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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2002
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Commission file number #0-10786
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Insituform Technologies, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3032158
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
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(Address of Principal Executive Offices)
(636) 530-8000
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(Registrant's telephone number including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at August 12, 2002
- ------------------------------------------ ------------------------------
Class A Common Stock, $.01 par value 26,500,727 Shares
INDEX
Page No.
Part I Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income.................................................3
Consolidated Balance Sheets.......................................................4
Consolidated Statements of Cash Flows.............................................5
Notes to Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................11
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................14
Part II Other Information:
Item 1. Legal Proceedings................................................................15
Item 4. Submission of Matters to a Vote of Security Holders..............................15
Item 6. Exhibits and Reports on Form 8-K.................................................15
Signatures...................................................................................................16
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES $ 118,488 $ 118,071 $ 229,663 $ 216,921
COST OF REVENUES 87,491 80,227 169,777 149,178
--------- --------- --------- ---------
GROSS PROFIT 30,997 37,844 59,886 67,743
SELLING, GENERAL AND ADMINISTRATIVE 16,741 18,065 34,396 38,605
--------- --------- --------- ---------
OPERATING INCOME 14,256 19,779 25,490 29,138
OTHER (EXPENSE) INCOME:
Interest expense (1,643) (2,374) (3,831) (4,825)
Other 333 315 783 977
--------- --------- --------- ---------
TOTAL OTHER EXPENSE (1,310) (2,059) (3,048) (3,848)
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 12,946 17,720 22,442 25,290
TAXES ON INCOME 4,899 6,911 8,595 9,963
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS
AND DISCONTINUED OPERATIONS 8,047 10,809 13,847 15,327
MINORITY INTERESTS (37) (74) (68) (172)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 228 346 381 468
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 8,238 11,081 14,160 15,623
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (927) 356 (2,529) 440
--------- --------- --------- ---------
NET INCOME $ 7,311 $ 11,437 $ 11,631 $ 16,063
========= ========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS:
Basic:
Income from continuing operations $ 0.31 $ 0.41 $ 0.53 $ 0.60
Discontinued operations (0.03) 0.01 (0.09) 0.02
Net income 0.28 0.43 0.44 0.61
Diluted:
Income from continuing operations $ 0.31 $ 0.40 $ 0.53 $ 0.58
Discontinued operations (0.03) 0.01 (0.09) 0.02
Net income 0.27 0.42 0.43 0.60
See accompanying notes to consolidated financial statements.
3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$3,445 and $4,262, respectively $ 64,294 $ 74,649
Receivables, net 91,890 86,191
Retainage 23,608 21,327
Costs and estimated earnings in excess of billings 28,328 23,719
Inventories 12,594 13,712
Prepaid expenses and other assets 10,887 8,135
Assets held for disposal 12,415 32,034
--------- ---------
TOTAL CURRENT ASSETS 244,016 259,767
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation 78,578 68,547
--------- ---------
OTHER ASSETS
Goodwill 125,733 117,251
Other assets 20,662 18,057
--------- ---------
TOTAL OTHER ASSETS 146,395 135,308
--------- ---------
TOTAL ASSETS $ 468,989 $ 463,622
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and short-term borrowings $ 43,587 $ 35,218
Accounts payable and accrued expenses 72,995 68,302
Billings in excess of costs and estimated earnings 9,791 8,057
Liabilities related to discontinued operations 3,406 9,471
--------- ---------
TOTAL CURRENT LIABILITIES 129,779 121,048
--------- ---------
LONG-TERM DEBT, less current maturities 73,658 88,853
OTHER LIABILITIES 4,388 2,039
--------- ---------
TOTAL LIABILITIES 207,825 211,940
--------- ---------
MINORITY INTERESTS 1,323 1,555
--------- ---------
STOCKHOLDERS' EQUITY
Preferred stock, undesignated, $.10 par - shares authorized
1,400,000; none outstanding - -
Series A Junior Participating Preferred stock, $.10 par - shares
authorized 600,000; none outstanding - -
Common stock, $.01 par - shares authorized 60,000,000;
shares outstanding 26,510,727 and 26,602,385 287 286
Additional paid-in capital 130,905 129,651
Retained earnings 184,712 172,112
Treasury stock - 2,168,773 and 1,968,773 shares (48,920) (44,563)
Cumulative foreign currency translation adjustments (7,143) (7,359)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 259,841 250,127
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 468,989 $ 463,622
========= =========
See accompanying notes to consolidated financial statements.
4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE SIX MONTHS
ENDED JUNE 30,
2002 2001
-------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 11,631 $ 16,063
Loss (income) from discontinued operations 2,529 (440)
-------- ---------
INCOME FROM CONTINUING OPERATIONS 14,160 15,623
-------- ---------
ADJUSTMENTS TO RECONCILE NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 7,197 7,917
Amortization 721 3,642
Other (1,349) 448
Deferred income taxes 42 100
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES:
Receivables, including costs and estimated earnings in excess of billings
and retainage (6,098) (2,910)
Inventories 1,121 4,474
Prepaid expenses and other assets (2,470) (275)
Accounts payable, accrued expenses and billings in excess of costs and
estimated earnings 3,240 (14,173)
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 16,564 14,846
NET CASH PROVIDED BY OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS 1,800 1,710
-------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,364 16,556
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (11,561) (11,688)
Proceeds from sale of fixed assets 2,520 569
Purchases of businesses, net of cash acquired (8,484) (2,359)
Cash from sale of business (discontinued operations) 1,515 -
Other investing activities (501) (199)
-------- ---------
NET CASH USED IN INVESTING ACTIVITIES (16,511) (13,677)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,257 5,908
Purchases of treasury stock (4,357) (5,152)
Principal payments on long-term debt (17,870) (16,902)
Increase in short-term borrowings 7,929 13,791
-------- ---------
NET CASH USED IN FINANCING ACTIVITIES (13,041) (2,355)
-------- ---------
Effect of exchange rate changes on cash 833 (654)
-------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (10,355) (130)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 74,649 64,107
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 64,294 $ 63,977
======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest expense $ 4,074 $ 5,039
Income taxes 5,786 5,309
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note receivable on sale of business (discontinued operations) $ 2,000 $ -
Liabilities established in connection with business acquisitions 1,690 -
Amounts due to the Company settled in business acquisitions 2,300 -
Reissuance of treasury shares in connection with business acquisitions - 64,650
Note payable issued in connection with business acquisitions - 5,350
See accompanying notes to consolidated financial statements.
5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2002
1. GENERAL
In the opinion of the Company's management, the accompanying consolidated
financial statements reflect all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the Company's financial
position, results of operations and cash flows. The financial statements
have been prepared in accordance with the requirements of Form 10-Q and
consequently do not include all the disclosures normally made in an Annual
Report on Form 10-K. Accordingly, the consolidated financial statements
included herein should be reviewed in conjunction with the financial
statements and the notes thereto included in the Company's 2001 Annual
Report on Form 10-K.
The results of operations for the three and six months ended June 30, 2002
and 2001 are not necessarily indicative of the results to be expected for
the full year.
2. BUSINESS ACQUISITIONS
On May 2, 2002, the Company acquired the business and certain assets and
liabilities of Elmore Pipe Jacking, Inc. ("Elmore") for approximately $12.5
million. The purchase price included $8.5 million in cash, settlement of
$2.3 million of debt owed by Elmore to the Company, and an additional $1.7
million of non-interest bearing liabilities, including covenants not to
compete, owed to the former owners of the Elmore assets. The Company's
results reflect the results of operating Elmore's former assets from the
date of acquisition. Elmore added $4.2 million of revenues and $0.1 million
of net income in the tunneling segment for the second quarter of 2002. An
additional $3.7 million of goodwill was added in the tunneling segment
during the quarter related to the acquisition. Elmore is a regional
provider of trenchless tunneling, microtunneling, segmented lining and pipe
jacking services in the western U.S.
On February 28, 2001, the Company acquired 100% of the stock of Kinsel
Industries, Inc. ("Kinsel") and an affiliated company, Tracks of Texas,
Inc. ("Tracks"). Kinsel has operations in pipebursting, microtunneling,
commercial construction and highway construction and maintenance. Tracks is
a real estate and construction equipment leasing company that primarily
leases equipment to Kinsel. The purchase price was approximately $80
million, paid in a combination of cash, notes and 1,847,165 shares of the
Company's common stock valued at $35.51 per share. The transaction was
accounted for by the purchase method of accounting, and accordingly,
Kinsel's and Tracks' results are included in the Company's consolidated
income statements from the date of acquisition. The purchase price was
allocated to assets and liabilities based on their respective fair value at
the date of acquisition and resulted in goodwill of $61.2 million (see Note
8). There are no contingent payments, options, or commitments in connection
with the acquisition. The Company subsequently decided to sell off portions
of Kinsel that did not fit the Company's overall business strategy, and
these operations have been segregated in the Company's consolidated
financial statements as discontinued operations. Kinsel's wastewater
treatment plant construction operations were sold effective January 1,
2002. Also see Note 3.
The following unaudited pro forma summary presents information as if Kinsel
and Tracks had been acquired as of January 1, 2001. The pro forma amounts
include certain adjustments, primarily to recognize depreciation and
amortization, including amortization of goodwill, based on the allocated
purchase price of Kinsel and Tracks assets, and do not reflect any benefits
from economies which might be achieved from combining operations. The
unaudited pro forma information has been presented for comparative purposes
and does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations
of the combined companies (in thousands, except per share amounts):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
(UNAUDITED) (UNAUDITED)
------------------ ----------------
Revenues $118,071 $226,533
Income from continuing operations 11,081 16,591
Income (loss) from discontinued operations 356 (332)
Net income 11,437 16,259
Earnings (loss) per share:
Basic
Income from continuing operations 0.41 0.63
Income (loss) from discontinued operations 0.01 (0.01)
Net income 0.43 0.62
6
Diluted
Income from continuing operations 0.40 0.62
Income (loss) from discontinued operations 0.01 (0.01)
Net income 0.42 0.61
3. DISCONTINUED OPERATIONS
In the fourth quarter of 2001, the Company made the decision to sell
certain operations acquired in the Kinsel transaction. Accordingly, the
Company has classified as discontinued the wastewater treatment plant
construction, commercial construction and highway operations acquired as
part of the Kinsel acquisition. These operations are not consistent with
the Company's operating strategy. The Company completed the sale of the
wastewater treatment plant construction operations effective January 1,
2002. The Company received $1.5 million in cash and a $2.0 million note for
a total sale price of $3.5 million, resulting in a slight loss on the sale.
As part of the sale agreement, the Company agreed to absorb additional
trailing costs on uncompleted jobs. This resulted in a $0.6 million loss in
the first quarter on no revenue. The Company is currently marketing
Kinsel's highway operations. As of June 30, 2002 and December 31, 2001,
assets held for disposal totaled $12.4 million and $32.0 million,
respectively, and included $3.1 million and $7.6 million of unbilled
receivables, respectively. Assets held for disposal also included $4.0
million of trade accounts receivable and $3.1 million of fixed assets at
June 30, 2002, and $6.8 million and $3.3 million of trade receivables and
fixed assets, respectively, at December 31, 2001. Liabilities related to
discontinued operations totaled $3.4 million and $9.5 million at June 30,
2002 and December 31, 2001, respectively. The results of operations for the
discontinued operations are as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
--------- ------- -------- --------
REVENUES:
Wastewater treatment plant construction $ -- $ 5,969 $ -- $ 8,245
Commercial construction and highway
construction 8,248 10,710 16,870 12,816
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS:
Wastewater treatment plant construction, net
of tax of $0, $156, $348 and $183, respectively -- 244 (642) 291
Commercial construction and highway
construction, net of tax expense (benefit)
of $(659), $71, $(563), and $90, respectively (927) 112 (1,887) 149
4. RESTRUCTURING
In the fourth quarter of 2001, the Company recorded a restructuring charge
of $4.1 million, $0.9 million of which is severance cost associated with
the elimination of 112 company-wide positions specifically identified as of
December 31, 2001. An additional $3.2 million of the charge relates to
asset write-downs, lease cancellations and other costs associated with the
closure of eight facilities in the United States and the disposal of the
associated assets. As of June 30, 2002, the remaining liability was $0.6
million.
5. COMPREHENSIVE INCOME
For the quarters ended June 30, 2002 and 2001, comprehensive income was
$7.2 million and $12.1 million, respectively. For the six months ended June
30, 2002 and 2001, comprehensive income was $11.8 million and $15.8
million, respectively. The Company's adjustment to comprehensive income
consists solely of cumulative foreign currency translation adjustments.
6. EARNINGS PER SHARE
Earnings per share have been calculated using the following share
information:
THREE MONTHS ENDED JUNE 30,
2002 2001
---------- ----------
Weighted average number of common shares
used for basic EPS 26,543,025 26,788,721
Effect of dilutive stock options and warrants 275,858 629,349
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,818,883 27,418,070
---------- ----------
7
SIX MONTHS ENDED JUNE 30,
2002 2001
---------- ----------
Weighted average number of common shares
used for basic EPS 26,548,236 26,180,750
Effect of dilutive stock options and warrants 281,797 664,150
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,830,033 26,844,900
---------- ----------
7. SEGMENT REPORTING
The Company has three operating segments: rehabilitation, tunneling, and
TiteLiner(R), the Company's corrosion and abrasion segment ("TiteLiner").
These operating units represent strategic business units that offer
distinct products and services and correspond with the current
organizational structure.
The following disaggregated financial results have been prepared using a
management approach, which is consistent with the basis and manner with
which management internally disaggregates financial information for the
purpose of assisting in making internal operating decisions. The Company
evaluates performance based on stand-alone operating income.
Financial information by segment is as follows (in thousands):
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
2002 2001 2002 2001
--------- ------------ --------- -----------
REVENUES
Rehabilitation $ 93,351 $ 100,127 $ 184,793 $ 182,102
Tunneling 22,249 10,465 37,425 19,915
TiteLiner 2,888 7,479 7,445 14,904
--------- --------- --------- ---------
TOTAL REVENUES $ 118,488 $ 118,071 $ 229,663 $ 216,921
--------- --------- --------- ---------
GROSS PROFIT
Rehabilitation $ 26,080 $ 33,281 $ 50,386 $ 58,921
Tunneling 4,224 2,044 7,275 3,991
TiteLiner 693 2,519 2,225 4,831
--------- --------- --------- ---------
TOTAL GROSS PROFIT $ 30,997 $ 37,844 $ 59,886 $ 67,743
--------- --------- --------- ---------
OPERATING INCOME
Rehabilitation $ 11,904 $ 16,827 $ 20,530 $ 23,706
Tunneling 2,497 1,219 4,363 2,186
TiteLiner (145) 1,733 597 3,246
--------- --------- --------- ---------
TOTAL OPERATING INCOME $ 14,256 $ 19,779 $ 25,490 $ 29,138
--------- --------- --------- ---------
8. ACQUIRED INTANGIBLE ASSETS AND GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets," which requires that an intangible asset that
is acquired shall be initially recognized and measured based on its fair
value. This statement also provides that certain intangible assets deemed
to have an indefinite useful life, such as goodwill, should not be
amortized, but shall be tested for impairment annually, or more frequently
if circumstances indicate potential impairment, through a comparison of
fair value to its carrying amount. SFAS 142 is effective for fiscal periods
beginning after December 15, 2001. The Company adopted SFAS 142 on January
1, 2002, at which time amortization of goodwill ceased and a transitional
impairment test was performed. Management retained an independent party to
perform a valuation of goodwill as of that date and determined that no
impairment of goodwill existed.
8
There was no goodwill in the TiteLiner segment at June 30, 2002. Changes in
the carrying amount of goodwill in the rehabilitation and tunneling segment
for the six months ended June 30, 2002 were as follows (in thousands):
REHABILITATION TUNNELING TOTAL
-------------- ---------- ---------
Balance as of December 31, 2001 $117,251 $ -- $ 117,251
Reassignment of goodwill due to adoption of SFAS 142 4,792 -- 4,792
Goodwill acquired as part of Elmore purchase -- 3,748 3,748
Impact of foreign exchange rates (58) -- (58)
-------- --------- ---------
Balance as of June 30, 2002 $121,985 $ 3,748 $ 125,733
-------- --------- ---------
Intangible assets are as follows (in thousands):
AS OF JUNE 30, 2002
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
Amortized intangible assets:
Patents and trademarks $21,959 $ (16,723)
License agreements 3,408 (1,357)
Non-compete agreements 4,628 (1,694)
------- ---------
Total $29,995 $ (19,774)
------- ---------
Aggregate amortization expense:
For quarter ended June 30, 2002 $ 418
For six months ended June 30, 2002 721
Estimated amortization expense:
For year ended December 31, 2002 $ 1,801
For year ended December 31, 2003 1,781
For year ended December 31, 2004 1,473
For year ended December 31, 2005 1,141
For year ended December 31, 2006 1,127
The effect of the adoption of SFAS 142 on reported net income was as
follows (in thousands, except per share information):
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2002 2001 2002 2001
------ -------- -------- --------
Reported income from continuing operations $8,238 $ 11,081 $ 14,160 $ 15,623
Add: Goodwill amortization related to continuing operations -- 1,666 -- 2,838
------ -------- -------- --------
Adjusted income from continuing operations $8,238 $ 12,747 $ 14,160 $ 18,461
Reported net income (loss) from discontinued operations (927) 356 (2,529) 440
Add: Goodwill amortization related to discontinued operations -- 62 -- 83
------ -------- -------- --------
Adjusted net income $7,311 $ 13,165 $ 11,631 $ 18,984
------ -------- -------- --------
Basic earnings per share:
Reported income from continuing operations $ 0.31 $ 0.41 $ 0.53 $ 0.60
Add: Goodwill amortization related to continuing operations -- 0.06 -- 0.11
------ -------- -------- --------
Adjusted income from continuing operations $ 0.31 $ 0.48 $ 0.53 $ 0.71
Reported net income (loss) from discontinued operations (0.03) 0.01 (0.09) 0.02
Add: Goodwill amortization related to discontinued operations -- -- -- --
------ -------- -------- --------
Adjusted net income $ 0.28 $ 0.49 $ 0.44 $ 0.73
------ -------- -------- --------
9
Diluted earnings per share:
Reported income from continuing operations $ 0.31 $ 0.40 $ 0.53 $ 0.58
Add: Goodwill amortization related to continuing operations -- 0.06 -- 0.11
------ -------- -------- --------
Adjusted income from continuing operations $ 0.31 $ 0.46 $ 0.53 $ 0.69
Reported net income (loss) from discontinued operations (0.03) 0.01 (0.09) 0.02
Add: Goodwill amortization related to discontinued operations -- -- -- --
------ -------- -------- --------
Adjusted net income $ 0.27 $ 0.48 $ 0.43 $ 0.71
------ -------- -------- --------
9. LITIGATION
The Company is involved in certain litigation incidental to the conduct of
its business. The Company does not believe that the outcome of any such
litigation will have a material adverse effect on the Company's financial
position, results of operations and liquidity. The financial statements
include the estimated amounts of liabilities that are likely to be incurred
from these and various other pending litigation and claims.
10. SUBSEQUENT EVENTS
The Company plans to incur restructuring charges to continue its focus on
efficiency in costs. This restructuring plan is in addition to that
implemented in 2001, and focuses on gaining efficiencies in the Company's
administrative, sales and support functions. As part of the plan, certain
fixed assets will be eliminated and approximately 75 salaried employees
will be impacted by the efforts. The Company expects to incur a charge of
approximately $1.5 million, or $0.06 per diluted share after taxes, all of
which will be charged in the third quarter of 2002.
In the third quarter of 2002, the Company also expects to incur charges
related to valuation adjustments to certain intangible assets under SFAS
144. SFAS 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," which the Company adopted in 2001, provides authoritative guidance
for the impairment review of long-lived assets subject to amortization. In
July 2002, the Company preliminarily reviewed its patent, trademark,
license and non-compete intellectual property assets and concluded that
some of them may have become impaired based on recent business decisions
and other circumstances. The Company expects to incur a non-cash charge of
up to $2.3 million, or $0.09 per diluted share after taxes. In addition,
the write-down of these intangible assets will decrease the estimated
annual amortization expense reported in Note 8 by an undetermined amount.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and results of
operations during the periods included in the accompanying consolidated
financial statements.
RESULTS OF OPERATIONS - Three and Six Months Ended June 30, 2002 and 2001
The following table highlights the results for each of the segments and periods
presented (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
REVENUES GROSS PROFIT OPERATING INCOME REVENUES GROSS PROFIT OPERATING INCOME
--------- ------------ ---------------- --------- ------------ ----------------
Rehabilitation $ 93,351 $ 26,080 $11,904 $184,793 $ 50,386 $ 20,530
Tunneling 22,249 4,224 2,497 37,425 7,275 4,363
TiteLiner 2,888 693 (145) 7,445 2,225 597
--------- -------- ------- -------- -------- --------
Total $ 118,488 $ 30,997 $14,256 $229,663 $ 59,886 $ 25,490
--------- -------- ------- -------- -------- --------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
REVENUES GROSS PROFIT OPERATING INCOME REVENUES GROSS PROFIT OPERATING INCOME
--------- ------------ ---------------- --------- ------------ ----------------
Rehabilitation $ 100,127 $ 33,281 $16,827 $182,102 $ 58,921 $ 23,706
Tunneling 10,465 2,044 1,219 19,915 3,991 2,186
TiteLiner 7,479 2,519 1,733 14,904 4,831 3,246
--------- -------- ------- -------- -------- --------
Total $ 118,071 $ 37,844 $19,779 $216,921 $ 67,743 $ 29,138
--------- -------- ------- -------- -------- --------
For the three months ended June 30, 2002, consolidated revenues from continuing
operations totaled $118.5 million, representing a 0.4% increase over the second
quarter of 2001. Tunneling reported a 112.6% increase in revenues compared to
the second quarter of 2001, while all other business units experienced lower
revenues during the second quarter of 2002. The addition of Elmore's operations
beginning May 2, 2002 contributed $4.2 million to revenues in the tunneling
segment. Negative pricing trends in the rehabilitation segment continued to
impact revenue and gross margin. In addition, TiteLiner's traditional markets
continued to contract through a low point in their economic cycle. Copper and
palladium miners are historically significant consumers of the TiteLiner
product. Pricing pressures in these commodities translated to decreased revenues
in the TiteLiner segment. Consolidated revenues from continuing operations for
the six months ended June 30, 2002 were 5.9% higher than in the first six months
of the prior year, largely as a result of tunneling's 87.9% revenue increase
over the six months ended June 30, 2001. Additionally, rehabilitation operations
achieved a 1.5% increase in revenues in the first six months of 2002 as compared
to the same period of 2001, due primarily to the inclusion of Kinsel in the full
six months in 2002 versus only four of the first six months in 2001 after the
date of acquisition (February 28, 2001).
Cost of sales increased 9.1% in the second quarter of 2002 to $87.5 million from
$80.2 million in the second quarter of 2001. This increase is primarily due to
the tunneling business in which cost of sales increased 114.1% (41.2% related
to the Elmore acquisition) in the second quarter of 2002 compared to the same
quarter of 2001. Cost of sales in the tunneling segment is expected to continue
growing in line with anticipated revenue growth indicated by the increases
obtained in tunneling backlog over the previous two quarters.
Consolidated gross profit from continuing operations for the Company was $31.0
million in the second quarter of 2002, representing a decrease of 18.1% compared
to $37.8 million in gross profit from the same period of the prior year. Gross
margin percentage also decreased for the second quarter of 2002 to 26.2% of
consolidated revenues from 32.1% gross margin in the second quarter of 2001. The
Company continued to see average per foot revenue decreases that slightly
outpaced decreases in cost of sales for the cured-in-place pipe rehabilitation
business. In addition, the tunneling segment, where project gross margins are
lower than in the rehabilitation and TiteLiner segments, continued to be a
bigger percentage of the Company's overall business, decreasing consolidated
gross margin percentages. For the six months ended June 30, 2002 and 2001, gross
profit was $60.0 million and $67.7 million, respectively, representing an 11.6%
decline. Margins for the first half of 2002 were 26.1% compared to 31.2% in
2001, due primarily to pricing pressures and tunneling's continued growth in the
Company's overall operation.
11
Selling, general and administrative expenses decreased 7.3% to $16.7 million in
the second quarter of 2002 compared to $18.1 million in the second quarter of
2001. As a percent of revenue, selling, general and administrative costs
decreased to 14.1% of total consolidated revenues in the second quarter of 2002
versus 15.3% in the same period of 2001. This decrease is primarily a result of
the Company's adoption of SFAS 142 that required the cessation of amortization
on goodwill as of January 1, 2002. This was partially offset by modest increases
in incentive compensation and profit sharing accruals. In the first half of
2002, selling, general and administrative expenses were $34.4 million, a
decrease of 5.3% from the $38.6 million posted in the first half of 2001. Much
of this decrease was attributable to the adoption of SFAS 142 with a small
offset from incentive compensation accruals. The decrease in selling, general
and administrative expenses was inclusive of a full first quarter of Kinsel
expenses in 2002. The Company's ongoing management of overhead costs held
operating expenses down even while adding the Kinsel business.
Operating income for the second quarter of 2002 was $14.3 million, resulting in
a 27.9% decrease from the $19.8 million reported for the second quarter of 2001.
Tunneling reported $2.5 million in operating income for the second quarter of
2002, a 104.9% increase over the second quarter of 2001. For the second quarter
and first six months of 2002, all other business units reported lower operating
income compared to the second quarter and first six months of the prior year.
For the first half of 2002, operating income was $25.5 million, a 12.5% decrease
from the $29.1 million in operating income reported during the first half of
2001.
For the three months ended June 30, 2002, income from continuing operations was
$8.2 million, or $0.31 per diluted share, representing a decrease of 25.7% from
the $11.1 million, or $0.40 per diluted share, in income from continuing
operations in the second quarter of 2001. Income from continuing operations
increased by $0.1 million in the second quarter of 2002 compared to the same
quarter of 2001 as a result of the additional income from Elmore operations
during the second quarter of 2002. Loss from discontinued operations was $0.9
million in the second quarter of 2002 versus income of $0.4 million in 2001.
This loss was a result of cost overruns in the heavy highway businesses. The
resulting net income for the second quarter of 2002 was $7.3 million, a 36.1%
decline from the $11.4 million reported in the second quarter of
the prior year. For the six months ended June 30, 2002, income from continuing
operations was $14.2 million, a 9.4% decrease from the $15.6 million in income
from continuing operations in the first half of 2001. The loss from discontinued
operations in the first six months of 2002 was $2.5 million compared to income
of $0.4 million in the first half of 2001. The Company expects a continuing
decline in the commercial construction and heavy highway businesses that
currently comprise discontinued operations and is actively seeking qualified
buyers for these businesses.
RECENT EVENTS
In July 2002, a Company crew had an accident on a cured-in-place pipe project in
Des Moines, Iowa. Two workers died and five workers were injured in the
accident. The Company is cooperating with Iowa's state OSHA in investigating the
accident and is reviewing its safety procedures. During the third quarter, the
Company expects to incur the cost of its $250 thousand insurance deductible. In
addition, operational performance will be affected in the rehabilitation segment
because of disruption in work in the unit impacted by the accident and because
of a one-day stand down in North American rehabilitation to review safety
procedures. Iowa's state OSHA has the ability to impose fines on the Company if
it believes there were violations of safety regulations in connection with this
accident. The Company does not expect the accident to have any significant
financial impact on forecasted results for the third quarter of 2002 or for
future quarters.
The five-year Jacksonville Electric Authority ("JEA") term contract was awarded
to PM Construction & Rehabilitation L.P. and Kinsel Industries, Inc., a Joint
Venture (the "Joint Venture") in November 2000, for a not to exceed amount of
$380 million. As of June 30, 2002, the Company included $136.0 million of total
backlog for the JEA contract. The unreleased term contract backlog portion was
$128.6 million, and there was $7.4 million of released contract backlog.
JEA has not changed the "not to exceed amount" under the contract. On August 1,
2002, the original contract was ratified and affirmed by the parties as being
continued in full force and effect.
However, JEA has been publicly quoted as stating that for its next fiscal year
beginning October 1, 2002, only $20 million will be awarded to the Joint Venture
under the current contract, from which the Company would anticipate receiving
$10 million, and that $40 million of similar work would be out to bid. The
amount JEA will actually award to the Joint Venture in the future under the
contract of for work related to the contract is uncertain.
In what the Company considers the unlikely event that JEA were to award only $20
million per year to the Joint Venture for the balance of the contract term, the
Company would need to reduce its unreleased backlog related to this contract by
$98.6 million.
As a result of JEA's expressed intention, the Company reviewed its goodwill
related to the 2001 Kinsel acquisition. The Company believes it is still fairly
valued even if the JEA contract backlog is reduced. However, the Company will
continue to review the Kinsel goodwill valuation based on changes in the current
facts and circumstances. See Note 10 for discussion of additional items
occurring subsequent to the date of the financial statements.
BACKLOG
The following table highlights backlog for each of the segments and at each date
presented (in millions):
JUNE 30, 2002:
APPARENT LOW BID AND APPARENT LOW BID AND
UNRELEASED TERM EXPECTED UNRELEASED TERM
CONTRACT BACKLOG IN NEXT 12 MONTHS AVAILABLE BEYOND 12 MONTHS
---------------- ------------------------ --------------------------
Rehabilitation $122.0 $ 94.3 $ 155.5
Tunneling 122.7 9.7 11.0
TiteLiner 3.2 -- --
------ ------- -------
Total $247.9 $ 104.0 $ 166.5
------ ------- -------
DECEMBER 31, 2001:
2002 APPARENT LOW BID AND
APPARENT LOW BID AND UNRELEASED TERM
CONTRACT BACKLOG UNRELEASED TERM AVAILABLE BEYOND 2002
---------------- -------------------- ---------------------
Rehabilitation $125.8 $ 87.0 $ 148.9
Tunneling 36.4 11.0 61.9
TiteLiner 2.1 -- --
------ ------- -------
Total $164.3 $ 98.0 $ 210.8
------ ------- -------
Contract backlog is management's expectation of revenues to be generated from
received, signed, uncompleted contracts whose cancellation is not anticipated at
the time of reporting. Reported contract backlog excluded any term contract
amounts for which there was not specific and determinable work released. At June
30, 2002 and December 31, 2001, the Company reported contract backlog (excluding
projects where the Company was advised that it was low bidder, but not
formally awarded the contract) in the amounts of approximately $247.9 million
and $164.3 million, respectively. The Company anticipates that a significant
portion of contract backlog reported at June 30, 2002 and an additional $104.0
million of unreleased term contracts and jobs on which the Company was the
12
apparent low bidder will be completed through June 30, 2003. An additional
$166.5 million of unreleased term contract work and work on which the Company
was the apparent low bidder was anticipated for completion beyond June 30, 2003.
All backlog values were the estimate of management based on contracts
outstanding at June 30, 2002 and are subject to change due to factors beyond the
control of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $64.3 million at June 30, 2002, roughly unchanged
compared to the $64.0 million balance at June 30, 2001 and 13.9% less than the
$74.6 million in cash and cash equivalents at December 31, 2001. The cash
balance at June 30, 2002 included $3.4 million of cash and cash equivalents
restricted in various escrow accounts. In the first six months of 2002,
operating activities from continuing operations contributed $16.6 million,
compared to $14.8 million in the first half of 2001, a 12.2% increase.
Discontinued operations contributed an additional $1.8 million during the first
half of 2002 for a total of $18.4 million in operating cash flow. In the first
six months of 2001, discontinued operations contributed $1.7 million in cash
flow for a total operating cash flow of $16.6 million. Working capital increased
by $4.2 million in the first half of 2002 due in part to underbillings recorded
as additional receivables just prior to the cutoff date. Specifically, the
tunneling segment performed significant work on jobs that were not yet billed to
customers, causing a change in underbillings from December 31, 2001 to June 30,
2002 of approximately $5.0 million.
The sale of the Company's Kinsel wastewater treatment plant construction
operations in February contributed $1.5 million to cash during the first six
months of 2002. The sale of fixed assets contributed an additional $2.5 million
during the first half of 2002.
A scheduled $15.7 million principal payment on the Company's Senior Notes,
Series A (the "Senior Notes") in the first quarter of 2002 along with $2.2
million in additional repayments of long-term debt were the most significant
uses of cash in the first half of 2002. Additionally, capital expenditures
totaled $11.6 million in the first half of 2002, $6.1 million of which was in
the second quarter. Much of the capital expenditure activity continued to be the
addition of machinery and equipment necessary to support the expanding tunneling
segment, along with ongoing upgrades and purchases necessary to support the
rehabilitation segment.
The Company purchased an additional 100,000 shares of its stock in the second
quarter of 2002, bringing the total shares purchased in the first six months to
200,000 for a total of $4.4 million in cash. During the first half of 2001,
222,600 shares were purchased for $5.2 million. Cumulatively, the Company spent
$71.8 million for 3,760,115 shares through June 30, 2002 in the stock repurchase
program since its inception in 1998. Repurchased shares are held as treasury
stock until reissued.
In the first half of 2002, $13.0 million in cash was consumed by financing
activities compared to $2.4 million in financing activities in the first half of
2001. The greater use of cash in 2002 was due to a decreased rate of borrowing
on notes payable, a reduction of $5.9 million compared to the first six months
of 2001, and decreased proceeds from the exercise of options by $4.7 million
compared to the first half of 2001.
Trade receivables and retainage totaled $115.5 million on June 30, 2002,
representing a 7.4% increase from December 31, 2001. Costs and estimated
earnings in excess of billings were $28.3 million in the first half of 2002, a
19.4% increase over the December 31, 2001 balance of $23.7 million. The increase
was due primarily to the initiation of new projects in the first half of 2002,
particularly in the tunneling segment. At project start-up, significant costs
were incurred for equipment acquisition and mobilization of equipment and crews.
These costs were incurred prior to any work being performed. Therefore, these
costs were not charged to the customer and margin was not recognized during
this time period.
The Company has a line of credit facility under a credit agreement (the "Credit
Agreement") to borrow up to $50 million. At June 30, 2002, the Company had
unused committed bank credit facilities under the Credit Agreement totaling
$21.8 million. Of the $28.2 million used under the Credit Agreement, $23.0
million related to short-term borrowings and $5.2 million was for various
standby letters of credit. The commitment fee paid per annum by the Company is
0.2% on the unborrowed balance. The interest rates under this facility vary and
are based on the prime rate. As of June 30, 2002, the rate was 2.5%.
The Company's Senior Notes, due February 14, 2007, bear interest, payable
semi-annually in August and February of each year, at the rate per annum of
7.88%. Each year, from February 2002 to February 2006, inclusive, the Company
will be required to make principal payments of $15.7 million, together with an
equivalent payment at maturity. On June 30, 2002, the principal amount of Senior
Notes outstanding was $78.6 million. The Senior Notes may be prepaid at the
Company's option, in whole or in part, at any time, together with a make-whole
premium. Upon specified change in control events each holder has the right to
require the Company to purchase its Senior Notes without any premium thereon.
The note purchase agreements pursuant to which the Senior Notes were acquired,
and the Credit Agreement, obligate the Company to comply with certain financial
ratios and restrictive covenants that, among other things, place limitations on
operations and sales of assets by the Company or its subsidiaries, limit the
ability of the Company to incur further secured
13
indebtedness and liens and of subsidiaries to incur indebtedness, and, in the
event of default, limit the ability of the Company to pay cash dividends or make
other distributions to the holders of its capital stock or to redeem such stock.
The Credit Agreement also obligates certain of the Company's domestic
subsidiaries to guaranty the Company's obligations, as a result of which the
same subsidiaries have also delivered their guaranty with respect to the Senior
Notes. The Company is in compliance with all of its debt covenants.
The Company believes it has adequate resources and liquidity to fund future cash
requirements for working capital, capital expenditures and debt repayments with
cash generated from operations, existing cash balances, additional short- and
long-term borrowing and the sale of assets.
MARKET RISK
The Company is exposed to the effect of interest rate changes and foreign
currency fluctuations.
INTEREST RATE RISK
The fair value of the Company's cash and short-term investment portfolio and the
fair value of the line of credit facility at June 30, 2002 approximated carrying
value. Given the short-term nature of these instruments, market risk, as
measured by the change in fair value resulting from a hypothetical 10% change in
interest rates, was not material.
The Company's objectives in managing exposure to interest rate changes are to
limit the impact of interest rate changes on earnings and cash flows and to
lower overall borrowing costs. To achieve these objectives, the Company
maintained fixed rate debt as a percentage of its net debt in a percentage range
set by policy. The impact to earnings and cash flows from a hypothetical 10%
change in interest rates is not material.
FOREIGN EXCHANGE RISK
The Company operates subsidiaries, and is associated with licensees and
affiliates operating solely in countries outside of the United States, and in
currencies other than the U.S. dollar. Consequently, these operations are
inherently exposed to risks associated with fluctuation in the value of the
local currencies of these countries compared to the U.S. dollar. The effect of a
hypothetical adverse change of 10% in exchange rates (a weakening of the U.S.
dollar) is immaterial.
FORWARD-LOOKING INFORMATION
This quarterly report contains various forward-looking statements that are based
on information currently available to management and on management's beliefs and
assumptions. When used in this document, the words "anticipate," "estimate,"
"believes," "plans," and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. Such statements are subject to risks and uncertainties. The
Company's actual results may vary materially from those anticipated, estimated
or projected due to a number of factors, such as the competitive environment for
the Company's products and services, the geographical distribution and mix of
the Company's work, the timely award or cancellation of projects, political
circumstances impeding the progress of work, and other factors set forth in
reports and other documents filed by the Company with the Securities and
Exchange Commission from time to time. The Company does not assume a duty to
update forward-looking statements. Please use caution and do not place reliance
on forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information concerning this item, see "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Market Risk," which
information is incorporated herein by reference.
14
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes since the filing of the Company's Form 10-Q
for the period ended March 31, 2002.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders on May 30, 2002, stockholders
elected the following persons as directors of the Company:
WITHHOLD
FOR AUTHORITY
---------- -----------
Robert W. Affholder 23,150,772 2,275,931
Paul A. Biddelman 25,333,453 93,250
Stephen P. Cortinovis 25,333,453 93,250
John P. Dubinsky 25,333,453 93,250
Juanita H. Hinshaw 25,333,453 93,250
Anthony W. Hooper 23,150,542 2,276,161
Thomas N. Kalishman 25,333,653 93,050
Sheldon Weinig 25,333,653 93,050
Alfred L. Woods 25,333,453 93,250
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The exhibits filed as part of this Quarterly Report on Form 10-Q
are listed on the annexed Index to Exhibits.
(b) On May 2, 2002, the Company filed a Current Report on Form 8-K,
under Item 5, to provide the Company's press release dated May 2, 2002,
announcing that it completed the acquisition of the business and certain assets
and liabilities of Elmore Pipe Jacking, Inc. On June 10, 2002, the Company filed
two Current Reports on Form 8-K. One Current Report on Form 8-K was filed under
Item 9 to provide the Company's press release dated June 10, 2002, announcing
April and May 2002 new orders for the cured-in-place pipe unit of its North
American rehabilitation business. The second Current Report on Form 8-K filed on
June 10, 2002 was filed under Item 4, reporting that the Company's Board of
Directors, based on the recommendation of its Audit Committee, authorized the
dismissal of Arthur Andersen LLP as the Company's independent public accountants
and authorized the engagement of PricewaterhouseCoopers LLP to serve as the
Company's independent public accountants for the 2002 fiscal year.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INSITUFORM TECHNOLOGIES, INC.
August 14, 2002 /s/ Joseph A. White
------------------------------------------
Joseph A. White
Vice President - Chief Financial Officer
Principal Financial and Accounting Officer
16
INDEX TO EXHIBITS
2 - Not applicable.
3(i) - Not applicable.
3(ii) - Not applicable.
4 - Not applicable.
10.1 - Note Modification Allonge executed on July 17, 2002 relating to Promissory Note (filed as
Exhibit 10.2 hereto).(1)
10.2 - Promissory Note dated September 24, 1997 made by Anthony W. Hooper in favor of the
Company.(1)
10.3 - Form of Directors' Indemnification Agreement.(1)
11 - Not applicable.
15 - Not applicable.
18 - Not applicable.
19 - Not applicable.
22 - Not applicable.
23 - Not applicable.
24 - Not applicable.
99.1 - Certification of Anthony W. Hooper pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 - Certification of Joseph A. White pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
- ------------
(1) Management contract or compensatory plan or arrangement.
17