Facility consists of a $250.0 million five-year revolving credit line and a $250.0 million five-year term loan facility. The entire amount of the term loan was drawn by the Company on August 31, 2011 for the following purposes: (1) to pay the $115.8 million cash closing purchase price of the Company’s acquisition of Fyfe NA, which closed on August 31, 2011 (see Note 1 for additional detail regarding this acquisition); (2) to retire $52.5 million in indebtedness outstanding under the Company’s prior credit facility; (3) to redeem the Company’s $65.0 million, 6.54% Senior Notes, due April 2013, and to pay the associated $5.7 million make-whole payment due in connection with the redemption of the Senior Notes; and (4) to fund expenses associated with the New Credit Facility and the Fyfe NA transaction. In connection with the New Credit Facility, the Company paid $4.1 million in arrangement and up-front commitment fees that will be amortized over the life of the New Credit Facility.

Generally, interest will be charged on the principal amounts outstanding under the New Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from 1.50% to 2.50% depending on the Company’s consolidated leverage ratio. The Company also can opt for an interest rate equal to a base rate (as defined in the credit documents) plus an applicable rate, which also is based on the Company’s consolidated leverage ratio. The applicable LIBOR borrowing rate (LIBOR plus Company’s applicable rate) as of March 31, 2012 was approximately 2.72%.
 
 
15

 
 
In November 2011, the Company entered into an interest rate swap agreement, for a notional amount of $83.0 million, which is set to expire in November 2014. The swap notional amount mirrors the amortization of $83.0 million of the Company’s original $250.0 million term loan from the New Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 0.89% calculated on the amortizing $83.0 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the amortizing $83.0 million notional amount. The annualized borrowing rate of the swap at March 31, 2012 was approximately 2.49%. The receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR-based interest cost on a corresponding $83.0 million portion of the Company’s term loan from the New Credit Facility. This interest rate swap is used to hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement, and is accounted for as a cash flow hedge.

During the first quarter of 2012, the Company borrowed $26.0 million on the line of credit under the New Credit Facility in order to fund the purchase of Fyfe Asia on April 5, 2012 and for working capital and joint venture investments. See Note 1 for additional detail regarding this acquisition.

The Company’s total indebtedness at March 31, 2012 consisted of $237.5 million outstanding from the original $250.0 million term loan under the New Credit Facility, $26.0 million on the line of credit under the New Credit Facility and $1.0 million of third party notes and bank debt in connection with the working capital requirements of Insituform Pipeline Rehabilitation Private Limited, the Company’s Indian joint venture (“Insituform-India”). In connection with the formation of Bayou Perma-Pipe Canada, Ltd. (“BPPC”), the Company and Perma-Pipe Canada, Inc. loaned the joint venture an aggregate of $8.0 million for the purchase of capital assets and for operating purposes. Additionally, during the quarter ended March 31, 2012, both entities agreed to loan the joint venture an aggregate of $2.0 million for the purchase of capital assets increasing the total to $10.0 million. As of March 31, 2012, $5.2 million of such amount was designated in the consolidated financial statements as third-party debt.

As of March 31, 2012, the Company had $20.9 million in letters of credit issued and outstanding under the New Credit Facility. Of such amount, $11.1 million was collateral for the benefit of certain of our insurance carriers and $9.8 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.

At March 31, 2012 and December 31, 2011, the estimated fair value of the Company’s long-term debt was approximately $265.2 million and $245.1 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 8.

The Company’s total indebtedness at December 31, 2011 consisted of $243.8 million outstanding from the original $250.0 million term loan under the New Credit Facility and $1.5 million of third party notes and bank debt in connection with the working capital requirements of Insituform-India. In connection with the formation of BPPC, the Company and Perma-Pipe Canada, Inc. loaned the joint venture an aggregate of $8.0 million for the purchase of capital assets and for operating purposes. As of December 31, 2011, $4.1 million of such amount was designated in the consolidated financial statements as third-party debt.

Debt Covenants

The New Credit Facility is subject to certain financial covenants, including a consolidated financial leverage ratio, consolidated fixed charge coverage ratio and consolidated net worth threshold. Subject to the specifically defined terms and methods of calculation as set forth in the New Credit Facility’s credit agreement, the financial covenant requirements, as of each quarterly reporting period end, are defined as follows:

Consolidated financial leverage ratio compares consolidated funded indebtedness to New Credit Facility defined income. The initial maximum amount was not to exceed 3.00 to 1.00 and will decrease periodically at scheduled reporting periods to not more that 2.25 to 1.00 beginning with the quarter ending period June 30, 2014. At March 31, 2012, the Company’s consolidated financial leverage ratio was 2.43 to 1.00 and, using the current New Credit Facility defined income, the Company had the capacity to borrow up to approximately $64.0 million of additional debt.

Consolidated fixed charge coverage ratio compares New Credit Facility defined income to New Credit Facility defined fixed charges with a minimum permitted ratio of not less than 1.25 to 1.00. At March 31, 2012, the Company’s fixed charge coverage ratio was 2.05 to 1.00.

New Credit Facility defined consolidated net worth of the Company shall not at any time be less than the sum of 80% of the New Credit Facility defined consolidated net worth as of December 31, 2010, increased cumulatively on a quarterly basis by 50% of consolidated net income, plus 100% of any equity issuances. The current minimum consolidated net worth is $505.2 million. At March 31, 2012, the Company’s consolidated net worth was $646.6 million.
 
 
16

 
 
At March 31, 2012, the Company was in compliance with all of its debt and financial covenants as required under the New Credit Facility.

6.     STOCKHOLDERS EQUITY AND EQUITY COMPENSATION

Share Repurchase Plan

During 2011, the Company’s Board of Directors authorized the repurchase of up to $10.0 million of the Company’s common stock. The authorization allowed the Company to purchase up to $5.0 million during 2011 and an additional $5.0 million during 2012. These amounts constitute the maximum open market repurchases currently authorized in any calendar year under the terms of the New Credit Facility.

In addition to the open market repurchases, the Company also is authorized to purchase up to $5.0 million of the Company’s common stock in each calendar year in connection with the Company’s equity compensation programs for employees and directors. The participants in the Company’s equity plans may surrender shares of previously issued common stock, in satisfaction of tax obligations arising from the vesting of restricted stock awards under such plans 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 vests or the shares of the Company's common stock are surrendered in exchange for stock option exercises.

During the first quarter of 2012, we acquired 310,035 shares of the Company’s common stock for $5.0 million ($16.13 average price per share) through the open market repurchase program and 56,991 shares of the Company’s common stock for $1.0 million ($18.12 average price per share) in connection with the Company’s equity compensation programs. Once repurchased, the Company immediately retired the shares.

Equity-Based Compensation Plans

At March 31, 2012, the Company had two active equity-based compensation plans under which equity-based awards may be granted, including stock appreciation rights, restricted shares of common stock, performance awards, stock options and stock units. The Company's 2009 Employee Equity Incentive Plan (the “2009 Employee Plan”) has 2.5 million shares of the Company’s common stock registered for issuance, and at March 31, 2012, 0.8 million shares of common stock were available for issuance. In order to determine shares available for issuance, the Company assumed the issuance of shares pursuant to restricted stock unit awards were issued at the target level. The Company’s 2011 Non-Employee Director Equity Incentive Plan (“2011 Director Plan”) has 0.2 million shares of the Company’s common stock registered for issuance, and at March 31, 2012, 0.2 million shares of common stock were available for issuance.

Stock Awards

Stock awards, which include shares of restricted stock and restricted 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 restriction period. The forfeiture of unvested restricted stock awards and units cause the reversal of all previous expense recorded as a reduction of current period expense. During 2012, the Company’s Board of Directors approved certain changes to the Company’s equity program to more closely align compensation to long-term performance in furtherance of driving the Company’s long-term financial success. This change was implemented to incentivize superior performance over an extended period for certain key employees. For 2012, the vesting of these restricted stock units awarded  to the Company’s senior management team members will depend upon achievement of annual and cumulative three-year returns on invested capital and earnings per share.
 
 
17

 
 
A summary of stock award activity during the quarter ended March 31, 2012 follows:

   
Stock Awards
   
Weighted
Average
Award Date
Fair Value
 
Outstanding at January 1, 2012
    643,117     $ 17.44  
Restricted shares awarded
    251,054       18.11  
Restricted stock units awarded (1)
    188,958       18.11  
Restricted shares distributed
    (258,242 )     12.84  
Restricted stock units distributed
    (11,936 )     12.84  
Restricted shares forfeited
    (7,825 )     20.78  
Restricted stock units forfeited
           
Outstanding at March 31, 2012
    805,126     $ 19.32  

 
(1)
The Company assumed the issuance of shares pursuant to restricted stock unit awards were issued at the target level.

Expense associated with stock awards was $1.0 million and $1.1 million in the quarters ended March 31, 2012 and 2011, respectively. Unrecognized pre-tax expense of $10.5 million related to stock awards is expected to be recognized over the weighted average remaining service period of 2.5 years for awards outstanding at March 31, 2012.

Deferred Stock Unit Awards

Deferred stock units generally are awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date and generally are fully vested on the date of grant. The expense related to the issuance of deferred stock units is recorded according to this vesting schedule.

A summary of deferred stock unit activity during the quarter ended March 31, 2012 follows:

   
Deferred
Stock
Units
   
Weighted
Average
Award Date
Fair Value
 
Outstanding at January 1, 2012
    173,916     $ 20.12  
Awarded
           
Shares distributed
    (8,937 )     18.52  
Forfeited
           
Outstanding at March 31, 2012
    164,979     $ 20.21  

There was no expense associated with deferred stock unit awards during the quarters ended March 31, 2012 or 2011.

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 during the quarter ended March 31, 2012 follows:

   
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding at January 1, 2012
    1,107,712     $ 18.98  
Granted
    267,880       18.11  
Exercised
    (11,623 )     13.33  
Canceled/Expired
    (65,008 )     23.53  
Outstanding at March 31, 2012
    1,298,961     $ 18.62  
Exercisable at March 31, 2012
    839,590     $ 17.21  
 
 
18

 
 
In the quarters ended March 31, 2012 and 2011, the Company recorded expense of $0.6 million and $0.7 million, respectively, related to stock option grants. Unrecognized pre-tax expense of $3.7 million related to stock options is expected to be recognized over the weighted average remaining service period of 2.3 years for awards outstanding at March 31, 2012.

Financial data for stock option exercises for the quarters ended March 31, 2012 and 2011 are summarized in the following table (in millions):

   
2012
 
2011
   
(in millions)
Amount collected from stock option exercises
  $   0.2     $   1.6  
Total intrinsic value of stock option exercises
      0.1         0.9  
Tax benefit of stock option exercises recorded in additional paid-in-capital
    <
0.1
      <
0.1
 
                     
                     
Aggregate intrinsic value of outstanding stock options at March 31, 2012
      2.3         8.9  
Aggregate intrinsic value of exercisable stock options at March 31, 2012
      2.3         6.3  

The intrinsic value calculations are based on the Company’s closing stock price of $17.83 and $26.75 on March 31, 2012 and 2011, respectively.

The Company uses a binomial option-pricing model for valuation purposes to reflect the features of stock options granted. The fair value of stock options awarded during the first quarters of 2012 and 2011 were estimated at the date of grant based on the assumptions presented in the table below. Volatility, expected term and dividend yield assumptions were based on the Company’s historical experience. The risk-free rate was based on a U.S. treasury note with a maturity similar to the option grant’s expected term.

   
For the Quarter Ended March 31,
 
   
2012
   
2011
 
   
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average grant-date fair value
          n/a           $ 8.19             n/a           $ 11.65  
Volatility
          45.2 %           45.2 %     49.6 %   -     50.6 %     50.5 %
Expected term (years)
          7.0             7.0             7.0             7.0  
Dividend yield
          0.0 %           0.0 %           0.0 %           0.0 %
Risk-free rate
          1.5 %           1.5 %     2.8 %   -     3.0 %     2.8 %

7.     COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved in certain litigation incidental to the conduct of its business and affairs. Management, after consultation with legal counsel, does not believe that the outcome of any such litigation, individually and 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 March 31, 2012.
 
Guarantees

The Company has entered into several contractual joint ventures in order to develop joint bids on contracts for its installation business. The Company could be required to complete the joint venture partner’s portion of the contract if the partner were unable to complete its portion. The Company would be liable for any amounts for which the Company itself could not complete the work and for which a third-party contractor could not be located to complete the work for the amount awarded in the contract. While the Company would be liable for additional costs, these costs would be offset by any related revenues due under that portion of the contract. The Company has not previously experienced material adverse results from such arrangements. At March 31, 2012, the Company’s maximum exposure to its joint venture partner’s proportionate share of performance guarantees was $0.7 million. Based on these facts, while there can be no assurances, the Company currently does not anticipate any future material adverse impact on its consolidated financial position, results of operations or cash flows.
 
 
19

 
 
The Company also 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 March 31, 2012 on its consolidated balance sheet.

8.     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 fix exchange rates for net investments in foreign operations or 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 effective; therefore, no gain or loss was recorded in the Company’s consolidated statements of operations for the outstanding hedged balance. During the quarters ended March 31, 2012 and 2011, the Company recorded less than $0.1 million as a gain for each period on the consolidated statements of operations upon settlement of the cash flow hedges. At March 31, 2012, the Company recorded a net deferred loss of $0.7 million in other current liabilities and other comprehensive income.

The Company engages in regular inter-company trade activities with, and receives royalty payments from, its wholly-owned Canadian entities, paid in Canadian Dollars, rather than the Company’s functional currency, U.S. Dollars. In order to reduce the uncertainty of the U.S. Dollar settlement amount of that anticipated future payment from the Canadian entities, the Company uses forward contracts to sell a portion of the anticipated Canadian Dollars to be received at the future date and buys U.S. Dollars.

In some instances, certain of the Company’s United Kingdom operations enter into contracts for service activities with third party customers that will pay in a currency other than the entity’s functional currency, British Pound Sterling. In order to reduce the uncertainty of that future conversion of the customer’s foreign currency payment to British Pound Sterling, the Company uses forward contracts to sell, at the time the contract is entered into, a portion of the applicable currency to be received at the future date and buys British Pound Sterling. These contracts are not accounted for using hedge accounting.

In November 2011, the Company entered into an interest rate swap agreement, for a notional amount of $83.0 million, which swap is set to expire in November 2014. See Note 5 to the financial statements contained in this report for additional detail regarding the interest rate swap.
 
 
20

 
 
The following table provides a summary of the fair value amounts of our derivative instruments, all of which are Level 2 inputs (in thousands):

Designation of Derivatives
 
Balance Sheet Location
 
March 31, 2012
   
December 31, 2011
 
Derivatives Designated as Hedging Instruments
               
Forward Currency Contracts
 
Other current assets
  $ 2     $  
   
Total Assets
  $ 2     $  
                     
Forward Currency Contracts
 
Other current liabilities
  $     $ 6  
Interest Rate Swaps
 
Other long-term liabilities
    684       545  
   
Total Liabilities
  $ 684     $ 551  
                     
Derivatives Not Designated as Hedging Instruments
                   
Forward Currency Contracts
 
Other current assets
  $     $ 9  
   
Total Assets
  $     $ 9  
                     
Forward Currency Contracts
 
Other current liabilities
  $ 291     $ 69  
   
Total Derivative Assets
    2       9  
   
Total Derivative Liabilities
    975       620  
   
Total Net Derivative Liability
  $ 973     $ 611  
 
FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value, establishes a framework for measuring fair value and expands disclosure requirements about fair value measurements for interim and annual reporting periods. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include: Level 1 – defined as quoted prices in active markets for identical instruments; Level 2 – defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3 – defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. In accordance with FASB ASC 820, the Company determined that the instruments summarized below are derived from significant observable inputs, referred to as Level 2 inputs.
 
 
21

 
 
The following table represents assets and liabilities measured at fair value on a recurring basis and the basis for that measurement (in thousands):

   
Total Fair Value at March 31, 2012
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
Assets
                       
Forward Currency Contracts
  $ 2           $ 2        
Total
  $ 2           $ 2        
                                 
Liabilities
                               
Forward Currency Contracts
  $ 291           $ 291        
Interest Rate Swap
    684             684        
Total
  $ 975           $ 975        

   
Total Fair Value at December 31, 2011
   
Quoted Prices in Active Markets for Identical Assets
(Level 1)
   
Significant Observable Inputs (Level 2)
   
Significant Unobservable Inputs
(Level 3)
 
                         
Assets
                       
Forward Currency Contracts
  $ 9           $ 9        
Total
  $ 9           $ 9        
                                 
Liabilities
                               
Forward Currency Contracts
  $ 75           $ 75        
Interest Rate Swap
    545             545        
Total
  $ 620           $ 620        
 
 
22

 
 
The following table summarizes the Company’s derivative positions at March 31, 2012:

           
Weighted
       
           
Average
       
           
Remaining
   
Average
 
     
Notional
   
Maturity
   
Exchange
 
 
Position
 
Amount
   
In Years
   
Rate
 
Canadian Dollar/USD
Sell
  $ 12,150,000       0.4       1.03  
Interest Rate Swap
    $ 78,850,000       2.7          

The Company had no significant transfers between Level 1, 2 or 3 inputs during the first quarter of 2012. Certain financial instruments are required to be recorded at fair value. Changes in assumptions or estimation methods could affect the fair value estimates; however, we do not believe any such changes would have a material impact on our financial condition, results of operations or cash flows. Other financial instruments including cash and cash equivalents and short-term borrowings, including notes payable, are recorded at cost, which approximates fair value, which are based on Level 2 inputs as previously defined.

9.     SEGMENT REPORTING

The Company operates in three distinct markets: energy and mining; water and wastewater; and commercial and structural services. Management organizes the enterprise around differences in products and services, as well as by geographic areas. Within the water and wastewater market, the Company operates in three distinct geographies: North America; Europe; and internationally outside of North America and Europe. As such, the Company is organized into five reportable segments: Energy and Mining; North American Water and Wastewater; European Water and Wastewater; Asia-Pacific Water and Wastewater; and Commercial and Structural. Each segment is regularly reviewed and evaluated separately.

Prior to the third quarter of 2011, the Company previously considered Water Rehabilitation to be a separate reportable segment. Based on an internal management reorganization, the Company has combined previously reported water rehabilitation results for all periods presented, which have not been material, with the geographically separated sewer rehabilitation segments. In connection with the Company’s acquisition of Fyfe NA, the Company has designated the Commercial and Structural reportable segment. See Note 1 for a description of the acquired business.

The quarter ended March 31, 2012 results by segment reflect $0.6 million for costs incurred related to the acquisitions of Fyfe LA and Fyfe Asia. The Company recorded these costs under “Acquisition-related expenses” on its consolidated statements of operations.

The following disaggregated financial results have been prepared using a management approach that is consistent with the basis and manner with which management internally disaggregates financial information for the purpose of making internal operating decisions. The Company evaluates performance based on stand-alone operating income (loss).
 
 
23

 
 
Financial information by segment was as follows (in thousands):

   
Quarters Ended, March 31,
 
   
2012
   
2011
 
             
Revenues:
           
Energy and Mining
  $ 115,038     $ 95,457  
North American Water and Wastewater
    74,338       81,861  
European Water and Wastewater
    16,077       20,760  
Asia-Pacific Water and Wastewater
    10,594       12,509  
Commercial and Structural
    14,547        
Total revenues
  $ 230,594     $ 210,587  
                 
Gross profit:
               
Energy and Mining
  $ 26,899     $ 23,091  
North American Water and Wastewater
    14,571       11,143  
European Water and Wastewater
    3,352       4,523  
Asia-Pacific Water and Wastewater
    254       2,417  
Commercial and Structural
    7,608        
Total gross profit
  $ 52,684     $ 41,174  
                 
Operating income (loss):
               
Energy and Mining
  $ 7,440     $ 6,390  
North American Water and Wastewater
    4,190       (1,675 )
European Water and Wastewater
    (286 )     601  
Asia-Pacific Water and Wastewater
    (1,792 )     173  
Commercial and Structural
    1,347        
Total operating income
  $ 10,899     $ 5,489  
 
The following table summarizes revenues, gross profit and operating income (loss) by geographic region (in thousands)
 
   
Quarters Ended, March 31,
 
   
2012
   
2011
 
             
Revenues:
           
United States
  $ 144,322     $ 113,682  
Canada
    44,390       44,981  
Europe
    19,943       24,348  
Other foreign
    21,939       27,576  
Total revenues
  $ 230,594     $ 210,587  
                 
Gross profit:
               
United States
  $ 35,967     $ 18,832  
Canada
    11,299       11,809  
Europe
    4,443       5,428  
Other foreign
    975       5,105  
Total gross profit
  $ 52,684     $ 41,174  
                 
Operating income (loss):
               
United States
  $ 5,641     $ (6,168 )
Canada
    6,636       7,749  
Europe
    352       1,303  
Other foreign
    (1,730 )     2,605  
Total operating income
  $ 10,899     $ 5,489  
 
 
24

 
 
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis of certain significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2011.

We believe that certain accounting policies could potentially have a more significant impact on our consolidated financial statements, either because of the significance of the consolidated financial statements to which they relate or because they involve a higher degree of judgment and complexity. A summary of such critical accounting policies can be found in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of our Annual Report on Form 10-K for the year ended December 31, 2011.

Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. We make forward-looking statements in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this Quarterly Report on Form 10-Q that represent our beliefs or expectations about future events or financial performance. These forward-looking statements are based on information currently available to us and on management’s beliefs, assumptions, estimates and projections and are not guarantees of future events or results. When used in this report, the words “anticipate,” “estimate,” “believe,” “plan,” “intend,” “may,” “will” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2011, as filed with the Securities and Exchange Commission on February 28, 2012, and in our subsequent Quarterly Reports on Form 10-Q, including this report. In light of these risks, uncertainties and assumptions, the forward-looking events discussed may not occur. In addition, our actual results may vary materially from those anticipated, estimated, suggested or projected. Except as required by law, we do not assume a duty to update forward-looking statements, whether as a result of new information, future events or otherwise. Investors should, however, review additional disclosures made by us from time to time in our periodic filings with the Securities and Exchange Commission. Please use caution and do not place reliance on forward-looking statements. All forward-looking statements made by us in this report are qualified by these cautionary statements.

Executive Summary

We are a global leader in infrastructure protection, providing proprietary technologies and services to protect against the corrosion of industrial pipelines and for the rehabilitation and strengthening of sewer, water, energy and mining piping systems and buildings, bridges, tunnels and waterfront structures. We offer one of the broadest portfolios of cost-effective solutions for rehabilitating aging or deteriorating infrastructure and protecting new infrastructure from corrosion. Our business activities include research and development, manufacturing, distribution, installation, coating and insulation, cathodic protection and licensing. Our products and services are currently utilized and performed in more than 100 countries across six continents. We believe that the depth and breadth of our products and services platform make us a leading “one-stop” provider for the world’s infrastructure rehabilitation and protection needs.

We are organized into five reportable segments: Energy and Mining; North American Water and Wastewater; European Water and Wastewater, Asia-Pacific Water and Wastewater; and Commercial and Structural. We regularly review and evaluate our reportable segments. Market changes between the segments are typically independent of each other, unless a macroeconomic event affects the water and wastewater markets, the oil, mining and gas markets and the commercial and structural markets concurrently. These changes exist for a variety of reasons, including, but not limited to, local economic conditions, weather-related issues and levels of government funding.
 
 
25

 
 
Our long-term strategy consists of:
 
 
·
expanding our position in the growing and profitable energy and mining sector through organic growth, selective acquisitions of companies, formation of strategic alliances and by conducting complimentary product and technology acquisitions;
 
 
·
growing market opportunities in the commercial and structural infrastructure sector (A) through (i) continued customer acceptance of current products and technologies and (ii) expansion of our product and service offerings with respect to protection, rehabilitation and restoration of a broader group of infrastructure assets and (B) by leveraging our premier brand and experience of successfully innovating and delivering technologies and services through selective acquisitions of companies and technologies and through strategic alliances;
 
 
·
expanding all of our businesses in key emerging markets such as Asia and the Middle East; and
 
 
·
streamlining our water and wastewater rehabilitation operations by improving project execution, cost management practices, including the reduction of redundant fixed costs, and product mix; and by identifying opportunities to streamline key management functions and processes to improve our profitability; and strongly emphasizing higher return manufacturing operations.

2012 Acquisitions/Strategic Initiatives

On January 4, 2012, we purchased Fyfe Group’s Latin American operations (“Fyfe LA”), which included all of the equity interests of Fyfe Latin America S.A., a Panamanian entity (and its interest in various joint ventures located in Peru, Costa Rica, Chile and Colombia), Fyfe – Latin America S.A. de C.V., an El Salvador entity, and Fibrwrap Construction Latin America S.A., a Panamanian entity. The purchase price was $2.3 million in cash at closing with the sellers able to earn an additional payout both annually upon achievement of certain performance targets over the three-year period ending December 31, 2014 (the “Fyfe LA earnout”) and upon completion of 2011 and 2012 audited financials based upon a multiple of EBITDA calculation. During the first quarter of 2012, we paid the sellers an additional $1.1 million based on the preliminary working capital adjustment. Fyfe LA provides Fibrwrap installation services throughout Latin America, as well as provides product and engineering support to installers and applicators of the FRP systems in Latin America. The purchase price was funded out of our cash balances. Fyfe LA is included in our Commercial and Structural reportable segment.

On April 5, 2012, we purchased Fyfe Group’s Asian operations, which is based in Singapore, including its operations in Singapore, Hong Kong, Malaysia, Japan, Indonesia and Brunei. Customers in India and China will be served through an exclusive product supply and license agreement. The purchase price was $40.7 million. The acquisition also includes the patent portfolio of Fyfe Asia. Fyfe Asia will continue to actively research and develop improved products and processes for the structural repair, strengthening and restoration of buildings, bridges and other infrastructure using advanced composites. The purchase price was funded out of our cash balances and by borrowing $18.0 million against our line of credit. See Note 5 to the financial statements contained in this report for further discussion on this acquisition. Fyfe Asia will be included in our Commercial and Structural reportable segment.

We are in current negotiations, pursuant to the one-year exclusive negotiating right provided as part of the Fyfe NA transaction, to acquire Fyfe Group’s European operations (“Fyfe Europe”). We currently expect this transaction to close by September 30, 2012.

See Note 1 of this report for further discussion regarding our recent acquisitions and strategic initiatives.

Results of OperationsThree Months Ended March 31, 2012 and 2011

Overview – Consolidated Results

Key financial data for our consolidated operations was as follows (dollars in thousands):
 
(dollars in thousands)
 
Quarters Ended March 31,
   
Increase (Decrease)
 
   
2012
   
2011
    $     %  
Revenues
  $ 230,594     $ 210,587     $ 20,007       9.5 %
Gross profit
    52,684       41,174       11,510       28.0  
Gross profit margin
    22.8 %     19.6 %     n/a       3.2  
Operating expenses
    41,210       35,685       5,525       15.5  
Acquisition-related expenses
    575             575       n/m  
Operating income
    10,899       5,489       5,410       98.6  
Operating margin
    4.7 %     2.6 %     n/a       2.1  
Net income attributable to Aegion Corporation
    6,724       3,006       3,718       123.7  
 
 
26

 
 
Consolidated income from operations was $6.7 million for the quarter ended March 31, 2012 compared to $3.0 million in the prior year quarter. The increase in consolidated income from operations for the first quarter of 2012 was a result of increased results in our North American Water and Wastewater segment from improvements in project execution and more favorable weather in the first quarter of 2012 compared to 2011. Results also include contributions from our Commercial and Structural segment, which was established with our third quarter 2011 acquisition of Fyfe NA and results of our 2011 acquisitions of CRTS, Inc. (“CRTS”) and .Hockway Limited and Hockway Middle East FZE (collectively, “Hockway”) within our Energy and Mining segment. Results in our Energy and Mining segment also include increases in our industrial lining and cathodic protection businesses due to international growth. These increases were partially offset by decreases in our European Water and Wastewater segment due to severe weather conditions throughout Europe and project performance issues in our Asia-Pacific Water and Wastewater segment.

For the quarter, revenues increased $20.0 million, or 9.5%, primarily due to the inclusion of revenue from our 2011 acquisitions and growth in our industrial linings operations, partially offset by lower revenues in our North American Water and Wastewater segment due to weaker market conditions in the United States. Gross margin rates have improved in our North American Water and Wastewater segment due to better project execution and an improved project management organizational structure. Additionally, our Commercial and Structural segment had a 200 basis point favorable impact to our overall 22.8% first quarter gross margin.

Quarter over quarter, operating expenses increased $5.5 million, or 15.5%, primarily due to the inclusion of our 2011 acquisitions, but partially offset by cost reduction measures implemented during September 2011. 2012 results also included $0.6 million of acquisition-related expenditures for the acquisitions of Fyfe LA and Fyfe Asia.

Total contract backlog decreased slightly to $459.0 million at March 31, 2012 compared to $464.2 million at December 31, 2011. However, the March 31, 2012 backlog was 16.8% higher than total contract backlog of $392.9 million at March 31, 2011. The March 31, 2012 levels include $53.1 from our 2011 acquisitions of CRTS, Fyfe NA and Hockway. These increases were partially offset by lower backlog in our Asia-Pacific segment as a result of working through certain large projects in Australia and Singapore.
 
Energy and Mining Segment
 
Key financial data for our Energy and Mining segment was as follows (in thousands):
 
(dollars in thousands)
 
   
Quarters Ended March 31,
   
Increase (Decrease)
 
   
2012
   
2011
    $     %  
Revenues
  $ 115,038     $ 95,457     $ 19,581       20.5 %
Gross profit
    26,899       23,091       3,808       16.5  
Gross profit margin
    23.4 %     24.2 %     n/a       (0.8 )
Operating expenses
    19,459       16,701       2,758       16.5  
Operating income
    7,440       6,390       1,050       16.4  
Operating margin
    6.5 %     6.7 %     n/a       (0.2 )
 
Revenues

Revenues in our Energy and Mining segment increased by $19.6 million, or 20.5%, in the first quarter of 2012 compared to the first quarter of 2011. This increase was primarily due to significant growth in our cathodic protection and industrial lining businesses as a result of international growth, strong market conditions and the inclusion of $7.4 million of revenue from our 2011 acquisitions of CRTS and Hockway, which were acquired on June 30, 2011 and August 2, 2011, respectively. Our Energy and Mining segment is active in six primary geographic regions: the United States, Canada, Mexico, South America, the Middle East and Europe, and includes pipeline rehabilitation, pipe coating, design and installation of cathodic protection systems and welding services. We expect improving global markets will lead to expansion within existing geographies for our corrosion engineering and industrial lining platforms as well as new geographies, specifically, in Asia and the Middle East.

Our Energy and Mining segment contract backlog at March 31, 2012 was $255.2 million, essentially flat compared to December 31, 2011 and a 72.9% increase compared to March 31, 2011. The increase over the prior year quarter was primarily driven by large contract awards in Morocco for UPS and in Saudi Arabia for CRTS. We continue to believe that improved commodity prices will result in significant opportunities for our Energy and Mining segment for future periods, particularly as it relates to new spending in the sector.
 
 
27

 
 
Gross Profit and Gross Profit Margin

Our Energy and Mining segment gross profit increased by $3.8 million, or 16.5%, to $26.9 million in the first quarter of 2012 compared to $23.1 million in the same quarter of 2011. The increase in gross profit was due to higher revenues in our industrial lining and cathodic protection businesses. Overall, our gross margin percentage decreased to 23.4% compared to 24.2% for the prior year quarter. The decrease was due to lower margins in our pipe coating businesses due to customer driven project delays. We believe margins will trend upwards during the remainder of 2012 as a result of significant large project, higher margin activity in our coatings business.

Operating Expenses

Operating expenses in our Energy and Mining segment increased by $2.8 million, or 16.5%, in the first quarter of 2012 compared to the first quarter of 2011. The increase in operating expenses for the first quarter of 2012 was primarily attributable to operating expenses related to CRTS, Hockway and our new joint ventures, which accounted for $2.2 million of the overall increase. As a percentage of revenues, our Energy and Mining operating expenses were 16.9% in the first quarter of 2012 compared to 17.5% in the first quarter of 2011.

Operating Income and Operating Margin

Operating income increased by $1.1 million, or 16.4%, to $7.4 million in the first quarter of 2012 compared to $6.4 million in the first quarter of 2011. Operating margin was 6.5% in the first quarter of 2012 compared to 6.7% in the first quarter of 2011 primarily as a result of a lower gross profit margin in the segment.

North American Water and Wastewater Segment

Key financial data for our North American Water and Wastewater segment was as follows (dollars in thousands):
 
(dollars in thousands)
 
   
Quarters Ended March 31,
   
Increase (Decrease)
 
   
2012
   
2011
    $     %  
Revenues
  $ 74,338     $ 81,861     $ (7,523 )     (9.2 )%
Gross profit
    14,571       11,143       3,428       30.8  
Gross profit margin
    19.6 %     13.6 %     n/a       6.0  
Operating expenses
    10,381       12,818       (2,437 )     (19.0 )
Operating income (loss)
    4,190       (1,675 )     5,865       350.1  
Operating margin
    5.6 %     (2.0 )%     n/a       7.6  
 
Revenues

Revenues decreased by $7.5 million, or 9.2%, in our North American Water and Wastewater segment in the first quarter of 2012 compared to the first quarter of 2011. The quarter over quarter decline was primarily due to market contraction in certain regions and our more disciplined bidding strategy initiated in the second half of 2011, which resulted in higher gross margins in the contract backlog during the same period. Despite the lower contracting revenue, third party tube sales increased by $0.7 million, or 20.0%, to $4.2 million as a result of continued market penetration.

Contract backlog in our North American Water and Wastewater segment at March 31, 2012 represented a $2.5 million, or 1.9%, increase from backlog at December 31, 2011 and a $20.1 million, or 13.2%, decrease from backlog at March 31, 2011. The decrease from March 31, 2011 was due to weaker market conditions in the Eastern region of the United States, and our more disciplined bidding strategy.

Gross Profit and Gross Profit Margin

Gross profit in our North American Water and Wastewater segment increased $3.4 million, or 30.8%, in the first quarter of 2012 compared to the first quarter in 2011, primarily due to improved gross margin percentages to 19.6% in the first quarter of 2012 from 13.6% in the first quarter of 2011, which offset the lower gross profit resulting from lower revenue. The improvement of 600 basis points was primarily due to improved project execution, the effects of our efforts to improve our project management organizational structure which began in early 2011 and improvement in leveraging our fixed cost structure, which was hampered by severe weather in the first quarter of 2011.
 
 
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Operating Expenses

Operating expenses in our North American Water and Wastewater segment decreased by $2.4 million, or 19.0%, during the first quarter of 2012 compared to the first quarter of 2011. Operating expenses in this segment decreased primarily due to a continued focus on operational efficiencies and resource management, which included cost reduction initiatives taken in the second half of 2011. Operating expenses as a percentage of revenues were 14.0% in the first quarter of 2012 compared to 15.7% in the first quarter of 2011.

Operating Income (Loss) and Operating Margin

Higher gross margin percentages and lower operating expense partially offset by lower revenue led to a $5.9 million, or 350.1%, increase in operating income in our North American Water and Wastewater segment in the first quarter of 2012 compared to the first quarter of 2011. The North American Water and Wastewater operating margin increased to 5.6% in the first quarter of 2012 compared to (2.0)% in the first quarter of 2011.

Although we have experienced continued weaker market conditions in the United States and a product mix shift to lower margin small diameter pipe projects, we anticipate continued performance improvement in this business compared to 2011 based on our more disciplined bidding approach, improvement in project execution and cost reduction measures taken during 2011.

European Water and Wastewater Segment

Key financial data for our European Water and Wastewater segment was as follows (dollars in thousands):
 
(dollars in thousands)
 
   
Quarters Ended March 31,
   
Increase (Decrease)
 
   
2012
   
2011
    $     %  
Revenues
  $ 16,077     $ 20,760     $ (4,683 )     (22.6