AEGION CORPORATION The following is management's discussion and analysis of certain significant factors that have affected our financial condition, results of operations and cash flows during the periods included in the accompanying unaudited consolidated financial statements. This discussion should be read in conjunction with the consolidated financial statements and notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . We believe that certain accounting policies could potentially have a more significant impact on our consolidated financial statements, either because of the significance of the consolidated financial statements to which they relate or because they involve a higher degree of judgment and complexity. A summary of such critical accounting policies can be found in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 and in Note 2 to the consolidated financial statements contained in this report. Forward-Looking Information The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. We make forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Quarterly Report on Form 10-Q that represent our beliefs or expectations about future events or financial performance. These forward-looking statements are based on information currently available to us and on management's beliefs, assumptions, estimates and projections, are subject to risks, uncertainties and assumptions that are difficult to predict and are not guarantees of future events or results or statements of historical fact. Forward-looking statements include statements concerning business strategy, plans and prospects, among other things, including anticipated trends and developments in and management plans for our business and the markets in which we operate. In some cases, you can identify these statement by forward-looking words, such as: "estimate," "expect," "anticipate," "project," "plan," "intend," "believe," "forecast," "foresee," "likely," "may," "should," "goal," "target," "might," "will" "could," "predict," and "continue," the negative and or plural of these words and other comparable terminology. Such statements are subject to known and unknown risks, uncertainties and assumptions, including those referred to in the "Risk Factors" section of our Annual Report on Form 10-K for the year endedDecember 31, 2020 , as filed with theSecurities and Exchange Commission onMarch 10, 2021 , and in our subsequently filed documents, including this report, and, in particular, the impact of the current COVID-19 virus outbreak and the evolving response thereto both on the Company generally and on the other risks described therein, and the following factors:
• the risk that the Merger (as defined below) may not be consummated in a
timely manner, if at all, including (i) due to breach by any party to the
Merger Agreement (as defined below); (ii) due to the occurrence of any event,
change or other circumstances that could give rise to the termination of the
Merger Agreement giving any party the right to collect damages (limited to a
termination fee and reimbursement obligations); (iii) due to a material
adverse effect; (iv) the failure of a condition to the Merger to be satisfied
or waived; and (v) in circumstances in which specific performance to force
the closing of the Merger is not available;
• the risk that the Merger Agreement may be terminated in circumstances that
require the Company to pay Parent (as defined below) a termination fee of
• risks related to the diversion of management's attention from the Company's
ongoing business operations;
• the effect of the announcement or pendency of the Merger may have on the
Company's business relationships (including, without limitation, customers
and suppliers), operating results and business generally;
• risks that conditions to the consummation of the Merger are not satisfied,
including, without limitation, the receipt of approval from the Company's
stockholders;
• the effect of limitations that the Merger Agreement places on our ability to
operate our business, return capital to stockholders or engage in an
alternate transaction;
• the conditions of the capital markets during the period covered by the
forward-looking statements;
• risks that the proposed Merger disrupts our current plans and operations or
affects our ability to retain or recruit key employees;
• the amount of the costs, fees, expenses and charges related to the Merger
Agreement or the Merger;
• risk that our stock price may decline significantly if the Merger is not
completed;
• risks related to other business effects, including the effects of industry,
market, economic, political or regulatory conditions, future exchange or
interest rates or credit ratings, changes in tax laws, regulations, rates and
policies or competitive development;
• the scope and duration of the COVID-19 (coronavirus) pandemic and actions
taken by governmental authorities to contain the spread of the virus;
• the nature, cost and outcome of pending and future litigation and other legal
proceedings, including any such proceedings related to the Merger and
instituted against us and others; and
• that Company stockholders would forgo the opportunity to realize the
potential long-term value of the successful execution of the Company'scurrent strategy as an independent company if the Merger is consummated.
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 theSecurities 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. 30
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Table of Contents Executive SummaryAegion combines innovative technologies with market leading expertise to maintain, rehabilitate and strengthen pipelines and other infrastructure around the world. For 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. Our Segments We have two operating segments that are also our reportable segments: Infrastructure Solutions and Corrosion Protection. 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. InDecember 2020 , our board of directors approved a plan to sell our Energy Services operating segment. 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 endedMarch 31, 2021 and 2020. See Note 5 to the consolidated financial statements contained in this Report for further discussion. 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 acrossNorth 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. Pending Merger OnFebruary 16, 2021 , we entered into a definitive agreement and plan of merger (the "Merger Agreement") withCarter Intermediate, Inc. ("Parent") andCarter Acquisition, Inc. , a wholly-owned subsidiary of Parent, ("Merger Sub"). Each of Parent and Merger Sub are affiliates ofNew Mountain Capital, L.L.C. , a leading growth-oriented investment firm headquartered inNew York . The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and intoAegion , withAegion continuing as the surviving corporation and as a wholly-owned subsidiary of Parent (the "Merger"). The Merger Agreement was amended onMarch 13, 2021 andApril 13, 2021 . The transaction is valued at approximately$1.1 billion , or$30.00 per common share, and was unanimously approved by our board of directors. If the Merger closes,Aegion will become a private company and shares ofAegion common stock will no longer be listed on any public market. All necessary regulatory approvals have been obtained and Parent and Merger Sub's financing has been completed and the Merger is expected to close shortly following a special meeting of our 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 forMay 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 us paying a termination fee of$50,000,000 . For a summary of the Merger Agreement and related amendments, please refer to our Form 8-Ks filed with theU.S. Securities and Exchange Commission onFebruary 17, 2021 ,March 15, 2021 andApril 14, 2021 . 31
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Table of Contents COVID-19 Update Over the past year, the COVID-19 outbreak has significantly impacted domestic and international operations and economic activity. We expect these disruptions will continue through the first half of 2021 as general business and economic uncertainty persists. The disruption caused by the pandemic has adversely impacted our employees, suppliers and customers. From a human capital perspective, to date, we have not had any material disruptions to our business due to confirmed or suspected COVID-19 cases. We support our employees by providing all the necessary equipment and implementing the appropriate procedures so that they can continue to perform their duties safely. The vast majority of our office staff has been able to effectively work remotely as a result of our existing information technology infrastructure and any remaining office staff as well as our field crews and laborers have generally been able to continue working safely with the necessary protective equipment and practices.Aegion serves as an 'essential' business in nearly all ofNorth America and as such we have been able to continue to serve our customers in a safe and quality manner. From a supplier perspective, to date, we have not had any significant issues with critical suppliers, but we continue to communicate with them and closely monitor developments. Finally, from a customer perspective, we have not experienced any significant contract losses? however, we have experienced some disruption, including temporary facility shutdowns and reduced man hours in our Energy Services business, project delays and shelter-in-place and stay-at-home orders in certain international locations. In order to help mitigate the negative financial impact caused by the pandemic, we implemented a number of cost savings measures across our platforms and at our corporate office including employee furloughs, temporary wage adjustments, utilization of governmental job retention subsidies, elimination of non-essential travel and reduction of discretionary spend. During 2020, we also took cash preservation measures to aggressively manage working capital, reduce non-critical capital expenditures, suspend open-market share repurchases and transition certain salaried compensation and board of directors' fees to equity-based compensation. Additionally, we amended our credit facility in April to provide more flexible financial covenants and increase the borrowing capacity on our revolving line of credit. As a result of various measures taken, we were able to achieve cost savings of$2.6 million during 2020 from the temporary suspension of employer contributions to 401(k) and other defined contribution plans. Additionally, certain of our international businesses received approximately$5.2 million in government wage subsidies during 2020. Depending on the jurisdiction, the wage subsidy initiatives either offset incurred costs while revenue generating activities were suspended, or incentivized businesses to maintain their workforce rather than initiating furloughs. In both instances, the benefit to our businesses partially offset costs that would have likely been removed through company-initiated furloughs and workforce reductions. Certain of these spending restrictions were lifted in the second half of 2020, including: (i) full reinstatement of employee salaries effectiveJuly 1, 2020 ; (ii) compensating employees for lost salary through equity-based compensation; (iii) reinstating employer contributions to 401(k) and other defined contribution plans, effectiveNovember 1, 2020 ; (iv) reinstating cash board of directors' fees effectiveJuly 1, 2020 ; and (v) reinstating open-market share repurchases effectiveOctober 30, 2020 . OnMarch 27, 2020 , the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted and signed intoU.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on our consolidated financial condition or results of operations. However, we have deferred payments of$12.2 million as ofMarch 31, 2021 related to the timing of employer payroll taxes and a$0.4 million tax benefit related to the carryback of the 2019 U.S. net operating loss, as permitted by the CARES Act. The extent of the impact of the COVID-19 outbreak on our operational and financial performance will continue to depend on certain developments, including the duration and spread of the outbreak, its impact on our customers and suppliers and the range of governmental and community reactions to the pandemic, which continue to be uncertain and unpredictable at this time. We will continue to proactively respond to the situation and may take further actions that alter our business operations as may be required by governmental authorities, or that we determine are in the best interests of our employees and customers. 32
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Table of Contents Business OutlookAegion 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 2021, 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 80 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 operating segments, and we are targeting significant earnings
expansion in 2021.
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 capital expenditures,
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 to reduce the environmental and equipment
footprint that is currently required for the curing process. Any new technology
takes time to penetrate the market, but we believe both initiatives represent
long-term growth levers for the segment and we are focused on commercializing
these initiatives to gain broader market acceptance.
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Table of Contents Corrosion Protection The oil and gas sector has been impacted by the COVID-19 pandemic as decreased economic and travel activity has led to reduced global demand. However, recent Energy Information Industry data shows an increase in demand and limited increases in production as regions recover from COVID-19.North America midstream operators will continue to evaluate 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 our markets with a 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 inNorth 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. This offering allows us 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 theMiddle East for our products and services remains strong as well. 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.
Strategic Initiatives/Divestiture
Restructuring OnJuly 28, 2017 , our board of directors approved the Restructuring, a comprehensive global realignment and restructuring plan. As part of the Restructuring, we announced plans to: (i) divest our pipe coating and insulation businesses inLouisiana ,The Bayou Companies, LLC andBayou Wasco Insulation, LLC (collectively "Bayou"); (ii) exit all non-pipe related contract applications for the Tyfo® system inNorth America ; (iii) right-size the cathodic protection services operation inCanada and the CIPP businesses inAustralia andDenmark ; 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 theAustralia and Denmark CIPP businesses; (ii) take actions to optimize further operations withinNorth 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 theMiddle East , includingCorrpower International Limited , our cathodic protection materials manufacturing and production joint venture inSaudi Arabia ; (b)United Pipeline de Mexico S.A. de C.V. , our Tite Liner® joint venture inMexico ("United Mexico"); (c) our Tite Liner® businesses inBrazil andArgentina ; (d)Aegion South Africa Proprietary Limited , our Tite Liner® and CIPP joint venture in theRepublic of South Africa ; and (e) our CIPP contract installation operations inEngland ,the Netherlands ,Spain andNorthern 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 inMexico in 2019, as well as the shutdown of activities for the CIPP business inEngland . We completed the divestitures of CIPP operations inAustralia andSpain in early 2020. Remaining shutdown activities include Corrosion Protection entities inArgentina andSouth Africa , which are expected to be completed in the first half of 2021. Additionally, the exit of our cathodic protection installation activities in theMiddle East is substantially complete, though we expect 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 theNorthern Ireland contracting operation has been temporarily suspended and management expects to recommence the sale process during the second half of 2021. 34
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As part of efforts to optimize our cathodic protection operations inNorth America , management initiated plans during 2019 to further downsize operations in theU.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 expected these actions to improve our cathodic protection cost structure in theU.S. , eliminate unprofitable results in certain parts of the business and reduce consolidated annual expenses for the business overall. Also during 2019, we reduced corporate headcount and took other actions to reduce corporate costs. Although not part of the original outlined restructuring plan, during 2020, management executed additional headcount reductions and office closings across the Company related to business slowdowns and to balance the effects of COVID-19. We also implemented further actions at our cathodic protection operations inNorth America to reduce our exposure to construction activities, including additional headcount reductions and office closures. Additionally, we dissolved our specialty turnaround services business,P2S ServTech, LLC ("P2S"), which is reported within discontinued operations. Total pre-tax Restructuring charges recorded during the first quarter of 2021 were$0.1 million ($0.1 million post-tax) and consisted of employee severance, retention, extension of benefits, employment assistance programs, early contract termination and other restructuring costs associated with the restructuring efforts described above. Total pre-tax Restructuring and related impairment charges since inception were$188.8 million ($171.7 million post-tax), including cash charges of$57.5 million and non-cash charges of$131.3 million , of which$86.4 million relates to goodwill and long-lived asset impairment charges recorded in 2017 as part of exiting the non-pipe FRP contracting market inNorth America . We reduced headcount by approximately 830 employees as a result of these actions. We expect to incur additional cash charges related to this program of approximately$2 million . We continue to monitor the impact COVID-19 is having on the oil refining markets inthe United States and stay-at-home or other restrictive orders in certain of our international operations. We are prepared to proactively respond to the situation and may take further restructuring actions as warranted, which could result in additional cash and non-cash restructuring charges. We 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.
See Note 4 to the consolidated financial statements contained in this Report for a detailed discussion regarding our restructuring efforts.
Divestitures - Planned and Completed
Through our restructuring efforts to exit higher risk, low return markets and streamline our operations, we have divested, or plan to divest, certain businesses during 2021 and 2020:
i. In
segment. We currently believe it is probable that a sale of Energy Services
will occur in 2021.
ii. In
connection with the sale, we entered into a five-year tube-supply agreement
whereby the buyer will exclusively purchase our Insituform® CIPP felt
liners. The buyer is also entitled to use the Insituform® trade name in
period.
iii. In
connection with the sale, we entered into a five-year tube-supply agreement
whereby the buyer will exclusively purchase our Insituform® CIPP liners.
The buyer is also entitled to use the Insituform® trade name in
based on trademark license granted for the same five-year time period.
iv. In
contracting operation in
contracting operation was temporarily suspended due to COVID-19, but we
expect to recommence the sale process during the second half of 2021.
See Notes 1 and 5 to the consolidated financial statements contained in this Report for additional information.
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Table of Contents
Results of Operations - Quarters Ended
Significant Events Restructuring - As part of our restructuring efforts, we recorded pre-tax charges of$0.1 million ($0.1 million post-tax) and$3.6 million ($3.1 million post-tax) during the first quarters of 2021 and 2020, respectively. See Note 4 to the consolidated financial statements contained in this Report.
Acquisition and Divestiture Expenses - We recorded pre-tax expenses of
Consolidated Operating Results
Key financial data for consolidated operations was as follows:
(dollars in thousands) Quarters Ended March 31, Increase (Decrease)
2021 2020 $ %
Revenues $ 181,191 $ 196,312 $ (15,121 ) (7.7 )%
Gross profit 42,718 40,287 2,431 6.0 %
Gross profit margin 23.6 % 20.5 % N/A 310bp
Operating expenses 36,986 39,023 (2,037 ) (5.2 )%
Acquisition and divestiture 4,971 852 4,119 483.5 %
expenses
Restructuring and related (25 ) 1,192 (1,217 ) (102.1 )%
charges (reversals)
Operating income (loss) 786 (780 ) 1,566 200.8 %
Operating margin 0.4 % (0.4 )% N/A 80bp
Loss from continuing (665 ) (2,536 ) 1,871 73.8 %
operations
Income from discontinued 2,026 1,233 793 64.3 %
operations
Net income (loss)
attributable to Aegion 837 (1,632 ) 2,469 151.3 %
Corporation
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"N/A" represents not applicable.
Revenues Revenues decreased$15.1 million , or 7.7%, in the first quarter of 2021 compared to the first quarter of 2020. The decrease in revenues was primarily due to: (i) a$11.4 million decrease in Corrosion Protection due to decreased project activity in our cathodic protection and industrial linings operations, primarily inNorth America , due to lower customer demand as a result of COVID-19 and reduced spending in the wake of reduced oil prices; and (ii) a$3.7 million decrease in Infrastructure Solutions primarily due to decreased international revenues from our CIPP contracting installation services operations as a result of the divestitures of Insituform Australia and Insituform Spain in the first quarter of 2020, and decreased FRP orders inNorth America as a result of reduced commercial construction activity. 36
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Gross Profit and Gross Profit Margin
Gross profit increased$2.4 million , or 6.0%, in the first quarter of 2021 compared to the first quarter of 2020. As part of our restructuring efforts, we recognized charges of less than$0.1 million and$0.3 million in the first quarters of 2021 and 2020, respectively. The increase in gross profit was due to a$4.3 million increase in Corrosion Protection primarily from improved revenue and profitability from our coating services operation due to large, higher-margin international projects executed in the first quarter of 2021, and efficiencies and cost-cutting measures taken by our North American cathodic protection operations in response to the lower revenue environment and restructuring actions taken in 2020. Partially offsetting this increase was a$1.9 million decrease in Infrastructure Solutions primarily due to lower gross profit generated from CIPP contracting installation services activity in our North American operation as severe weather negatively impacted productivity during the first quarter of 2021. Gross profit margin in the first quarter of 2021 was 23.6% compared to 20.5% in the first quarter of 2020. The increase was primarily due to Corrosion Protection, which improved 1070 basis points due to productivity improvements in the coating services and cathodic protection operations, as noted above. Offsetting this increase was a 80 basis point decline in Infrastructure Solutions primarily due to the severe weather during the first quarter of 2021 and increased material costs. Operating Expenses Operating expenses decreased$2.0 million , or 5.2%, in the first quarter of 2021 compared to the first quarter of 2020. As part of our restructuring efforts, we recognized charges of$0.2 million and$1.4 million in the first quarters of 2021 and 2020, respectively. The decrease in operating expenses was due to: (i) a$1.1 million decrease in Corrosion Protection primarily due to savings from headcount reductions and cost savings achieved in connection with restructuring actions in our cathodic protection operations inNorth America ; (ii) a$0.9 million decrease in Corporate expenses primarily due to lower activity across the business in response to lower revenues and lower restructuring charges; and (iii) a$0.1 million decrease in Infrastructure Solutions primarily due to divesting certain international CIPP contracting installation operations and lower restructuring charges.
Operating expenses as a percentage of revenues were 20.4% in the first quarter of 2021 compared to 19.9% in the first quarter of 2020. The increase, as a percentage of revenues, was primarily driven by the lower revenues noted above.
Consolidated Net Income (Loss)
Consolidated net income increased
Included in consolidated net income (loss) were the following pre-tax items: (i) restructuring charges of$0.1 million and$3.6 million in the first quarters of 2021 and 2020, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down costs, early contract termination costs, inventory obsolescence, fixed asset disposals, release of cumulative currency translation adjustments and other related restructuring costs; (ii)$5.0 million and$0.9 million of divestiture expenses in the first quarters of 2021 and 2020, respectively; and (iii) a$0.2 million gain on the divestiture of Bayou in the first quarter of 2021 and a net gain of$0.4 million related to the sale of our CIPP contracting businesses inAustralia andSpain in the first quarter of 2020. The increase in consolidated net income (loss) in the first quarter of 2021 compared to the first quarter of 2020 was primarily due to an increase in operating income in Corrosion Protection from improved profitability in our coating services and cathodic protection operations. Consolidated net income was also positively impacted by lower Corporate expenses, lower interest expense from reduced borrowings and lower restructuring charges, as noted above. Consolidated net income in the first quarter of 2021, as compared to the first quarter of 2020, was negatively impacted by lower operating income in Infrastructure Solutions from severe weather that negatively impacted productivity in our North American CIPP contracting operation, higher divestiture expenses due to costs associated with the pending sale ofAegion and higher non-controlling interest income. 37
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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 have not undertaken 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 or values beyond
a renewal date in the forward 12-month period. Projects whereby we have been
advised that we are the low bidder, but have not formally been awarded the
contract, are not included. Although backlog represents only those contracts and
Master Service Agreements ("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.
The following table sets forth our consolidated backlog by segment (in
millions):
March 31, 2021 December 31, 2020 March 31, 2020
Infrastructure Solutions $ 321.9 $ 291.4 $ 297.3
Corrosion Protection 124.7 121.9 135.6
Continuing operations 446.6 413.3 432.9
Discontinued operations (1) 246.8 249.3 215.2
Total backlog $ 693.4 $ 662.6 $ 648.1
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(1) In
Energy Services operating segment, which is now reported as discontinued
operations.
Within our Infrastructure Solutions and Corrosion Protection segments, certain
contracts are performed through our variable interest entities, in which we own
a controlling portion of the entity. As of March 31, 2021 , 21.0% of our
Corrosion Protection backlog related to these variable interest entities. The
backlog related to variable interest entities in Infrastructure Solutions was de
minimus. 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.
Our discontinued operations generally enter into cost reimbursable contracts
that are based on costs incurred at agreed upon contractual rates. Included
within backlog are amounts that represent expected revenues to be realized under
long-term 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.
Contract backlog from continuing operations increased $33.3 million , or 8.1%,
to $446.6 million at March 31, 2021 from $413.3 million at December 31, 2020 .
The increase in backlog was due primarily to an increase in Infrastructure
Solutions from strong order intake in the first quarter of 2021 from our CIPP
contracting business in North America , and an increase in Corrosion Protection
primarily from our cathodic protection operations in North America .
Consolidated customer orders from continuing operations, net of cancellations
("New orders"), increased $9.9 million , or 4.8%, to $214.5 million in the first
quarter of 2021 compared to $204.6 million in the first quarter of 2020.
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Table of Contents
Infrastructure Solutions Segment
Key financial data for Infrastructure Solutions was as follows:
(dollars in thousands) Quarters Ended March 31, Increase (Decrease)
2021 2020 $ %
Revenues $ 126,562 $ 130,244 $ (3,682 ) (2.8 )%
Gross profit 29,483 31,370 (1,887 ) (6.0 )%
Gross profit margin 23.3 % 24.1 % N/A (80)bp
Operating expenses 17,557 17,652 (95 ) (0.5 )%
Acquisition and divestiture - 163 (163 ) (100.0 )%
expenses
Operating income 11,926 13,555 (1,629 ) (12.0 )%
Operating margin 9.4 % 10.4 % N/A (100)bp
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"N/A" represents not applicable.
Revenues Revenues decreased$3.7 million , or 2.8%, in the first quarter of 2021 compared to the first quarter of 2020. The decrease in revenues was primarily due to: (i) decreased international revenues from our CIPP contracting installation services operations as a result of the divestitures of Insituform Australia and Insituform Spain in the first quarter of 2020; and (ii) decreased FRP orders inNorth America as a result of reduced commercial construction activity.
Gross Profit and Gross Profit Margin
Gross profit decreased$1.9 million , or 6.0%, in the first quarter of 2021 compared to the first quarter of 2020 and gross profit margin declined 80 basis points to 23.3% in the first quarter of 2021 compared to 24.1% in the first quarter of 2020. The decreases in gross profit and gross profit margin were primarily due to lower gross profit generated from CIPP contracting installation services activity in our North American operation as severe weather negatively impacted productivity during the first quarter of 2021. While we minimized unproductive labor hours whenever possible, unallocated idle equipment costs significantly impacted gross profit inNorth America . Also contributing to the decrease in the North American operation was higher resin and chemical costs during the first quarter of 2021 compared to the prior year period. Gross profit also declined in the first quarter of 2021 compared to the first quarter of 2020 due to decreased FRP orders inNorth America , as discussed above, but were partially offset by higher gross profit and gross profit margins from FRP project activity in our Asian operations. Operating Expenses Operating expenses decreased$0.1 million , or 0.5%, in the first quarter of 2021 compared to the first quarter of 2020. As part of our restructuring efforts, we recognized expense reversals of less than$0.1 million and charges of$0.4 million in the first quarters of 2021 and 2020, respectively. The decrease in operating expenses was primarily due to: (i) lower restructuring charges noted above; (ii) exiting CIPP contracting installation services in certain international locations; and (iii) reduced activity in our North American FRP operations in response to lower revenues. These reductions were partially offset by increased operating expenses in our North American CIPP operation and FRP operations inAsia .
Operating expenses as a percentage of revenues were 13.9% in the first quarter of 2021 compared to 13.6% in the first quarter of 2020.
Operating Income and Operating Margin
Operating income decreased$1.6 million , or 12.0%, to$11.9 million in the first quarter of 2021 compared to$13.6 million in the first quarter of 2020. Operating margin declined to 9.4% in the first quarter of 2021 compared to 10.4% in the first quarter of 2020. Included in operating income were the following items: (i) restructuring charge reversals of less than$0.1 million and charges of$0.5 million in the first quarters of 2021 and 2020, respectively, related to employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs; and (ii) divestiture related expenses of$0.2 million in the first quarter of 2020 related to held for sale operations. Operating income decreased primarily due to: (i) severe weather that negatively impacted productivity in our North American CIPP contracting operation during the first quarter of 2021; and (ii) decreased revenue and gross profit from our North American FRP operation as a result of reduced commercial construction activity. Partially offsetting these decreases were lower restructuring charges and divestiture expenses in the first quarter of 2021 compared to the first quarter of 2020, and improved profitability from FRP project activity in our Asian operations. 39
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Table of Contents Corrosion Protection Segment
Key financial data for Corrosion Protection was as follows:
(dollars in thousands) Quarters Ended March 31, Increase (Decrease)
2021 2020 $ %
Revenues $ 54,629 $ 66,068 $ (11,439 ) (17.3 )%
Gross profit 13,235 8,917 4,318 48.4 %
Gross profit margin 24.2 % 13.5 % N/A 1070bp
Operating expenses 13,371 14,447 (1,076 ) (7.4 )%
Restructuring and related (21 ) 917 (938 ) (102.3 )%
charges (reversals)
Operating loss (115 ) (6,447 ) 6,332 (98.2 )%
Operating margin (0.2 )% (9.8 )% N/A 960bp
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"N/A" represents not applicable.
Revenues Revenues decreased$11.4 million , or 17.3%, in the first quarter of 2021 compared to the first quarter of 2020. The decrease was primarily due to: (i) decreased project activity in our cathodic protection and industrial linings operations, primarily inNorth America , due to lower customer demand as a result of COVID-19 and reduced spending in the wake of reduced oil prices; (ii) decreased revenues in our domestic cathodic protection operation from the exit of drilling activities as part of our restructuring activities; and (iii) decreased international revenues from our cathodic protection and industrial linings operations as we exit non-core operations as part of our restructuring efforts. Partially offsetting these decreases was increased project activity in ourMiddle East industrial linings operation and increased revenues in our coating services operation from large international projects executed during the first quarter of 2021.
Gross Profit and Gross Profit Margin
Gross profit increased$4.3 million , or 48.4%, in the first quarter of 2021 compared to the first quarter of 2020. As part of our restructuring efforts, we recognized charges of less than$0.1 million and$0.3 million in the first quarters of 2021 and 2020, respectively, primarily related to inventory obsolescence at closed locations. Gross profit margin increased 1070 basis points to 24.2% in the first quarter of 2021 compared to 13.5% in the first quarter of 2020. Gross profit and gross profit margin increased primarily due to: (i) improved revenue and profitability from our coating services operation due to large, higher-margin international projects executed in the current year period; (ii) efficiencies and cost-cutting measures taken by our North American cathodic protection operations in response to the lower revenue environment and restructuring actions taken in 2020; (iii) increased revenues from ourMiddle East industrial linings operation; and (iv) fewer restructuring charges in the first quarter of 2021 noted above. Partially offsetting these increases was a decline in gross profit and gross profit margin from our North American industrial linings operations due to lower revenues and lower fixed cost coverage. Operating Expenses Operating expenses decreased$1.1 million , or 7.4%, in the first quarter of 2021 compared to the first quarter of 2020. As part of our restructuring efforts, we recognized charges of less than$0.1 million and$0.6 million in the first quarters of 2021 and 2020, respectively. Operating expenses decreased primarily due to: (i) fewer restructuring charges in the first quarter of 2021 noted above; (ii) savings from headcount reductions and other cost savings initiatives; and (iii) cost savings achieved in connection with restructuring actions in our cathodic protection operations inNorth America . Operating expenses as a percentage of revenues were 24.5% in the first quarter of 2021 compared to 21.9% in the first quarter of 2020. The increase, as a percentage of revenues, was primarily driven by the lower revenues resulting from COVID-19 and reduced customer spending in the wake of reduced oil prices, as noted above.
Operating Loss and Operating Margin
Operating loss decreased$6.3 million to a loss of$0.1 million in the first quarter of 2021 compared to a loss of$6.4 million in the first quarter of 2020. Operating margin improved to (0.2)% in the first quarter of 2021 compared to (9.8)% in the first quarter of 2020. Included in operating loss were restructuring charges of less than$0.1 million and$1.8 million in the first quarters of 2021 and 2020, respectively, related to inventory obsolescence, employee severance, retention, extension of benefits, employee assistance programs, wind-down and other related restructuring costs. The decrease in operating loss was primarily due to: (i) fewer restructuring charges in the first quarter of 2021 compared to the first quarter of 2020; (ii) improved revenue and profitability from our coating services operation due to large, higher-margin international projects executed in the current year period; (iii) efficiencies and cost-cutting measures taken by ourU.S. cathodic protection operations in response to the lower revenue environment and restructuring actions taken in 2020; and (iv) lower operating expenses in connection with headcount reductions and other actions. These decreases were offset by lower revenues and related gross profit, primarily in our North American industrial linings operation, resulting from COVID-19 and reduced oil prices. 40
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Table of Contents Corporate
Key financial data for Corporate was as follows:
(dollars in thousands) Quarters Ended March 31, Increase (Decrease)
2021 2020 $ %
Revenues $ - $ - $ - - %
Gross profit - - - -
Gross profit margin N/A N/A N/A N/A
Operating expenses 6,058 6,924 (866 ) (12.5 )%
Acquisition and divestiture 4,971 689 4,282 621.5 %
expenses
Restructuring and related (4 ) 275 (279 ) (101.5 )%
charges (reversals)
Operating loss (11,025 ) (7,888 ) (3,137 ) (39.8 )%
Operating margin N/A N/A N/A N/A
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"N/A" represents not applicable.
Operating Expenses Operating expenses decreased$0.9 million , or 12.5%, in the first quarter of 2021 compared to the first quarter of 2020. As part of our restructuring efforts, we recognized charges of$0.2 million and$0.4 million in the first quarters of 2021 and 2020, respectively. The decrease in operating expenses was mainly due to: (i) savings from headcount reductions and other cost savings initiatives; (ii) lower restructuring charges, as noted above; and (iii) lower activity across the business in response to lower revenues. Corporate operating expenses as a percentage of consolidated revenues were 3.3% in the first quarter of 2021 compared to 3.5% in the first quarter of 2020. Operating Loss Operating loss in Corporate increased$3.1 million , or 39.8%, to$11.0 million in the first quarter of 2021 compared to$7.9 million the first quarter of 2020. Included in operating loss were the following items: (i) restructuring charges of$0.2 million and$0.7 million in the first quarters of 2021 and 2020, respectively, related to severance, extension of benefits, employee assistance programs, wind-down and other restructuring costs; and (ii) divestiture related expenses of$5.0 million in the first quarter of 2021 related primarily to the pending sale ofAegion and the planned divestiture of Energy Services, and$0.7 million in the first quarter of 2020 related primarily to the divestitures of Insituform Australia and Insituform Spain. The increase in operating loss was primarily due to the increase in divestiture expenses noted above, partially offset by lower restructuring charges and the decrease in operating expenses noted above. 41
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Table of Contents Other Income (Expense) Interest Income and Expense Interest income increased$0.1 million in the first quarter of 2021 compared to the prior year quarter primarily due to a higher interest rate received on the$8.0 million note receivable acquired in the Bayou sale. Interest expense decreased$0.5 million , or 19.3%, in the first quarter of 2021 compared to the prior year quarter primarily due to reduced loan principal balances, partially offset by higher borrowing costs under our amended Credit Facility. Other (Income) Expense Other income was$0.2 million and$0.4 million in the first quarters of 2021 and 2020, respectively. As part of our restructuring efforts, we recognized gains of$0.1 million and charges of$0.6 million in the first quarters of 2021 and 2020, respectively, related to the dissolution of certain restructured entities including the release of cumulative currency translation adjustments resulting from those disposals. Additionally, we recorded a$0.2 million gain on the divestiture of Bayou in the first quarter of 2021 and a net gain of$0.4 million related to the sale of our CIPP contracting businesses inAustralia andSpain in the first quarter of 2020. The remaining amounts primarily consisted of net foreign currency transaction losses of$0.1 million in the first quarter of 2021 and net foreign currency transaction gains of$0.6 million in the first quarter of 2020. Taxes on Income (Loss) The tax benefit on a pre-tax loss from continuing operations in the first quarter of 2021 was$0.1 million compared to a tax benefit of$0.1 million on a pre-tax loss from continuing operations in the first quarter of 2020. Our effective tax rate was a benefit of 8.0% in the quarter endedMarch 31, 2021 compared to a benefit of 4.2% in the quarter endedMarch 31, 2020 . The effective rate for the first quarter of 2021 was negatively impacted, as compared toU.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 benefited in the first quarter of 2021 from$0.3 million in domestic and foreign state rate changes. The effective rate for the first quarter of 2020 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. Non-controlling Interests Income attributable to non-controlling interests was$0.5 million and$0.3 million in the first quarters of 2021 and 2020, respectively. In the first quarter of 2021, income was primarily driven from our Corrosion Protection joint venture inOman and our Infrastructure Solutions joint ventures inAsia . In the first quarter of 2020, income was primarily driven from our Corrosion Protection joint venture inOman and our Infrastructure Solutions joint ventures inAsia , partially offset by losses from our Corrosion Protection joint venture inSaudi Arabia . 42
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Liquidity and Capital Resources
COVID-19 Considerations InMarch 2020 , the CARES Act was signed intoU.S. law to provide economic relief to individuals and businesses facing economic hardship as a result of the COVID-19 pandemic. The CARES Act did not have a material impact on our consolidated financial condition or results of operations as of and for the year endedDecember 31, 2020 . However, we have deferred payments of$12.2 million as ofMarch 31, 2021 related to the timing of employer payroll taxes and a$0.4 million tax benefit related to the carryback of the 2019 U.S. net operating loss, as permitted by the CARES Act. Due to the continued developing impacts and uncertainties of the COVID-19 pandemic, including the depth and duration of any disruptions to customers and suppliers, its future effect on our business, results of operations and financial condition cannot be predicted. While management is unable to accurately foresee these future impacts, we believe that our financial resources and liquidity levels, along with various contingency plans to reduce costs are sufficient to manage the impact currently anticipated from the COVID-19 pandemic, which will likely include reduced revenues and operating profits in all segments and lower operating cash flows for the first half of 2021. Because the COVID-19 pandemic is an evolving situation, management will continue to monitor the business impact and may take further actions that are deemed appropriate in light of the circumstances. Sources and Uses of Cash Our primary source of cash is operating activities, which include the collection of accounts receivable as well as the ultimate billing and collection of contract assets. AtMarch 31, 2021 , we believed our net accounts receivable and our contract assets, as reported on our Consolidated Balance Sheet, were fully collectible and a significant portion of the receivables will be collected within the next twelve months. From time to time, we have net receivables recorded that we believe will be collected but are being disputed by the customer in some manner. Disputes of this nature could meaningfully impact the timing of receivable collection or require us to invoke our contractual or legal rights in a lawsuit or alternative dispute resolution proceeding. If in a future period we believe any of these receivables are no longer collectible, we would increase our allowance for bad debts through a charge to earnings. We also occasionally borrow under our line of credit's available capacity to fund operating activities, including working capital investments. In April andNovember 2020 , we amended our credit facility to include more flexible financial covenants, which based on current projections, provide us with additional expected borrowing capacity over the next twelve months of more than$90 million .
We expect the principal operational use of funds for the foreseeable future will be for capital expenditures, working capital and debt service.
During the first quarter of 2021, capital expenditures were primarily used to support our Infrastructure Solutions North American CIPP business and maintain the needs of our discontinued operations. For 2021, we anticipate that we will spend approximately$25 million for capital expenditures, which is above the 2020 levels that were minimized in response to cash preservation measures taken in the wake of COVID-19. Repurchases ofAegion's common stock, including both open market repurchases and those in connection with equity compensation programs for employees, totaled 105,720 shares, or$2.5 million , in the first quarter of 2021. Shares repurchased in the open market are done so in accordance with applicable regulatory requirements and subject to cash availability, market conditions and other factors. We are not obligated to acquire any particular amount of common stock and, subject to applicable regulatory requirements, may commence, suspend or discontinue purchases at any time without notice or authorization. InFebruary 2021 , we terminated the open market share repurchase program in connection with the Merger Agreement. See Note 9 to the consolidated financial statements contained in this Report for additional information regarding our stock repurchase plans. As part of our Restructuring, we utilized cash of$1.9 million during the first quarter of 2021 and$55.0 million in cumulative cash payments since 2017 related to employee severance, extension of benefits, employment assistance programs, early lease and contract termination and other restructuring related costs. Cumulatively, we have incurred both cash and non-cash charges of$188.8 million , of which$86.4 million relates to goodwill and long-lived asset impairment charges recorded in 2017 as part of exiting the non-pipe FRP contracting market inNorth America . We expect to incur additional cash charges related to this program of approximately$2 million . We 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 entities. We will continue to evaluate impacts on the business as a result of the COVID-19 pandemic and oil market declines to determine whether additional structural changes are required as a result of evolving long-term demand fundamentals, which could result in additional cash and non-cash restructuring charges. See Note 4 to the consolidated financial statements contained in this Report for additional information and disclosures regarding our Restructuring. 43
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The following table is a condensed schedule of cash flows used in the discussion of liquidity and capital resources (in thousands):
Quarters Ended March 31,
2021 2020
Net cash provided by (used in) operating activities
$ (8,119 ) Net cash provided by (used in) investing activities 4,303 (2,737 ) Net cash provided by (used in) financing activities (7,016 )
20,205
Effect of exchange rate changes on cash (57 ) (1,291 ) Net increase (decrease) in cash, cash equivalents and$ (1,577 ) $ 8,058 restricted cash for the period
Cash Flows from Operating Activities
Cash flows from operating activities provided$1.2 million in the first quarter of 2021 compared to$8.1 million used in the first quarter of 2020. The increase in operating cash flow from the prior year period was primarily due to: (i) improved working capital management as we used$4.4 million of cash during the first quarter of 2021 compared to$8.2 million used in the first quarter of 2020; (ii) improved operating cash flows from our discontinued operations, which used$2.6 million in the first quarter of 2021 compared to$4.8 million used in the first quarter of 2020 primarily due to working capital improvements; and (iii) higher operating income during the first quarter of 2021 as compared to the first quarter of 2020, exclusive of certain non-cash charges in both periods. Cash flows during the first quarter of 2021 and 2020 were negatively impacted by$1.9 million and$5.3 million , respectively, in cash payments related to our restructuring activities. It is typical for our operations to have working capital usage during the first quarter given the seasonal increase in construction activity and payments for incentive compensation, tax obligations and various annual renewals.
Cash Flows from Investing Activities
Cash flows from investing activities provided$4.3 million during the first quarter of 2021 compared to$2.7 million used during the first quarter of 2020. Our continuing operations used$2.7 million in cash for capital expenditures in the first quarter of 2021 compared to$5.5 million in the first quarter of 2020. In the first quarters of 2021 and 2020,$0.5 and$0.8 million , respectively, of non-cash capital expenditures were included in accounts payable and accrued expenses. Capital expenditures in the first quarters of 2021 and 2020 were partially offset by$0.3 million and$0.1 million , respectively, in proceeds received from asset disposals. During the first quarter of 2021, we received$8.4 million on the receipts of note receivable related to the divestitures of Bayou and the CIPP contracting operations inSpain . During the first quarter of 2020, we received$3.4 million from the divestitures of the CIPP contracting operations inAustralia andSpain . Our discontinued operations used cash from investing activities of$1.6 million and$0.7 million in the first quarters of 2021 and 2020, respectively, primarily for capital expenditures.
Cash Flows from Financing Activities
Cash flows from financing activities used$7.0 million during the first quarter of 2021 compared to$20.2 million provided in the first quarter of 2020. During the first quarter of 2021 and 2020, we used net cash of$2.5 million and$5.0 million to repurchase 105,720 and 260,620 shares, respectively, of our common stock through open market purchases and in connection with our equity compensation programs as discussed in Note 9 to the consolidated financial statements contained in this report. During the first quarter of 2021, we used cash of$5.8 million to pay down the principal balance of our term loan and borrowed$1.3 million to fund the start-up of a joint venture. During the first quarter of 2020, we had net borrowings of$34.0 million on our line of credit to fund domestic working capital needs and to ensure we had sufficient liquidity due to COVID-19 business impacts, and we used cash of$8.8 million to pay down the principal balance of our term loan. 44
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Table of Contents Financial Condition
The following table presents our capitalization (in thousands):
March 31, 2021 December 31, 2020
Cash and cash equivalents $ 93,275 $ 94,848
Restricted cash 761 765
Total long-term debt 215,576 219,799
Total equity 409,715 408,365
Total capitalization (debt plus equity) 625,291 628,164
Debt to total capitalization 34 % 35 %
Cash and Cash Equivalents
At March 31, 2021 , our cash balances were located worldwide for working capital
and support needs. Given the breadth of our international operations,
approximately $29.0 million , or 31.1%, of our cash was denominated in currencies
other than the United States dollar as of March 31, 2021 . We manage our
worldwide cash requirements by reviewing available funds among the many
subsidiaries through which we conduct business and the cost effectiveness with
which those funds can be accessed. The repatriation of cash balances from
certain of our subsidiaries could have adverse tax consequences or be subject to
regulatory capital requirements; however, those balances are generally available
without legal restrictions to fund ordinary business operations. Certain
provisions within the Tax Cuts and Jobs Act (the "TCJA") effectively transition
the U.S. to a territorial system and eliminate deferral on U.S. taxation for
certain amounts of income that are not taxed at a minimum level. At this time,
we do not intend to distribute earnings in a taxable manner, and therefore,
intend to limit distributions to: (i) earnings previously taxed in the U.S. ;
(ii) earnings that would qualify for the 100 percent dividends received
deduction provided in the TCJA; or (iii) earnings that would not result in
significant foreign taxes. As a result, we did not recognize a deferred tax
liability on any remaining undistributed foreign earnings at March 31, 2021 .
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 .
Long-Term Debt
In October 2015 , we 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 , we amended this facility (the "amended
Credit Facility"). At March 31, 2021 , 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 , we amended our 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 our business and the uncertainties
associated with the duration of the pandemic. In November 2020 , based on
management's revised confidence with future cash flows, we further amended our
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 our open market share repurchase program.
Our indebtedness at March 31, 2021 consisted of $215.9 million outstanding from
the term loan under the amended Credit Facility. Additionally, we had $2.0
million of debt held by our joint ventures (representing funds loaned by our
joint venture partners). In connection with the formation of United Special
Technical Services Arabia Company Limited ("USTS-Saudi Arabia"), we and STS
International Holdings LTD 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 our consolidated financial
statements.
As of March 31, 2021 , we 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 our insurance carriers and $14.8
million was for letters of credit or bank guarantees of performance or payment
obligations of foreign subsidiaries.
In March 2018 , we 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 us to make
a monthly fixed rate payment of 2.937% calculated on the $170.6 million
amortizing notional amount, and provides for us 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 our 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 amended Credit Facility is subject to certain financial covenants including
a consolidated financial leverage ratio and consolidated fixed charge coverage
ratio. We were in compliance with our financial covenants at March 31, 2021 and
expect continued compliance for the next twelve months.
We believe that we have adequate resources and liquidity to fund future cash
requirements and debt repayments with cash generated from operations, existing
cash balances and additional short- and long-term borrowing capacity for the
next 12 months. At March 31, 2021 , we had the capacity to borrow up to $103.2
million of additional debt under our amended Credit Facility.
See Note 8 to the consolidated financial statements contained in this report for additional information and disclosures regarding our long-term debt.
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Disclosure of Contractual Obligations and Commercial Commitments
There were no material changes in contractual obligations and commercial commitments from those disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . See Note 11 to the consolidated financial statements contained in this report for further discussion regarding our commitments and contingencies.
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