aegn20191231_10k.htm
0000353020 Aegion Corp false --12-31 FY 2019 5 5 6.5 2 1 1 24 60 90 30 45 16.0 4.9 3 2 2 7 10 0 0 21 0.2 0.2 2015 2016 2017 2018 2019 3 5 5 5 5 During 2019, as a result of selling or disposing of certain international entities, $10.9 million was reclassified out of accumulated other comprehensive loss to "Other expense" in the Consolidated Statements of Operations. Amounts presented net of tax of $164, $(48) and $930 for the years ended December 31, 2019, 2018 and 2017, respectively. Total pre-tax restructuring charges include cash charges of $12.1 million and non-cash charges of $17.4 million. Cash charges consist of charges incurred during the year that will be settled in cash, either during the current period or future periods. Includes pre-tax expenses of $5.2 million related to our restructuring efforts (see Note 4). During 2018, the Company incurred non-cash charges of $2.8 million related to estimates for inventory obsolescence within its cathodic protection operations. The charges were recorded to cost of revenues in the Consolidated Statement of Operations. Operating income for 2019 includes: (i) $7.5 million of restructuring charges (see Note 4); (ii) $1.0 million of costs primarily related to the planned divestiture of certain international operations; and (iii) $17.6 million of impairment charges to assets held for sale (see Note 6). Operating income for 2018 includes: (i) $16.1 million of restructuring charges (see Note 4); and (ii) $0.4 million of cost incurred related to the disposition of Denmark. Operating loss for 2017 includes: (i) $17.5 million of restructuring charges (see Note 4); (ii) $45.4 million of goodwill impairment charges (see Note 2); (iii) $41.0 million of definite-lived intangible asset impairment charges (see Note 2); and (iv) $0.1 million of costs incurred related to the acquisition of Environmental Techniques. The Company recorded bad debt expense (reversals) of less than ($0.1) million, $5.3 million and $0.4 million in 2019, 2018 and 2017, respectively, as part of the restructuring efforts (see Note 4) and was primarily due to the exiting of certain low-return businesses mainly in foreign locations. Includes Insituform Australia, Insituform Spain, Environmental Techniques and land held at Corporate. Long-lived assets do not include goodwill, intangible assets, operating lease assets or deferred tax assets. Includes pre-tax expenses of $7.4 million related to our restructuring efforts (see Note 4). Attributed to the country of origin. Amounts exclude contract assets of $1.8 million and contract liabilities of less than $0.1 million that were classified as held for sale at December 31, 2018 (see Note 6). Includes activity from our pipe coating and insulation joint venture in Louisiana, which was sold during the third quarter of 2018. During 2019, the Company classified certain assets of its CIPP contracting operation in Europe as held for sale (see Note 6). Includes pre-tax expenses of $6.5 million related to our restructuring efforts (see Note 4). Other expense for 2019 includes $10.2 million of restructuring charges (see Note 4). Other expense for 2018 includes charges of $7.0 million related to the loss on the sale of Bayou (see Note 1) and $4.0 million of restructuring charges (see Note 4). Amounts presented net of tax of $8, $(134) and $22 for the years ended December 31, 2019, 2018 and 2017, respectively. Calculations based on a weighted average market price of the Company's stock at the time of exercise of $20.55 and $27.35 for the years ended December 31, 2019 and 2017, respectively. Total pre-tax restructuring charges include cash charges of $19.5 million and non-cash charges of $12.8 million. Cash charges consist of charges incurred during the year that will be settled in cash, either during the current period or future periods. Operating loss for 2019 includes: (i) $5.2 million of restructuring charges (see Note 4); (ii) $2.2 million of costs primarily related to the planned divestiture of certain international operations; and (iii) $2.9 million of impairment charges to assets held for sale (see Note 6). Operating loss for 2018 includes $1.6 million of restructuring charges (see Note 4) and $4.1 million of divestiture costs. Operating loss for 2017 includes $1.6 million of restructuring charges (see Note 4) and $1.2 million of divestiture costs. Includes charges primarily related to exiting non-pipe-related applications for the Tyfo system in North America and right-sizing the cathodic protection services operation in Canada, inclusive of wind-down costs, professional fees, patent write offs, fixed asset disposals and certain other restructuring and related charges. Includes pre-tax expenses of $13.9 million related to our restructuring efforts (see Note 4). Includes charges primarily related to certain wind-down costs, allowances for accounts receivable, fixed asset disposals and other restructuring-related costs in connection with exiting non-pipe-related contract applications for the Tyfo system in North America, divesting the CIPP operations in Australia and Denmark, and exiting the cathodic protection operations in the Middle East. Amounts also include goodwill and definite-lived intangible asset impairments related to Denmark and definite-lived intangible asset impairments related to the cathodic protection operations in the Middle East. Includes charges related to the loss on disposal of restructured entities, including the release of cumulative currency translation adjustments resulting from those disposals. Includes activity from our Tite Liner joint venture in Mexico, which was sold during the fourth quarter of 2019. Amounts exclude operating lease assets of $0.3 million, accrued expenses of $0.2 million and other liabilities of $0.2 million that were classified as held for sale at December 31, 2019 (see Note 5). Includes charges related to the loss on disposal of restructured entities, including the release of cumulative currency translation adjustments resulting from those disposals. Includes Insituform Australia. Includes charges primarily related to certain wind-down costs, inventory obsolescence, fixed asset disposals, release of cumulative currency translation adjustments and other restructuring-related costs in connection with exiting or divesting the CIPP operations in Europe and Australia, exiting the cathodic protection operations in the Middle East and right-sizing the cathodic protection services operation in North America. During 2018, the Company recorded goodwill of $2.7 million and $1.3 million related to the acquisitions of Hebna and P2S, respectively (see Note 1). Operating loss for 2019 includes: (i) $7.7 million of restructuring charges (see Note 4); (ii) $0.1 million of divestiture costs; and (iii) $2.9 million of impairment charges to assets held for sale (see Note 6). Operating income for 2018 includes: (i) $7.6 million of restructuring charges (see Note 4); and (ii) $2.5 million of costs incurred related to the divestiture of Bayou. Operating income for 2017 includes $4.9 million of restructuring charges (see Note 4) and (ii) $1.6 million of costs incurred related to the planned divestiture of Bayou. Amounts exclude contract assets of $5.4 million and contract liabilities of $0.1 million that were classified as held for sale at December 31, 2019 (see Note 6). Total pre-tax restructuring charges include cash charges of $13.6 million and non-cash charges of $10.1 million. Cash charges consist of charges incurred during the year that will be settled in cash, either during the current period or future periods. Operating income for 2019 includes $1.7 million of restructuring charges (see Note 4). Operating income for 2018 includes $0.3 million of restructuring charges (see Note 4). 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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

 

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

 

 

 

For the fiscal year ended December 31, 2019

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: 001-35328

 

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)  
         
Registrant’s telephone number, including area code:  (636) 530-8000

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of 15(d) of the Act. Yes ☐ No

 

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 ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐

 

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

 

Large accelerated filer

Accelerated filer ☐

Non-accelerated filer ☐

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each Class Trading Symbol(s) Name of each Exchange on which Registered
Class A Common Shares, $.01 par value  AEGN The Nasdaq Global Select Market

 

Securities registered pursuant to Section 12(g) of the Act: None

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of June 28, 2019: $563,133,402.

 

There were 30,714,860 shares of Class A common stock, $.01 par value per share, outstanding at February 21, 2020.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

As provided herein, portions of the documents below are incorporated by reference:

 

  Document    Part — Form 10-K  
  Registrant’s Proxy Statement for the 2020 Annual Meeting of Stockholders    Part III  

 

 

 

 

 
 

TABLE OF CONTENTS

 

PART I

 

 

 

 

 

Item 1.

Business

2

 

 

 

Item 1A.

Risk Factors

15

 

 

 

Item 1B.

Unresolved Staff Comments

29

 

 

 

Item 2.

Properties

29

 

 

 

Item 3.

Legal Proceedings

30

 

 

 

Item 4.

Mine Safety Disclosure

30

 

 

 

Item 4A.

Information about our Executive Officers

30

 

 

 

PART II

 

 

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

32

 

 

 

Item 6.

Selected Financial Data

35

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

59

 

 

 

Item 8.

Financial Statements and Supplementary Data

61

 

 

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

61

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

108

 

 

 

Item 9A.

Controls and Procedures

108

 

 

 

Item 9B.

Other Information

108

 

 

 

PART III

 

 

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

109

 

 

 

Item 11.

Executive Compensation

109

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

109

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

109

 

 

 

Item 14.

Principal Accountant Fees and Services

109

 

 

 

PART IV

 

 

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

110

 

 

 

SIGNATURES

111

 

1

 

 

 
 

Note About 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 this Annual Report on Form 10-K for the year ended December 31, 2019 (this “Report”) 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 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 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.

 

PART I

 

Item 1. Business

 

Unless otherwise indicated, the terms “Aegion Corporation,” “Aegion,” “the Company,” “we,” “our” and “us” are used in this Report to refer to Aegion Corporation or one of our consolidated subsidiaries or to all of them taken as a whole. We are incorporated in the State of Delaware. We maintain executive offices at 17988 Edison Avenue, Chesterfield, Missouri 63005. Our telephone number is (636) 530-8000 or toll free at (800) 325-1159. Our website address is www.aegion.com. Our common shares, $.01 par value, are traded on The Nasdaq Global Select Market under the symbol “AEGN”. Our fiscal year ends on December 31 of each calendar year.

 

Overview

 

Aegion combines innovative technologies with market leading expertise to maintain, rehabilitate and strengthen pipelines and other infrastructure around the world. For nearly 50 years, we have played a pioneering role in finding transformational solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. We also maintain the efficient operation of refineries and other industrial facilities and provide innovative solutions for the strengthening and increased longevity of buildings, bridges and other structures. We are committed to keeping infrastructure working better, safer and longer for customers and communities around the world. We believe the depth and breadth of our products and services make us a leading provider for the world’s infrastructure rehabilitation and protection needs.

 

Our Company premise is to use technology to extend the structural design life and maintain, if not improve, the performance of infrastructure, mostly pipelines and piping systems. We have proved this expertise can be applied in a variety of markets to protect pipelines in oil, gas, nuclear, power, utility, mining, industrial, wastewater and water applications and can be extended to the rehabilitation and maintenance of commercial structures and the provision of professional services in refineries. Many types of infrastructure must be protected from the corrosive and abrasive materials that pass through or near them. Our expertise in non-disruptive corrosion engineering and abrasion protection is wide-ranging. We have a long history of product development and intellectual property management. We manufacture many of the engineered solutions we offer to customers as well as the specialized equipment required to install them. Finally, decades of experience give us an advantage in understanding municipal, utility, energy, mining, industrial and commercial customers. Strong customer relationships and brand recognition allow us to support the expansion of existing and innovative technologies in our core end markets.

 

We originally incorporated in Delaware in 1980 to act as the exclusive United States licensee of the Insituform® cured-in-place pipe (“CIPP”) process, which Insituform’s founder invented in 1971. The Insituform® CIPP process served as the first trenchless technology for rehabilitating wastewater pipelines and has enabled municipalities and private industry to avoid the extraordinary expense and extreme disruption that can result from conventional dig-and-replace methods. We have maintained our leadership position in the CIPP market from manufacturing to technological innovations and market share for nearly 50 years.

 

We embarked on a diversification strategy in 2009 to expand not only our geographic reach but also our product and service portfolio into the oil and gas markets. Through a series of strategic initiatives and acquisitions, we built up a broad portfolio of cost-effective solutions for rehabilitating and maintaining aging or deteriorating infrastructure, protecting new infrastructure from corrosion and other threats, and providing integrated professional services in engineering, procurement, construction, maintenance and turnaround services for oil and natural gas companies, primarily in the midstream and downstream markets. Over the last five years, we have taken a number of actions to position our operations in markets with favorable scale and earnings profiles and reduce our footprint in markets where growth opportunities were limited, uneven, or better served by a different business model. Today, our long-term strategy is to preserve our industry leadership in our core markets and grow share through innovation and new product offerings. We are also focused on improving our scale and operating leverage in our smaller, niche technical offerings.

 

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Our Segments

 

We have three operating segments, which are also our reportable segments: Infrastructure Solutions, Corrosion Protection and Energy Services. Our operating segments correspond to our management organizational structure. Each operating segment has leadership that reports to our chief executive officer, who is also the chief operating decision manager (“CODM”). The operating results and financial information reported by each segment are evaluated separately, regularly reviewed and used by the CODM to evaluate segment performance, allocate resources and determine management incentive compensation. See Note 14 to the consolidated financial statements contained in this Report for further discussion regarding our segments.

 

Infrastructure Solutions – The majority of our work is performed in the municipal water and wastewater pipeline sector. While the pace of growth is primarily driven by government funding and spending, overall demand is strong due to required improvements to aging pipeline infrastructure in our core markets, which should result in a long-term stable growth opportunity for our market leading products, Insituform® CIPP, the Tyfo® system and Fusible PVC® pipe.

 

Corrosion Protection Corrosion Protection is positioned to capture the benefits of continued oil and natural gas pipeline infrastructure developments across North America and internationally, as producers and midstream pipeline companies transport their product from onshore and offshore oil and gas fields to regional demand centers. We provide solutions to customers to enhance the safety, environmental integrity, reliability and compliance of their pipelines in the global transmission and distribution network, especially in the oil and gas markets. The segment has a broad portfolio of technologies, products and services to protect, maintain, rehabilitate, assess and monitor pipelines from the effects of corrosion, including cathodic protection, interior pipe linings, interior and exterior pipe and weld coatings and inspection and repair capabilities, as well as an increasing offering of asset integrity management data storage and analytics capabilities related to these services.

 

Energy Services We offer a unique value proposition based on our industry-leading safety and labor productivity programs, which allow us to provide cost-effective long-term maintenance, construction, turnaround and specialty services at customers’ refineries as well as chemical and other industrial facilities. We understand the demands and the level of critical planning required to ensure a successful turnaround or shutdown and offer a full range of services as part of our facility maintenance solutions, while maintaining a reputation for being safe, professional and providing predictable value. We have deep relationships with our customers, which give us insight into their critical needs and expectations.

 

Our Long-Term Strategy

 

Aegion primarily serves aging infrastructure markets, where the demand for maintenance and rehabilitation exceeds available funding and resources. That imbalance results in favorable long-term growth trends in our core markets. Our focus on rehabilitation also lessens our dependence on new construction activity, which reduces our risk in cyclical markets. We also see a growing global awareness of health, safety and environmental issues, which further reinforces the need for the environmentally sustainable solutions we provide. We are committed to being a valued partner to our customers, with a constant focus on expanding those relationships by solving complex infrastructure problems, enhancing our capabilities and improving execution while also developing or acquiring innovative technologies and comprehensive services.  We are pursuing growth through three key strategic offerings:

 

Municipal Pipeline Rehabilitation – The fundamental driver in the global municipal pipeline rehabilitation market is the growing gap between the need and current spend. While we do not expect the spending gap to close any time soon, the increasing need for pipeline rehabilitation supports a long-term sustainable market for the technologies and services offered by our Infrastructure Solutions segment. A recent Bluefield research forecast estimates that in the U.S. alone, more than $230 billion of capital expenditures are forecasted over the next decade to address water and wastewater pipeline infrastructure, where the national average age of water and wastewater pipeline has climbed to 45 years. Rehabilitation of existing pipes is expected to be the fastest growing spend category, and with installation costs including labor and paving making up a significant percentage of overall capex, municipalities will continue to look for trenchless solutions in lieu of more expensive and socially disruptive dig-and-replace alternatives.

 

We are committed to maintaining our market leadership position in the trenchless rehabilitation of wastewater pipelines in North America using our CIPP technology, the largest contributor to Aegion’s consolidated revenues. We have a diverse portfolio of trenchless technologies to rehabilitate aging and damaged municipal pipelines. We are also focused on growing our presence in the rehabilitation of pressure pipelines (i.e., water pipelines). It is estimated that water loss at U.S. utilities averages 15% annually with some municipalities losing more than half of all water pumped and treated for distribution to customers. Our pressure pipe portfolio includes Fusible PVC®, InsituMain® CIPP, Tyfo® fiber-reinforce polymer (“FRP”) and Tite Liner® high-density polyethylene (“HDPE”) systems. As part of our pressure pipe strategy, we have continued to invest in the development of a mechanical services reinstatement for pressure pipe lateral connections. We believe this new technology will allow Aegion to become a leading provider in the North American pressure pipe rehabilitation market and are focused on commercializing this offering more broadly to customers in 2020. While the majority of our CIPP liner installations use felt tube cured by steam or hot water, we have been focused in the last couple of years on expanding our capabilities to offer fiberglass reinforced tube and felt tube that uses an ultraviolet (UV) curing process, which gives us a broader offering to meet the ever changing needs of our customer base. We also are continuing to grow our third-party product sales, both domestically and internationally, which allows us to leverage our strong manufacturing footprint in the U.S. and Europe with a lower risk and higher margin operating model in certain geographies as a global technology provider. Our international strategy is to use a blend of third-party product sales as well as FRP contract installation operations in select markets. .  

 

Pipeline Integrity and Corrosion Management – Oil and gas fundamentals support a positive outlook in the U.S. market, where production in 2019 set new records. The International Energy Agency projects the U.S. will continue to dominate global growth in oil and natural gas through 2025. As supply has grown, so has the U.S. export market and the EIA projects the U.S. will become a net energy exporter by 2022. For North America midstream operators, this strength in production and demand continues to create new opportunities to expand existing networks, build greenfield pipelines and ensure existing infrastructure is operating as safely and efficiently as possible. Aegion is well positioned to serve this demand with our broad suite of offerings, providing pipeline protection through interior pipe linings, interior and exterior pipe weld coatings and insulation as well as best-in-class cathodic protection systems that inhibit exterior pipeline corrosion.

 

There are over one million miles of regulated pipelines in North America, which remain the safest and most cost-effective mode of oil and gas transmission. Within our Corrosion Protection segment, the design and installation of cathodic protection systems to help prevent pipeline corrosion have historically represented a large portion of the revenues and profits for the segment. We also provide inspection services to monitor these systems and detect early signs of corrosion. Our asset integrity digital data collection and analysis tool increases the efficiency and accuracy of pipeline corrosion assessment data we collect as well as upgrades how we share this valuable information with customers. We recently commercialized an advanced data collection unit for use in the field that interfaces with our database to significantly reduce the time required to provide surveys to our customers as well as increase the accuracy of the collected data. Through this offering, we seek to improve customer regulatory compliance by providing critical real-time monitoring and assessment of external corrosion threats to help guide decision making for pipeline operators as part of their asset integrity management programs.

 

The outlook in the Middle East remains strong as well, with a significant buildout of oil and gas capacity planned or under construction over the next several years. Strong product acceptance for our industrial linings and coatings applications, along with our solid track record of operating safely in the region for more than a decade, positions us well to capture growth opportunities arising from this multi-year development pipeline.

 

3

 
 

Downstream Oil Refining and Industrial Facility Maintenance – We have long-term relationships with oil refinery and industrial customers in the western United States through our Energy Services segment. Our objective is to leverage those relationships to expand the services we provide in mechanical maintenance, electrical and instrumentation services, small capital construction, shutdown and turnaround maintenance activity and specialty services. We also continue to promote our safety and performance improvement services to increase the overall value to customers. Outside of the oil refining industry, we serve oil and gas and oil product terminals as well as industrial gas and chemical facilities. We are in the process of expanding our western United States energy services business to the Rocky Mountain oil refining industry.

 

Our Products and Services

 

Today our diverse portfolio of full-service solutions includes:

 

Rehabilitation of Water and Wastewater Pipelines with CIPP Products – Through our Infrastructure Solutions segment, we offer manufacturing and installation of cost-effective solutions to remediate operational, health, regulatory and environmental problems resulting from aging and defective water and wastewater pipelines. Our Insituform® CIPP product is a trenchless, jointless, seamless pipe-within-a-pipe solution used to rehabilitate pipes in various diameters. Our Insituform® CIPP process provides a more affordable alternative to dig-and-replace methods and is a less disruptive and more environmentally friendly method for pipe repairs. We have maintained our leadership position in the CIPP market through our ISO 9001:2015 certified manufacturing facilities and technological innovations for nearly 50 years. Our Insituform® portfolio of products and services are utilized worldwide.

 

Fusible Polyvinyl Chloride Products for Rehabilitation and New Installation – Underground Solutions’ patented Fusible PVC® pipe is used in the new installation and rehabilitation of pipelines for the water, wastewater, recycled water, industrial, power and conduit markets, primarily in North America. Underground Solutions uniquely complements Aegion’s other pressure pipe rehabilitation technologies (InsituMain® CIPP as well as the Tyfo® and Tite Liner® systems) and increases Aegion’s presence in the pressure pipe market.

 

Fiber Reinforced Polymer Systems for Rehabilitation and Strengthening – We use the Tyfo® system to rehabilitate medium- to large-diameter pipelines, providing a unique advantage over conventional rehabilitation methods. The Tyfo® system consists of proprietary and specialized carbon, glass, aramid and hybrid lightweight and low profile woven fabrics combined with the proprietary resin and epoxy polymers, which, in unique combinations, create the tested, proven and certified Tyfo® advanced composite system. The Tyfo® system is specifically engineered, manufactured and installed to solve a host of structural deficiencies or demands in existing structures. Certified Tyfo® system applicators apply the technology to civil structures to withstand seismic and force loads and provide strengthening, repair and restoration of masonry, concrete, steel and wooden infrastructure worldwide. We offer technical support to our customers through a highly-trained structural engineering team that assists in all phases of a potential project, from the initial design to implementation and installation. We believe there is a growing addressable market in North America as well as an increasing acceptance of our products and services internationally, with particular focus in Southeast Asia and Europe.

 

Cathodic Protection for Corrosion Engineering Control and Infrastructure Rehabilitation – Through our Corrosion Protection segment, we offer cathodic protection solutions, a time-tested pipeline corrosion mitigation technology that is mandated by regulatory rules in many types of pipeline systems. We provide engineering and inspection services through individuals trained and certified by the National Association of Corrosion Engineers International (“NACE”), which is one of the largest independent consulting corrosion engineering organizations in the world. We also provide project management, training, research, testing and design, consultation and installation services to the following markets: pipeline, refinery, above and underground storage tanks, water/wastewater structures, concrete infrastructure and offshore and marine structures. We also offer a full line of superior quality corrosion control and cathodic protection materials, which are NSF/ANSI 61 classified for drinking water system components. More recently, we have enhanced our pipeline inspection services through the internal development of an asset integrity digital data collection and analysis tool, which is designed to increase the efficiency and accuracy of pipeline corrosion assessment data we collect as well as upgrade how we share this valuable information with customers in order to provide critical real-time monitoring and assessment of external corrosion threats to help guide decision making for pipeline operators as part of their asset integrity management programs.

 

Pipe Coatings for Corrosion and Thermal Control and Prevention – We provide products and services to protect pipes from corrosion primarily for the oil and gas industries. We accomplish this through external and internal pipe coatings utilizing fusion bonded epoxy (“FBE”) and field joint coating for corrosion protection of fittings, valves and other primary sources for metal corrosion. Additionally, we provide custom coating services on pipe bends, fittings, fabricated spools, valves and short runs of straight pipe for oil, gas and potable water services, as well as onshore or offshore fabrication and welding services. We also offer a proprietary robotic pipe coating and inspection technology for internal and external welded pipe field joints.

 

4

 
 

Thermoplastic Pipe Lining for Corrosion Control, Abrasion Protection and Pipeline Rehabilitation – Our proprietary Tite Liner® installation system provides chemical, corrosion and abrasion resistance for numerous pipeline applications, including in the oil and gas, mining and chemical pipeline markets, and has application in the rehabilitation of pressure pipes in the municipal marketplace. Our system can rehabilitate pipelines for a fraction of the cost and time associated with industrial pipeline replacement. We offer our lining protection products and services worldwide, with a strategic focus on expanding our presence in key end markets with sustainable capital spend on oil, gas and mining activities.

 

Our cathodic protection capabilities and products for lining and coating pipelines are applicable worldwide in the oil, gas and mining markets, with a focus on North America and the Middle East.

 

Construction and Maintenance of Oil and Gas Facilities – Through our Energy Services segment, which operates as Aegion Energy Services, we are a leading integrated service provider of maintenance, construction and turnaround activities for the downstream oil and gas markets. Focused on serving large refinery customers in the western United States with recent growth in Hawaii, Utah and the United States Rocky Mountain region, Energy Services offers an industry-leading safety record, a strong reputation for reliability and quality and comprehensive solutions needed for major refinery maintenance, repairs and retrofits. These core competencies position Energy Services to meet the growing demand for non-discretionary operating and maintenance expenditures.

 

Restructuring Activities

 

On July 28, 2017, our board of directors approved a comprehensive global realignment and restructuring plan (the “Restructuring”). As part of the Restructuring, we announced plans to: (i) divest our pipe coating and insulation businesses in Louisiana, The Bayou Companies, LLC and Bayou Wasco Insulation, LLC (collectively “Bayou”); (ii) exit all non-pipe related contract applications for the Tyfo® system in North America; (iii) right-size the cathodic protection services operation in Canada and the CIPP businesses in Australia and Denmark; and (iv) reduce corporate and other operating costs.

 

During 2018 and 2019, our board of directors approved additional actions with respect to the Restructuring, which included the decisions to: (i) divest the Australia and Denmark CIPP businesses; (ii) take actions to further optimize operations within North America, including measures to reduce consolidated operating costs; and (iii) divest or otherwise exit multiple additional international businesses, including: (a) our cathodic protection installation activities in the Middle East, including Corrpower International Limited, our cathodic protection materials manufacturing and production joint venture in Saudi Arabia; (b) United Pipeline de Mexico S.A. de C.V., our Tite Liner® joint venture in Mexico (“United Mexico”); (c) our Tite Liner® businesses in Brazil and Argentina; (d) Aegion South Africa Proprietary Limited, our Tite Liner® and CIPP joint venture in the Republic of South Africa; and (e) our CIPP contract installation operations in England, the Netherlands, Spain and Northern Ireland.

 

We completed the divestitures of Bayou and the Denmark CIPP business in 2018. We also completed the divestitures of the Netherlands CIPP business and Tite Liner® joint venture in Mexico in 2019, as well as the shutdown of activities for the CIPP business in England. We completed the divestitures of CIPP operations in Australia and Spain in early 2020. Remaining divestiture and shutdown activities include the sale of the Northern Ireland contracting operation and minor final dissolution activities in South America and South Africa, all of which is expected to be completed in the first half of 2020. Additionally, the exit of our cathodic protection installation activities in the Middle East is substantially complete, though we expect minimal wind-down activities will extend through the second quarter of 2020 related to a small number of projects remaining in backlog.

 

As part of efforts to optimize the cathodic protection operations in North America, management initiated plans during the fourth quarter of 2019 to further downsize operations in the U.S., including the closure of three branch offices and the exit of capital intensive drilling activities at four branch offices. These actions included a reduction of approximately 20% of the cathodic protection domestic workforce and an exit of drilling activities that contributed approximately 20% to our cathodic protection domestic revenues in 2019. We expect these actions to improve our cathodic protection cost structure in the U.S., eliminate unprofitable results in certain parts of the business and reduce consolidated annual expenses for the business overall. Also during the fourth quarter of 2019, we reduced corporate headcount and took other actions to reduce corporate costs. 

 

See Notes 1 and 4 to the consolidated financial statements contained in this Report for a detailed discussion regarding strategic initiatives and restructuring efforts.

 

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Available Information

 

Our website is www.aegion.com. We make available on this website (under “Investors” and then under “SEC Filings”), free of charge, our proxy statements used in conjunction with stockholder meetings, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and Section 16 beneficial ownership reports (as well as any amendments to those reports) as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. In addition, our Code of Ethics for our Chief Executive Officer, Chief Financial Officer and senior financial employees, our Code of Conduct applicable to all of our officers, directors and employees, our Corporate Governance Guidelines and our Board committee charters are available, free of charge, on our website (under “Investors” and then under “Corporate Governance”). In addition, paper copies of these documents will be furnished to any stockholder, upon request, free of charge.

 

Technologies

 

Infrastructure Solutions

 

Our Insituform® CIPP process (including Insitupipe® and Insitutube®) for the rehabilitation of wastewater pipelines and other conduits utilizes a custom-manufactured tube, or liner, made of synthetic fiber. After the tube is saturated (impregnated) with a thermosetting resin mixture, it is installed in the host pipe by various processes. The resin is then cured, by heat (hot water or steam) or ultraviolet light, forming a new rigid pipe within a pipe.

 

Our iPlus® Infusion® pull-in CIPP is a trenchless method for the rehabilitation of small-diameter wastewater pipelines, whereby a felt liner is continuously impregnated with liquid, thermosetting resin through a proprietary process, after which the liner is pulled into the host pipe, inflated with air and cured with steam or ultraviolet light.

 

Our iPlus® Composite CIPP is used for the trenchless rehabilitation of large-diameter wastewater pipelines, where the felt liner is reinforced with carbon or glass fiber, impregnated with liquid, thermosetting resin, inverted into place and cured with hot water or steam.

 

Our InsituMain® CIPP system is a solution for pressure pipes, including water mains and force mains up to 96-inches in diameter. The system can negotiate bends and is pressure-rated up to 150 psi. The InsituMain® system has also been certified as complying with NSF/ANSI Standard 61.

 

Our Insituform® RPP process is a trenchless technology used for the rehabilitation of wastewater force mains and industrial pressure pipelines. The felt tube is reinforced with glass and impregnated with liquid, thermosetting resin, after which it is inverted with water and cured with hot water to form a structural, jointless pipe within the host pipe.

 

Our Insituform® PPL® process is a trenchless technology certified to NSF/ANSI Standard 61 used for the rehabilitation of drinking water and industrial pressure pipelines. A glass-reinforced liner is impregnated with an epoxy or vinyl ester resin, inverted with water and cured with hot water to form a jointless pipe lining within the host pipe.

 

Our Thermopipesystem is a non-disruptive pressure pipe rehabilitation system ideal for potable and non-potable water mains whereby a high tenacity polyester reinforced liner is winched into a host pipe from a reel and inflated with air, forming a close-fit, jointless, leak-free lining system able to independently carry the full system design pressure.  

 

6

 
 

Our iPlus® Glass UV system is a CIPP solution for small- to medium-diameter pipes utilizing a glass fiber tube that is impregnated with a resin sensitive to ultraviolet light. The tube is pulled into place in the host pipe, inflated by air and cured via an ultraviolet light source.

 

Our iPlus® Felt UV system is a CIPP solution for small- to medium-diameter pipes utilizing a 100% felt tube that is impregnated with a resin sensitive to ultraviolet light. The tube is pulled into place in the host pipe, inflated by air and cured via an ultraviolet light source.

 

Sliplining is a method used to push or pull a new pipeline into an old one. With segmented sliplining, short segments of pipe are joined to form the new pipe. For gravity wastewater rehabilitation, these short segments can often be joined in a manhole or access structure, eliminating the need for a large pulling pit.

 

Our iTap® is an internal service line reinstatement process that includes associated fittings, robotics and control systems for leak free connections in CIPP lined potable water mains.

 

Our Fusible PVC® technology contains proprietary polyvinyl chloride (“PVC”) formulation that, when combined with its patented fusion process, results in a monolithic, fully-restrained, gasket-free, leak-free piping system. Fusible PVC® pipe products include Fusible C-900® and FPVC® pipes. Fusible C-900® pipes comply with the AWWA C900 standard and are certified to the NSF/ANSI Standard 61.

 

Our Tyfo® system applies high-strength fiber fabric to strengthen structures, including pipelines, and the connections between structural components, thereby strengthening, repairing and restoring masonry, concrete, steel and wooden structures. Beyond general strengthening of pipelines and structures, the Tyfo® system also has application in blast mitigation and seismic reinforcement.

 

See “Patents and Proprietary Technologies” below for more information concerning certain of these technologies.

 

Corrosion Protection

 

Our Tite Liner® system is a method of lining new and existing pipe with a corrosion and abrasion resistant thermoplastic pipe.

 

Our Safetyliner product is a grooved thermoplastic liner that is installed in an industrial pipeline using the Tite Liner® process. The Safetyliner liner is normally used in natural gas or CO2 pipelines to allow the release of gas that permeates the thermoplastic liner. If gas is allowed to build in the annular space under normal operating conditions, the line can be susceptible to collapse upon sudden changes in operating pressures. The Safetyliner liner also has been used in pipelines as a leak detection system and for dual containment in mine water pipelines.

 

Our rotational lining process bonds a uniform, seamless polymer layer to the interior of virtually any metallic structure, regardless of shape and complexity. This result is achieved by placing granular resin inside the structure to be lined and all openings are covered. The structure is then heated while simultaneously being rotated about two axis. The resin melts and flows evening over the entire inner surface of the structure, bonding to the metal substrate. Once cooled, the result is a monolithic corrosion and chemical resistant lining that conforms to complex shapes and is virtually free of stresses.

 

Our fusion bonded epoxy pipeline coating utilizes heat to melt a dry powder FBE coating material into liquid form. The liquid material flows onto the steel pipe and solidifies through a process called cross-linking. Once cooled, this “fusion-bonded” epoxy cannot return to its original state and forms a corrosion protection barrier on the interior or exterior surface of the pipe.

 

Our 3-layer polyethylene coating is an external coating for buried or submerged oil or gas pipelines and offers superior adhesion, cathodic disbondment resistance and mechanical protection.

 

Our deepwater coating and insulation capabilities answer the challenge of subsea wet insulation requirements for high-pressure and high-temperature environments. Applications include subsea equipment and field joints for coating the girth welds where the pipe coating has been cutback to allow for welding joints of pipe.

 

Our internal field joint coating technology consists of self-contained robots that travel inside the pipe, find the weld and then blast clean, vacuum and coat the area. Utilizing various cameras, these field joint coating robots transmit a real-time video image back to the operator which is then used for control and inspection. The technology allows for the field application of FBE and plural component liquid materials to the weld area.

 

Cathodic protection is an electrochemical process that prevents corrosion of new structures and stops corrosion on existing structures. Metal loss is prevented by the passing of a very small direct current from a cathodic protection electrode (anode), through the electrolyte (soil, water, concrete, etc.) on to the structure to be protected (cathode).  In this process, the anode corrodes, sacrificing itself to protect the integrity of the cathode.  Structures commonly protected by this process include oil and gas pipelines, offshore platforms, above and underground storage tanks, ships, electric power plants, bridges, parking garages, transit systems and water and wastewater facilities.

 

Our CorrFlex® system is a linear anode system installed parallel to pipelines, oftentimes to prevent stress corrosion cracking that can lead to ruptures on high pressure gas transmission pipelines.

 

Our CorrSpray® product provides a unique solution for preventing corrosion of steel reinforcements in concrete structures.

 

Our Corrporwer® DC power supplies include innovative designs, plus remote monitoring and control capabilities.

 

Our Green Rectifier® system is an ecologically friendly method of cathodic protection using solar panels and a wind generator to power the cathodic protection process.

 

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Our Grid system has set the global standard for preventing releases from external corrosion of at-grade storage tanks containing oil and petroleum products, thereby ensuring safe operations and protection of the environment.

 

Our AC interference mitigation solution protects pipeline operators and the public from electrical hazards when pipelines share space on rights-of-way with overhead electric transmission lines. Beginning with advanced predictive modeling, we then design mitigation schemes and provide systems to protect people and the pipeline.

 

Our asset integrity management (AIM) platform allows for the collection, communication and storage of data in the cloud using a geospatial information system-based, centralized, integrated repository that provides us and our customers more timely information and improved data analytics. Data collection applications include LiveLine and CISView, data delivery applications include AssetView® and FieldLine®, and data analytical tools include ScanLine® and ChargeLine®.

 

Our Correlator™ data collection system electronically records corrosion protection data on our customer’s assets, transmits and stores the data in our AIM platform for compliance reporting and advanced analytics.

 

See “Patents and Proprietary Technologies” below for more information concerning certain of these technologies.

 

Energy Services

 

Our DelayTrak® system identifies delays in real time. The data is used to identify and quickly communicate improvement opportunities and, later, action plans for improvement.

 

Our TimeTrak system tracks how time is spent by crews on a jobsite. The data is used to drive process improvements in routine maintenance.

 

Operations

 

We are organized into three operating segments, which are also our reportable segments: Infrastructure Solutions, Corrosion Protection and Energy Services. Each segment is regularly reviewed and evaluated separately.

 

Our operations are generally project oriented. Projects may range in duration from just a few days to several years and can be performed as one-time contracts or as part of longer-term agreements. These contracts are usually obtained through competitive bidding or negotiations and require performance at a fixed price or time and materials basis. Our Corrosion Protection and Energy Services projects are generally performed under contracts with industrial entities. A majority of our water and wastewater rehabilitation installation projects in our Infrastructure Solutions segment are performed under contracts with municipal entities. Independent contractors may be utilized to perform portions of the work on any given project that we provide.

 

Infrastructure Solutions Operations

 

Our water and wastewater pipeline rehabilitation activities are conducted principally through installation and other construction operations performed directly by our subsidiaries.

 

Our North American Infrastructure Solutions operations, including research and development, engineering, training and financial support systems, are headquartered in St. Louis, Missouri. Tube manufacturing and processing facilities for North America are maintained in ten locations, geographically dispersed throughout the United States and Canada to support our North American contracting operations and through which we sell liners to third parties, domestically and internationally. We utilize multifunctional robotic devices internally developed in connection with the inspection and repair of pipelines.

 

We also maintain a manufacturing facility in Wellingborough, United Kingdom and one wetout facility in continental Europe to support our third-party product sales of liners internationally.

 

We have granted licenses to our trenchless rehabilitation processes to unaffiliated companies in certain geographic regions. As described under “Ownership Interests in Operating Licensees and Joint Ventures” below, we have also entered into contractual joint ventures from time to time to capitalize on our trenchless rehabilitation processes. Under these contractual joint venture relationships, work is bid by the joint venture entity and subcontracted to the joint venture partners or to third parties. The joint venture partners are primarily responsible for their subcontracted work, but both joint venture partners are liable to the customer for all of the work. Revenues and associated costs are recorded using percentage-of-completion accounting for our subcontracted portion of the total contract only.

 

In addition to wastewater pipeline rehabilitation, we have performed water pipeline rehabilitation operations since 2006 using our pressure pipe product portfolio. We are now able to restore water pipes using our InsituMain® CIPP and the Tite Liner® and Tyfo® systems.

 

Our acquisition in February 2016 of Underground Solutions, headquartered in Poway, California, bolstered our capabilities with respect to water pipeline rehabilitation operations. We are now able to provide additional infrastructure technologies for water, wastewater and conduit applications, primarily Fusible PVC® pipe, which, when combined with its patented fusion process, results in a monolithic, fully-restrained, gasket-free, leak-free piping system.

 

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Our infrastructure rehabilitation operations also utilize FRP to rehabilitate and strengthen pipelines throughout the United States through Fibrwrap Construction Services, headquartered in San Diego, California. We further design and manufacture FRP composite systems used for rehabilitating buildings, bridges, tunnels, industrial developments and waterfront structures, which we supply to certified applicators. We service the Asia-Pacific FRP market, with respect to both product and engineering services as well as application services, through our wholly-owned subsidiaries in Singapore, Malaysia, Hong Kong and New Zealand and through our joint ventures in Borneo and Indonesia. Finally, we have granted licenses to our proprietary FRP products and processes to unaffiliated companies in certain additional geographic regions, as described under “Licensees” and “Ownership Interests in Operating Licensees and Joint Ventures” below.

 

Corrosion Protection Operations

 

Our corrosion protection operations perform maintenance, rehabilitation and corrosion protection services for oil and gas, industrial and mineral piping systems and structures. We also offer products for gas release and leak detection systems. Our worldwide corrosion protection operations are conducted through our various subsidiaries (Corrpro based in Houston, Texas; United Pipeline Systems based in Durango, Colorado; and Aegion Coating Services, LLC (“ACS”) based in Tulsa, Oklahoma and Conroe, Texas). Certain of our corrosion protection operations outside of the United States are conducted through our wholly-owned subsidiaries in the United Kingdom, Chile, Canada, Saudi Arabia and through our joint venture in Oman.

 

Our Corrpro business performs fully-integrated corrosion prevention services including: (i) engineering and design; (ii) product and material sales; (iii) construction and installation; (iv) inspection, surveying, monitoring, data collection and maintenance; and (v) coatings.  United Pipeline Systems performs pipeline rehabilitation and protection services using our proprietary Tite Liner® process. Our ACS business specializes in the application of internal corrosion coatings services, provision of external field joint anti-corrosion coating services and the supply of equipment, all for pipeline construction projects onshore and offshore in locations around the world.

 

Energy Services Operations

 

Aegion Energy Services is based in Irvine, California and performs construction, maintenance and turnaround services, primarily for the downstream oil and gas industry.  Aegion Energy Services’ operations are located primarily in California, Washington and Utah.  We specialize in offering clients a flexible, single source for all project needs. Clients may choose a single service or multiple integrated services, from technical consulting to turnkey project delivery, ongoing maintenance, small cap construction, turnaround and safety services.  We provide project management professionals across various disciplines, including civil, structural, mechanical, electrical, instrumentation, project controls, estimating, procurement and safety. AllSafe Services, Inc., a wholly-owned subsidiary of Aegion Energy Services, provides safety field services.

 

Sweeping refinery industry changes occurred in California in recent years as a result of the implementation of California Health and Safety Code section 25536.7 (the “California Refinery Safety Law”).  The California Refinery Safety Law introduced new requirements for refineries and outside contractors at certain facilities in California covered by the law. Over the past few years, Aegion Energy Services has successfully transitioned all of its clients’ refinery operations covered by the California Refinery Safety Law to building trade union employees, as required by its clients in order to comply with the California Refinery Safety Law.

 

Licensees

 

We have granted licenses for the Insituform® CIPP process covering exclusive and non-exclusive territories to non-affiliated licensees that provide pipe repair and rehabilitation services throughout their respective licensed territories.  The licenses generally grant to the licensee the right to utilize our know-how and patent rights (where such rights exist) relating to the subject process, and to use our copyrights and trademarks. These licenses have varying durations and some of these licenses allow the licensee to renew the license at the end of the term.

 

Our CIPP licensees generally are obligated to pay a royalty at a specified rate.  Any improvements or modifications a licensee may make in the subject process during the term of the license agreement generally becomes our property or is licensed to us. Should a licensee fail to meet its royalty obligations or other material obligations, we may terminate the license at our discretion. Licensees, upon prior notice to us, may generally terminate the license for certain specified reasons. We may vary the terms of agreements entered into with new licensees according to prevailing conditions. Income from royalties are immaterial to our overall consolidated revenues.

 

Our Fyfe joint ventures in Borneo and Indonesia provide design, product and engineering support to applicators of FRP systems in Asia-Pacific.  Our joint ventures in Asia-Pacific are granted the non-exclusive right to use Fyfe products in their respective territories. Fyfe Co. also periodically licenses its patented technology to both affiliated and third-party certified applicators.

 

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With regard to our Underground Solutions business, we have granted licenses to our Fusible PVC® pipe products and fusion processes internationally covering exclusive and non-exclusive territories to non-affiliated licensees that provide Fusible PVC® products and services. The licenses generally grant to the licensee, in exchange for royalties at a specified rate, the right to utilize our know-how and patent rights (where such rights exist) relating to the subject products and processes, and to use our copyrights and trademarks. Underground Solutions also licenses domestically its patented technology to third-party extruders and installers.

 

Ownership Interests in Operating Licensees and Joint Ventures

 

We hold controlling interests in Fyfe/Fibrwrap joint ventures in Borneo and Indonesia. Through our wholly-owned subsidiary, Fyfe Asia Pte. Ltd., we hold (i) a fifty-one percent (51%) equity interest in Fyfe Borneo Sdn Bhd., with the other forty-nine percent (49%) equity interest held by C. Tech Sdn Bhd; and (ii) a fifty-five percent (55%) equity interest in PT Fyfe Fibrwrap Indonesia, with the other forty-five percent (45%) equity interest held by PT Graha Citra Anugerah Lestari.

 

Through our subsidiary, Corrpro Canada, Inc., we hold a seventy-percent (70%) equity interest in Corrpower International Limited (“Corrpower”) based in Saudi Arabia, through which we provide corrosion prevention products and services to government and private sector clients throughout the Kingdom of Saudi Arabia. The other thirty-percent (30%) equity interest is held by Saudi Trading & Research Co., Ltd., based in Al-Khobar, Saudi Arabia. As discussed in “Restructuring Activities” above, we are currently in the process of exiting this joint venture as part of our restructuring initiative.

 

Through our subsidiary, Insituform Technologies Netherlands B.V., we hold a fifty-one percent (51%) equity interest in United Special Technical Services LLC located in Oman for the purpose of executing pipeline, piping and flow line thermoplastic lining services throughout the Middle East and Northern Africa. The other forty-nine percent (49%) equity interest is held by Special Technical Services LLC, an Omani company.

 

We have previously entered into teaming and other cooperative arrangements in various geographic regions throughout the world in order to develop cooperative bids on contracts for our thermoplastic pipeline rehabilitation and cathodic protection businesses. Typically, the arrangements provide for each participant to complete its respective scope of work, and we are not required to complete the other participant’s scope of work. We continue to investigate opportunities for expanding our business through such arrangements.

 

We previously entered into contractual joint ventures in other geographic regions in order to develop joint bids on contracts for our wastewater pipeline rehabilitation business. Typically, the joint venture entity holds the contract with the owner and subcontracts portions of the work to the joint venture partners. As part of the subcontracts, the partners usually provide bonds to the joint venture. We could be required to complete our joint venture partner’s portion of the contract if the partner were unable to complete its portion and a bond is not available. We continue to investigate opportunities for expanding our business through such arrangements.

 

Product Development

 

We seek out and develop innovative solutions for pipelines and other infrastructure through a stage-gate process for management of our research and development initiatives, whereby a market and business impact evaluation is conducted at each gate review. Corporate and business unit resources make up the specific research and development teams, supplemented, where beneficial, by our technology partners (often major suppliers), outside consultants and academic institutions. During the years ended December 31, 2019, 2018 and 2017, we spent $6.4 million, $5.6 million and $4.2 million, respectively, on research and development related activities, including engineering.  

 

Customers and Marketing

 

We offer our products and services to highly diverse markets worldwide.  We service municipal, state and federal governments, as well as corporate customers in numerous industries including pipelines, energy, oil and gas, refinery, mining, general and industrial construction, infrastructure (buildings, bridges, tunnels, railways, etc.), water and wastewater, transportation, utilities, maritime and defense.  Our products and services are currently utilized and performed in over 90 countries across six continents.

 

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We offer our corrosion protection solutions worldwide to energy, refinery, mining and other customers to protect new and existing pipelines and other structures. The marketing of wastewater pipeline rehabilitation technologies is focused primarily on the municipal wastewater markets worldwide.  We offer our water rehabilitation products to municipal and commercial customers. We offer our other infrastructure rehabilitation products worldwide to certain certified third-party installers and applicators and market our engineering, manufacturing and, in some countries, installation services to municipal, state, federal and commercial customers. We offer our Energy Services solutions primarily to the oil and gas markets on the West Coast, but have been actively pursuing opportunities beyond the West Coast.  No customer accounted for more than 10% of our consolidated revenues during the years ended December 31, 2019 or 2018. During the year ended December 31, 2017, we had one customer that accounted for approximately 12.1% of our consolidated revenues primarily due to a large deepwater pipe coating and insulation project that was substantially completed during the year.

 

To help shape decision-making at every step, we use a highly-trained, multi-level sales force structured around target markets and key accounts, focusing on engineers, contractors, consultants, administrators, technical staff and public officials.  Due to the technical nature of our products and services, many of our sales personnel have engineering or technical expertise and experience.  We also produce sales literature and presentations, participate in trade shows, present at conferences and execute other marketing programs for our own sales force and those of unaffiliated licensees.  Our unaffiliated licensees are responsible for marketing and sales activities in their respective territories.  See “Licensees” and “Ownership Interests in Operating Licensees and Joint Ventures” above for a description of our licensing operations and for a description of investments in licensees.

 

Contract Backlog

 

Contract backlog is our expectation of revenues to be generated from received, signed and uncompleted contracts, the cancellation of which is not anticipated at the time of reporting.  We assume that these signed contracts are funded.  For government or municipal contracts, our customers generally obtain funding through local budgets or pre-approved bond financing.  We generally do not undertake a process to verify funding status of these contracts and, therefore, cannot reasonably estimate what portion, if any, of our contracts in backlog have not been funded.  However, we have little history of signed contracts being canceled due to the lack of funding.  Contract backlog excludes any term contract amounts for which there are not specific and determinable work releases and projects where we have been advised that we are the low bidder, but have not formally been awarded the contract.

 

In accordance with industry practice, substantially all of our contracts are subject to cancellation, termination or suspension at the discretion of the customer.  Contracts in our backlog are subject to changes in scope and of services to be provided as well as adjustments to the costs relating to the contracts.  Accordingly, backlog is not necessarily indicative of our future revenues or earnings.

 

Included within backlog for Energy Services are amounts that represent expected revenues to be realized under long-term Master Service Agreements (“MSAs”) and other signed contracts.  If the remaining term of these arrangements exceeds 12 months, the unrecognized revenues attributable to such arrangements included in backlog are limited to only the next 12 months of expected revenues.  Although backlog represents only those contracts and MSAs that are considered to be firm, there can be no assurance that cancellation or scope adjustments will not occur with respect to such contracts.

 

Included within backlog for Infrastructure Solutions and Corrosion Protection are certain contracts that are performed through our variable interest entities in which we own a controlling portion of the entity.  A substantial majority of our contracts in these two segments are fixed price contracts with individual private businesses and municipal and federal government entities across the world.  Energy Services generally enters into cost reimbursable contracts that are based on costs incurred at agreed upon contractual rates.

 

For additional information regarding our backlog including those risk factors specific to backlog, please refer to “Risk Factors” in Item 1A, and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 below.

 

Manufacturing and Suppliers

 

We maintain our North American Insituform® CIPP process liner manufacturing facility in Batesville, Mississippi.  In Europe, we manufacture and sell Insituform® CIPP process liners from our plant located in Wellingborough, United Kingdom.  Although raw materials used in Insituform® CIPP process products are typically available from multiple sources, our historical practice has been to purchase materials from a limited number of suppliers.  We maintain our own felt manufacturing facility in Batesville, Mississippi.  Substantially all of our fiber requirements are purchased from four sources, but there are alternate vendors readily available.  We source our global resin supply from multiple vendors.  We also manufacture certain equipment used in our Insituform® CIPP business.  We believe that the sources of supply for our Insituform® CIPP operations in North America, Europe and Asia-Pacific are adequate for our needs.

 

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We sell Insituform® CIPP process liners, equipment and related products to third parties and certain licensees on a long-term or, in certain instances, on a project-by-project basis.  In Europe, in addition to sales made on a project-by-project basis, we have entered into supply agreements with five third parties to supply them with Insituform® CIPP process liners and related products.

 

With regard to Underground Solutions, we have a limited number of qualified third-party extruders to manufacture our Fusible PVC® pipe products.

 

The principal raw materials used by Fyfe Co. in the manufacture of FRP composite materials are carbon, glass, resins, fabric and epoxy raw materials.  Fabric and epoxies are the most significant materials purchased, which are currently purchased through a select group of suppliers, although these and the other materials are available from a number of vendors.  The weaving of FRP components into woven fabric is done at our facility in La Conner, Washington.  Fyfe Co. does specialized blending of unique epoxies from basic chemicals at our Batesville, Mississippi facility.  The epoxy resin is also repackaged at our Batesville, Mississippi facility, and specialized blending is also often done on each job site.  Fyfe Co. also sells finished materials throughout the United States and worldwide to our affiliates and certain certified third-party applicators.

 

Product and material revenues for our Corrpro business are derived principally from the sale of products that are purchased from select outside vendors or from assembling components that are sourced from suppliers.  We conduct light assembly for a number of our Corrpro® products in our production facilities in Sand Springs, Oklahoma; Edmonton, Alberta, Canada; and the United Kingdom.  In addition, we manufacture our own line of rectifiers and other power supplies in Canada and the United Kingdom.  The primary products and raw materials used by our Corrpro businesses include zinc, aluminum, magnesium and other metallic anodes, as well as wire and cable.  We maintain relationships with multiple vendors for these products and are not dependent on any single vendor to meet our supply needs.

 

The product and service revenues for our United Pipeline Systems business are derived primarily from the procurement and installation of HDPE liners inside pipelines.  The raw material used for these liners is extruded thermoplastic pipe.  It has been our practice to purchase this material from a select group of suppliers; however, we believe that it is available from many other sources.  We manufacture most of the proprietary equipment and many of the consumable items used in Tite Liner® system installations in our own facilities in Canada, the United States and Chile.

 

Product and service revenues for our ACS business is derived principally from internal and external pipeline coating.  Facilities are located in Tulsa, Oklahoma, Conroe, Texas and Saudi Arabia.  The primary raw materials used in the coating process include FBE and paint.  Although our historical practice has been to purchase materials from a limited number of suppliers, we believe that the raw materials used in the coating process are typically available from multiple sources.  However, in certain limited circumstances, our customer has required use of a specific material available from only a single source.

 

Our pricing of raw materials is subject to fluctuations in the underlying commodity prices.  See “Commodity Risk” in Item 7A of this Report for detail on our management of the risks associated with such price fluctuations.

 

Patents and Proprietary Technologies

 

We have obtained and are pursuing patent protection in our principal global markets covering various aspects of our propritary technology.  Activity as of December 31, 2019 consisted of the following:

 

    United States  

Foreign

Process, System or Product

  Number of
Patents Held
  Number of
Patents Pending
  Number of
Patents Held
  Number of
Patents Pending
Insituform® CIPP   32   9   81   19 (1)
Fusible PVC®   14     13  
Tyfo®   12     10   4
Tite Liner®   3     7   4
Cathodic Protection Operations   2   3     3
Coatings Operations   6   2   7   1
Total   69   14   118   31

 

(1) Includes one Patent Cooperation Treaty application that covers most jurisdictions throughout the world and one European Patent Convention application that covers multiple jurisdictions in Europe.

 

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The specifications and/or rights granted in relation to each patent will vary from jurisdiction to jurisdiction.  In addition, as a result of differences in the nature of the work performed and in the climate of the countries in which the work is carried out, we do not necessarily seek patent protection for all of our inventions in every jurisdiction in which we do business.

 

There can be no assurance that the validity of our patents will not be successfully challenged.  Our business could be adversely affected by increased competition upon expiration of the patents or if one or more of our patents were adjudicated to be invalid or inadequate in scope to protect our operations.  We believe in either case that our long experience with the proprietary processes, the strength of our trademarks and our degree of market penetration should enable us to continue to compete effectively in the pipeline rehabilitation, corrosion protection, energy, mining and infrastructure protection markets.

 

In some instances throughout each of our three platforms, we have elected to maintain certain internally developed technologies, know-how and inventions as trade secrets.  We have entered into confidentiality agreements with employees, consultants and third parties to whom we disclose such trade secrets.  Although there can be no assurance that these measures will suffice to prevent unauthorized disclosure or use or that third parties will not develop similar technologies, we believe it would take substantial time and resources to independently develop such technologies.

 

See “Risk Factors” in Item 1A of this Report for further discussion.

 

Competition

 

The markets in which we operate are highly competitive, primarily on the basis of price, quality of service and capacity to perform.  Many of our products and services face direct competition from competitors offering similar or essentially equivalent products or services.  In addition, customers can select a variety of methods to meet their infrastructure installation, strengthening and rehabilitation needs, as well as their coating and cathodic protection needs, including a number of methods that we do not offer.

 

In the trenchless wastewater rehabilitation market, the CIPP process is one of the preferred rehabilitation methods.  Because relatively few significant barriers to entry exist in this market, any organization with adequate financial resources and access to technical expertise may become a competitor.  As such, there are numerous companies with which we compete.  Worldwide, we compete with numerous smaller firms on local or regional levels and with several larger firms on the global and national levels.  Despite the number of competitors, Insituform®, as the worldwide pioneer of this technology, has maintained its role as a global market leader, both in the United States and abroad.

 

In water rehabilitation, dig-and-replace is still the preferred method for the majority of customers.  Because this is a more specialized field, with more barriers to entry, including strict government mandates, we compete primarily with a handful of global and national specialty contractors.

 

Our Fusible PVC® products compete against other more-traditional products in the pressure pipe market, such as HDPE and other restrained joint PVC pipe products.

 

In our infrastructure rehabilitation business, the FRP process competes against traditional methods of pipeline and structural retrofitting, but is gaining acceptance in the construction and retrofitting industries.  With its proprietary technologies relating to both products and application, Fyfe Co. is a leader in the FRP market and Fibrwrap Construction, having successfully performed installations of FRP systems for 25 years, is one of the most experienced applicators of the Tyfo® system and has a well-established reputation.  In this field, there are barriers to entry, including testing requirements, experience, intellectual property and certifications.  Fyfe has teamed with a number of universities around the world to conduct extensive product testing.  In addition, Fyfe has dedicated significant resources to obtaining technical market acceptance of its proprietary products.  As a result, Fyfe has received a number of certifications, including NSF certification for its Tyfo® system; International Code Council - Evaluation Service Report (ESR-2103), indicating product approval by the International Building Code; and compliance with ICC-AC125 guidelines for FRP strengthening.  Because of the barriers to entry, Fyfe Co. and Fibrwrap Construction tend to compete with a small number of companies on a regional or national level, most of which do not provide the full spectrum of services provided by Fyfe Co. and Fibrwrap Construction.

 

In our Corrosion Protection segment, Corrpro operates in the highly-competitive field of cathodic protection for corrosion control.  While this market is highly competitive, because there are relatively few barriers to entry, Corrpro is a recognized market leader in North America in this field.  Competitors include a limited number of large firms, which provide services nationally and, in some instances, globally, although more prevalent are a number of small- and medium-sized firms with more limited portfolios of products and services, which are only provided on a regional or local level.  Corrpro’s competitive advantage is its broad depth of high-quality cathodic protection offerings, including its cost-effective engineering, pipeline integrity, construction and coating services, which are provided to customers worldwide.  We believe the advanced data collection and analytics capabilities associated with our asset integrity management program present a barrier to entry for smaller competitors.  

 

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The process of utilizing thermoplastic liners is a prevalent method used to protect pipelines servicing the energy and mining industries.  United Pipeline Systems is recognized as a leader in the thermoplastic liner market, having provided lining solutions on six continents.  Due to barriers to entry arising from necessary technological capabilities, United Pipeline Systems mainly competes with a small number of specialty firms globally, nationally and regionally.  Through our focused efforts on expanding our services worldwide, United Pipeline Systems enjoys significant name recognition and substantial market share in this industry in the key energy and mining regions of the world.

 

ACS has a strong presence in the field of FBE coating and is an industry leader in both inner diameter robotic coatings and outer diameter coatings.  Because of these specialized fields, ACS usually competes with a small number of specialty providers.

 

Aegion Energy Services operates in a fragmented and intensely competitive field of plant maintenance and construction and specialty services in the downstream oil refining industry, as well as performing work in the industrial and natural gas, gas processing and compression markets.  Competitors may be local, regional or national contractors and service providers and vary with the markets that are served, with few competitors competing in all of the geographic markets we serve or offering all of the services we provide.  With the implementation of the California Refinery Safety Law, competition at refineries in California is from building trade union contractors or, in some instances, from customers themselves expanding their own workforces to reduce reliance on contractors.  Contracts are generally awarded based on safety performance, reputation for quality, price, schedule and client satisfaction.  However, with the new California Refinery Safety Law in place, the trade unions have increasing influence in the California labor market and on union contractors.  Issues around labor relations and access to supplemental labor are new factors affecting client decisions in selecting contractors.

 

There can be no assurance as to the success of our processes in competition with our competitors and alternative technologies for pipe installation and rehabilitation, coating, cathodic protection and infrastructure installation, strengthening and rehabilitation.

 

Seasonality

 

Our operations can be affected by seasonal variations and our results tend to be stronger in the second and third quarters of each year due to typically milder weather in the regions in which we operate.  We are more likely to be impacted by weather extremes, such as excessive rain, hurricanes or monsoons, snow and ice or frigid temperatures, which may cause temporary, short-term anomalies in our operational performance in certain localized geographic regions.  However, these impacts usually have not been material to our operations as a whole.  See “Risk Factors” in Item 1A of this Report for further discussion.

 

Employees

 

As of December 31, 2019, we had approximately 4,900 employees.  Certain of our subsidiaries are parties to collective bargaining agreements that covered an aggregate of approximately 1,400 employees as of December 31, 2019.  We generally consider our relations with our employees and unions to be good.

 

Insurance and Bonding

 

We are required to carry insurance and provide bonding in connection with certain projects and, accordingly, maintain comprehensive insurance policies, including workers’ compensation, general and automobile liability and property coverage.  We believe that we presently maintain adequate insurance coverage for all operations.  We have also arranged bonding capacity for bid, performance and payment bonds.  Typically, the cost of a performance bond is less than 1% of the contract value.  We are required to indemnify the surety companies against losses from third-party claims of customers and subcontractors.  The indemnification obligations are collateralized by unperfected liens on our assets and the assets of those subsidiaries that are parties to the applicable indemnification agreement.

 

Government Regulation

 

We are required to comply with all applicable United States federal, state and local, and all applicable foreign statutes, regulations and ordinances.  In addition, our installation and other operations have to comply with various relevant occupational safety and health regulations, transportation regulations, code specifications, permit and licensing requirements and bonding and insurance requirements, as well as with fire regulations relating to the storage, handling and transporting of flammable materials.  Our manufacturing and coatings facilities, as well as our installation and other operations, are subject to federal and state environmental protection regulations, none of which presently have any material effect on our capital expenditures, earnings or competitive position in connection with our present business.  However, although our installation and other operations have established monitoring programs and safety procedures, further restrictions could be imposed on the manner in which installation and other activities are conducted, on equipment used in installation and other activities, on volatile organic compounds and hazardous air pollutant emissions from our paintings and coatings processes and on the use of solvents or the thermosetting resins used in the Insituform® CIPP process.

 

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The use of both thermoplastics and thermosetting resin materials in contact with drinking water is strictly regulated in most countries.  In the United States, a consortium led by NSF International, under arrangements with the United States Environmental Protection Agency (“EPA”), establishes minimum requirements for the control of potential human health effects from substances added indirectly to water via contact with treatment, storage, transmission and distribution system components, by defining the maximum permissible concentration of materials that may be leached from such components into drinking water, and methods for testing them.  Our lining and coating products for drinking water use are NSF/ANSI Standard 61 compliant, including the entire Tyfo® system, the full range of Insituform® water pipe lining products and our Fusible C-900® and Fusible C-905® products.  In addition, our Tite Liner® HDPE system is certified to NSF/ANSI Standard 61. Corrpro’s corrosion control products are NSF/ANSI Standard 61 classified for drinking water systems and its cathodic protection solutions for water storage tanks and water treatment units are compliant with AWWA Standard D104 and NACE recommended practices.  NSF assumes no liability for use of any products, and NSF’s arrangements with the EPA do not constitute the EPA’s endorsement of NSF, NSF’s policies or its standards.  Dedicated equipment is needed in connection with use of these products in drinking water applications.

 

Item 1A. Risk Factors.

 

You should carefully consider the following risks and other information contained or incorporated by reference into this Report when evaluating our business and financial condition and an investment in our common stock.  Should any of the following risks or uncertainties develop into actual events, such developments could have material adverse effects on our business, financial condition, cash flows and results of operations.

 

Our businesses face significant competition in the industries in which they operate.

 

Many of our products and services face direct competition from companies offering similar products or services. Competition can place downward pressure on our contract prices and profit margins. Intense competition is expected to continue in these markets. If we are unable to realize our objectives, we could lose market share to our competitors and experience an overall reduction in our profits.

 

In the water and wastewater rehabilitation portion of our Infrastructure Solutions segment, we face competition from companies providing similar products and services as well as companies providing other methods of rehabilitation that we do not offer, including traditional dig-and-replace, which is still the preferred method in the water rehabilitation market. In the trenchless wastewater rehabilitation market, CIPP is one of the preferred methods. In this market, few significant barriers to entry exist and, as a result, any organization that has the financial resources and access to technical expertise and bonding may become a competitor. As such, we compete with many smaller firms on a local or regional level and with several larger firms on the global and national levels. In water rehabilitation, where there are more significant barriers to entry because the market is strictly regulated, we compete with a smaller number of specialty contractors around the world. Further, our Fusible PVC® pipe products compete against other more traditional products, such as HDPE and restrained joint PVC pipe products.

 

In the infrastructure rehabilitation portion of our Infrastructure Solutions segment, the Tyfo® system competes against traditional methods of structural retrofitting. There are significant barriers to entry, including testing requirements, experience, intellectual property and certifications. In manufacturing, we only compete with a handful of FRP suppliers. However, with respect to installation, we compete with a number of FRP applicators. Our ability to grow revenues in this market could be adversely impacted if any of our competitors were to become fully-integrated like us or if new entrants in the market were to develop strong installation and manufacturing expertise.

 

In our Corrosion Protection platform, we compete primarily with specialty firms in the pipeline protection industry and both a limited number of large firms globally and a large number of smaller firms regionally in the cathodic protection industry. In addition, customers can select a variety of methods to meet their pipe installation, rehabilitation, coating and cathodic protection needs, including methods that we do not offer.

 

In our Energy Services platform, we compete with a limited number of local, regional and national companies in the oil and gas procurement, construction, maintenance and turnaround industries on the U.S. West Coast.

 

Our business depends upon the maintenance of our proprietary technologies and information.

 

We depend on our proprietary technologies and information, many of which are no longer subject to patent protection. In addition to patent protection, we rely significantly upon trade secret laws to protect our proprietary technologies. We regularly enter into confidentiality agreements with our key employees, customers, potential customers and other third parties and limit access to and distribution of our trade secrets and other proprietary information. However, these measures may not be adequate to prevent misappropriation of our technologies or to assure that our competitors will not independently develop technologies that are substantially equivalent or superior to our technologies. In addition, the laws of other countries in which we operate may not protect our proprietary rights to the same extent as the laws of the United States. We are also subject to the risk of adverse claims and litigation alleging infringement of intellectual property rights.

 

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Our efforts to develop new products and services or enhance existing products and services involve substantial research, development and marketing expenses, and the resulting new or enhanced products or services may not generate sufficient revenues to justify such expenses.

 

Our future success will depend in part on our ability to anticipate and respond to changing technologies and customer requirements by enhancing our existing products and services. We will need to develop and introduce, on a timely and cost-effective basis, new products, features and services that address the needs of our customer base. As a result of these efforts, we may be required to expend substantial research, development and marketing resources, and the time and expense required to develop a new product or service or enhance an existing product or service are difficult to predict. We cannot assure that we will succeed in developing, introducing and marketing new products or services or product or service enhancements. In addition, we cannot be certain that any new or enhanced product or service will generate sufficient revenues to justify the expenses and resources devoted to this product development and enhancement effort.

 

Acquisitions and investments could result in operating difficulties, dilution and other harmful consequences that may adversely impact our business and results of operations.

 

Acquisitions are an element of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business or technology has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include:

 

 

Diversion of management time and focus from operating our business to acquisition integration challenges.

     
 

Failure to successfully operate and further develop the acquired business or technology.

     
 

Implementation or remediation of controls, procedures and policies at the acquired company.

     
 

Integration of the acquired company’s accounting, human resource and other administrative systems, and coordination of product, engineering and sales and marketing functions.

     
 

Transition of operations, users and customers onto our existing platforms.

     
 

Failure to obtain required approvals or consents on a timely basis, if at all, including from governmental authorities or contractual counter-parties, or conditions placed upon approval or consent, including under competition and antitrust laws, which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition.

     
 

In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.

     
 

Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of key employees from the businesses we acquire.

     
 

Liability for activities of the acquired company before the acquisition, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities.

     
 

Assumption of contracts with terms, including, without limitation, terms relating to payment terms, warranty, liability, damages and indemnification, that are not consistent with our normal contracting practices.

     
 

Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former stockholders or other third parties.

 

Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated costs or liabilities, and harm our business generally.

 

Our acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, the assumption of contingent liabilities, amortization expenses, impairment of goodwill and purchased long-lived assets and restructuring charges, any of which could harm our financial condition or results of operations. Also, the anticipated benefit of many of our acquisitions may not materialize for reasons separate and apart from the specific risks set forth above.

 

We may be liable to complete the work of our joint venture partners under our joint venture arrangements.

 

We enter into contractual joint ventures in order to develop joint bids on certain contracts. The success of these joint ventures depends largely on the satisfactory performance by our joint venture partners of their obligations with respect to the joint venture. Under these joint venture arrangements, we may be required to complete our joint venture partner’s portion of the contract if the joint venture partner is unable to complete its portion and a bond is not available. In such case, the additional obligations could result in reduced profits or, in some cases, significant losses for us.

 

16

 
 

Our backlog is an uncertain indicator of our future earnings.

 

Our backlog, which at December 31, 2019 was $658.2 million, is subject to unexpected adjustments and cancellation.  The revenues projected in this backlog may not be realized or, if realized, may not result in profits.  We may be unable to complete some projects included in our backlog in the estimated time and, as a result, such projects could remain in backlog for extended periods of time.  Further, our customers often have the contractual right to terminate our contract or reduce our scope of our work at the convenience of the customer.  To the extent that we experience project or contract cancellation or scope adjustments, we could face a reduction in the dollar amount of our backlog and the revenues that we actually receive from such backlog.  In addition, one or more of our large or multi-year contracts have in the past and may in the future contribute a material portion of our backlog in any one year.  The loss of business from any one of these significant customers could have a material adverse effect on our business or results of operations.  See the section above captioned “Contract Backlog” for additional information on our backlog.

 

The preparation of our consolidated financial statements requires us to make estimates and judgments, which are subject to an inherent degree of uncertainty and which may differ from actual results.

 

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Some accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these estimates and judgments are subject to an inherent degree of uncertainty and actual results may differ from these estimates and judgments under different assumptions or conditions, which may have an adverse effect on our financial condition or results of operations in subsequent periods.

 

Our use of input measures to recognize revenue on construction, engineering and installation services could result in a reduction or reversal of previously recorded results.

 

Revenues from construction, engineering and installation services are recognized over time using an input measure to measure progress toward satisfying performance obligations. This methodology recognizes revenues and profits over the life of a project based on costs incurred to date compared to total estimated project costs. Revisions to revenues and profits are made once amounts are known and can be reasonably estimated. Given the uncertainties associated with some of our contracts, it is possible for actual costs to vary from estimates previously made. Revisions to estimates could result in the reversal of revenues and gross profit previously recognized. For the year ended December 31, 2019, approximately 61% of our revenues were derived from accounting utilizing estimated input measures.

 

We may experience cost overruns on our projects.

 

We conduct a significant portion of our business under guaranteed maximum price or fixed price contracts, where we bear a significant portion of the risk for cost overruns. Under such contracts, prices are established in part on cost and scheduling estimates, which are based on a number of assumptions, including assumptions about future economic conditions, prices and availability of materials and other exigencies. Our profitability depends heavily on our ability to make accurate estimates. Inaccurate estimates, or changes in other circumstances, such as unanticipated technical problems, difficulties obtaining permits or approvals, changes in local laws or labor conditions, weather delays, cost of raw materials, trade disputes and tariffs, currency fluctuations or our suppliers’ or subcontractors’ inability to perform could result in substantial losses, as such changes adversely affect the revenues and gross profit recognized on each project.

 

Our recognition of revenues from change orders, extra work or variations in the scope of work could be subject to reversal in future periods.

 

We recognize revenues from change orders, extra work or variations in the scope of work as set forth in our written contracts with our clients when management believes that realization of these revenues is probable and the recoverable amounts can be reasonably estimated. We also factor in all other information that we possess with respect to the change order to determine whether the change order should be recognized at all and, if recognition is appropriate, what dollar amount of the change order should be recognized. Due to factors that we may not anticipate at the time of recognition, however, revenues ultimately received on these change orders could be less than revenues that we recognized in a prior reporting period or periods, which could require us in subsequent reporting periods to reduce or reverse revenues and gross profit previously recognized.

 

We may incur significant costs in providing services in excess of original project scope without having an approved change order.

 

After commencement of a contract, we may perform, without the benefit of an approved change order from the customer, additional services requested by the customer that were not contemplated in our contract price for various reasons, including customer changes, incomplete or inaccurate engineering, changes in project specifications and other similar information provided to us by the customer. Our construction contracts generally require the customer to compensate us for additional work or expenses incurred under these circumstances.

 

17

 
 

A failure to obtain adequate compensation for these matters could require us to record in the current period an adjustment to revenues and profit recognized in prior periods under the percentage-of-completion accounting method. Any such adjustments, if substantial, could have a material adverse effect on our results of operations and financial condition, particularly for the period in which such adjustments are made. We can provide no assurance that we will be successful in obtaining, through negotiation, arbitration, litigation or otherwise, approved change orders in an amount adequate to compensate us for our additional work or expenses.

 

Cyclical downturns in the mining, oil and natural gas industries, including a substantial or extended decline in the price of mined minerals, oil or natural gas, or in the oil field, refinery and mining services businesses, may have a material adverse effect on our financial condition or results of operations.

 

The mining, oil and natural gas industries are highly cyclical. Demand for the majority of the oil field, refinery and mining products and services provided by our Corrosion Protection and Energy Services platforms are substantially dependent on the level of expenditures by the mining, oil and natural gas industries for the exploration, development and production of mined minerals, crude oil and natural gas reserves, which are sensitive to the prices of these commodities and generally dependent on the industry’s view of future mined mineral, oil and natural gas prices. The prices of these commodities can be volatile. There are numerous factors affecting the related industries and, thereby, the supply of, and demand for, our products and services, which include, but are not limited to:

 

 

market prices of mined minerals, oil and natural gas and expectations about future prices;

     
 

cost of producing mined minerals, oil and natural gas;

     
 

the level of mining, drilling and production activity;

     
 

the discovery rate of new oil and gas reserves;

     
 

mergers, consolidations and downsizing among our clients;

     
 

coordination by various oil-producing countries, including the Organization of Petroleum Exporting Countries (OPEC);

     
 

the output and willingness to export of certain oil-producing countries;

     
 

the impact of commodity prices on the expenditure levels of our clients;

     
 

financial condition of our client base and their ability to fund capital and maintenance expenditures;

     
 

political instability in oil-producing countries;

     
 

tax incentives, including for alternative energy sources;

     
 

domestic and worldwide economic conditions;

     
 

adverse weather conditions, including those that can affect mining, oil or natural gas operations over a wide area;

     
 

availability of energy sources other than oil and gas;

     
 

level of consumption of minerals, oil, natural gas and petrochemicals by consumers, including the effects of increased regulation, conservation measures and technological advances affecting energy consumption; and

     
 

availability of services and materials for our clients to grow their capital expenditures.

 

As seen in the historic high volatility in crude oil prices and other energy commodities, prices for mined minerals, oil and natural gas are subject to periodic downturns and large fluctuations in response to relatively minor changes in supply and demand, market uncertainty and a variety of other factors (including those set forth above) that are beyond our control, and we expect such prices to continue to be volatile. Demand for the products and services we provide could decrease in the event of a sustained reduction in demand for mined minerals, oil or natural gas, while perceptions of long-term decline in the prices of mined materials, oil and natural gas by mining, oil and gas companies (some of our customers) can similarly reduce or defer major expenditures given the long-term nature of many large-scale projects or result in downward pressure on the prices we charge. As such, a significant downturn in the mining, oil and/or natural gas industries could result in a reduction in demand for our mining, oil field and refinery services and could adversely affect our operating results. Additionally, the volatility of such prices and the resulting effects are difficult to predict, which reduces our ability to anticipate and respond effectively to changing conditions.

 

18

 

 

Our operations could be adversely impacted by the California Refinery Safety Law related to downstream work performed in California refineries.

 

Aegion Energy Services continues to face challenges from the impact of the California Refinery Safety Law, which went into effect on January 1, 2014. The law introduced new requirements for refineries and outside contractors at covered facilities when construction, alteration, demolition, installation, repair or maintenance work is performed at the covered facility. The law imposes the following requirements:

 

 

all subject workers must be paid the applicable prevailing wage rate;

     
 

all subject workers must be either “skilled journeymen” or “registered apprentices”; and

     
 

at least 60% of skilled journeypersons on the project must be graduates of certified apprenticeship programs.

 

The effect of the California Refinery Safety Law is to require the use of building trade union contractors or refinery owners or operators to perform the covered work.

 

These requirements only pertain to contracts entered into, extended or renewed after January 1, 2014. Contracts entered into, extended or renewed prior to that date generally expired in 2018 across the industry. Aegion Energy Services has historically had long-term contracts in place with many of its major downstream clients, which it intends to maintain through its building trade union entity. Throughout 2018, Aegion Energy Services was able to transition its contracts with all of its California refinery clients to its building trade union entity in order to satisfy the conditions of the California Refinery Safety Law. However, as a result of this drastic change in the market in California, customers are looking at ways to reduce costs. For example, many clients are reevaluating their contracting strategies and have reduced, or may in the future reduce, the size of their contractor maintenance crews by increasing their own in-house maintenance capabilities. There are no assurances that clients will maintain their contracts, or the historical annual volume of work, with Aegion Energy Services as the industry adapts to operating under the California Refinery Safety Law, which could materially and adversely impact its revenues.

 

Federal and state legislative and regulatory initiatives as well as governmental reviews relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays that could adversely affect our Corrosion Protection customers.

 

Federal, state and local legislative and regulatory initiatives relating to hydraulic fracturing could result in increased costs and additional operating restrictions or delays in the production of oil and natural gas, including from the developing shale plays. Our Corrosion Protection segment services oil and gas companies in the shale plays and we foresee strong market opportunities here. A decline in drilling of new wells and related servicing activities caused by these initiatives could have an adverse effect on our business, financial position or results of operations.

 

We may be subject to liabilities under environmental laws and regulations.

 

Our services are subject to numerous U.S. and international environmental protection laws and regulations that are complex and stringent. For example, we must comply with a number of U.S. federal government laws that strictly regulate the handling, removal, treatment, transportation, and disposal of toxic and hazardous substances. Under the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (“CERCLA”), and comparable state laws, we may be required to investigate and remediate regulated hazardous materials. CERCLA and comparable state laws typically impose strict, joint and several liabilities without regard to whether a company knew of or caused the release of hazardous substances. The liability for the entire cost of clean-up could be imposed upon any responsible party. Other principal U.S. federal environmental, health, and safety laws affecting us include, but are not limited to, the Resource Conservation and Recovery Act, National Environmental Policy Act, the Clean Air Act, the Occupational Safety and Health Act, the Federal Mine Safety and Health Act of 1977, the Toxic Substances Control Act, and the Superfund Amendments and Reauthorization Act. Our business operations may also be subject to similar state and international laws relating to environmental protection. Further, past business practices at companies that we have acquired may also expose us to future unknown environmental liabilities. Liabilities related to environmental contamination or human exposure to hazardous substances, or a failure to comply with applicable regulations, could result in substantial costs to us, including clean-up costs, fines, civil or criminal sanctions, and third-party claims for property damage or personal injury or cessation of remediation activities. Our continuing work in the areas governed by these laws and regulations exposes us to the risk of substantial liability.

 

The effects of the Tax Cuts and Jobs Act on our business are still not fully known and could have an adverse effect on our business and financial condition.

 

Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the “TCJA”), was signed into law on December 22, 2017. The TCJA contains significant changes to corporate taxation, including reducing the corporate tax rate from 35% to 21%, limiting the tax deduction for interest expense to 30% of earnings (except for certain small businesses), limiting the deduction for net operating losses to 80% of current year taxable income and eliminating net operating loss carrybacks, one-time taxing of offshore earnings at reduced rates regardless of whether they are repatriated, eliminating U.S. tax on foreign earnings (subject to certain important exceptions), immediately deducting certain new investments instead of deducting depreciation expense over time, and modifying or repealing many business deductions and credits. We anticipate additional guidance, both at the federal and state level, to be forthcoming. As such, the full impacts of the legislation may differ from our current estimates, interpretations and assumptions, possibly materially, and the amount of the impact on the Company may accordingly be adjusted over time.

 

19

 
 

A general downturn in U.S. and global economic conditions, specifically a downturn in the municipal bond market, or government disruptions, including government shutdowns, may reduce our business prospects and decrease our revenues and cash flows.

 

Our business is affected by general economic conditions. Any extended weakness in the U.S. and global economies could reduce our business prospects and could cause decreases in our revenues and operating cash flows. Specifically, a downturn in the municipal bond market caused by an actual downgrade of monoline insurers could result in our municipal customers being required to spend municipal funds previously allocated to projects that would benefit our business to pay off outstanding bonds. A period of prolonged economic weakness could impact our customers’ ability to pay bills in a timely manner and may result in customer bankruptcies. Untimely payment and customer bankruptcies may lead to increased bad debt expenses or other adverse effects on our financial position, results of operations and/or cash flows. In addition, government disruptions, such as government shutdowns, may delay or halt the granting and renewal of permits, licenses and other items required by us and our customers to conduct our business.

 

We conduct manufacturing, sales and distribution operations on a worldwide basis and are subject to a variety of risks associated with doing business outside the United States.

 

We maintain significant international operations, including operations in North America, Europe, Asia-Pacific, the Middle East and South America. For the years ended December 31, 2019, 2018 and 2017, approximately 24.7%, 27.5%, and 24.3%, respectively, of our revenues were derived from international operations. We expect a significant portion of our revenues and profits to come from international operations and joint ventures for the foreseeable future.

 

As a result, we are subject to a number of risks and complications associated with international manufacturing, sales, services and other operations. These include:

 

 

difficulties in enforcing agreements, collecting receivables and resolving disputes through some foreign legal systems;

     
 

foreign customers with longer payment cycles than customers in the United States;

     
 

difficulties in enforcing intellectual property rights or weaker intellectual property right protections in some countries;

     
 

tax rates in certain foreign countries that exceed those in the United States and foreign earnings subject to withholding requirements;

     
 

tax laws that restrict our ability to use tax credits, offset gains or repatriate funds;

     
 

tax laws that impose additional taxes on our operations, including the implementation of value added tax in certain countries in the Middle East;

     
 

sanctions, tariffs, exchange controls, trade disputes (including so-called “trade wars”) or other trade restrictions, including transfer pricing restrictions, when products produced in one country are sold to an affiliated entity in another country;

     
 

difficulties with regard to, or taxes imposed on, the movement of cash between countries, including the repatriation of cash back to the United States;

     
 

abrupt changes in foreign government policies and regulations;

     
 

unsettled political conditions;

     
 

acts of terrorism or criminality;

     
 

kidnapping of employees;

     
 

nationalization or privatization of companies with which we do business;

     
 

protectionist policies in certain foreign countries, including those in the Middle East, that disfavor foreign companies operating in such countries;

     
 

forced negotiation or modification of contracts;

     
 

increased governmental ownership and regulation of markets in which we operate;

     
 

the financial instability of, and the related inability or unwillingness to timely pay for our services by, national oil companies and other foreign customers resulting from, and/or exacerbated by, depressed oil prices;

     
 

hostility from local populations, particularly in the Middle East;

     
 

tenuous, unstable or hostile relationships between countries that are interconnected in our operations; and

     
 

difficulties associated with compliance with a variety of laws and regulations governing international trade, including the Foreign Corrupt Practices Act.

 

20

 
 

To the extent that our international operations are affected by these unexpected and adverse foreign economic and political conditions, we may experience project disruptions and losses that could significantly reduce our revenues and profits.

 

Implementation and achievement of international growth objectives also may be impeded by political, social and economic uncertainties or unrest in countries in which we conduct operations or market or distribute our products. In addition, compliance with multiple, and potentially conflicting, international laws and regulations, import and export limitations, anti-corruption laws and exchange controls may be difficult, burdensome or expensive.

 

For example, we are subject to compliance with various laws and regulations, including the Foreign Corrupt Practices Act and similar anti-bribery laws, which generally prohibit companies and their intermediaries from making improper payments to officials for the purpose of obtaining or retaining business. While our employees and agents are required to comply with these laws, we cannot provide assurance that our internal policies, procedures and controls will always protect us from violations of these laws, despite our commitment to legal compliance and corporate ethics. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition and results of operations.

 

Operational disruptions caused by political instability and conflict in the Middle East, South America, Europe and Asia could adversely impact our current operations and plans of expansion in these regions.

 

Our Corrosion Protection segment currently operates in the Middle East and South America, and our Infrastructure Solutions segment currently operates in Europe and Asia. Political instability and social unrest in the Middle East, South America, Europe and Asia (including export restrictions, trade and other sanctions, taxes, repatriations and nationalizations), as well as the potential for catastrophic events such as abrupt political change, terrorist acts and conflicts or wars in these and other regions may cause damage or disruption to the economy, financial markets and our current and prospective customers in the these regions. Political instability, conflicts and the potential for catastrophic events have contributed to, and will likely continue to contribute to, volatility in these regions, which could adversely affect our operations and operating results.

 

As a result of our operations in these regions, we are also exposed to certain other uncertainties not generally encountered in our U.S. operations, including those detailed in the immediately preceding risk factor.

 

Business operations could be adversely affected by terrorism.

 

The threat of, or actual acts of, terrorism may affect our operations around the world in unpredictable ways and may force an increase in security measures and cause disruptions in supplies and markets. If any of our facilities, including our manufacturing facilities, or if any of the projects we are working on, particularly in the energy and mining sector, were to be a direct target, or an indirect casualty, of an act of terrorism, our operations could be adversely affected. Corresponding instability in the financial markets as a result of terrorism also could adversely affect our ability to raise capital.

 

We have international operations that are subject to foreign economic uncertainties and foreign currency fluctuation.

 

Global financial and credit markets have been, and continue to be, unstable and unpredictable. For example, on January 31, 2020, the United Kingdom exited the European Union (commonly referred to as “Brexit”) and is now in an eleven month transition period.  This has created significant uncertainties affecting the economy and business operations, including our operations, in the United Kingdom and the European Union. The terms of Brexit remain uncertain at the current time and, as such, it is difficult to predict the effect of Brexit on our Company and our operations in the United Kingdom, including our operations in Northern Ireland and the Republic of Ireland, our manufacturing facility in Wellingborough, United Kingdom, which distributes liners to the European Union and elsewhere, and our manufacturing facility in Stockton-on-Tees, United Kingdom, which manufactures and distributes cathodic protection equipment worldwide. Brexit could, among other things, affect the legal and regulatory schemes to which our operations in the United Kingdom are subject, adversely affect trade between the United Kingdom and the European Union and continue to cause economic uncertainty. The instability of the markets and weakness of the economy could affect the demand for our services, the financial strength of our customers and suppliers, their ability or willingness to do business with us, our willingness to do business with them, and/or our suppliers’ and customers’ ability to fulfill their obligations to us and/or the ability of us, our customers or our suppliers to obtain credit. These factors could adversely affect our operations, earnings and financial condition.

 

A significant portion of our contaacts and revenues are denominated in foreign currencies, which may result in additional risk of fluctuating currency values and exchange rates, hard currency shortages and controls on currency exchange. Changes in the value of foreign currencies could increase our U.S. dollar costs for, or reduce our U.S. dollar revenues from, our foreign operations. Any increased costs or reduced revenues as a result of foreign currency fluctuations could affect our profits. For example, Brexit to date has resulted in a sharp decline in the value of the British Pound as compared to the U.S. dollar and other major currencies. If there is a significant strengthening of the U.S. dollar compared to the British pound, Euro, or the Canadian dollar, it may adversely affect our operating results and financial condition.

 

The impact of the coronavirus outbreak, or similar global health concerns, could negatively impact our operations, supply chain and customer base.

 

Our international operations and supply chains for certain of our products or services could be negatively impacted by the regional or global outbreak of illnesses, including coronavirus.  Any quarantines, labor shortages or other disruptions to our operations, or those of our suppliers or customers, may adversely impact our sales and operating results.  In addition, a significant outbreak of epidemic, pandemic or contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economies and financial markets of many countries, including those in which we operate, resulting in an economic downturn that could affect the supply or demand for our products and services.  We are unable to accurately predict the possible future effect on the Company if coronavirus or another disease continues to expand globally.

 

21

 
 

New tariffs and other trade restrictions may adversely affect our business and results of operations.

 

Certain of our businesses use, or depend on our customers’ access to, steel products, including steel pipe, that may be imported into the United States from international markets.  Certain new tariffs have been recently imposed or threatened by the United States on, among other things, steel products.  Imposed tariffs have increased prices for imported steel products and have led domestic sellers to respond with market-based increases.  In response, certain other countries have proposed responsive tariffs or other trade restrictions on U.S. products.

 

These new tariffs and trade restrictions, along with any additional tariffs and restrictions that may be implemented by the United States or other countries in the future, may result in further increased prices, decreased available supply of steel and other materials used in our business and decreased demand for U.S. products internationally.  We may not be able to pass any resulting price increase on to our customers.  Further, we, or our customers, may be unable to secure adequate supplies of steel or other materials on a timely basis, which may reduce demand for our products and services.  As a result, our business and results of operations may be adversely affected.

 

An inability to attract and retain qualified personnel, and in particular, engineers, estimators, project managers, line workers, skilled craft workers and other experienced professionals, could impact our ability to perform on our contracts, which could harm our business and impair our future revenues and profitability.

 

Our ability to attract and retain qualified engineers, estimators, project managers, line workers, skilled craft workers and other experienced professionals in accordance with our needs is an important factor in our ability to maintain profitability and grow our business. The market for these professionals is competitive, particularly during periods of economic growth when the supply is limited. We cannot provide any assurance that we will be successful in our efforts to retain or attract qualified personnel when needed. Therefore, when we anticipate or experience growing demand for our services, we may incur additional cost to maintain a professional staff in excess of our current contract needs in an effort to have sufficient qualified personnel available to address this anticipated demand. If we do incur additional compensation and benefit costs, our customer contracts may not allow us to pass through these costs. We may recruit skilled professionals from other countries to work in the U.S., and from the U.S. and other countries to work abroad. Limitations imposed by immigration laws in the U.S. and abroad, travel bans, and difficulties obtaining visas and other restrictions on international travel could hinder our ability to attract necessary qualified personnel and harm our business and future operating results.

 

Competent and experienced engineers, project managers and craft workers are especially critical to the profitable performance of our contracts, particularly on our fixed-price contracts where superior design or execution of the project can result in profits greater than originally estimated or where inferior design or project execution can reduce or eliminate estimated profits or even result in a loss. Our project managers are involved in most aspects of contracting and contract execution including:

 

 

supervising the bidding process, including providing estimates of significant cost components, such as material and equipment needs, and the size, productivity and composition of the workforce;

     
 

negotiating contracts;

     
 

supervising project performance, including performance by our employees, subcontractors and other third-party suppliers and vendors;

     
 

estimating costs for completion of contracts that is used to estimate amounts that can be reported as revenues and earnings on the contract under the percentage-of-completion method of accounting;

     
 

negotiating requests for change orders and the final terms of approved change orders; and

     
 

determining and documenting claims by us for increased costs incurred due to the failure of customers, subcontractors and other third-party suppliers of equipment and materials to perform on a timely basis and in accordance with contract terms.

 

The California Refinery Safety Law, which requires owners and operators to use only building trade union contractors for covered work at the refineries (if not self-performed), has the potential to reduce, constrict or disrupt the entire labor pool for refinery maintenance in California by: (i) eliminating the non-union workforce; and (ii) requiring the use of the same workforce that also performs public works and general construction in California. This could adversely affect staffing for large turnaround projects at California refineries. This could also adversely affect Energy Services’ ability to support turnaround and project work outside California, due to its past reliance on its mobile California workforce to staff short term projects throughout the West Coast. There will be a significant wage differential between high union wages in California and wages in other states on the West Coast, creating a large disincentive for the California workforce to leave the state. The uncertainty created by this industry workforce change has the potential to negatively impact the entire West Coast refinery labor market, which in turn would negatively impact our revenues, profits and operations.

 

In addition, we use a multi-level sales force structured around target markets and key accounts, focusing on marketing our products and services to engineers, consultants, administrators, technical staff and elected officials. We are dependent on our personnel to continue to develop improvements to our proprietary processes, including materials used and the methods of manufacturing, installing, strengthening, coating and cathodic protection and we require quality field personnel to effectively and profitably perform our work. Our success in attracting and retaining qualified personnel is dependent on the resources available in individual geographic areas and the impact on the labor supply of general economic conditions, as well as our ability to provide a competitive compensation package and work environment. Our failure to attract, train, integrate, engage and retain qualified personnel could have a significant effect on our financial condition and results of operations.

 

22

 
 

Our profitability could be negatively impacted if we are not able to maintain appropriate utilization of our workforce.

 

The extent to which we utilize our workforce affects our profitability. If we under-utilize our workforce, our project gross margins and overall profitability suffer in the short term. If we over-utilize our workforce, we may also negatively impact margins and overall profitability, as well as safety, employee satisfaction and project execution, which could result in an increase in injuries to our employees and a decline of future project awards. The utilization of our workforce is impacted by numerous factors including:

 

 

our estimate of the headcount requirements for various units based on our forecast of the demand for our products and services;

     
 

our ability to maintain our talent base and manage attrition;

     
 

our ability to schedule our portfolio of projects to efficiently utilize our employees and minimize downtime between project assignments; and

     
 

our need to invest time and resources into functions such as training, business development, employee recruiting, and sales that are not chargeable to customer projects.

 

Our business may be adversely impacted by work stoppages, staffing shortages and other labor matters.

 

As of December 31, 2019, our Aegion Energy Services business had approximately 1,250 employees that were represented by unions, although these numbers are constantly changing as customer demands change. Infrastructure Solutions has approximately 140 employees represented by unions. Although we believe that our relations with our employees and the unions are good, no assurances can be made that we will not experience these and other types of conflicts with labor unions, works councils, other groups representing employees, or our employees in general, especially in the context of any future negotiations with our labor unions. We can also make no assurance that future negotiations with our labor unions will not result in a significant increase in the cost of labor. Approximately 70% of our Energy Services union employees currently participate in multi-employer benefit plans, which is a result of the transition of many of our clients to our building trade union contracting entity. The number of multi-employer plans in which our employees participate varies depending on how many local unions we are using at any particular time, but it is usually between 20 and 30 multi-employer plans. Participation in multi-employer benefit plans may result in liability to Aegion Energy Services in excess of that directly attributable to employees of Aegion Energy Services.

 

Additionally, the employees of some of our customers are unionized, especially the customers of our Aegion Energy Services business. Any strikes, work stoppages or other labor matters experienced by our customers may impact our ability to work on projects and, as a result, have an adverse effect on our financial condition and results of operations.

 

Finally, in certain areas of our business, most notably in our Corrosion Protection platform, our employees are not represented by unions. As a result, we may not be eligible to bid or perform certain work that requires union labor, which may have an adverse effect on our financial condition and results of operations.

 

The revenues from the water and wastewater portion of our Infrastructure Solutions platform are substantially dependent on municipal government spending.

 

Many of our customers are municipal governmental agencies and, as such, we are dependent on municipal spending. Spending by our municipal customers can be affected by local political circumstances, budgetary constraints and other factors. Consequently, future municipal spending may not be allocated to projects that would benefit our business or may not be allocated in the amounts or for the size of the projects that we anticipated. A decrease in municipal spending on such projects would adversely impact our revenues, results of operations and cash flows.

 

The loss of one or more of our significant customers could adversely affect us.

 

One or more customers have in the past and may in the future contribute a material portion of our revenues in any one year. Because these significant customers generally contract with us for specific projects or for specific periods of time, we may lose these customers from year to year as the projects or maintenance contracts are completed. The loss of business from any one of these customers could have a material adverse effect on our business or results of operations.

 

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The execution of our growth strategy is dependent upon the continued availability of third-party financing arrangements for our customers.

 

Tighter credit markets could adversely affect our customers’ ability to secure the financing necessary to proceed or continue with pipe or other infrastructure installation, rehabilitation, strengthening, coating and cathodic protection projects. Our customers’ or potential customers’ inability to secure financing for projects could result in the delay, cancellation or downsizing of new projects or the suspension of projects already under contract, which could cause a decline in the demand for our services and negatively impact our revenues and earnings.

 

A substantial portion of our raw materials is from a limited number of vendors, and we are subject to market fluctuations in the prices of certain commodities.

 

The primary products and raw materials used by our Corrpro operations include zinc, aluminum, magnesium and other metallic anodes, as well as wire and cable. We believe that Corrpro has multiple sources available for these raw materials and is not dependent on any single vendor to meet its supply needs. However, the prices of these raw materials have historically been affected by the prices of energy, petroleum, steel and other commodities, tariffs and duties on imported materials and foreign currency and exchange rates. A significant increase in the prices of these raw materials could adversely affect our results of operations.

 

We purchase the majority of our fiber requirements for Insituform® tube manufacturing from four sources. We believe, however, that alternate sources are readily available, and we continue to negotiate with other supply sources. The manufacture of the Insituform® tubes used in our water and wastewater pipeline rehabilitation business is dependent upon the availability of resin, a petroleum-based product. We currently have qualified multiple resin suppliers, however, at the current time we purchase the majority of our resin for our North American operations from one supplier.  For our European operations, we currently have qualified six resin suppliers. We believe that these and other sources of resin supply are readily available. Historically, resin prices have fluctuated on the basis of the prevailing prices of its inputs, including styrene and oil. We anticipate that prices will continue to be heavily influenced by the events affecting these inputs, including the oil market. If there is a shortage or contraction of fiber or resin suppliers or if the price of fiber or resin increase, it could have an adverse effect on our results of operations.

 

The primary products and raw materials used in the manufacture of our FRP composite systems are carbon, glass, resins, fabric and epoxy raw materials. Carbon and epoxies are the largest materials purchased, which are currently purchased through a select group of suppliers, although we believe these and the other materials are available from a number of vendors. The price of epoxy historically is affected by the price of oil. In addition, a number of factors such as worldwide demand, labor costs, energy costs, import duties and other trade restrictions may influence the price of these raw materials. An increase in the price of these raw materials may have an adverse effect on our operations. Further, because we utilize a limited number of extruders to manufacture our Fusible PVC® pipe products, we could be adversely affected if one or more of these extruders is unable to continue to manufacture our Fusible PVC® pipe products.

 

We also purchase a significant volume of fuel to operate our trucks and equipment. At present, we do not engage in any type of hedging activities to mitigate the risks of fluctuating market prices for oil or fuel. A significant increase in the price of oil could cause an adverse effect on our cost structure that we may not be able to recover from our customers.

 

We may become involved in legal proceedings, which will increase our costs and, if adversely determined, could have a material effect on our financial condition, results of operations, cash flows and liquidity.

 

As a result of the type of work we do, namely construction, we may become engaged in legal proceedings arising from the operation of our business, including being named as a defendant in future actions. Such actions against us may arise out of the normal course of performing services on project sites, and include workers’ compensation claims, personal injury claims, property damage claims, environmental claims and contract disputes with our customers. From time to time, we may also be named as a defendant for actions involving the violation of federal and state labor laws related to employment practices, wages and benefits. We may also be a plaintiff in legal proceedings against customers seeking to recover wages and benefits or seeking to recover payment of contractual amounts due to us. Further, we may make claims against customers for increased costs incurred by us resulting from, among other things, services performed by us at the request of a customer that are in excess of original project scope that are later disputed by the customer and customer-caused delays in our contract performance.

 

We maintain insurance against operating hazards in amounts that we believe are customary in our industry. However, in some instances we are self-insured and in other instances our insurance policies include deductibles and certain coverage exclusions, so we cannot provide assurance that we are adequately insured against all of the risks associated with the conduct of our business. A successful claim brought against us in excess of, or outside of, our insurance coverage could have a material adverse effect on our financial condition, results of operations, cash flows and liquidity.

 

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Litigation, regardless of its outcome, is expensive, typically diverts the efforts of our management away from operations for varying periods of time, and can disrupt or otherwise adversely impact our relationships with current or potential customers, subcontractors and suppliers. Payment and claim disputes with customers may also cause us to incur increased interest costs resulting from incurring indebtedness under our revolving line of credit or receiving less interest income resulting from fewer funds invested due to the failure to receive payment for disputed claims and accounts.

 

Extreme weather conditions may adversely affect our operations.

 

We are likely to be impacted by weather extremes, such as excessive rain or hurricanes, tornadoes, typhoons, snow and ice or frigid temperatures, which may cause temporary, short-term anomalies in our operational performance in certain localized geographic regions. Our Infrastructure Solutions and Corrosion Protection segments are particularly sensitive to weather extremes. Delays and other weather impacts could adversely affect our ability to meet project deadlines and may increase a project’s cost and decrease its profitability.

 

Certain of our facilities are located in regions that may be affected by natural disasters.

 

We have multiple facilities in and around the U.S. Gulf Coast, including facilities near Houston, Texas, and in Florida. These regions are subject to increased hurricane activity that can result in substantial flooding. Our Aegion Energy Services business serves large oil and gas customers in California and is headquartered in Irvine, California. Furthermore, our Infrastructure Solutions and Corrosion Protection segments have substantial operations in California. Historically, California has been susceptible to natural disasters, such as earthquakes, drought, floods and wildfires. Although we maintain loss insurance where necessary, a hurricane, earthquake, wildfire or other natural disaster could result in significant damage to our facilities, destruction or disruption of our critical business or information technology systems, recovery costs and interruption to certain of our operations. In addition, a catastrophic event could interrupt operations of our customers and suppliers, which could result in delays or cancellation of customer orders, the loss of customers, and impediments to the manufacture or shipment of products or execution of projects, which could result in loss of business or an increase in expense, both of which may have a material adverse effect on our business. In the specific case of wildfires, an accusation or ultimate determination that our operations were the cause of a wildfire may also have a material adverse effect on our business.

 

The actual timing, costs and benefits of the Restructuring may differ from those currently expected, which may reduce our operating results.

 

On July 28, 2017, we introduced the Restructuring and, through several additional actions during 2018, 2019 and 2020, expanded the scope of the restructuring to include many of our operations around the world.  The Restructuring is intended to reduce complexity and risk in our business operations, eliminate losses from underperforming businesses and also significantly reduce our consolidated annual operating expenses.  We substantially completed much of the Restructuring during 2017, 2018 and 2019 and expect to complete all remaining activities during 2020.  See Notes 1 and 4 to the consolidated financial statements contained in this report for additional information and disclosures regarding our restructuring activities.

 

The Restructuring is subject to various risks, which could result in the actual timing, costs and benefits of the plan differing from those currently anticipated.  These risks and uncertainties include, among others, that: (i) we may not be able to implement the Restructuring in the time frame currently planned; (ii) our costs related to the Restructuring may be higher than currently estimated; (iii) the expected annual expense reductions may be less than currently estimated; and (iv) unanticipated disruptions to our operations may result in additional costs being incurred.  Because of these and other factors, we cannot predict whether we will realize the purpose and anticipated benefits of the Restructuring, and if we do not, our business and results of operations may be adversely impacted.  We also cannot provide assurance that we will not undertake additional restructuring activities in the future.

 

Additionally, the Restructuring may yield unintended consequences, such as:

 

 

actual or perceived disruption of service or reduction in service standards to customers;

     
 

the failure to preserve supplier relationships and distribution, sales and other important relationships and to resolve conflicts that may arise;

     
 

attrition beyond our intended reduction in headcount and reduced employee morale, which may cause our employees who were not affected by the Restructuring to seek alternate employment;

     
 

increased risk of employment litigation; and

     
 

diversion of management attention from ongoing business activities.

 

Divestitures and discontinued operations could negatively impact our business, and retained liabilities from businesses that we sell could adversely affect our financial results.

 

As part of our portfolio management process, we review our operations for businesses, which may no longer be aligned with our strategic initiatives and long-term objectives.  For example, as part of our Restructuring discussed above, we have recently or are in the process of divesting or otherwise exiting multiple businesses.  We also continue to review our portfolio and may pursue additional divestitures.  Divestitures pose risks and challenges that could negatively impact our business, including required separation or carve-out activities and costs, disputes with buyers or potential impairment charges.  We may also dispose of a business at a price or on terms that are less than we had previously anticipated.  After reaching an agreement with a buyer for the disposition of a business, we are also subject to the satisfaction of pre-closing conditions, as well as necessary contractual counter-party, regulatory and governmental approvals or consents on acceptable terms, which may prevent us from completing a transaction.  Dispositions may also involve continued financial involvement, as we may be required to retain responsibility for, or agree to indemnify buyers against contingent liabilities related to a business sold, such as lawsuits, tax liabilities, lease payments, product liability claims or environmental matters.  Under these types of arrangements, performance by the divested businesses or other conditions outside of our control could affect future financial results.

 

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If we do not realize the expected benefits or synergies of any divestiture transaction, our consolidated financial position, results of operations and cash flows could be negatively impacted.  Any divestiture may result in a dilutive impact to our future earnings if we are unable to offset the dilutive impact from the loss of revenue associated with the divestiture, as well as significant write-offs, including those related to goodwill and other intangible assets, which could have a material adverse effect on our results of operations and financial condition.

 

We may from time to time undertake internal reorganizations that may adversely impact our business and results of operations.

 

From time to time, including in 2019, in an effort to simplify our organizational structure and streamline our operations or for other operational reasons, we may undertake certain internal reorganizations that may involve, among other things, the combination or dissolution of certain of our existing subsidiaries, the creation of new subsidiaries and business divisions and the settlement of historical inter-company transactions.  Additionally, as a result of the enactment of the TCJA and its effect on the taxation of offshore earnings, in connection with these actions or our operations generally, we may determine to repatriate certain earnings from our international subsidiaries, which earnings were previously permanently reinvested in such subsidiaries’ operations.  In undertaking such actions, we consider, among other things, the alignment of our corporate structure with our organizational objectives, the operational and tax efficiency of our corporate structure and the long-term cash flow needs of our business.  These efforts may not result in the intended or expected benefits, may result in disruptions to our business and may cause the Company to incur additional expenses or tax liabilities.  Accordingly, such actions may adversely impact our business and results of operations.

 

Changes in the industries within which we operate and market conditions could lead to charges related to discontinuances of certain of our businesses, asset impairment, workforce reductions or restructurings.

 

In response to changes in industry and market conditions, we may be required to strategically realign our resources and to consider restructuring, disposing of or otherwise exiting businesses.  Any resource realignment, or decision to limit investment in or dispose of or otherwise exit businesses, may result in the recording of special charges, such as asset write-offs, workforce reductions, restructuring costs or charges relating to consolidation of excess facilities or businesses.  Our estimates with respect to the useful life or ultimate recoverability of our carrying basis of assets, including purchased intangible assets, could change as a result of such assessments and decisions.  Further, our estimates relating to the liabilities for excess facilities are affected by changes in real estate market conditions.

 

We may incur impairments to goodwill or long-lived assets.

 

We review our long-lived assets, including goodwill and other intangible assets, for impairment annually or whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable.  The valuation of goodwill and other intangible assets requires assumptions and estimates of many critical factors, including revenue and market growth, operating cash flows, market multiples and discount rates.  Negative industry or economic trends, including reduced market prices of our common stock, reduced estimates of future cash flows, disruptions to our business, slower growth rates, or lack of growth in our relevant businesses, could lead to further impairment charges against our long-lived assets, including goodwill and other intangible assets.  If, in any period, our stock price decreases to the point where our fair value, as determined by our market capitalization, is less than the book value of our assets for an extended period of time, this could also indicate a potential impairment, and we may be required to record an impairment charge in that period, which could adversely affect our results of operations.

 

We may be subject to information technology system failures, network disruptions, cybersecurity attacks and breaches in data security, which could disrupt our operations and could result in a loss of assets.

 

In the ordinary course of our business, we collect and store sensitive data, including intellectual property, proprietary business information, and personally identifiable information of our customers, suppliers, employees and other individuals.  In storing and managing this information, we rely upon multiple information technology systems and networks, some of which are web-based or managed by third parties, to process, transmit and store electronic information and to manage or support a variety of critical business processes and activities.  The secure and consistent operation of these systems, networks and processes is critical to our business operations.  Our systems and networks have been, and will continue to be, the target of cybersecurity threats, such as botnets, distributed denial-of-service attacks, malware, ransomware, phishing, viruses, spoofing and other cyber-security incidents that could result in the unauthorized release, gathering, monitoring, use, loss or destruction of our customers’, suppliers’ or employees’ sensitive and personal data.  Successful cyber-attacks or other data breaches, as well as risks associated with compliance with applicable data privacy laws, could harm our reputation, divert management attention and resources, increase our operating expenses due to the employment of consultants and third party experts and the purchase of additional infrastructure, and/or subject us to legal or regulatory liability, resulting in increased costs and loss of revenue.

 

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While we proactively safeguard our data and are continuously enhancing our security software and controls, the increase in frequency and sophistication of cyber-attacks may result in our security controls and practices and business continuity plans being ineffective in anticipating, preventing and effectively responding to all potential cyber-risk exposures.  Further, data privacy is subject to frequently changing rules and regulations, which are not uniform and may possibly conflict in jurisdictions and countries where we provide services.  Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.

 

Additionally, our employees and certain of our third-party service providers may have access or exposure to sensitive customer data and systems.  The misuse or unauthorized disclosure of information could result in contractual and legal liability for us due to the actions or inactions of our employees or vendors.

 

To improve the effectiveness of our operations and to interface with our customers and suppliers, we use our customers’ or suppliers’ information technology systems to submit and process invoices and payments.  The failures of these systems could disrupt our operations by causing transaction errors, processing inefficiencies, delays or cancellation of customer orders, impediments to the manufacture or shipment of products and other business disruptions.  These events could lead to financial losses from loss of business or an increase in expense, all of which may have a material adverse effect on our business.

 

Increasing regulatory focus on privacy issues and expanding laws could expose us to increased liability as it relates to our necessary collection of employee and independent contractor personal data to effectively execute operations and comply with various regulatory requirements.

 

In May 2018, the European Union’s new General Data Protection Regulation replaced the existing European Union Data Protection Directive, and has had a significant impact on how businesses can collect and process the personal data of European Union individuals, including the requirement for business to self-report personal data breaches to the relevant supervisory authority and, under certain circumstances, to the affected data subjects, and provide additional rights to individuals whose data is processed.  Penalties for non-compliance are also significantly higher under the new law, with the maximum fine being the higher of €20 million or 4% of global turnover for the preceding year.  Approximately 4% of our workforce as of December 31, 2019 was employed in the European Union.  In January 2020, the California Consumer Privacy Act took effect, which establishes certain transparency rules and creates new data privacy rights for California residents.  Approximately 38% of our workforce are California residents as of December 31, 2019.  In addition, numerous proposals regarding privacy and data protection are pending before U.S. and non-U.S. legislative and regulatory bodies.  Despite our commitment to complying with applicable laws, actual or alleged violations of these laws could result in legal claims or proceedings and regulatory penalties, which could disrupt our business, distract our employees and negatively impact our reputation as well as our results of operations.  These rules and regulations may not be uniform and may possibly conflict in jurisdictions and countries where we conduct business.  Our failure to adhere to or successfully implement processes in response to changing regulatory requirements in this area could result in legal liability or impairment to our reputation in the marketplace.

 

We are subject to a number of restrictive debt covenants under our credit facility.

 

In October 2015, the Company amended and restated its $650.0 million senior secured credit facility, followed by subsequent amendments in February 2018 and December 2018, (the “amended Credit Facility”) with a syndicate of banks.  Our amended Credit Facility contains certain restrictive covenants, which restrict our ability to, among other things, incur additional indebtedness, incur certain liens on our assets or sell assets, make investments and make other restricted payments.  Our amended Credit Facility also requires us to maintain specified financial ratios under certain conditions and satisfy financial condition tests.  Our ability to meet those financial ratios and tests and otherwise comply with our financial covenants may be affected by the factors described in this “Risk Factors” section of this Report and other factors outside our control, and we may not be able to continue to meet those ratios, tests and covenants.  Our ability to generate sufficient cash from operations to meet our debt obligations will depend upon our future operating performance, which will be affected by general economic, financial, competitive, business and other factors beyond our control.  A breach of any of these covenants, ratios, tests or restrictions, as applicable, or any inability to pay interest on, or principal of, our outstanding debt as it becomes due could result in an event of default.  Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable.

 

At December 31, 2019, we were in compliance with all of our debt covenants as required under the amended Credit Facility.  If we are unable to comply with the restrictive covenants in the future, we would be required to obtain amendments or waivers from our lenders or secure another source of financing.  If our current lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis.

 

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In addition, these restrictive covenants may prevent us from engaging in transactions that benefit us, including responding to changing business and economic conditions and taking advantage of attractive business opportunities.

 

We occasionally access the financial markets to finance a portion of our working capital requirements and support our liquidity needs. Our ability to access these markets may be adversely affected by factors beyond our control and could negatively impact our ability to finance our operations, meet certain obligations or implement our operating strategy.

 

We occasionally borrow under our existing credit facility to fund operations, including working capital investments.  Market disruptions such as those experienced in the United States and abroad in the past few years have materially impacted liquidity in the credit and debt markets, making financing terms for borrowers less attractive and, in certain cases, resulting in the unavailability of certain types of financing.  Uncertainty in the financial markets may negatively impact our ability to access additional financing or to refinance our existing credit facility or existing debt arrangements on favorable terms or at all, which could negatively affect our ability to fund current and future expansion as well as future acquisitions and development.  These disruptions may include turmoil in the financial services industry, volatility in the markets where our outstanding securities trade and general economic downturns in the areas where we do business.  If we are unable to access funds at competitive rates, or if our short-term or long-term borrowing costs increase, our ability to finance our operations, meet our short-term obligations and implement our operating strategy could be adversely affected.

 

As a holding company, Aegion depends on its operating subsidiaries to meet its financial obligations.

 

Aegion Corporation is a holding company with no significant operating assets.  Our subsidiaries conduct all of our operations and own substantially all of our assets.  Our cash flow and our ability to meet our obligations depends on the cash flow of our subsidiaries.  In addition, the payments of funds in the form of dividends, intercompany payments, tax sharing payments and other forms may be subject to restrictions under the laws of the states and countries in which we operate.

 

The market price of our common stock is highly volatile and may result in investors selling shares of our common stock at a loss.

 

The trading price of our common stock is highly volatile and subject to wide fluctuations in price in response to various factors, many of which are beyond our control, including:

 

 

actual or anticipated variations in quarterly operating results;

     
 

changes in financial estimates by securities analysts that cover our stock or our failure to meet these estimates;

     
 

conditions or trends in the U.S. wastewater rehabilitation market;

     
 

conditions or trends in mined materials, oil and natural gas markets;

     
 

changes in municipal and corporate spending practices;

     
 

a downturn of the municipal bond market or lending markets generally;

     
 

changes in the federal or state governments that impact regulation and spending regarding energy and infrastructure;

     
 

changes in market valuations of other companies operating in our industries;

     
 

announcements by us or our competitors of a significant acquisition or divestiture; and

     
 

additions or departures of key personnel.

 

In addition, the stock market in general and The Nasdaq Global Select Market in particular have experienced extreme price and volume fluctuations that may be unrelated or disproportionate to the operating performance of listed companies.  Industry factors may seriously harm the market price of our common stock, regardless of our operating performance.  Such stock price volatility could result in investors selling shares of our common stock at a loss.

 

Future sales of our common stock or equity-linked securities in the public market could adversely affect the trading price of our common stock and our ability to raise funds in new stock offerings.

 

Sales of substantial numbers of additional shares of our common stock or any shares of our preferred stock, including sales of shares in connection with any future acquisitions, or the perception that such sales could occur, may have a harmful effect on prevailing market prices for our common stock and our ability to raise additional capital in the financial markets at a time and price favorable to us.  We may issue equity securities in the future for a number of reasons, including to finance our operations and business strategy, to adjust our ratio of debt to equity, to satisfy obligations upon exercise of outstanding warrants or options or for other reasons.  Our certificate of incorporation provides that we have authority to issue 125,000,000 shares of common stock.  As of December 31, 2019, 30,715,959 shares of common stock were issued and outstanding.

 

Provisions in our certificate of incorporation could make it more difficult for a third party to acquire us or could adversely affect the rights of holders of our common stock or the market price of our common stock.

 

Our certificate of incorporation provides that our board of directors has the authority, without any action of our stockholders, to issue up to 2,000,000 shares of preferred stock. Preferred stock may be issued upon such terms and with such designations as our board of directors may fix in its discretion, including with respect to: (i) the payment of dividends upon our liquidation, dissolution or winding up; (ii) voting rights that dilute the voting power of our common stock; (iii) dividend rates; (iv) redemption or conversion rights; (v) liquidation preferences; or (vi) voting rights.

 

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In addition, our certificate of incorporation provides that subject to the rights of the holders of any class or series of preferred stock set forth in our certificate of incorporation, the certificate of designation relating to such class or series of preferred stock, or as otherwise required by law, any stockholder action may be taken only at a meeting of stockholders and may not be effected by any written consent by such stockholders.  The affirmative vote of the holders of at least 80% of the capital stock entitled to vote for the election of directors is required to amend, repeal or adopt any provision inconsistent with such arrangement.

 

These provisions could potentially be used to discourage attempts by others to obtain control of our company through merger, tender offer, proxy, consent or otherwise by making such attempts more difficult or more costly, even if the offer may be considered beneficial by our stockholders.  These provisions also may make it more difficult for stockholders to take action opposed by our board of directors or otherwise adversely affect the rights of holders of our common stock or the market price of our common stock.

 

Our amended and restated by-laws designate the state courts of Delaware or, if no such state court has jurisdiction, the federal court for the District of Delaware, as the sole and exclusive forum for certain types of claims that may be initiated by our stockholders, which could discourage lawsuits against Aegion and Aegions directors and officers.

 

Our amended and restated by-laws provide that, unless waived by Aegion, the state courts of the State of Delaware or, if no state court located in the State of Delaware has jurisdiction, the federal court for the District of Delaware, will be the sole and exclusive forum for any claims brought by a stockholder (including a beneficial owner) (i) that are based upon a violation of a duty by a current or former director, officer or stockholder in such capacity or (ii) as to which the Delaware General Corporation Law confers jurisdiction upon the Delaware Court of Chancery.  This exclusive forum provision may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with Aegion or Aegion’s directors or officers, which may discourage such lawsuits against Aegion and Aegion’s directors and officers.  Alternatively, if a court outside of Delaware were to find this exclusive forum provision inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings described above, we could incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business, financial condition or results of operations.

 

We do not intend to pay cash dividends on our common stock in the foreseeable future.

 

We do not anticipate paying cash dividends on our common stock in the foreseeable future.  Our present policy is to retain earnings to provide for the operation and expansion of our business or for the repurchase of shares of our common stock.  Any payment of cash dividends will depend upon our earnings, financial condition, cash flows, financing agreements and other factors deemed relevant by our board of directors.  Furthermore, under the terms of certain debt arrangements to which we are a party, we are subject to certain limitations on paying dividends.  However, we carefully review this policy regularly and could initiate dividends in the future depending on appropriate circumstances.

 

Item 1B. Unresolved Staff Comments.

 

None.

 

Item 2. Properties.

 

We own our executive offices located in Chesterfield, Missouri, a suburb of St. Louis, at 17988 Edison Avenue.  We also own our research and development and training facilities in Chesterfield.

 

Insituform Technologies, LLC owns a liner manufacturing facility and a contiguous felt manufacturing facility in Batesville, Mississippi. Insituform Linings Limited, our United Kingdom manufacturing company, owns certain premises in Wellingborough, United Kingdom, where its felt liner manufacturing facility is located and leases a facility for its glass liner manufacturing.

 

Underground Solutions, our wholly-owned subsidiary, leases office and warehouse space in California and Pennsylvania, and also leases pipe storage space in North Dakota and South Carolina.

 

Fyfe Co. and Fibrwrap Construction Services, our wholly-owned subsidiaries, lease an office in San Diego, California.

 

Corrpro, our wholly-owned subsidiary, owns certain office and warehouse space in Medina, Ohio as well as a manufacturing and warehouse facility in Sands Springs, Oklahoma.  Corrpro also leases substantial office space in Houston, Texas.  Its subsidiary, Corrpro Canada, Inc., owns certain premises in Edmonton, Alberta, Canada used for office and warehouse space.  In addition, our Corrpro subsidiary in the United Kingdom, Corrpro Companies Europe Ltd., owns an office and production facility in Stockton-on-Tees, United Kingdom.

 

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Our wholly-owned subsidiary, United Pipeline Systems, Inc., owns an office and shop facility as well as additional property in Durango, Colorado.  In addition, our wholly-owned Canadian subsidiary, United Pipeline Systems Limited, owns an operating facility in Edmonton, Alberta, Canada for office space and manufacturing.

 

ACS, another wholly-owned subsidiary, owns certain premises in Conroe, Texas that are used as office space and operational facilities and leases certain premises in Tulsa, Oklahoma that are also used as office space and operational facilities.

 

Our wholly-owned subsidiary, Aegion Energy Services, leases an office in Irvine, California for its headquarters and also leases various operational facilities throughout California as well as in Washington, Texas and Utah.

 

We own or lease various other operational facilities in the United States, Canada, Europe, South America, Asia-Pacific and the Middle East, and the foregoing facilities are regarded by management as adequate for the current requirements of our business.

 

Item 3. Legal Proceedings.

 

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

 

Item 4. Mine Safety Disclosure.

 

Information concerning mine safety violations or other regulatory matters required by section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of SEC Regulation S-K is included in Exhibit 95 to this annual report on Form 10-K.

 

Item 4A. Information about our Executive Officers.

 

Our executive officers, and their respective ages and positions with us, are as follows:

 

Charles R. Gordon

62

President and Chief Executive Officer

David F. Morris

58

Executive Vice President and Chief Financial Officer

Mark A. Menghini

47

Senior Vice President, General Counsel and Secretary

Kenneth L. Young

68

Senior Vice President, Treasury and Tax

John L. Heggemann 42 Senior Vice President, Corporate Controller and Chief Accounting Officer

 

Charles R. Gordon serves as our President and Chief Executive Officer, a position he has held since October 2014. Mr. Gordon had been serving as our interim Chief Executive Officer since May 2014 and has served on our board of directors since 2009. Prior to serving as interim Chief Executive Officer of the Company, Mr. Gordon served as Chief Executive Officer of Natural Systems Utilities, LLC, a distributed water infrastructure company, from February 2014 to May 2014. Prior to Natural Systems Utilities, LLC, Mr. Gordon was President and Chief Operating Officer of Nuverra Environmental Solutions, Inc. (a holding company formerly known as Heckmann Corporation that buys and builds companies in the water sector) from November 2010 until his resignation in October 2013. Mr. Gordon was President and Chief Executive Officer of Siemens Water Technologies (a business unit of Siemens AG, a world leader in products, systems and services for water and wastewater treatment for industrial, institutional and municipal customers) from 2008 to 2010. Previously, Mr. Gordon served as Executive Vice President of the Siemens Water & Wastewater Systems Group from 2005 to 2008 and as Executive Vice President of the Siemens Water & Wastewater Services and Products Group from 2003 to 2005. His past experience also includes various management positions with US Filter Corporation and Arrowhead Industrial Water, prior to the acquisition of US Filter Corporation by the Siemens family of companies in 2004.

 

David F. Morris serves as our Executive Vice President and Chief Financial Officer, a position he has held since April 2018.  Mr. Morris served as our Executive Vice President, Chief Administrative Officer, General Counsel and Secretary from October 2014 through April 2018 and as our interim Chief Financial Officer from November 2017 through April 2018. Mr. Morris served as our Vice President, General Counsel and Secretary beginning in January 2005 through April 2007, at which time he was promoted to Senior Vice President. Mr. Morris became our Chief Administrative Officer in August 2007. Mr. Morris was promoted to Executive Vice President in October 2014. From March 1993 until January 2005, Mr. Morris was an attorney with the law firm of Thompson Coburn LLP, St. Louis, Missouri, most recently as a partner in its corporate and securities practice areas.

 

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Mr. Menghini serves as our Senior Vice President and General Counsel, a position he has held since May 2018.  Mr. Menghini served as our Senior Vice President and Interim General Counsel from November 2017 through May 2018.  Mr. Menghini served as our Senior Vice President and Deputy General Counsel from October 2014 through November 2017 and as our Vice President and Deputy General Counsel from December 2013 through October 2014. Prior to joining Aegion, Mr. Menghini was an officer and shareholder with the law firm of Greensfelder, Hemker & Gale, P.C., a regional law firm based in St. Louis, Missouri, where he practiced as a member of the firm’s Construction Law Practice Group from 1998 until 2013.

 

Kenneth L. Young serves as our Senior Vice President, Treasury and Tax, a position he has held since June 2019. He served as our Senior Vice President, Controller, Principal Accounting Officer and Treasurer from December 2018 until June 2019. Mr. Young served as our Senior Vice President and Treasurer from October 2014 through December 2018, and as interim Corporate Controller from May to December 2018. Mr. Young served as our Vice President and Treasurer from April 2009 until October 2014. Prior to joining our Company in April 2009, he worked for Huttig Building Products, Inc., a building supply distributor, from 2005 to 2009, most recently serving as Chief Financial Officer, Secretary and Treasurer. Prior to that, he worked for MEMC Electronic Materials (now SunEdison Semiconductor) from 1989 to 2005, most recently serving as Corporate Treasurer.

 

John L. Heggemann serves as our Senior Vice President, Corporate Controller and Chief Accounting Officer, a position he has held since June 2019.  He served as our Vice President – Operational Finance, Middle East and Asia Pacific from April 2018 to June 2019. Prior to that, Mr. Heggemann served as our Senior Controller and Director of Cost Accounting in the Corrosion Protection Platform and as a Plant/Manufacturing Controller and Senior Financial Analyst in the Infrastructure Solutions Platform. Mr. Heggemann has been with the Company since August 2013 and previously worked for the Company from September 2001 to September 2006. Mr. Heggemann served in finance-related roles with Spartan Showcase, a division of Leggett & Platt, Inc., and with Carboline Company, a division of RPM International Inc., from September 2006 to August 2013.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

Our common shares, $.01 par value, are traded on The Nasdaq Global Select Market under the symbol “AEGN”.

 

During the quarter ended December 31, 2019, we did not offer any equity securities that were not registered under the Securities Act of 1933, as amended. As of February 21, 2020, the number of holders of record of our common stock was 374.

 

Holders of common stock are entitled to receive dividends as and when they may be declared by our board of directors. Our present policy is to retain earnings to provide for the operation and expansion of our business. However, our board of directors will review our dividend policy from time to time and will consider our earnings, financial condition, cash flows, financing agreements and other relevant factors in making determinations regarding future dividends, if any. Under the terms of our debt arrangement to which we are a party, we are subject to certain limitations on paying dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Long-Term Debt” for further discussion of such limitations.

 

The following table provides information as of December 31, 2019 with respect to the shares of common stock that may be issued under our existing equity compensation plans:

 

Equity Compensation Plan Information

 

Plan Category

 

Number of securities to be issued

upon exercise of outstanding

options, warrants and rights

(a)

   

Weighted-average exercise price

of outstanding options, warrants

and rights

(b)

   

Number of securities remaining available

for future issuance under equity

compensation plans

(excluding securities reflected

in column (a)) (c)

 

Equity compensation plans approved by security holders (1)

    1,288,304     $ 22.71       2,099,380  

Equity compensation plans not approved by security holders

                 

Total

    1,288,304     $ 22.71       2,099,380  

 

(1)

The number of securities to be issued upon exercise of granted/awarded options, warrants and rights includes: (i) 1,034,964 restricted stock units and restricted performance units; and (ii) 253,340 deferred stock units outstanding at December 31, 2019.

 

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Issuer Purchases of Equity Securities

 

The following table provides information regarding repurchases made by us of our common stock during the year ended December 31, 2019, pursuant to share repurchase programs approved by our board of directors.

 

   

Total Number of

Shares (or Units)

Purchased

   

Average Price

Paid per Share

(or Unit)

   

Total Number of Shares

(or Units)

Purchased as Part of

Publicly Announced

Plans or Programs

   

Maximum Number

(or Approximate Dollar Value) of

Shares (or Units) that May Yet Be

Purchased Under the

Plans or Programs

 

January 2019 (1) (2)

    232,134     $

17.96

      222,901       1,777,099  

February 2019 (1) (2)

    280,640       19.86       137,107       1,639,992  

March 2019 (1) (2)

    262,215       17.07       262,035       1,377,957  

April 2019 (1) (2)

    184,846       19.09       184,162       1,193,795  

May 2019 (1) (2)

    286,721       15.84       286,721       907,074  

June 2019 (1) (2)

    181,160       15.88       181,160       725,914  

July 2019 (1) (2)

    74,939       17.96       70,330       655,584  

August 2019 (1) (2)

    55,576       19.19       55,000       600,584  

September 2019 (1) (2)

    27,500       20.36       27,500       573,084  

October 2019 (1) (2)

    64,033       20.59       24,763       548,321  

November 2019 (1) (2)

    21,343       21.68       19,955       528,366  

December 2019 (1) (2)

    20,884       22.19       20,714       507,652  

Total

    1,691,991     $ 17.96       1,492,348      

(3)    

 

 

(1)

In December 2018, our board of directors authorized the open market repurchase of up to two million shares of our common stock beginning January 1, 2019. Any shares repurchased are pursuant to one or more 10b5-1 plans. The program expires on the earlier of the repurchase by the Company of two million shares of common stock pursuant to the program or the board of directors’ termination of the program. In December 2018, we amended our senior secured credit facility, which limited the open market repurchase of our common stock to be made during 2019 to $32.0 million. We began repurchasing shares under this program in January 2019 and repurchased 1,492,348 shares of our common stock during 2019. Once repurchased, we promptly retired the shares.

(2)

In connection with approval of our credit facility, our board of directors approved the purchase of up to $10.0 million of our common stock in each calendar year in connection with our equity compensation programs for employees. The number of shares purchased includes shares surrendered to us to pay the exercise price and/or to satisfy tax withholding obligations in connection with “net, net” exercises of employee stock options and/or the vesting of restricted stock, restricted stock units or performance units issued to employees.  During 2019, 48,409 shares were surrendered in connection with stock swap transactions and 151,234 shares were surrendered in connection with restricted stock unit and performance unit transactions. The deemed price paid was the closing price of our common stock on the Nasdaq Global Select Market on the date that the restricted stock units or performance units vested. Once repurchased, we promptly retired the shares.

(3)

In December 2019, our board of directors authorized the open market repurchase of up to an additional two million shares of our common stock upon completion of the program approved by the board of directors in December 2018. As of December 31, 2019, 507,652 shares remained to be repurchased under the 2018 program and an additional two million shares under the new 2019 program. Any shares repurchased will be pursuant to one or more 10b5-1 plans. The 2019 program will expire on the earlier of the repurchase by the Company of two million shares of common stock pursuant to the program or the board of directors’ termination of the program. The terms of our senior secured credit facility limit the open market repurchase of our common stock to $40.0 million annually while our consolidated financial leverage ratio remains greater than 2.50 to 1.00.

 

33

 
 

Performance Graph

 

The following performance graph compares the total stockholder return on our common stock to the S&P 500 Index and a selected peer group index for the past five years. The compensation committee of our board of directors also reviews data for this peer group in establishing the compensation of our executive officers. In 2019, the peer group index was comprised of the following companies:

 

 

Actuant Corporation

 

Matrix Service Company

 
 

Barnes Group, Inc.

 

McDermott International Inc.

 
 

CIRCOR International, Inc.

 

Mistras Group, Inc.

 
 

Dril-Quip, Inc.

 

Newpark Resources, Inc.

 
 

Forum Energy Technologies, Inc.

 

Oil States International Inc.

 
 

Granite Construction Incorporated

 

Primoris Services Corporation

 
 

Helix Energy Solutions Group, Inc.

 

Team, Inc.

 
 

Kennametal, Inc.

 

Tetra Tech, Inc.

 
 

MasTec, Inc.

 

Valmont Industries, Inc.

 

 

The graph assumes that $100 was invested in our common stock and each index on December 31, 2014 and that all dividends, if any, were reinvested.

 

 

 

 

Comparison of Five-Year Cumulative Return

 

   

2014

   

2015

   

2016

   

2017

   

2018

   

2019

 

Aegion Corporation

  $ 100.00     $ 103.76     $ 127.35     $ 136.65     $ 87.69     $ 120.20  

S&P 500 Total Returns

    100.00       101.38       113.51       138.29       132.23       173.86  

Peer Group

    100.00       75.43       108.63       114.06       80.96       100.64  

 

Notwithstanding anything set forth in any of our previous filings under the Securities Act of 1933 or the Securities Exchange Act of 1934 which might incorporate future filings, including this Annual Report on Form 10-K, in whole or in part, the preceding performance graph shall not be deemed incorporated by reference into any such filings.

 

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Item 6. Selected Financial Data.

 

The selected financial data set forth below has been derived from our consolidated financial statements contained in “Item 8. Financial Statements and Supplementary Data” of this Report and previously published historical financial statements not included in this Report. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the footnotes, contained in this Report.

 

   

Years Ended December 31,

 

(In thousands, except per share amounts)

  2019(1)     2018(2)     2017(3)     2016(4)     2015(5)  

STATEMENT OF OPERATIONS DATA:

                                       

Revenues

  $ 1,213,935     $ 1,333,568     $ 1,359,019     $ 1,221,920     $ 1,333,570  

Operating income (loss)

    10,973       29,647       (43,520 )     50,791       17,729  

Net income (loss) (6)

    (20,892 )     2,928       (69,401 )     29,453       (10,284 )

Basic earnings (loss) per share (6)

    (0.67 )     0.09       (2.09 )     0.85       (0.28 )

Diluted earnings (loss) per share (6)

    (0.67 )     0.09       (2.09 )     0.84       (0.28 )

BALANCE SHEET DATA:

                                       

Cash and cash equivalents

  $ 64,874     $ 83,527     $ 105,717     $ 129,500     $ 209,253  

Working capital, net of cash

    142,194       178,690       219,673       172,136       171,176  
Current assets     450,215       481,867       587,064       532,237       678,196  

Property, plant and equipment, net

    101,091       107,059       109,040       156,747       144,833  

Goodwill

    256,835       260,633       260,715       298,619       249,120  

Intangible assets, net

    104,828       119,696       132,345       194,911       174,118  
Total assets     995,513       992,417       1,107,099       1,193,582       1,254,013  
Current liabilities     234,041       219,650       261,674       230,601       297,767  
Total long-term debt     276,432       311,472       344,795       370,620       351,128  
Total liabilities     560,420       522,230       602,043       617,399       659,457  

Total stockholders’ equity

    435,093       462,737       494,246       568,500       578,025  

 

(1) 2019 results include pre-tax charges of $32.3 million related to our restructuring efforts, impairment charges of $23.4 million related to our held for sale operations, $3.4 million in acquisition and divestiture expenses related primarily to our held for sale operations and a $4.4 million project remediation charge related to a CIPP project in Infrastructure Solutions.

(2)

2018 results include pre-tax charges of $29.5 million related to our restructuring efforts, $7.0 million in acquisition and divestiture expenses related primarily to our divestiture of Bayou and two small acquisitions, $2.8 million in non-cash charges related to estimates for inventory obsolescence, $2.2 million related to amending our Credit Facility and a $7.0 million loss on the sale of Bayou.  Results also include a tax benefit of $1.9 million related to certain adjustments from the TCJA.

(3)

2017 results include pre-tax charges of $24.0 million related to our restructuring efforts, $86.4 million related to certain goodwill and definite-lived intangible asset impairments, and $3.1 million in acquisition and divestiture expenses related to our acquisition of Environmental Techniques and our planned divestiture of Bayou. Results also include tax expenses of $2.4 million related to impacts from the TCJA.

(4)

2016 results include pre-tax charges of $15.9 million related to our restructuring efforts and $2.7 million in acquisition expenses related to our acquisitions of Underground Solutions, Fyfe Europe, Concrete Solutions, LMJ and diligence on other targets. Results also include a pre-tax gain of $6.6 million in connection with the settlement of two longstanding lawsuits.

(5)

2015 results include pre-tax charges of $11.0 million related to our restructuring efforts, $43.5 million related to certain goodwill impairments, and $1.9 million in acquisition expenses related to our acquisitions of Schultz, Underground Solutions and diligence on other targets. Results also include pre-tax charges of $3.4 million related to issuing our Credit Facility.

(6)

All periods presented include amounts attributable to Aegion Corporation.

 

35

 
 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.

 

Executive Summary

 

Aegion combines innovative technologies with market leading expertise to maintain, rehabilitate and strengthen pipelines and other infrastructure around the world. For nearly 50 years, we have played a pioneering role in finding innovative solutions to rehabilitate aging infrastructure, primarily pipelines in the wastewater, water, energy, mining and refining industries. We also maintain the efficient operation of refineries and other industrial facilities and provide innovative solutions for the strengthening of buildings, bridges and other structures. We are committed to keeping infrastructure working better, safer and longer for customers and communities around the world. We believe the depth and breadth of our products and services make us a leading provider for the world’s infrastructure rehabilitation and protection needs.

 

Business Outlook

 

Aegion primarily serves aging infrastructure markets, where the demand for maintenance and rehabilitation exceeds available funding and resources. That imbalance results in favorable long-term growth trends in our core markets. Our focus on rehabilitation also lessens our dependence on new construction activity, which reduces our risk in cyclical markets. We also see a growing global awareness of health, safety and environmental issues, which further reinforces the need for the environmentally sustainable solutions we provide.

 

We have substantially completed a process that began five years ago to position our operations in markets with favorable scale and earnings profiles and reduce our footprint in markets where growth opportunities were limited, uneven or better served by a different business model. We also simplified our overhead and legal entity structure to align with our more focused organization. As a result of these efforts, we shrank the top line in certain underperforming or divested portions of our business.

 

Moving into 2020, we are transitioning into a new phase of growth for the organization, focused on profitable expansion in our core markets. We are differentiated from our competitors in several ways:

 

  Our strong focus on technology & innovation, evidenced by R&D investments that have doubled historical levels in recent years.
  Our unmatched market coverage, which enables us to serve customers in all 50 states, in more than 90 countries and on six continents. As we deploy new technologies, we are well-positioned to leverage our channels to market for faster product acceptance.
  Our global manufacturing capabilities, which allow us to enjoy stronger margins than traditional installation-only contractors and provide tremendous market intelligence as we look for new ways to meet the ever-changing needs of our customers.

 

We are well positioned with a positive market outlook and growth opportunities in each of our three operating segments, and we are targeting significant earnings expansion in 2020. Longer term, we believe our core businesses can generate annual revenue growth in the low-to mid-single digit range, which should result in low double-digit annual earnings per share growth.

 

Infrastructure Solutions

 

One of the most attractive areas for growth is in the rehabilitation of municipal wastewater and pressure pipelines, primarily in North America. Recent Bluefield Research forecasts estimate that in the U.S. alone, more than $230 billion of capital expenditures are forecasted over the next decade to address water and wastewater pipeline infrastructure, where the national average age of water and wastewater pipeline has climbed to 45 years. It is estimated that water loss at U.S. utilities averages 15% annually with some municipalities losing more than half of all water pumped and treated for distribution to customers. Rehabilitation of existing pipes is expected to be the fastest growing spend category, and with installation costs including labor and paving making up a significant percentage of overall capex, municipalities will continue to look for trenchless solutions in lieu of more expensive and socially disruptive dig-and-replace alternatives.

 

We are well positioned to serve this growing demand both domestically and abroad through our extensive portfolio of trenchless solutions. We offer a diverse portfolio of solutions in a highly fragmented and growing market. Outside North America, we also have an attractive market in Asia-Pacific for large-diameter pressure pipe strengthening, and we are continuing to pursue a strategy of growing third-party product sales around the globe. Our objective is to maintain growth and our share in a large and mature market through a continued focus on productivity and offering customer-driven solutions through technological differentiation.

 

For more than two years, we have focused heavily on developing new technology initiatives to serve the pressure pipe and wastewater rehabilitation business. In 2019, we substantially completed the development for a robotic system to mechanically and effectively seal the service connection between a CIPP pressurized water main line to residential lines into homes. Success with this development initiative could address a weak point in current commercially available small-diameter pressure pipe rehabilitation systems today. We also recently introduced the application of ultraviolet light technology to cure felt CIPP tubes, which has the potential