AEGN Aegion Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

The accompanying unaudited consolidated financial statements of Aegion Corporation and its subsidiaries (collectively, “Aegion” or the “Company”) reflect all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position, results of operations and cash flows for the dates and periods presented. Results for interim periods are not necessarily indicative of the results to be expected during the remainder of the current year or for any future period. All significant intercompany related accounts and transactions have been eliminated in consolidation.

The Consolidated Balance Sheet as of December 31, 2020, which is derived from the audited consolidated financial statements, and the interim unaudited consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the requirements of Form 10-Q and Article 10 of Regulation S-X and, consequently, do not include all information or footnotes required by GAAP for complete financial statements or all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the unaudited consolidated financial statements included herein should be read in conjunction with the audited consolidated financial statements and footnotes included in the Company’s 2020 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 10, 2021.

Strategic Initiatives/Acquisitions/Divestitures

Pending Merger

On February 16, 2021, the Company entered into a definitive agreement and plan of merger with affiliates of New Mountain Capital, L.L.C., a leading growth-oriented investment firm headquartered in New York (the “Merger Agreement”). The Merger Agreement was amended on March 13, 2021 and April 13, 2021. The transaction is valued at approximately $1.1 billion, or $30.00 per common share, and was unanimously approved by the Company’s board of directors. Upon completion of the transaction, Aegion will become a private company and shares of Aegion common stock will no longer be listed on any public market. All necessary regulatory approvals have been completed and the transaction is expected to close shortly following a special meeting of the Company’s stockholders that has been called in order for the stockholders to vote on, among other things, the adoption of the Merger Agreement. The stockholder meeting is currently scheduled for May 14, 2021. In connection with the merger, any unvested restricted stock units and performance stock units will become fully vested at the time of the completed transaction and convert into the right to receive a cash payment equal to the per share merger consideration. This conversion could be material. The Merger Agreement also includes customary termination provisions for both parties, subject, in certain circumstances, to the payment by the Company of a termination fee of $50,000,000.

Discontinued Operations

In December 2020, the Company’s board of directors approved a divestiture plan for the Energy Services reportable segment (“Energy Services”). This decision reflects an advancement of the Company’s strategy to expand its focus on core water and wastewater markets, while reducing its exposure to the oil and gas markets. The results of the former Energy Services segment are presented as discontinued operations and have been excluded from both continuing operations and segment results for the quarters ended March 31, 2021 and 2020. The Company has classified Energy Services’s assets and liabilities as held for sale on the Consolidated Balance Sheets at March 31, 2021 and December 31, 2020. See Note 5.

Restructuring Activities

On July 28, 2017, the Company’s board of directors approved a comprehensive global realignment and restructuring plan (the “Restructuring”) intended to generate more predictable and sustainable long‐term earnings growth, which included, among other things, actions to reduce upstream oil & gas exposure, the exit or divestiture of multiple smaller international businesses, the restructuring of unprofitable businesses in North America and other efforts to right‐size underperforming businesses and reduce corporate and other operating costs. See Note 4.

Infrastructure Solutions Segment (“Infrastructure Solutions”)

On February 13, 2020, the Company sold its Spanish CIPP contracting entity, Insituform Technologies Iberica, S.A. (“Insituform Spain”), to Lajusocarley S.L. In connection with the sale, the Company entered into a five-year tube supply agreement whereby Insituform Spain will buy felt liners exclusively from the Company. Insituform Spain is also entitled to use the Insituform^® trade name in Spain based on a trademark license granted for the same five-year time period.

On January 24, 2020, the Company sold its Australian CIPP contracting entity, Insituform Pacific Pty Limited (“Insituform Australia”), to Insituform Holdings Pty Ltd, an entity affiliated with Killard Infrastructure Pty Ltd. In connection with the sale, the Company entered into a five-year tube supply agreement whereby Insituform Australia, under its new ownership, will buy liners exclusively from the Company. Insituform Australia is also entitled to use the Insituform^® trade name in Australia based on a trademark license granted for the same five-year time period.

During 2019, the Company initiated plans to sell its contracting business in Northern Ireland, Environmental Techniques Limited (“Environmental Techniques”). Accordingly, the Company has classified the assets and liabilities of this business as held for sale on the Consolidated Balance Sheets at March 31, 2021 and December 31, 2020. The Company temporarily suspended the sales process for Environmental Techniques due to COVID-19 and expects to recommence the process during the second half of 2021. See Note 5.

Corrosion Protection Segment (“Corrosion Protection”)

In August 2018, the Company sold substantially all of the assets of its wholly-owned subsidiary, The Bayou Companies, LLC and its fifty-one percent (51%) interest in Bayou Wasco Insulation, LLC (collectively “Bayou”). The sale price included an $8 million fully secured loan payable to Aegion. During the first quarter of 2021, the loan was paid in full.

Accumulated Other Comprehensive Loss

As set forth below, the Company’s accumulated other comprehensive loss is comprised of three main components: (i) currency translation; (ii) derivatives; and (iii) gains and losses associated with the Company’s defined benefit plan in the United Kingdom (in thousands):

For the Company’s international subsidiaries, the local currency is generally the functional currency. Assets and liabilities of these subsidiaries are translated into U.S. dollars using rates in effect at the balance sheet date while revenues and expenses are translated into U.S. dollars using average exchange rates. The cumulative translation adjustment resulting from changes in exchange rates are included in the Consolidated Balance Sheets as a component of “Accumulated other comprehensive loss” in total stockholders’ equity. Net foreign exchange transaction losses of $0.1 million and gains of $0.6 million in the first quarters of 2021 and 2020, respectively, are included in “Other expense” in the Consolidated Statements of Operations.

Taxation

The Company provides for estimated income taxes payable or refundable on current year income tax returns as well as the estimated future tax effects attributable to temporary differences and carryforwards, based upon enacted tax laws and tax rates, and in accordance with FASB ASC 740, Income Taxes (“FASB ASC 740”). FASB ASC 740 also requires that a valuation allowance be recorded against any deferred tax assets that are not likely to be realized in the future. The determination is based on the Company’s ability to generate future taxable income and, at times, is dependent on its ability to implement strategic tax initiatives to ensure full utilization of recorded deferred tax assets. Should the Company not be able to implement the necessary tax strategies, it may need to record valuation allowances for certain deferred tax assets, including those related to foreign income tax benefits. Significant management judgment is required in determining the valuation allowances recorded against net deferred tax assets.

The Company excluded 637,420 and 553,766 restricted and deferred stock units for the quarters ended March 31, 2021 and 2020, respectively, from the diluted earnings per share calculation for the Company’s common stock because of the reported net loss from continuing operations for the periods.

Cash, Cash Equivalents and Restricted Cash

The Company classifies highly liquid investments with original maturities of 90 days or less as cash equivalents. Recorded book values are reasonable estimates of fair value for cash and cash equivalents.

Restricted cash held in escrow primarily relates to funds reserved for legal requirements, deposits made in lieu of retention on specific projects performed for municipalities and state agencies, or advance customer payments and compensating balances for bank undertakings in Europe. Restricted cash related to operations is similar to retainage, and is, therefore, classified as a current asset, consistent with the Company’s policy on retainage.

Fair Value Measurements

FASB ASC 820, Fair Value Measurements (“FASB ASC 820”), defines fair value and establishes a framework for measuring and disclosing fair value instruments. The guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

The Company uses these levels of hierarchy to measure the fair value of certain financial instruments on a recurring basis, such as for derivative instruments; on a non-recurring basis, such as for acquisitions and impairment testing; for disclosure purposes, such as for long-term debt; and for other applications, as discussed in their respective footnotes. Changes in assumptions or estimation methods could affect the fair value estimates. Other financial instruments including notes payable are recorded at cost, which approximates fair value, and is based on Level 2 inputs as previously defined. The Company had no transfers between Level 1, 2 or 3 inputs during the quarters ended March 31, 2021 and 2020.

Investments in Variable Interest Entities

The Company evaluates all transactions and relationships with variable interest entities (“VIE”) to determine whether the Company is the primary beneficiary of the entities in accordance with FASB ASC 810, Consolidation.

In the first quarter of 2021, the Company entered into an agreement with STS International Holdings LTD (“STS”) to form a joint venture, United Special Technical Services Arabia Company Limited (“USTS-Saudi Arabia”) for the purpose of executing pipeline, piping and flowline high-density polyethylene lining services primarily in Saudi Arabia. Pursuant to the agreement, the Company will hold a fifty-one percent (51%) equity interest in USTS-Saudi Arabia and STS will hold the other forty-nine percent (49%) equity interest. Certain business in Saudi Arabia is currently conducted by the Company’s Omani joint venture with STS and will be migrated to USTS-Saudi Arabia. The Company expects USTS-Saudi Arabia to be operational by the second half of 2021. There were no other changes in the Company’s VIEs during the quarter ended March 31, 2021.

Financial data for consolidated variable interest entities are summarized in the following tables (in thousands):

Newly Issued Accounting Pronouncements

In March 2020, the FASB issued Accounting Standards Update No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This update provides optional expedients and exceptions for applying generally accepted accounting principles to certain contract modifications and hedging relationships that reference London Inter-bank Offered Rate (LIBOR) or another reference rate expected to be discontinued. The guidance is effective immediately and can be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2022. The Company adopted this standard, the impact of which was not material on the Company’s consolidated financial statements.

In December 2019, the FASB issued Accounting Standards Update No. 2019-12, Simplifying the Accounting for Income Taxes, which removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for the Company’s fiscal year beginning January 1, 2021, including interim periods within that fiscal year. Early adoption is permitted. The Company early-adopted this standard effective January 1, 2020, the impact of which was not material on the Company’s consolidated financial statements.

Performance Obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account in FASB ASC 606. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. For contracts in which construction, engineering and installation services are provided, there is generally a single performance obligation as the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts and, therefore, not distinct. The bundle of goods and services represents the combined output for which the customer has contracted. For product sales contracts with multiple performance obligations where each product is distinct, the Company allocates the contract’s transaction price to each performance obligation using its best estimate of the standalone selling price of each distinct good in the contract. For royalty license agreements whereby intellectual property is transferred to the customer, there is a single performance obligation as the license is not separately identifiable from the other goods and services in the contract.

The Company’s performance obligations are satisfied over time as work progresses or at a point in time. Revenues from products and services transferred to customers over time accounted for 86.3% and 86.5% of revenues for the quarters ended March 31, 2021 and 2020, respectively. Revenues from construction, engineering and installation services are recognized over time using an input measure (e.g., costs incurred to date relative to total estimated costs at completion) to measure progress toward satisfying performance obligations. Incurred cost represents work performed, which corresponds with, and thereby best depicts, the transfer of control to the customer. Contract costs include labor, material, overhead and, when appropriate, general and administrative expenses. Revenues from maintenance contracts are structured such that the Company has the right to consideration from a customer in an amount that corresponds directly with the performance completed to date. Therefore, the Company utilizes the practical expedient in FASB ASC 606-55-255, which allows the Company to recognize revenue in the amount to which it has the right to invoice. Applying this practical expedient, the Company is not required to disclose the transaction price allocated to remaining performance obligations under these agreements. Revenues from royalty license arrangements are recognized either at contract inception when the license is transferred or when the royalty has been earned, depending on whether the contract contains fixed consideration. Revenues from stand-alone product sales are recognized at a point in time, when control of the product is transferred to the customer. Revenues from these types of contracts accounted for 13.7% and 13.5% of revenues for the quarters ended March 31, 2021 and 2020, respectively.

On March 31, 2021, the Company had $446.6 million of remaining performance obligations from construction, engineering and installation services. The Company estimates that approximately $440.1 million, or 98.5%, of the remaining performance obligations at March 31, 2021 will be realized as revenues in the next 12 months.

Contract Estimates

Accounting for long-term contracts involves the use of various techniques to estimate total contract revenue and costs. For long-term contracts, the Company estimates the profit on a contract as the difference between the total estimated revenue and expected costs to complete a contract, and recognizes that profit over the life of the contract. Contract estimates are based on various assumptions to project the outcome of future events that sometimes span multiple years. These assumptions include labor productivity and availability; the complexity of the work to be performed; the cost and availability of materials; the performance of subcontractors; and the availability and timing of funding from the customer.

The Company’s contracts do not typically contain variable consideration or other provisions that increase or decrease the transaction price. In rare situations where the transaction price is not fixed, the Company estimates variable consideration at the most likely amount to which it expects to be entitled. The Company includes estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. For royalty license agreements, the Company applies the sales-based and usage-based royalty exception and recognizes royalties at the later of: (i) when the subsequent sale or usage occurs; or (ii) the satisfaction or partial satisfaction of the performance obligation to which some or all of the sales-or usage-based royalty has been allocated. For contracts in which a portion of the transaction price is retained and paid after the good or service has been transferred to the customer, the Company does not recognize a significant financing component. The primary purpose of the retainage payment is often to provide the customer with assurance that the Company will perform its obligations under the contract, rather than to provide financing to the customer.

The Company’s estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of anticipated performance and all information (historical, current and forecasted) that is reasonably available.

The following tables summarize revenues by segment and contract type (in thousands):

Contract Balances

The timing of revenue recognition, billings and cash collections results in billed accounts receivable, contract assets and contract liabilities on the Consolidated Balance Sheets. Contract assets represent work performed that could not be billed either due to contract stipulations or the required contractual documentation has not been finalized. Substantially all unbilled amounts are expected to be billed and collected within one year.

For fixed fee and time-and-materials based contracts, amounts are billed as work progresses in accordance with agreed-upon contractual terms, either at periodic intervals or upon achievement of contractual milestones. Generally, billing occurs subsequent to revenue recognition, resulting in contract assets. For some royalty license arrangements, minimum amounts are billed over the license term as quarterly royalty amounts are determined. This results in contract assets as the Company recognizes revenue for the license when the license is transferred to the customer at contract inception. The Company’s contract liabilities consist of advance payments, billings in excess of revenue recognized and deferred revenue.

The Company’s contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period. Advance payments, billings in excess of revenue recognized and deferred revenue are each classified as current.

Net contract assets (liabilities) consisted of the following (in thousands):

Substantially all of the $37.6 million and $37.5 million contract liabilities balances at December 31, 2020 and December 31, 2019, respectively, were recognized in revenues during the first quarters of 2021 and 2020, respectively.

On July 28, 2017, the Company’s board of directors approved the Restructuring. As part of the Restructuring, the Company announced plans to: (i) divest Bayou; (ii) exit all non-pipe related contract applications for the Tyfo^® system in North America; (iii) right-size the cathodic protection services operation in Canada and the CIPP businesses in Australia and Denmark; and (iv) reduce corporate and other operating costs.

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

The Company completed the divestitures of Bayou and the Denmark CIPP business in 2018. The Company also completed the divestitures of the Netherlands CIPP business and its Tite Liner^® joint venture in Mexico in 2019, as well as the shutdown of activities for the CIPP business in England. The Company completed the divestitures of CIPP operations in Australia and Spain in early 2020 (see Note 1). Remaining shutdown activities include Corrosion Protection entities in Argentina and South Africa, which are expected to be completed in 2021. Additionally, the exit of the Company’s cathodic protection installation activities in the Middle East is substantially complete, though management expects minimal wind-down activities will extend through the first half of 2021 related to a small number of projects remaining in backlog. The sale of the Northern Ireland contracting operation was temporarily suspended due to COVID-19, but the Company expects to recommence the sale process during the second half of 2021.

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

Although not part of the original outlined restructuring plan, during 2020, the Company executed additional headcount reductions and office closings across the Company related to business slowdowns and to balance the effects of COVID-19. The Company also implemented further actions at its cathodic protection operations in North America to reduce exposure to construction activities, including additional headcount reductions and office closures. Additionally, the Company dissolved its specialty turnaround services business, P2S ServTech, LLC (“P2S”), which is reported within discontinued operations.

Total pre-tax restructuring and related impairment charges since inception were $188.8 million ($171.7 million post-tax) and consisted of cash charges totaling $57.5 million and non-cash charges totaling $131.3 million. Cash charges included employee severance, retention, extension of benefits, employment assistance programs and other restructuring costs associated with the restructuring efforts described above. Non-cash charges included (i) $86.4 million related to goodwill and long-lived asset impairment charges recorded in 2017 as part of exiting the non-pipe FRP contracting market in North America, and (ii) $44.9 million related to allowances for accounts receivable, write-offs of inventory and long-lived assets, impairment of definite-lived intangible assets, release of cumulative currency translation adjustments as well as net losses on the disposal of both domestic and international entities. The Company reduced headcount by approximately 830 employees as a result of these actions.

The Company continues to monitor the impact COVID-19 is having on the oil refining markets in the United States and stay-at-home or other restrictive orders in certain of the Company’s international operations. The Company is prepared to proactively respond to the situation and may take further restructuring actions as warranted. The Company expects to incur additional cash charges related to this program of approximately $2 million. It could also incur additional non-cash charges primarily associated with the release of cumulative currency translation adjustments and losses on the closure or liquidation of international businesses.

During the quarters ended March 31, 2021 and 2020, the Company recorded pre-tax expenses related to the Restructuring as follows (in thousands):

Restructuring costs related to severance, other termination benefit costs and early contract termination costs were less than $0.1 million and $1.2 million for the quarters ended March 31, 2021 and 2020, respectively, and are reported on a separate line in the Consolidated Statements of Operations.

The following tables summarize all charges related to the Restructuring recognized in the quarters ended March 31, 2021 and 2020 as presented in their affected line in the Consolidated Statements of Operations (in thousands):

The following tables summarize restructuring activity during the first quarters of 2021 and 2020 (in thousands):

Discontinued Operations

In December 2020, the Company’s board of directors approved a plan to sell its Energy Services operating segment. This disposal represented a strategic shift to further reduce Aegion’s oil and gas exposure and drive greater focus on the Company’s portfolio of pipeline rehabilitation technologies. Energy Services had historically been a separate reportable segment with exclusive operations in the United States. The Company expects to incur between $2 million and $3 million in cash charges in 2021 to divest Energy Services.

In accordance with FASB ASC 205, Presentation of Financial Statements – Discontinued Operations (“FASB ASC 205”), the results of the former Energy Services segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the quarters ended March 31, 2021 and 2020. Financial information included in net income from discontinued operations for the former Energy Services segment is as follows:

Assets Held for Sale

During 2019, the Company initiated plans to sell its contracting business in Northern Ireland, Environmental Techniques. Before the COVID-19 pandemic, the Company was in various stages of discussions with third parties for Environmental Techniques. Although the sale process has been temporarily suspended, the Company expects to recommence the process during the second half of 2021.

The relevant asset and liability balances for Energy Services and Environmental Techniques are accounted for as held for sale and measured at the lower of carrying value or fair value less cost to sell at March 31, 2021 and December 31, 2020. In the event the Company is unable to sell the assets and liabilities or sells them at a price or on terms that are less favorable than currently anticipated, the Company could incur impairment charges or a loss on disposal. The following table provides the components of assets and liabilities held for sale (in thousands):

The Company’s operating lease portfolio includes operational field locations, administrative offices, equipment, vehicles and information technology equipment. The majority of the Company’s leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for 5 years or more. Right-of-use assets are presented within “Operating lease assets” on the Consolidated Balance Sheet. “Operating lease liabilities” are presented within the respective current and non-current liability sections on the Consolidated Balance Sheet.

Operating lease assets and liabilities are recognized based on the present value of lease payments over the lease term at inception. For purposes of calculating operating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Operating leases in effect prior to January 1, 2019 were recognized at the present value of the remaining payments on the remaining lease term as of January 1, 2019.  A portion of the Company’s real estate, equipment and vehicle leases is subject to periodic changes in the Consumer Price Index, LIBOR or other market index. The changes to these indexes are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. Because most leases do not provide an explicit rate of return, the Company utilizes its incremental secured borrowing rate on a lease-by-lease basis in determining the present value of lease payments at the commencement date of the lease.

The following table presents the components of lease expense (in thousands):

Supplemental balance sheet information related to leases was as follows (in thousands):

Amortization expense was $2.3 million and $2.3 million for the quarters ended March 31, 2021 and 2020, respectively. Estimated amortization expense for the years ended December 31, 2021, 2022, 2023, 2024 and 2025 is $9.2 million, $9.2 million, $9.2 million, $9.2 million and $8.9 million, respectively.

In October 2015, the Company entered into an amended and restated $650.0 million senior secured credit facility with a syndicate of banks. In February 2018, December 2018, April 2020 and November 2020, the Company amended this facility (the “amended Credit Facility”). At March 31, 2021 and December 31, 2020, the amended Credit Facility consisted of a $175.0 million revolving line of credit and a $308.4 million term loan facility, each with a maturity date in February 2023.

In April 2020, the Company amended its credit facility to provide additional liquidity and to ensure ongoing debt covenant compliance as a proactive measure to manage the potential impacts of COVID-19 on the Company’s business and the uncertainties associated with the duration of the pandemic. In November 2020, based on management’s revised confidence with future cash flows, the Company further amended its credit facility to secure more favorable interest rates and maintain flexibility to manage through downside risk. Through these amendments, the amended Credit Facility now includes more flexible financial covenants and allows for the add-back of certain restructuring and divestiture charges. The amended Credit Facility also places certain limits on the Company’s open market share repurchase program. See Note 9.

Based on the 2020 amendments, interest is charged on the principal amounts outstanding under the amended Credit Facility at the British Bankers Association LIBOR rate plus an applicable rate ranging from 1.25% to 3.25% depending on the Company’s consolidated leverage ratio. The amended Credit Facility also provides a 25 basis point floor for the base LIBOR rate. The applicable LIBOR borrowing rate (LIBOR plus Company’s applicable rate) as of March 31, 2021 was 2.00%.

The Company’s indebtedness at March 31, 2021 consisted of $215.9 million outstanding from the term loan under the amended Credit Facility. Additionally, the Company had $2.0 million of debt held by its joint ventures (representing funds loaned by its joint venture partners). In connection with the formation of USTS-Saudi Arabia, the Company and STS loaned USTS-Saudi Arabia an aggregate of SAR 9.7 million (approximately $2.5 million) during the first quarter of 2021 for the purchase of capital assets and for operating purposes. Of such amount, $1.3 million was designated as third-party debt in the Company’s consolidated financial statements.

As of March 31, 2021, the Company had $25.6 million in letters of credit issued and outstanding under the amended Credit Facility. Of such amount, $10.8 million was collateral for the benefit of certain of the Company’s insurance carriers and $14.8 million was for letters of credit or bank guarantees of performance or payment obligations of foreign subsidiaries.

The Company’s indebtedness at December 31, 2020 consisted of $221.7 million outstanding from the term loan under the amended Credit Facility and $0.8 million of third-party notes.

At March 31, 2021 and December 31, 2020, the estimated fair value of the Company’s long-term debt was approximately $213.7 million and $219.2 million, respectively. Fair value was estimated using market rates for debt of similar risk and maturity and a discounted cash flow model, which are based on Level 2 inputs as defined in Note 2.

In March 2018, the Company entered into an interest rate swap forward agreement that began in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 2.937% calculated on the amortizing $170.6 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $170.6 million notional amount. The receipt of the monthly LIBOR-based payment offsets the variable monthly LIBOR-based interest cost on a corresponding $170.6 million portion of the Company’s term loan from the amended Credit Facility. After considering the impact of the interest rate swap agreement, the effective borrowing rate on the Company’s term note as of March 31, 2021 was approximately 4.12%. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge. See Note 13.

The amended Credit Facility is subject to certain financial covenants, including a consolidated financial leverage ratio and consolidated fixed charge coverage ratio. Subject to the specifically defined terms and methods of calculation as set forth in the amended Credit Facility’s credit agreement, the financial covenant requirements as of March 31, 2021 were defined as follows:

At March 31, 2021, the Company was in compliance with its financial covenants as required under the amended Credit Facility.

Share Repurchase Plan

In December 2019, the Company’s board of directors authorized the open market repurchase of up to an additional two million shares of the Company’s common stock upon completion of the two million share repurchase program approved by the board of directors in December 2018. As of March 31, 2021, 86,474 shares remained to be repurchased under the 2018 program and an additional two million shares under the 2019 program. Any shares repurchased are pursuant to one or more trading plans established in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The amended Credit Facility limits open market repurchases of the Company’s common stock to: (i) unlimited if the Company’s consolidated financial leverage ratio is less than 2.50 to 1.00; and (ii) $40.0 million per year while the Company’s consolidated financial leverage ratio is greater than or equal to 2.50 to 1.00. Effective February 16, 2021, the Company terminated the open market share repurchase program in connection with the Merger Agreement (see Note 1).

The Company is also authorized to repurchase up to $10.0 million of the Company’s common stock in each calendar year in connection with the Company’s equity compensation programs for employees. The participants in the Company’s equity plans may surrender shares of common stock in satisfaction of tax obligations arising from the vesting of restricted stock, restricted stock unit awards and performance unit awards under such plans. The deemed price paid is the closing price of the Company’s common stock on the Nasdaq Global Select Market on the date that the restricted stock, restricted stock unit or performance unit vests. The shares of common stock surrendered for taxes due on the exercise of the option are deemed repurchased by the Company.

During the first quarter of 2021, the Company acquired 39,501 shares of the Company’s common stock for $0.8 million ($19.84 average price per share) through the open market repurchase program discussed above, and 66,219 shares of the Company’s common stock for $1.7 million ($25.78 average price per share) in connection with the satisfaction of tax obligations in connection with equity compensation programs for employees. Once repurchased, the Company immediately retired all such shares.

During the first quarter of 2020, the Company acquired 180,491 shares of the Company’s common stock for $3.2 million ($17.80 average price per share) through open market repurchases and 80,129 shares of the Company’s common stock for $1.8 million ($22.87 average price per share) in connection with the satisfaction of tax obligations in connection with equity compensation programs for employees. Once repurchased, the Company immediately retired all such shares.

Equity-Based Compensation Plans

In April 2016, the Company’s stockholders approved the 2016 Employee Equity Incentive Plan, which was amended in 2017 by the First Amendment to the 2016 Employee Equity Incentive Plan (as amended, the “2016 Employee Plan”). In April 2018, the Company’s stockholders approved the Second Amendment to the 2016 Employee Equity Incentive Plan, which increased by 1,700,000 the number of shares of the Company’s common stock reserved and available for issuance in connection with awards issued under the 2016 Employee Plan. The 2016 Employee Plan, which replaced the 2013 Employee Equity Incentive Plan, provides for equity-based compensation awards, including restricted shares of common stock, performance awards, stock options, stock units and stock appreciation rights. The 2016 Employee Plan is administered by the Compensation Committee of the board of directors, which determines eligibility, timing, pricing, amount and other terms or conditions of awards. As of March 31, 2021, 1,284,982 shares of the Company’s common stock were available for issuance under the 2016 Employee Plan.

In April 2016, the Company’s stockholders approved the 2016 Non-Employee Director Equity Incentive Plan (the “2016 Director Plan”), which replaced the 2011 Non-Employee Director Equity Incentive Plan. In April 2019, the Company’s stockholders approved an amendment and restatement of the 2016 Director Plan, which among other things, increased by 300,000 the number of shares of the Company’s common stock reserved and available for issuance in connection with awards issued under the 2016 Director Plan. The 2016 Director Plan provides for equity-based compensation awards, including non-qualified stock options and stock units. The board of directors administers the 2016 Director Plan and has the authority to establish, amend and rescind any rules and regulations related to the 2016 Director Plan. As of March 31, 2021, 248,452 shares of the Company’s common stock were available for issuance under the 2016 Director Plan.

Stock Awards

Stock awards, which include shares of restricted stock, restricted stock units and performance stock units, are awarded from time to time to executive officers and certain key employees of the Company. Stock award compensation is recorded based on the award date fair value and charged to expense ratably through the requisite service period. The forfeiture of unvested restricted stock, restricted stock units and performance stock units causes the reversal of all previous expense to be recorded as a reduction of current period expense.

A summary of the stock award activity is as follows:

Expense associated with stock awards was $1.8 million and $1.8 million for the quarters ended March 31, 2021 and 2020, respectively. Unrecognized pre-tax expense of $11.8 million related to stock awards is expected to be recognized over the weighted average remaining service period of 2.02 years for awards outstanding at March 31, 2021.

Deferred Stock Unit Awards

Deferred stock units are generally awarded to directors of the Company and represent the Company’s obligation to transfer one share of the Company’s common stock to the grantee at a future date. Expense related to the issuance of deferred stock units is based on the award date fair value and charged to expense ratably through the requisite service period, which is generally one year. Certain deferred stock awards are fully vested, and fully expensed, on the date of grant. The forfeiture of unvested deferred stock units causes the reversal of all previous expense to be recorded as a reduction of current period expense.

A summary of deferred stock unit activity is as follows:

Expense associated with deferred stock unit awards was $0.3 million and $0.3 million for the quarters ended March 31, 2021 and 2020, respectively. Unrecognized pre-tax expense of less than $0.1 million related to deferred stock unit awards is expected to be recognized over the weighted average service period of 0.1 years for awards outstanding at March 31, 2021.

The Company’s effective tax rate from continuing operations in the quarter ended March 31, 2021 was a benefit of 8.0% on a pre-tax loss. The effective rate was negatively impacted, as compared to U.S. federal statutory tax rates, by valuation allowances on certain net operating losses in foreign jurisdictions for which no income tax benefits are expected to be recognized. The effective rate was benefited in the first quarter of 2021 from $0.3 million in domestic and foreign state rate changes.

The Company’s effective tax rate from continuing operations in the quarter ended March 31, 2020 was a benefit of 4.2% on a pre-tax loss. The expense was negatively impacted by: (i) valuation allowances on certain net operating losses in foreign jurisdictions for which no income tax benefits are expected to be recognized; and (ii) a $0.4 million net tax expense related to employee share-based payments that vested during the first quarter of 2020.

Litigation

The Company is involved in certain litigation incidental to the conduct of its business and affairs. Management, after consultation with legal counsel, does not believe that the outcome of any such litigation, individually or in the aggregate, will have a material adverse effect on the Company’s consolidated financial condition, results of operations or cash flows.

Litigation Relating to the Merger

On March 15, 2021, a shareholder complaint relating to the merger was filed in the United States District Court for the Southern District of New York, captioned Stein v. Aegion Corp. et al., Case No. 1:21-cv-2247. On March 19, 2021, a shareholder complaint relating to the merger was filed in the United States District Court for the Eastern District of New York, captioned Pallmer v. Aegion Corp. et al., Case No: 1:21-cv-01448. On March 29, 2021, a shareholder complaint relating to the merger was filed in the United States District Court for the Southern District of New York, captioned Griffin v. Aegion Corp. et al., Case No. 1:21-cv-02686. Each of the foregoing complaints alleges that the preliminary proxy statement filed with the SEC on March 15, 2021 is false and/or misleading and asserts claims for violations of Section 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 against the Company and its directors. On April 23, 2021, a shareholder complaint relating to the merger was filed in the Delaware Court of Chancery, captioned Assad v. Aegion Corp. et al., Case No. 2021-0349, which alleges that the definitive proxy statement filed with the SEC on April 1, 2021 (the “Definitive Proxy”) is materially incomplete and misleading and asserts breach of fiduciary duty claims against the Company and its directors. On April 26, 2021, two shareholder complaints relating to the merger were filed, one in the United States District Court for the District of Delaware, captioned Kubicek v. Aegion Corp. et al., Case No. 1:21-cv-579, and one in the United States District Court for the Eastern District of Pennsylvania, captioned Ciccotelli v. Aegion Corp. et al., Case No. 2:21-cv-01914; each alleges that the Definitive Proxy omits or misrepresents material information and asserts claims for violations of Section 14(a) and 20(a) of the Exchange Act and SEC Rule 14a-9 against the Company and its directors. Each of these complaints purports to seek, among other things, injunctive relief preventing the merger, damages and an award of plaintiffs’ costs and disbursements, including reasonable attorneys’ and expert fees and expenses. On May 4, 2021, the Company received a demand letter on behalf of a purported shareholder of the Company challenging certain disclosures set forth in the Definitive Proxy. The Company believes that the claims asserted in these complaints and the demand letter are without merit.

On May 7, 2021, the Company filed a Form 8-K disclosing additional information relating to the merger in response to allegations made in the above complaints. In filing the Form 8-K, the Company denied the allegations of the complaints and the need for any supplemental disclosure. However, the Company disclosed the additional information solely for the purpose of avoiding the risk of the complaints or the demand letter delaying or adversely affecting the merger and to minimize the costs, risks and uncertainties inherent in litigation.

Purchase Commitments

The Company had no material purchase commitments at March 31, 2021.

Guarantees

The Company has many contracts that require the Company to indemnify the other party against loss from claims, including claims of patent or trademark infringement or other third-party claims for injuries, damages or losses. The Company has agreed to indemnify its surety against losses from third-party claims of subcontractors. The Company has not previously experienced material losses under these provisions and, while there can be no assurances, currently does not anticipate any future material adverse impact on its consolidated financial position, results of operations or cash flows.

The Company regularly reviews its exposure under all its engagements, including performance guarantees by contractual joint ventures and indemnification of its surety. As a result of the most recent review, the Company has determined that the risk of material loss is remote under these arrangements and has not recorded a liability for these risks at March 31, 2021 on its Consolidated Balance Sheet.

The Company has two operating segments, which are also its reportable segments: Infrastructure Solutions and Corrosion Protection. The Company’s operating segments correspond to its management organizational structure. Each operating segment has leadership that reports to the chief operating decision manager (“CODM”). The operating results and financial information reported by each segment are evaluated separately, regularly reviewed and used by the CODM to evaluate segment performance, allocate resources and determine management incentive compensation. In December 2020, the Company’s board of directors approved a plan to sell its Energy Services operating segment (see Note 5). As a result, the operating results of the former Energy Services segment are presented as discontinued operations and, as such, have been excluded from both continuing operations and segment results for the quarters ended March 31, 2021 and 2020.

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

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

The following table summarizes revenues and gross profit by geographic region (in thousands):

As a matter of policy, the Company uses derivatives for risk management purposes, and does not use derivatives for speculative purposes. From time to time, the Company may enter into foreign currency forward contracts to hedge foreign currency cash flow transactions. For cash flow hedges, a gain or loss is recorded in the Consolidated Statements of Operations upon settlement of the hedge. All of the Company’s hedges that are designated as hedges for accounting purposes were highly effective; therefore, no notable amounts of hedge ineffectiveness were recorded in the Company’s Consolidated Statements of Operations for either the settlement of cash flow hedges or the outstanding hedged balance. The Company’s cash flow hedges were in a net deferred loss position of $7.7 million and $9.0 million at March 31, 2021 and December 31, 2020, respectively. The change during the period was due to favorable movements in short-term interest rates relative to the hedged position. The Company presents derivative instruments in the consolidated financial statements on a gross basis. Deferred losses were recorded in other non-current liabilities and other comprehensive loss on the Consolidated Balance Sheets. The net periodic change of the Company’s cash flow hedges was recorded on the foreign currency translation adjustment and derivative transactions line of the Consolidated Statements of Equity.

The Company also engages in regular inter-company trade activities and receives royalty payments and management fees from certain of its wholly-owned entities, paid in local currency, rather than the Company’s functional currency, U.S. dollars. From time to time, the Company utilizes foreign currency forward exchange contracts to mitigate the currency risk associated with the anticipated future payments from certain of its international entities. During the first quarter of 2021, a loss of $0.1 million was recorded upon settlement of foreign currency forward exchange contracts. Gains and losses of this nature are recorded to “Other income (expense)” in the Consolidated Statements of Operations. No contracts were utilized during the first quarter of 2020.

On March 12, 2018, the Company entered into an interest rate swap forward agreement that began in October 2020 and expires in February 2023 to coincide with the amortization period of the amended Credit Facility. The swap requires the Company to make a monthly fixed rate payment of 2.937% calculated on the amortizing $170.6 million notional amount, and provides for the Company to receive a payment based upon a variable monthly LIBOR interest rate calculated on the same amortizing $170.6 million notional amount. The receipt of the monthly LIBOR-based payment offsets the variable monthly LIBOR-based interest cost on a corresponding $170.6 million portion of the Company’s term loan from the amended Credit Facility. This interest rate swap is used to partially hedge the interest rate risk associated with the volatility of monthly LIBOR rate movement and is accounted for as a cash flow hedge.

The following table summarizes the Company’s derivative position at March 31, 2021: