XFRA:IT3A Aegion Corp Class A Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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
June 30, 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 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 39,288,156 shares of common stock, $.01 par value per share, outstanding at July 27, 2012.
 


 
 

 
 
TABLE OF CONTENTS
 
PART I—FINANCIAL INFORMATION    
       
Item 1.
Financial Statements (Unaudited):
   
       
 
Consolidated Statements of Operations for the Quarters and Six Months Ended June 30, 2012 and 2011
3  
       
 
Consolidated Statements of Comprehensive Income for the Quarters and Six Months Ended June 30, 2012 and 2011
4  
       
 
Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011
5  
       
 
Consolidated Statements of Equity for the Six Months Ended June 30, 2012 and 2011
6  
       
 
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 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
39  
       
Item 4.
Controls and Procedures
40  
       
PART II—OTHER INFORMATION    
       
Item 1.
Legal Proceedings
40  
       
Item 1A.
Risk Factors
40  
       
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
41  
       
Item 6.
Exhibits
41  
       
SIGNATURE 42  
       
INDEX TO EXHIBITS 43  
 
 
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
June 30,
   
For the Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 257,531     $ 224,985     $ 488,125     $ 435,572  
Cost of revenues
    195,104       179,145       373,014       348,558  
Gross profit
    62,427       45,840       115,111       87,014  
Operating expenses
    42,652       37,674       83,862       73,359  
Acquisition-related expenses
    1,412       326       1,987       326  
Operating income
    18,363       7,840       29,262       13,329  
Other income (expense):
                               
Interest expense
    (2,778 )     (1,666 )     (5,178 )     (3,659 )
Interest income
    77       51       145       136  
Other
    (1,458 )     2,247       (1,045 )     1,781  
Total other income (expense)
    (4,159 )     632       (6,078 )     (1,742 )
Income before taxes on income
    14,204       8,472       23,184       11,587  
Taxes on income
    4,001       1,961       6,484       2,802  
Income before equity in earnings of affiliated companies
    10,203       6,511       16,700       8,785  
Equity in earnings of affiliated companies
    1,735       762       2,387       1,615  
Net income
    11,938       7,273       19,087       10,400  
Non-controlling interests
    (440 )     356       (865 )     235  
Net income attributable to Aegion Corporation
  $ 11,498     $ 7,629     $ 18,222     $ 10,635  
                                 
Earnings per share attributable to Aegion Corporation:                                
Basic:
  $ 0.29     $ 0.19     $ 0.46     $ 0.27  
Diluted:
    0.29       0.19       0.46       0.27  
 
The accompanying notes are an integral part of the consolidated financial statements.
 
 
3

 
 
AEGION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
 
   
For the Quarters Ended
June 30,
   
For the Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Net income
  $ 11,938     $ 7,273     $ 19,087     $ 10,400  
Other comprehensive income:
                               
Foreign currency translation adjustments, net of tax
    (3,714 )     889       (412 )     6,465  
Total comprehensive income
    8,224       8,162       18,675       16,865  
Less: comprehensive income attributable to noncontrolling interests
    (98 )     (625 )     (860 )     (820 )
Comprehensive income attributable to Aegion Corporation
  $ 8,126     $ 7,537     $ 17,815     $ 16,045  
 
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)
 
   
June 30,
2012
   
December 31,
2011
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 106,725     $ 106,129  
Restricted cash
    1,544       82  
Receivables, net
    217,604       228,313  
Retainage
    36,874       33,933  
Costs and estimated earnings in excess of billings
    74,374       67,683  
Inventories
    60,157       54,540  
Prepaid expenses and other current assets
    28,472       27,305  
Total current assets
    525,750       517,985  
Property, plant & equipment, less accumulated depreciation
    174,072       168,945  
Other assets
               
Goodwill
    271,491       249,888  
Identified intangible assets, less accumulated amortization
    161,512       149,655  
Investments
    25,727       26,680  
Deferred income tax assets
    5,242       5,418  
Other assets
    7,348       6,393  
Total other assets
    471,320       438,034  
                 
Total Assets
  $ 1,171,142     $ 1,124,964  
                 
Liabilities and Equity
               
Current liabilities
               
Accounts payable
    79,310       72,326  
Accrued expenses
    70,782       69,417  
Billings in excess of costs and estimated earnings
    18,630       24,435  
Current maturities of long-term debt and line of credit
    28,610       26,541  
Total current liabilities
    197,332       192,719  
Long-term debt, less current maturities
    237,349       222,868  
Deferred income tax liabilities
    39,876       38,167  
Other non-current liabilities
    25,613       22,221  
Total liabilities
    500,170       475,975  
(See Commitments and Contingencies: Note 7)                
                 
Equity
               
Common stock, $.01 par – shares authorized 125,000,000; shares issued and outstanding 39,279,799 and 39,352,375, respectively
    393       394  
Additional paid‑in capital
    259,050       260,680  
Retained earnings
    392,018       373,796  
Accumulated other comprehensive income
    5,455       5,862  
Total stockholders' equity
    656,916       640,732  
Non-controlling interests
    14,056       8,257  
Total equity
    670,972       648,989  
                 
Total Liabilities and Equity
  $ 1,171,142     $ 1,124,964  
 
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 (loss)
                      10,635             (235 )     10,400  
Issuance of common stock upon stock option exercises including tax benefit
    119,559       1       3,303                         3,304  
Restricted shares issued
    166,276       2                               2  
Issuance of shares pursuant to deferred stock unit awards
    5,681                                      
Forfeitures of restricted shares
    (67,461 )                                    
Equity-based compensation expense
                4,007                         4,007  
Investment by non-controlling interests
                                  141       141  
Distribution to non-controlling interests
                                  (1,729 )     (1,729 )
Currency translation adjustment and derivative transactions
                            5,410       1,055       6,465  
BALANCE, June 30, 2011
    39,470,070     $ 395     $ 258,888     $ 357,884     $ 23,523     $ 8,607     $ 649,297  
 
BALANCE, December 31, 2011
    39,352,375     $ 394     $ 260,680     $ 373,796     $ 5,862     $ 8,257     $ 648,989  
Net income
                      18,222             865       19,087  
Issuance of common stock upon stock option exercises including tax benefit
    25,123       1       619                         620  
Restricted shares issued
    266,715       3                               3  
Issuance of shares pursuant to restricted stock unit awards
    11,936                                      
Issuance of shares pursuant to deferred stock unit awards
    22,185                                      
Forfeitures of restricted stock
    (18,861 )                                    
Repurchase of common stock
    (379,674 )     (5 )     (6,259 )                       (6,264 )
Equity-based compensation expense
                4,010                         4,010  
Investment by non-controlling interests
                                  4,939       4,939  
Currency translation adjustment and derivative transactions
                            (407 )     (5 )     (412 )
BALANCE, June 30, 2012
    39,279,799     $ 393     $ 259,050     $ 392,018     $ 5,455     $ 14,056     $ 670,972  
 
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 Six Months
Ended June 30,
 
   
2012
   
2011
 
             
Cash flows from operating activities:
           
Net income
  $ 19,087     $ 10,400  
Adjustments to reconcile to net cash provided by (used in) operating activities:
               
Depreciation and amortization
    19,734       17,279  
Gain on sale of fixed assets
    (33 )     (360 )
Equity-based compensation expense
    4,010       4,007  
Deferred income taxes
    352       (1,548 )
Equity in earnings of affiliated companies
    (2,387 )     (1,615 )
(Gain) loss on foreign currency transactions
    269       (2,010 )
Other
    964       (984 )
Changes in operating assets and liabilities:
               
Restricted cash
    (1,462 )     600  
Return on equity of affiliated companies
    3,401       4,722  
Receivables net, retainage and costs and estimated earnings in excess of billings
    10,223       (3,441 )
Inventories
    (5,020 )     (999 )
Prepaid expenses and other assets
    2,175       (1,223 )
Accounts payable and accrued expenses
    (4,084 )     (17,662 )
Other operating
    (225 )     (1,694 )
Net cash provided by operating activities
    47,004       5,472  
                 
Cash flows from investing activities:
               
Capital expenditures
    (21,872 )     (11,004 )
Proceeds from sale of fixed assets
    2,849       599  
Patent expenditures
    (347 )     (700 )
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 Asia, net of cash acquired
    (39,415 )      
Payment to Fyfe NA sellers for final net working capital adjustments
    (532 )      
Purchase of CRTS, net of cash acquired
          (23,639 )
Net cash used in investing activities
    (61,317 )     (34,744 )
                 
Cash flows from financing activities:
               
Issuance of common stock upon stock option exercises, including tax benefit
    620       3,303  
Investments from noncontrolling interests
    4,939       141  
Distributions/dividends to noncontrolling interests
          (1,729 )
Repurchase of common stock
    (6,264 )      
Proceeds on notes payable
    2,850       35  
Principal payments on notes payable
    (713 )     (1,564 )
Proceeds from line of credit
    26,000       25,000  
Proceeds from long-term debt
    976        
Principal payments on long-term debt
    (12,500 )     (5,000 )
Other financing activities
          (173 )
Net cash provided by financing activities
    15,908       20,013  
Effect of exchange rate changes on cash
    (999 )     2,434  
Net increase (decrease) in cash and cash equivalents for the period
    596       (6,825 )
Cash and cash equivalents, beginning of period
    106,129       114,829  
Cash and cash equivalents, end of period
  $ 106,725     $ 108,004  
 
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 June 30, 2012 and the results of operations and statements of comprehensive income for the three- and six-month periods ended June 30, 2012 and 2011 and the statements of equity and cash flows for the six-month periods ended June 30, 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 three- and six-month periods ended June 30, 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%) 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 early 2013.
 
In April 2011, the Company also expanded its Corrpro Companies, Inc. (“Corrpro”) and United Pipeline Systems, Inc. (“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, provides 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 serves as a platform for the continued expansion of the Company’s Energy and Mining group in the Middle East. Corrpower commenced providing corrosion protection 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.
 
 
8

 
 
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 (subject to working capital adjustments calculated from an agreed upon target) 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.
 
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%).
 
In March 2012, the Company organized United Special Technical Services LLC (“USTS”), a joint venture located in the Sultanate of Oman between UPS 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. UPS holds a fifty-one percent (51%) equity interest in USTS and STS holds the remaining forty-nine percent (49%) equity interest. USTS initiated operations in the second quarter of 2012.
 
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 of this report. 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.
 
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, the Company paid the sellers an additional $1.1 million based on a 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.
 
 
9

 
 
On April 5, 2012, the Company purchased Fyfe Group’s Asian operations (“Fyfe Asia”), which included all of the equity interests of Fyfe Asia Pte. Ltd, a Singaporean entity (and its interest in two joint ventures located in Borneo and Indonesia), Fyfe (Hong Kong) Limited, Fibrwrap Construction (M) Sdn Bhd, a Malaysian entity, Fyfe Japan Co. Ltd and Fibrwrap Construction Pte. Ltd and Technologies & Art Pte. Ltd., Singaporean entities. Customers in India and China will be served through an exclusive product supply and license agreement. The cash purchase price at closing was $40.7 million and also included the patent portfolio of Fyfe Asia. 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. Fyfe Asia is included in the Company’s Commercial and Structural reportable segment.
 
The Company continues to hold exclusive negotiating rights for Fyfe Group’s international operations in Europe and continues to review this transaction.
 
Purchase Price Accounting
 
The Company has completed its accounting for the acquisition of CRTS. The Company has substantially completed its accounting for the Hockway and Fyfe NA acquisitions and completed its initial accounting for the Fyfe LA and Fyfe Asia acquisitions 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, Fyfe LA and Fyfe Asia acquisitions is not deductible for tax purposes. The goodwill associated with the Fyfe NA acquisition is deductible for tax purposes. Additionally, the Company recorded expenses of $1.4 million and $2.0 million for costs incurred related to the acquisitions of Fyfe LA and Fyfe Asia in the three- and six-month periods ended June 30, 2012, respectively.
 
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 June 30, 2012, the Company calculated the fair value of the contingent consideration arrangement to be $14.8 million for CRTS, $1.4 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.
 
The CRTS, Hockway, Fyfe NA, Fyfe LA and Fyfe Asia acquisitions made the following contributions to the Company’s revenues and profits during their respective periods since acquisition (in thousands):
 
   
Quarter Ended June 30, 2012
   
Quarter Ended
June 30, 2012
 
86-Day Period Ended June 30, 2012
 
   
CRTS
   
Hockway
   
Fyfe NA
   
Fyfe LA
   
Fyfe Asia
 
Revenues
  $ 6,851     $ 2,068     $ 16,625     $ 328     $ 3,870  
Net income (loss) (1)
    356       145       (758 )     (103 )     84  
 
   
Six Months Ended June 30, 2012
   
178-Day Period Ended June 30, 2012
 
86-Day Period Ended June 30, 2012
 
   
CRTS
   
Hockway
   
Fyfe NA
   
Fyfe LA
   
Fyfe Asia
 
Revenues
  $ 13,528     $ 2,759     $ 30,897     $ 602     $ 3,870  
Net income (loss) (1)
    1,597       73       317       (128 )     84  
 

(1)
Net income includes an allocation of corporate expenses that is not necessarily indicative of the entity's operations on a stand-alone basis.
 
 
10

 
 
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 respective acquisition date (in thousands):
 
   
Quarters Ended
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues
  $ 257,531     $ 245,532     $ 491,871     $ 467,161  
Net income(1)
    11,498       11,242       19,546       14,628  

 
(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 the respective acquisition date.
 
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)
   
Fyfe Asia
   
Total
 
Cash
  $ 24,000     $ 3,552     $ 118,118     $ 3,349     $ 40,717     $ 189,736  
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     $ 40,717     $ 206,770  

 
(1)
Includes the cash purchase price at closing of $4.6 million plus a final working capital adjustment of $1.0 million, which was paid to the Company in the first quarter of 2012.
 
(2)
Includes the cash purchase price at closing of $115.8 million plus a final 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 to the sellers during the first quarter of 2012 based on a preliminary working capital adjustment.
 
The Company has completed its accounting for the acquisition of CRTS. The Company has substantially completed its accounting for the Hockway and Fyfe NA acquisitions and completed its initial accounting for Fyfe LA and Fyfe Asia. As the Company completes its final accounting for these acquisitions, there might be changes, some of which may be material, to this initial accounting. The following table summarizes the fair value of identified assets and liabilities of the acquisitions at their respective acquisition dates. With respect to CRTS, the summary below is final, whereas the summary below represents a preliminary valuation for the other acquisitions, (in thousands):
 
   
CRTS
   
Hockway
   
Fyfe NA
   
Fyfe LA
   
Fyfe Asia
 
Cash
  $ 361     $ 536     $ 1,096     $ 301     $ 1,303  
Receivables and cost and estimated earnings in excess of billings
    2,365       2,341       16,019       195       9,595  
Inventories
    21       623       5,977       514        
Prepaid expenses and other current assets
    175       228       792       75       1,262  
Property, plant and equipment
    5,350       324       1,064       90       938  
Identified intangible assets
    26,220       2,200       53,768       1,663       15,900  
Accounts payable, accrued expenses and billings in excess of cost and estimated earnings
    (2,830 )     (1,767 )     (3,642 )     (702 )     (4,926 )
Deferred tax liabilities
    (12,981 )                 (446 )     (2,703 )
Total identifiable net assets
  $ 18,681     $ 4,485     $ 75,074     $ 1,690     $ 21,369  
                                         
Total consideration recorded
  $ 38,760     $ 5,006     $ 118,118     $ 4,169       40,717  
Less: total identifiable net assets
    18,681       4,485       75,074       1,690       21,369  
Goodwill at June 30, 2012
  $ 20,079     $ 521     $ 43,044     $ 2,479     $ 19,348  
 
 
11

 
 
The following adjustments were made during the quarter ended June 30, 2012, after the transactions’ respective acquisition dates as the Company continued its purchase price accounting (in thousands):
 
   
CRTS
   
Fyfe LA
 
Total identifiable net assets at March 31, 2012
  $ 20,267     $ 2,453  
Receivables and cost and estimated earnings in excess of billings
          (381 )
Identified intangible assets
          261  
Accounts payable, accrued expenses and billings in excess of cost and estimated earnings
          (197 )
Deferred tax liabilities
    (1,586 )     (446 )
Total identifiable net assets at June 30, 2012
    18,681       1,690  
                 
Goodwill at March 31, 2012
  $ 18,493     $ 1,716  
Increase in goodwill related to acquisitions
    1,586       763  
Goodwill at June 30, 2012
  $ 20,079     $ 2,479  
 
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.
 
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 June 30, 2012 and December 31, 2011, the investments in affiliated companies on the Company’s consolidated balance sheets were $25.7 million and $26.7 million, respectively.
 
 
12

 
 
Net income presented below for the six-month periods ended June 30, 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 Company subsidiary. The Company’s equity in earnings of affiliated companies for all periods presented below includes acquisition-related depreciation and amortization expense and is net of income taxes associated with these earnings.
 
Financial data for these investments in affiliated companies for the six-month periods ended June 30, 2012 and 2011 are summarized in the following table (in thousands):
 
Income statement data
 
2012
   
2011
 
             
Revenue
  $ 63,502     $ 61,402  
Gross profit
    17,393       14,219  
Net income
    8,877       6,261  
Equity in earnings of affiliated companies
    2,387       1,615  
 
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.
 
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 June 30, 2012, the Company consolidated any VIEs in which it was the primary beneficiary. Also, as of June 30, 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.
 
 
13

 
 
Financial data for consolidated variable interest entities for the six-month periods ended June 30, 2012 and 2011 are summarized in the following table (in thousands):
 
Income statement data
 
2012
   
2011
 
             
Revenue
  $ 41,559     $ 24,471  
Gross profit
    6,097       2,240  
Net income (loss)
    433       (661 )
 
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 or six-month period ended June 30, 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 was effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company adopted this update on January 1, 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 necessary. 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 as of January 1, 2012 and the adoption of this update did not have a material impact on the Company.
 
3.     SHARE INFORMATION
 
Earnings per share have been calculated using the following share information:
 
   
Quarters Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
Weighted average number of common shares used for basic EPS
    39,277,649       39,343,690       39,237,141       39,308,049  
Effect of dilutive stock options and restricted stock
    292,805       388,387       298,056       409,870  
Weighted average number of common shares and dilutive potential common stock used in dilutive EPS
    39,570,454       39,732,077       39,535,197       39,717,919  
 
The Company excluded 251,686 and 41,488 stock options for the quarters ended June 30, 2012 and 2011, respectively, and 251,686 and 37,488 stock options for the six months ended June 30, 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 each period.
 
 
14

 
 
4.     GOODWILL AND INTANGIBLE ASSETS
 
Goodwill
 
Our recorded goodwill by reporting segment was as follows at June 30, 2012 and December 31, 2011 (in millions):
 
   
2012
   
2011
 
Energy and Mining
  $ 77.8     $ 77.4  
North American Water and Wastewater
    101.8       101.8  
European Water and Wastewater
    21.4       21.8  
Asia-Pacific Water and Wastewater
    5.7       5.7  
Commercial and Structural
    64.8       43.2  
Total goodwill
  $ 271.5     $ 249.9  
 
The following table presents a reconciliation of the beginning and ending balances of the Company’s goodwill at June 30, 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)
    22.5       63.7  
Foreign currency translation
    (0.9 )     (3.9 )
Goodwill at end of period(3)
  $ 271.5     $ 249.9  

 
(1)
During the first six months of 2012, the Company recorded goodwill of $2.5 million and $19.3 million related to the acquisition of Fyfe LA and Fyfe Asia, respectively. Additionally, the Company recorded decreases of $1.5 million and $0.2 million in goodwill related to the 2011 acquisitions of Hockway and Fyfe NA, respectively, and increases of $1.6 and $0.8 million in goodwill related to the CRTS and Fyfe LA acquisitions, respectively.
 
(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 of this report.
 
(3)
The Company does not have any accumulated impairment charges.
 
Intangible Assets
 
Intangible assets at June 30, 2012 and December 31, 2011 were as follows (in thousands):
 
   
As of June 30, 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     $ 3,922     $ (2,736 )   $ 1,186     $ 3,922     $ (2,654 )   $ 1,268  
Backlog
    <
1
      4,652       (4,507 )     145       4,651       (3,705 )     946  
Leases
      14       2,067       (260 )     1,807       2,067       (183 )     1,884  
Trademarks
      18       21,424       (2,653 )     18,771       21,396       (2,141 )     19,255  
Non-competes
      0       740       (740 )           740       (729 )     11  
Customer relationships
      15       116,375       (14,242 )     102,133       102,963       (10,970 )     91,993  
Patents and acquired technology
      18       57,474       (20,004 )     37,470       53,906       (19,608 )     34,298  
              $ 206,654     $ (45,142 )   $ 161,512     $ 189,645     $ (39,990 )   $ 149,655  

 
(1)
During the six months ended June 30, 2012, the Company recorded $3.9 million in patents and acquired technology to be amortized over a weighted average life of twenty years and $13.4 million in customer relationships to be amortized over a weighted average life of fifteen years related to the acquisitions discussed in Note 1 of this report.
 
 
15

 
 
Amortization expense was $3.0 million and $1.2 million for the quarters ended June 30, 2012 and 2011, respectively. Amortization expense was $5.7 million and $2.4 million for the six-month periods ended June 30, 2012 and 2011, respectively. Estimated amortization expense by year is as follows (in thousands):
 
 
2012
  $ 10,839  
 
2013
    10,163  
 
2014
    10,163  
 
2015
    10,157  
 
2016
    10,144  
 
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 of this report 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 June 30, 2012 was approximately 2.71%.
 
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 June 30, 2012 was approximately 2.50%. 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 of this report for additional detail regarding this acquisition.
 
The Company’s total indebtedness at June 30, 2012 consisted of $231.3 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 $3.6 million of third party notes and bank debt. 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 January, 2012, the Company and Perma-Pipe Canada, Inc. agreed to loan the joint venture an additional $6.2 million for the purchase of capital assets increasing the total to $14.2 million. As of June 30, 2012, $4.1 million has been funded. As of June 30, 2012, $5.1 million of the total amount was designated in the consolidated financial statements as third-party debt.
 
As of June 30, 2012, the Company had $20.7 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 $9.6 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.
 
 
16

 
 
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 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.
 
At June 30, 2012 and December 31, 2011, the estimated fair value of the Company’s long-term debt was approximately $259.0 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 of this report.
 
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 June 30, 2012, the Company’s consolidated financial leverage ratio was 2.23 to 1.00 and, using the current New Credit Facility defined income, the Company had the capacity to borrow up to approximately $93.5 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 June 30, 2012, the Company’s fixed charge coverage ratio was 1.71 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 $510.9 million. At June 30, 2012, the Company’s consolidated net worth was $671.2 million.
 
At June 30, 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 six months of 2012, the Company 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 58,906 shares of the Company’s common stock for $1.1 million ($18.10 average price per share) in connection with the satisfaction of tax obligations in connection with the vesting of restricted stock. In addition, the Company issued 2,769 common shares in exchange for 13,500 stock options (via a stock swap). Once repurchased, the Company immediately retired all such shares.
 
 
17

 
 
Equity-Based Compensation Plans
 
At June 30, 2012, the Company had two active equity-based compensation plans under which awards may be made, including stock appreciation rights, restricted shares of common stock, performance awards, stock options and stock units. The Company’s 2009 Employee Equity Incentive Plan (the “2009 Employee Plan”) has 2,500,000 shares of the Company’s common stock registered for issuance, and at June 30, 2012, 832,071 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 outstanding restricted stock unit awards were issued at the target level. The Company’s 2011 Non-Employee Director Equity Incentive Plan (“2011 Director Plan”) has 250,000 shares of the Company’s common stock registered for issuance, and at June 30, 2012, 208,266 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 requisite service period. The forfeiture of unvested restricted stock awards and units causes the reversal of all previous expense recorded as a reduction of current period expense.
 
A summary of stock award activity during the six-month period ended June 30, 2012 follows:
 
   
Stock Awards
   
Weighted
Average
Award Date
Fair Value
 
Outstanding at January 1, 2012
    643,117     $ 17.44  
Restricted shares awarded
    266,715       18.08  
Restricted stock units awarded
    188,958       18.11  
Restricted shares distributed
    (269,068 )     12.95  
Restricted stock units distributed
    (11,936 )     12.84  
Restricted shares forfeited
    (18,861 )     19.91  
Restricted stock units forfeited
    (31,392 )     18.11  
Outstanding at June 30, 2012
    767,533     $ 19.39  
 
Expense associated with stock awards was $2.2 million and $2.2 million in the six months ended June 30, 2012 and 2011, respectively. Unrecognized pre-tax expense of $9.3 million related to stock awards is expected to be recognized over the weighted average remaining service period of 2.3 years for awards outstanding at June 30, 2012.
 
Expense associated with stock awards was $1.2 million and $1.0 million for the quarters ended June 30, 2012 and 2011, respectively.
 
Deferred Stock Unit Awards
 
Deferred stock units generally are awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date and generally are fully vested on the date of grant. The expense related to the issuance of deferred stock units is recorded as of the date of the award.
 
A summary of deferred stock unit activity during the six-month period ended June 30, 2012 follows:
 
   
Deferred
Stock
Units
   
Weighted
Average
Award Date
Fair Value
 
Outstanding at January 1, 2012
    173,916     $ 20.12  
Awarded
    41,734       17.78  
Shares distributed
    (22,185 )     22.79  
Forfeited
           
Outstanding at June 30, 2012
    193,465     $ 19.31  
 
Expense associated with awards of deferred stock units in the quarters and six months ended June 30, 2012 and 2011 was $0.7 million, respectively.
 
 
18

 
 
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 six-month period ended June 30, 2012 follows:
 
   
Shares
   
Weighted
Average
Exercise
Price
 
Outstanding at January 1, 2012
    1,107,712     $ 18.98  
Granted
    267,880       18.11  
Exercised
    (25,123 )     14.04  
Canceled/Expired
    (106,332 )     23.66  
Outstanding at June 30, 2012
    1,244,137     $ 18.49  
Exercisable at June 30, 2012
    788,073     $ 16.91  
 
In each of the quarters ended June 30, 2012 and 2011, the Company recorded expense of $0.5 million related to stock option grants. In the six months ended June 30, 2012 and 2011, the Company recorded expense of $1.1 million and $1.2 million, respectively, related to stock option grants. Unrecognized pre-tax expense of $3.2 million related to stock option grants is expected to be recognized over the weighted average remaining contractual term of 2.1 years for awards outstanding at June 30, 2012.
 
Financial data for stock option exercises for the six-month periods ended June 30, 2012 and 2011 are summarized in the following table (in millions):
 
   
2012
   
2011
 
   
(in millions)
 
Amount collected from stock option exercises
  $   0.4     $   2.0  
Total intrinsic value of stock option exercises
      0.1         1.0  
Tax benefit of stock option exercises recorded in additional paid-in-capital
    <
0.1
      <
0.1
 
                     
                     
Aggregate intrinsic value of outstanding stock options at June 30, 2012
      2.3         4.3  
Aggregate intrinsic value of exercisable stock options at June 30, 2012
      2.3         3.5  
 
The intrinsic value calculations are based on the Company’s closing stock price of $17.89 and $20.97 on June 30, 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 Six Months Ended June 30,
 
   
2012
   
2011
 
   
Range
   
Weighted
Average
   
Range
   
Weighted
Average
 
Weighted average grant-date fair value
    n/a     $ 8.19         n/a         $ 11.61  
Volatility
    45.2 %     45.2 %     47.0 -   50.6 %     50.4 %
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 %     2.3 -   3.0 %     2.8 %
 
 
19

 
 
7.     COMMITMENTS AND CONTINGENCIES
 
Litigation
 
The Company is involved in certain litigation incidental to the conduct of its business and affairs. Management, after consultation with legal counsel, does not believe that the outcome of any such litigation, individually or in the aggregate, will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.
 
Purchase Commitments
 
The Company had no material purchase commitments at June 30, 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 June 30, 2012, the Company’s maximum exposure to its joint venture partner’s proportionate share of performance guarantees was $0.6 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.
 
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 June 30, 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 each of the three- and six-month periods ended June 30, 2012, the Company recorded less than $0.1 million as a gain on the consolidated statement of operations upon settlement of the cash flow hedges. At June 30, 2012, the Company recorded a net deferred loss of $0.1 million related to the cash flow hedges in other current liabilities and other comprehensive income on the consolidated balance sheets and on the foreign currency translation adjustment line of the consolidated statements of equity.
 
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.
 
 
20

 
 
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.
 
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
 
June 30, 2012
   
December 31, 2011
 
Derivatives Designated as Hedging Instruments
               
Forward Currency Contracts
 
Other current assets
  $ 22     $  
   
Total Assets
  $ 22     $  
                     
Forward Currency Contracts
 
Other current liabilities
  $     $ 6  
Interest Rate Swaps
 
Other long-term liabilities
    794       545  
   
Total Liabilities
  $ 794     $ 551  
                     
Derivatives Not Designated as Hedging Instruments
                   
Forward Currency Contracts
 
Other current assets
  $     $ 9  
   
Total Assets
  $     $ 9  
                     
Forward Currency Contracts
 
Other current liabilities
  $ 121     $ 69  
   
Total Derivative Assets
    22       9  
   
Total Derivative Liabilities
    915       620  
   
Total Net Derivative Liability
  $ 893     $ 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 June 30,
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
  $ 22           $ 22        
Total
  $ 22           $ 22        
                                 
Liabilities
                               
Forward Currency Contracts
  $ 121           $ 121        
Interest Rate Swap
    794             794        
Total
  $ 915           $ 915        
 
   
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 June 30, 2012:
 
 
Position
 
Notional
Amount
   
Weighted
Average
Remaining
Maturity
In Years
   
Average
Exchange
Rate
 
Canadian Dollar/USD
Sell
  $ 13,170,000       0.2       1.02  
Interest Rate Swap
    $ 76,775,000       2.4          
 
The Company had no significant transfers between Level 1, 2 or 3 inputs during the six-month period ended June 30, 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 of this report for a description of the acquired business.
 
The quarter and six-month period ended June 30, 2012 results for the Commercial and Structural segment include $1.4 million and $2.0 million, respectively, for costs incurred related to the acquisitions of Fyfe LA and Fyfe Asia. The quarter and six-month period ended June 30, 2011 results for the Energy and Mining segment include $0.3 million for costs incurred related to the acquisition of CRTS. 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
June 30,
   
Six Months Ended
June 30,
 
   
2012
   
2011
   
2012
   
2011
 
                         
Revenues:
                       
Energy and Mining
  $ 130,941     $ 100,400     $ 245,981     $ 195,857  
North American Water and Wastewater
    79,492       89,544       153,829       171,404  
European Water and Wastewater
    17,519       23,609       33,595       44,370  
Asia-Pacific Water and Wastewater
    8,757