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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 March 31, 2004
Commission file number #0-10786
Insituform Technologies, Inc.
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(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 April 30, 2004
- ------------------------------------ -----------------------------------
Class A Common Stock, $.01 par value 26,710,513 Shares
INDEX
Page No.
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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............................ 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 18
Item 4. Controls and Procedures........................................ 18
Part II Other Information:
Item 1. Legal Proceedings.............................................. 19
Item 6. Exhibits and Reports on Form 8-K............................... 19
Signatures............................................................................ 20
Certifications........................................................................ 22
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
ENDED MARCH 31,
2004 2003
---------- ----------
REVENUES $ 127,914 $ 123,348
COST OF REVENUES 102,547 95,079
---------- ----------
GROSS PROFIT 25,367 28,269
SELLING, GENERAL AND ADMINISTRATIVE 21,992 17,083
---------- ----------
OPERATING INCOME 3,375 11,186
OTHER (EXPENSE) INCOME:
Interest expense (2,168) (1,197)
Other (164) 431
---------- ----------
TOTAL OTHER EXPENSE (2,332) (766)
---------- ----------
INCOME BEFORE TAXES ON INCOME 1,043 10,420
TAXES ON INCOME 425 4,064
---------- ----------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS
AND DISCONTINUED OPERATIONS 618 6,356
MINORITY INTERESTS (56) (30)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES (60) 25
---------- ----------
INCOME FROM CONTINUING OPERATIONS 502 6,351
INCOME FROM DISCONTINUED OPERATIONS - 276
---------- ----------
NET INCOME $ 502 $ 6,627
========== ==========
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS:
Basic:
Income from continuing operations $ 0.02 $ 0.24
Discontinued operations - 0.01
Net income 0.02 0.25
Diluted:
Income from continuing operations $ 0.02 $ 0.24
Discontinued operations - 0.01
Net income 0.02 0.25
See accompanying notes to consolidated financial statements.
3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$1,314 and $6,126, respectively $ 94,765 $ 99,991
Receivables, net 86,256 90,814
Retainage 23,843 24,902
Costs and estimated earnings in excess of billings 35,661 27,853
Inventories 14,427 12,935
Prepaid expenses and other assets 10,104 19,515
Assets held for disposal - 1,263
----------- -----------
TOTAL CURRENT ASSETS 265,056 277,273
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 79,632 75,667
----------- -----------
OTHER ASSETS
Goodwill 131,606 131,613
Other assets 23,346 23,807
----------- -----------
TOTAL OTHER ASSETS 154,952 155,420
----------- -----------
TOTAL ASSETS $ 499,640 $ 508,360
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and line of credit $ 16,895 $ 16,938
Accounts payable and accrued expenses 88,354 82,670
Billings in excess of costs and estimated earnings 7,033 8,495
Liabilities related to discontinued operations - 1,770
----------- -----------
TOTAL CURRENT LIABILITIES 112,282 109,873
----------- -----------
LONG-TERM DEBT, less current maturities 98,542 114,323
OTHER LIABILITIES 3,767 3,530
----------- -----------
TOTAL LIABILITIES 214,591 227,726
----------- -----------
MINORITY INTERESTS 1,543 1,465
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTE 9)
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 26,710,398 and 26,458,205 288 288
Unearned restricted stock (379) (412)
Additional paid-in capital 136,562 133,794
Retained earnings 198,831 198,328
Treasury stock - 2,357,464 shares (51,596) (51,596)
Accumulated other comprehensive loss (200) (1,233)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 283,506 279,169
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 499,640 $ 508,360
=========== ===========
See accompanying notes to consolidated financial statements.
4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREE MONTHS
ENDED MARCH 31,
2004 2003
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 502 $ 6,627
Income from discontinued operations - (276)
--------- ---------
INCOME FROM CONTINUING OPERATIONS 502 6,351
--------- ---------
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 4,098 3,339
Amortization 606 319
Deferred income taxes (62) 10
Write-off of debt issuance costs 226 -
Translation and other 859 (167)
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES:
Receivables, including costs and estimated earnings in excess of billings (1,347) (2,197)
Inventories (1,492) 125
Prepaid expenses and other assets 10,090 3,266
Accounts payable and accrued expenses 2,452 2,877
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 15,932 13,923
NET CASH PROVIDED BY OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS - 1,798
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,932 15,721
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (7,696) (2,138)
Proceeds from sale of fixed assets 243 346
Other investing activities - 347
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,453) (1,445)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,770 91
Purchases of treasury stock - (1,417)
Principal payments on long-term debt (15,715) (18,652)
Increase in line of credit - 14,516
Deferred financing charges (633) (213)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES (13,578) (5,675)
--------- ---------
Effect of exchange rate changes on cash (127) (616)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (5,226) 7,985
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 99,991 75,386
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 94,765 $ 83,371
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID (RECEIVED) FOR:
Interest $ 2,495 $ 3,323
Income taxes, net (7,929) 883
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable recovered in settlement $ - $ 5,350
Accrued interest recovered in settlement - 557
Treasury stock recovered in settlement - 254
See accompanying notes to consolidated financial statements.
5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 2004
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 unaudited
consolidated balance sheets as of March 31, 2004 and December 31, 2003 and
the unaudited consolidated statements of income and cash flows for the
three months ended March 31, 2004 and 2003. 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 footnotes thereto included in the Company's 2003 Annual
Report on Form 10-K.
The results of operations for the three months ended March 31, 2004 and
2003 are not necessarily indicative of the results to be expected for the
full year.
2. STOCK-BASED COMPENSATION
At March 31, 2004, the Company had two active stock-based compensation
plans under which stock-based awards may be granted, including stock
appreciation rights, restricted shares of common stock, performance awards,
stock options and stock units. The Company applies the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for those plans. Stock-based compensation expense related to
grants of restricted stock was $34,000 before tax in the first quarter of
2004. There was no stock-based compensation expense in the first quarter of
2003. All stock options granted during these and subsequent time periods
had an exercise price equal to the market value of the underlying common
stock on the date of the grant. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair
value recognition provisions of Statement of Financial Accounting Standards
123 ("SFAS 123"), "Accounting for Stock-Based Compensation," to stock-based
compensation (in thousands, except share data):
THREE MONTHS ENDED MARCH 31,
2004 2003
---------- ----------
Net income - as reported $ 502 $ 6,627
Add: Total stock-based compensation expense
included in net income, net of related tax benefits 20 -
Deduct: Total stock-based compensation expense
determined under fair value method for all awards,
net of related tax effects (351) (1,469)
---------- ----------
Pro forma net income $ 151 $ 5,158
========== ==========
Basic earnings per share:
As reported $ 0.02 $ 0.25
Pro forma 0.01 0.19
Diluted earnings per share:
As reported 0.02 0.25
Pro forma 0.01 0.19
For SFAS 123 disclosure purposes, the weighted average fair value of stock
options is required to be based on a theoretical option-pricing model such
as the Black-Scholes method. In actuality, because the Company's stock
options are not traded on an exchange and are subject to vesting periods,
the disclosed fair value represents only an approximation of option value
based solely on historical performance. Beginning in 2000, the Company
decided to increase the alignment of key employee goals and shareholder
objectives by increasing the relative value of variable compensation.
6
For SFAS 148 ("Accounting for Stock-Based Compensation - Transition and
Disclosure") disclosure purposes, the stock-based compensation expense
recorded in the determination of reported net income is disclosed in the
table above. The pro forma stock-based compensation expense includes the
recorded expense and expense related to stock options that was determined
using the fair value method.
3. BUSINESS ACQUISITIONS
In November 2003, the Company acquired the remaining interest in Ka-Te
Insituform AG ("Ka-Te Insituform") for approximately $2.2 million. Net of
related party debt and shared accrued employee liabilities, the cash paid
by the Company was approximately $0.8 million. The operations of Ka-Te
Insituform added approximately $2.6 million in revenues and $0.1 million of
operating income to the Company's results of operations in the first
quarter of 2004.
In September 2003, the Company acquired the business and certain assets of
Insituform East, Inc. ("East") for $5.5 million. The Company subsequently
exercised an option to purchase additional assets from East for $0.6
million. The operations of East added approximately $2.5 million in
revenues and an operating loss of $0.6 million to the Company's results of
operations in the first quarter of 2004.
In June 2003, the Company completed the acquisition of the business of
Sewer Services, Ltd. ("Sewer Services") for approximately $0.4 million. The
operations of Sewer Services added approximately $1.3 million in revenues
and an operating loss of approximately $0.1 million to the Company's
results of operations in the first quarter of 2004.
4. DISCONTINUED OPERATIONS
During the fourth quarter of 2001, the Company made the decision to sell
certain operations acquired with Kinsel Industries, Inc. ("Kinsel"), which
was acquired in February 2001. Accordingly, the Company classified these
operations as discontinued as they were not consistent with the Company's
operating strategy of providing trenchless rehabilitation and tunneling
services. The Company has completed the disposition of all material assets
classified as discontinued pursuant to the acquisition of Kinsel. At
December 31, 2003, substantially all discontinued operations had been
completed, and the Company will no longer report discontinued operations
activity separately in 2004.
The Company negotiated settlements, without litigation, during the first
quarter of 2003 between the Company and the former Kinsel owners, and the
Company and the purchasers of the wastewater treatment plant operations
acquired from Kinsel. The Company made various claims against the former
shareholders of Kinsel, arising out of the February 2001 acquisition of
Kinsel and a related company, Tracks of Texas, Inc. Those claims were
settled in March 2003 without litigation. Under the terms of the
settlement, 18,891 shares of Company common stock valued at $254,084 based
on the settlement date closing stock price of $13.45 per share, and all of
the promissory notes, totaling $5,350,000 in principal (together with all
accrued and unpaid interest), issued to former Kinsel shareholders in
connection with the acquisition, were returned to the Company from the
claim collateral escrow account established at the time of acquisition. The
remaining 56,672 shares of Company common stock held in the escrow account
were distributed to the former Kinsel shareholders. The settlement of the
escrow account primarily related to matters associated with Kinsel
operations that have been sold and were presented as discontinued
operations through December 31, 2003. In January 2003, the Company received
notice of multiple claims, totaling more than $3.5 million, from the buyer
of the former Kinsel wastewater treatment division. The claims arose out of
the January 2002 sale of the Kinsel wastewater treatment division and
alleged the valuation of the assets sold was overstated. These settlements
resulted in a $1.0 million pre-tax non-operating gain in the results of
continuing operations, and a net pre-tax $1.1 million gain in discontinued
operations, of which $0.6 million was reported as an after-tax
non-operating gain in the results of continuing operations and $0.7 million
as an after-tax gain on discontinued operations in the first quarter of
2003.
5. COMPREHENSIVE INCOME
For the quarters ended March 31, 2004 and 2003, comprehensive income was
$1.5 million and $5.7 million, respectively. The Company's adjustment to
net income to calculate comprehensive income consists solely of cumulative
foreign currency translation adjustments of $1.0 million and $(0.9 million)
for the quarters ended March 31, 2004 and 2003, respectively.
7
6. SHARE INFORMATION
Earnings per share have been calculated using the following share
information:
THREE MONTHS ENDED MARCH 31,
2004 2003
---------- ----------
Weighted average number of common shares
used for basic EPS 26,487,787 26,529,602
Effect of dilutive stock compensation 158,013 46,248
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,645,800 26,575,850
========== ==========
7. SEGMENT REPORTING
The Company has principally three operating segments: rehabilitation,
tunneling, and Tite Liner(R), the Company's corrosion and abrasion segment
("Tite Liner"). The segments were determined based upon the types of
products sold by each segment and each is regularly reviewed and evaluated
separately.
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 MARCH 31,
2004 2003
--------- ---------
Revenues
Rehabilitation $ 95,629 $ 92,367
Tunneling 26,050 25,585
Tite Liner 6,235 5,396
--------- ---------
Total Revenues $ 127,914 $ 123,348
========= =========
Gross Profit
Rehabilitation $ 20,305 $ 23,468
Tunneling 2,946 3,161
Tite Liner 2,116 1,640
--------- ---------
Total Gross Profit $ 25,367 $ 28,269
========= =========
Operating Income
Rehabilitation $ 1,727 $ 8,814
Tunneling 496 1,441
Tite Liner 1,152 931
--------- ---------
Total Operating Income $ 3,375 $ 11,186
========= =========
8. ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets include patents, license agreements, non-compete
agreements, purchased backlog and customer relationships.
8
Intangible assets at March 31, 2004 and amortization expense were as
follows ($ in thousands):
AS OF MARCH 31, 2004
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
----------- ------------
Amortized intangible assets:
Patents and trademarks $ 13,943 $ (12,379)
License agreements 4,803 (2,160)
Non-compete agreements 3,246 (1,341)
Purchased backlog 582 (388)
Customer relationships 1,797 (60)
----------- ------------
Total $ 24,371 $ (16,328)
Aggregate amortization expense:
For the three months ended March 31, 2004 $ 606
Estimated amortization expense:
For year ending December 31, 2004 $ 1,580
For year ending December 31, 2005 850
For year ending December 31, 2006 845
For year ending December 31, 2007 452
For year ending December 31, 2008 438
9. COMMITMENTS AND CONTINGENCIES
Litigation
In the third quarter of 2002, a Company crew had an accident on an
Insituform CIPP Process project in Des Moines, Iowa. Two workers died and
five workers were injured in the accident. The Company fully cooperated
with Iowa's state OSHA in the investigation of the accident. Iowa OSHA
issued a Citation and Notification of Penalty in connection with the
accident, including several willful citations. Iowa OSHA proposed penalties
of $808,250. The Company challenged Iowa OSHA's findings, and in the fourth
quarter of 2003, an administrative law judge found in favor of Iowa OSHA on
some citations, found in favor of the Company on some citations and
combined a number of citations for purposes of assessing penalties. The
administrative law judge reduced the penalties to $158,000. In the second
quarter of 2004, the Iowa Department of Inspections and Appeals reinstated
many of the original penalties, ordering total penalties in the amount of
$733,750. The Company is vigorously opposing the citations, and expects to
appeal to the Iowa state district court. In 2002, Iowa OSHA referred this
matter to the local county attorney's office for potential criminal
investigation. The local county attorney referred the matter to the State
of Iowa Department of Criminal Investigation.
In August 2003, the Company began an Insituform CIPP Process installation
in Boston. The $1 million project required the Company to line 5,400 feet
of a 109-year-old 36 to 41-inch diameter unusually-shaped hand-laid rough
brick pipe. Many aspects of this project were atypical of the Company's
normal Insituform CIPP Process installations. The owner rejected
approximately 4,500 feet of the liner and all proposed repair methods. All
rejected liner was removed and re-installed. The parties are conducting
additional testing on the line to determine the effectiveness of the
repairs and hope to bring the project to closure shortly.
The Company has a "Contractor Rework" special endorsement to its primary
comprehensive general liability insurance policy. The Company has filed a
claim with its primary insurance carrier, who has informally advised the
Company that it will indemnify the Company under the special endorsement.
The primary coverage is $1 million, less a $250,000 deductible.
The Company has excess comprehensive general liability insurance coverage.
The excess insurance coverage is in an amount far greater than the
estimated costs associated with the liner removal and re-installation. The
Company believes the "Contractor Rework" special endorsement applies to the
excess insurance coverage, it has already incurred costs in excess of the
primary coverage and it has put its excess carrier on notice. The excess
insurance carrier denied coverage in writing without referencing the
"Contractor Rework" special endorsement, and subsequently indicated that it
does not believe that the "Contractor Rework" special endorsement applies
to the excess insurance coverage.
9
On March 10, 2004, the Company filed a lawsuit in Massachusetts against its
excess insurance carrier for its failure to acknowledge coverage and to
indemnify the Company for the entire loss in excess of the primary
coverage. The excess insurance carrier has filed an answer in response.
Because of the uncertainties in litigation and although the Company is
vigorously pursuing a full recovery of the loss, the Company did not
believe that it was prudent to recognize any of the potential excess
carrier insurance recovery at March 31, 2004.
The Company is involved in certain litigation incidental to the conduct of
its business and affairs. Management does not believe that the outcome of
any such litigation will have a material adverse effect on the financial
condition, results of operations or liquidity of the Company.
Guarantees
The Company has entered into several contractual joint ventures to develop
joint bids on contracts for its rehabilitation businesses, and for
tunneling operations. In these cases, the Company could be required to
complete the partner's portion of the contract if the partner is unable to
complete its portion. The Company is at risk for any amounts for which the
Company itself could not complete the work and for which a third party
contractor could not be located to complete the work for the amount awarded
in the contract. The Company has not experienced material adverse results
from such arrangements and foresees no future material adverse impact on
financial position, results of operations or cash flows. As a result, the
Company has not recorded a liability on the balance sheet associated with
this risk.
The Company has many contracts that require the Company to indemnify the
other party against loss from claims of patent or trademark infringement.
The Company also indemnifies its surety against losses from third party
claims of subcontractors. The Company has not experienced material losses
under these provisions and foresees no future material adverse impact on
financial position, results of operations or cash flows. As a result, the
Company has not recorded a liability on the balance sheet associated with
this risk.
10. FINANCINGS
Amended Credit Facility
Effective March 12, 2004, the Company entered into an amended and restated
bank revolving credit facility (the "Amended Credit Facility") that
replaced its existing $75 million bank credit facility (the "Old Credit
Facility"). The Amended Credit Facility provides a borrowing capacity of
$25 million, any portion of which may be used for the issuance of standby
letters of credit. The Company believed that the covenants contained in the
Old Credit Facility unduly limited the Company in the operation of its
business. In light of the Company's being out of compliance with certain
debt covenants at December 31, 2003 and based on the determination that it
did not anticipate using more than $25 million of its bank credit in the
foreseeable future (primarily for standby letters of credit), the Company
decided to amend the Old Credit Facility and consummate the Amended Credit
Facility which subjects the Company to less restrictive covenants. The
Amended Credit Facility matures on September 12, 2005.
Under the Amended Credit Facility, the Company paid a $25,000 closing fee
and will pay a commitment fee equal to 0.4% per annum on the unborrowed
balance at the end of each fiscal quarter. The Company will also pay a
letter of credit fee of 2.25% per annum on the aggregate stated amount for
each letter of credit that is issued and outstanding at the end of each
fiscal quarter. Any loan under the Amended Credit Facility will bear
interest at the rate equal to the Bank of America prime rate (4.0% per
annum as of March 31, 2004). The Amended Credit Facility contains
cross-default provisions to the Company's amended Senior Notes as
summarized below.
At December 31, 2003, the Company had an unborrowed balance under the Old
Credit Facility of $69.8 million, and the commitment fee was 0.3%. The
remaining $5.2 million was being utilized at year end for non-interest
bearing letters of credit, the majority of which were collateral for
insurance. The letters of credit under the Old Credit Facility were
transferred to the Amended Credit Facility and remain outstanding. The
Company issued $4.2 million in additional letters of credit under the
Amended Credit Facility relating to collateral for the benefit of its
insurance carrier, bringing the total amount of letters of credit issued to
$9.2 million at March 31, 2004. As a result of the issuance of the $4.2
million in additional letters of credit under the Amended Credit Facility
referenced above, the insurance collateral agreement was canceled since it
was no longer necessary and the related amount of restricted cash posted as
insurance collateral was released.
10
Senior Notes
On March 12, 2004, the Company, with the requisite approval of the holders
of the Company's Senior Notes, Series A, due February 14, 2007, and the
Company's Senior Notes, Series 2003-A, due April 24, 2013, amended certain
of the terms and conditions of the Senior Notes. In connection with the
amendment, the Company paid the noteholders an amendment fee of 0.25%, or
$0.3 million, of the outstanding principal balance of each series of Senior
Notes. In addition, the interest rate on each series of Senior Notes
increases by 0.75% per annum at closing, reducing by 0.25% per annum
beginning on April 1, 2005 and by an additional 0.5% per annum beginning on
April 1, 2006.
Prior to the amendment, the Senior Notes, Series A, bore interest, payable
semi-annually, at 7.88% per annum. At March 31, 2004, the outstanding
principal amount under the Senior Notes, Series A, was $47.1 million. Each
year through maturity the Company is required to make principal payments
under the Senior Notes, Series A, of $15.7 million, plus interest. Upon
specified change in control events, each holder of the Senior Notes, Series
A, has the right to require the Company to purchase its notes, without
premium.
Prior to the amendment, the Senior Notes, Series 2003-A, bore interest,
payable semi-annually, at a rate of 5.29% per annum. At March 31, 2004, the
outstanding principal amount under the Senior Notes, Series 2003-A, was
$65.0 million. The principal amount of the Senior Notes, Series 2003-A, is
due in a single payment on April 24, 2013. Upon specified change in control
events, each holder of the Senior Notes, Series 2003-A, has the right to
require the Company to purchase its notes, without premium. The proceeds of
the Senior Notes, Series 2003-A, were used by the Company to pay off
balances on the Old Credit Facility and to provide liquidity to the Company
for general corporate purposes.
The amended note purchase agreements of the Senior Notes, Series A, and the
Senior Notes, Series 2003-A, and the Amended Credit Facility obligate the
Company to comply with certain amended financial ratios and restrictive
covenants through the end of the first quarter of 2005. These covenants,
among other things, place limitations on operations, stock repurchases,
dividends, capital expenditures, acquisitions and sales of assets by the
Company and/or its subsidiaries and limit the ability of the Company and
its subsidiaries to incur further indebtedness. On April 1, 2005, the
financial covenants will revert to the original covenants which were in
place prior to the March 12, 2004 amendments.
At December 31, 2003, the Company was out of compliance with certain of the
debt covenants under the note purchase agreements, the Old Credit Facility
and an insurance collateral agreement, but with the recent amendments, is
now in compliance with all newly amended covenants.
In connection with the refinancing/amendments of its debt agreements as
described above, the Company recorded a charge to interest expense in the
quarter ended March 31, 2004 of approximately $0.3 million relative to
costs incurred for the refinancing/amendments, including the write-off of a
portion of deferred financing fees.
At March 31, 2004, the Company was in compliance with all debt covenants,
and expects to be in compliance for the balance of 2004.
The Company's Euro Note, due July 7, 2006, bears interest, payable
quarterly in January, April, July, and October of each year, at the rate
per annum of 5.5%. Each year until maturity, the Company will be required
to make principal payments of $1.0 million for which currency fluctuations
will have an effect on the U.S. dollar payment amount. On March 31, 2004,
the principal amount of the Euro Note outstanding was Eur 2.4 million, or
$3.0 million.
11. NEW ACCOUNTING PRONOUNCEMENTS
In January 2003 (as revised December 2003), the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46
clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," for certain entities in which equity
investors do not have the characteristics of a controlling financial
interest or do not have sufficient equity at risk for the entity to finance
its activities without additional subordinated financial support from other
parties. FIN 46 requires that variable interest entities, as defined,
should be consolidated by the primary beneficiary, which is defined as the
entity that is expected to absorb the majority of the expected losses,
receive the majority of the gains or both. FIN 46 requires that companies
disclose certain information about a variable interest entity created prior
to February 1, 2003. FIN 46 was effective for the Company on January 1,
2004. The adoption of FIN 46 did not have a material impact on the
Company's financial position or results of operations.
11
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. See the discussion of the Company's critical accounting
policies in its Annual Report on Form 10-K for the year ended December 31, 2003;
there have been no changes to these policies during the first quarter of 2004.
EXECUTIVE SUMMARY
Insituform Technologies is a worldwide company specializing in trenchless
technologies to rehabilitate, replace, maintain and install underground pipes.
The Company has three principal operating segments: rehabilitation, tunneling
and Tite Liner(R) ("Tite Liner"). These segments have been determined based on
the types of products sold, and each is reviewed and evaluated separately. While
the Company uses a variety of trenchless technologies, the Insituform
cured-in-place-pipe process (the "Insituform CIPP Process") contributed 62.1% of
its revenues in the first quarter of 2004. This percentage has been trending
downward slightly over the last few years as the Company has pursued
diversification from the addition of complementary businesses, technologies and
techniques. The tunneling segment has grown through organic growth and with the
acquisition of Elmore Pipe Jacking, Inc. in 2002. Tunneling revenues have grown
from $49.0 million in 2001 to $100.0 million in 2003.
Revenues are generated by the Company and its subsidiaries operating principally
in the United States, Canada, the United Kingdom, the Netherlands, France,
Belgium, Spain, Switzerland, and Chile, and include product sales and royalties
from several joint ventures in Europe, and unaffiliated licensees and
sub-licensees throughout the world. The United States remains the Company's
single largest market, representing 87.1% of total revenue in the first quarter
of 2004. See Note 7 to the Consolidated Financial Statements for additional
segment information and disclosures.
The Company has identified several initiatives that management believes will
reposition the Company to maintain its prominent status in its industry. In
order to accomplish these initiatives, the Company will strategically invest
money over the next two years. These initiatives are designed to accomplish cost
reduction, product innovation, and business growth for the long term.
Specifically, the Company will spend money on enhancing quality control and
safety programs, training, logistics management and sales programs, which will
impact all aspects of the business. In addition, there will be strategic
investments in the areas of product innovation, particularly seeking methods to
drive costs out of the business, to gain competitiveness. Some of the
initiatives are already in the implementation phase, and the Company will
continue to make planned investments to accomplish its goals. All of these
investments are tempered by the fact that the Company's debt covenants place
temporary restrictions on the use of cash. The Company expects the
implementation of these initiatives to start benefiting the financial results in
2005.
UPDATE OF FOURTH QUARTER AND YEAR-END 2003 ISSUES
As discussed in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2003 ("the 2003 Annual Report"), there were a number of
operational issues requiring adjustment to the Company's financial statements in
2003. The following is a brief discussion on some of the major issues discussed
in the 2003 Annual Report.
BOSTON INSITUFORM CIPP PROCESS PROJECT
See discussion in Note 9 to the Consolidated Financial Statements for an update.
The amount of $5.1 million (pre-tax) originally provided in the fourth quarter
of 2003 for estimated costs associated with removing and re-installing
approximately 4,500 feet of Insituform CIPP Process liner in Boston,
Massachusetts, was not adjusted.
CASUALTY INSURANCE AND HEALTHCARE RESERVES
In the fourth quarter of 2003, the Company recorded an additional $3.0 million
to its casualty insurance reserve and $0.7 million to its healthcare benefits
reserve. The Company obtains actuarial estimates of its liabilities on a
quarterly basis and adjusts its reserves accordingly. During the first quarter
of 2004, the casualty insurance reserve was increased by $0.8 million and the
healthcare benefits reserve was increased by $0.4 million.
RESERVE FOR POTENTIALLY UNCOLLECTIBLE ACCOUNTS AND CLAIMS
The Company recorded bad debt expense in the fourth quarter of 2003 of $0.6
million. The Company recorded no bad debt expense in the first quarter of 2004
or 2003. Also, at December 31, 2003, the Company reserved $0.8 million against
12
several previously recorded customer claims for which collection at originally
expected amounts was no longer considered probable. There was no need to
increase these reserves in the first quarter of 2004.
WRITE-DOWNS AND RESERVES AGAINST CERTAIN ASSETS AND DISCONTINUED OPERATIONS
The Company wrote down certain assets by $1.1 million during the fourth quarter
of 2003. The Company will perform physical counts of its fixed assets, with
individual original cost below $50,000, in 2004. In the first quarter of 2004,
the physical inventory of such items had not started, and no additional
write-offs were taken.
In the fourth quarter of 2003, the Company recorded a $1.5 million reserve
against certain assets related to discontinued operations. No adjustment to this
reserve was made in the first quarter of 2004.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2004 and 2003
Key financial data for the first quarter of 2004 compared to the first quarter
of 2003 is as follows ($ in thousands):
THREE MONTHS ENDED MARCH 31, 2004
GROSS SELLING, GENERAL OPERATING
GROSS PROFIT AND ADMINISTRATIVE OPERATING INCOME
SEGMENT REVENUES PROFIT MARGIN EXPENSE INCOME PERCENTAGE
---------- --------- ------ ------------------ --------- ----------
Rehabilitation $ 95,629 $ 20,305 21.2% $ 18,578 $ 1,727 1.8%
Tunneling 26,050 2,946 11.3% 2,450 496 1.9%
Tite Liner 6,235 2,116 33.9% 964 1,152 18.5%
---------- --------- ---- --------- --------- ---
TOTAL $ 127,914 $ 25,367 19.8% $ 21,992 $ 3,375 2.6%
========== ========= ==== ========= ========= ===
THREE MONTHS ENDED MARCH 31, 2003
GROSS SELLING, GENERAL OPERATING
GROSS PROFIT AND ADMINISTRATIVE OPERATING INCOME
SEGMENT REVENUES PROFIT MARGIN EXPENSE INCOME PERCENTAGE
---------- --------- ------ ------------------ --------- ----------
Rehabilitation $ 92,367 $ 23,468 25.4% $ 14,654 $ 8,814 9.5%
Tunneling 25,585 3,161 12.4% 1,720 1,441 5.6%
Tite Liner 5,396 1,640 30.4% 709 931 17.3%
---------- --------- ---- --------- --------- ---
TOTAL $ 123,348 $ 28,269 22.9% $ 17,083 $ 11,186 9.1%
========== ========= ==== ========= ========= ===
OVERVIEW
On a consolidated basis, revenues increased 3.7% to $127.9 million in the first
quarter of 2004 compared to $123.3 million in the first quarter of 2003,
reflecting the impact of acquisitions made after the first quarter of 2003
offset by declines in two domestic rehabilitation regions. Gross profit
decreased $2.9 million, or 10.3%, to $25.4 million in the first quarter of 2004
compared to $28.3 million in the first quarter of 2003, primarily due to lower
pricing in one domestic region in the rehabilitation business and lower volume
in another. Favorable performance in Canada and the Tite Liner segment partially
offset the decrease in gross profit. Selling, general and administrative
expenses increased $4.9 million to $22.0 million in the first quarter of 2004
compared to $17.1 million in the first quarter of 2003 due to additional
compensation and employee-related costs along with professional and consulting
fees which reflect implementation of corporate strategic initiatives.
Additionally, acquisitions made after the first quarter of 2003 added $1.5
million to selling, general and administrative expenses in the first quarter of
2004. Also impacting gross profit and operating income was higher insurance and
healthcare costs which increased $1.3 million in the first quarter of 2004
compared to the first quarter of 2003.
REHABILITATION SEGMENT
Rehabilitation revenues increased $3.3 million, or 3.5%, to $95.6 million in the
first quarter of 2004 compared to $92.4 million in the first quarter of 2003.
The acquisitions of Sewer Services, Ltd. ("Sewer Services"), Insituform East,
Inc. ("East") and Ka-Te Insituform AG ("Ka-Te Insituform") added $6.5 million in
revenues in the first quarter of 2004. These acquisitions were made in the
second, third and fourth quarters of 2003, respectively. Four regions in the
domestic rehabilitation business experienced revenue growth of $4.9 million due
to increased backlog in the first quarter of 2004. Two other domestic regions
suffered lower pricing and work release delays, causing an offsetting $8.4
million decline in revenues in the first quarter of 2004.
Gross profit in the rehabilitation segment decreased $3.2 million, or 13.5%, to
$20.3 million in the first quarter of 2004 compared to $23.5 million in the
first quarter of 2003. Lower pricing and lower volume caused by work release
delays in
13
two domestic regions caused gross profit to decline $5.6 million. Lower pricing
resulted from increased competition, lower margins realized on pipebursting
activities and subcontracted work which typically carries lower margins. Also
impacting revenues and gross profit was manpower devoted to the remediation of
the previously discussed project in Boston. However, growth in two domestic
regions and Europe caused an offsetting $2.0 million increase in gross profit.
Gross profit margin declined to 21.2% in the first quarter of 2004 compared to
25.4% in the first quarter of 2003 primarily due to lower pricing in the
domestic rehabilitation business.
Selling, general and administrative expenses in the rehabilitation segment
increased $3.9 million, or 26.8%, to $18.6 million in the first quarter of 2004
compared to $14.7 million in the first quarter of 2003. The acquisitions of
Sewer Services, East and Ka-Te Insituform added $1.5 million of selling, general
and administrative expenses in the first quarter of 2004. In Europe, additional
product support, a new regional operation's facility, higher business unit costs
and currency effects added $0.8 million of selling, general and administrative
expenses in the first quarter of 2004. Higher corporate and other costs,
including additional personnel and consulting allocated to the rehabilitation
segment, increased selling, general and administrative expenses by $1.6 million
in the first quarter of 2004.
The combination of factors discussed related to gross profit and selling,
general and administrative expenses caused rehabilitation operating income to
decrease $7.1 million, or 80.4%, to $1.7 million in the first quarter of 2004
compared to $8.8 million in the first quarter of 2003.
TUNNELING SEGMENT
Tunneling revenues increased $0.5 million, or 1.8%, to $26.1 million in the
first quarter of 2004 compared to $25.6 million in the first quarter of 2003.
Tunneling gross profit decreased $0.3 million, or 6.8%, to $2.9 million in the
first quarter of 2004 compared to $3.2 million in the first quarter of 2003.
January and part of February were particularly slow for tunneling, causing
under-utilization of equipment. This under-utilization caused gross profit
margin to fall 1.1% to 11.3% in the first quarter of 2004 compared to 12.4% in
the first quarter of 2003.
Selling, general and administrative expenses increased $0.7 million, or 42.4%,
to $2.5 million in the first quarter of 2004, compared to $1.7 million in the
first quarter of 2003. The tunneling segment added a number of employees in late
2003, including project management and engineering personnel, adding $0.3
million. Higher corporate expenses allocated to tunneling in the first quarter
of 2004 added an additional $0.4 million in selling, general and administrative
expenses.
Operating income decreased $0.9 million, or 65.6%, to $0.5 million in the first
quarter of 2004 compared to $1.4 million in the first quarter of 2003 due to the
combination of factors discussed relating to the gross profit and selling,
general and administrative expenses above.
TITE LINER SEGMENT
Tite Liner revenues increased $0.8 million, or 15.5%, to $6.2 million in the
first quarter of 2004 compared to $5.4 million in the first quarter of 2003.
Revenue growth in the first quarter of 2004 was $0.6 million in the United
States and $0.3 million in Canada compared to the same period last year. In the
same period, South America saw a decline in revenues of $0.1 million, compared
to the first quarter of 2003.
Tite Liner gross profit increased $0.5 million, or 29.0%, to $2.1 million in the
first quarter of 2004 compared to $1.6 million in the first quarter of 2003.
Tite Liner experienced improved results in the United States and Canada, causing
gross profit to rise. Gross profit margin also increased 3.5% to 33.9% in the
first quarter of 2004 compared to 30.4% in the first quarter of 2003.
Selling, general and administrative expenses increased $0.3 million to $1.0
million in the first quarter of 2004 compared to $0.7 million in the first
quarter of 2003 due to increased sales expenses and higher corporate expenses
allocated to Tite Liner. Resulting operating income increased $0.2 million, or
23.7%, to $1.2 million in the first quarter of 2004 compared to $0.9 million in
the first quarter of 2003.
14
OTHER INCOME (EXPENSE) AND TAXES
Details of interest and other income (expense) and taxes are included in the
table below:
THREE MONTHS ENDED MARCH 31,
2004 2003
--------- ---------
Operating income $ 3,375 $ 11,186
Interest income (expense) (2,168) (1,197)
Other income (expense) (164) 431
--------- ---------
Income before taxes $ 1,043 $ 10,420
Taxes on income 425 4,064
--------- ---------
Income before minority interests
and equity earnings $ 618 $ 6,356
Interest expense, net of interest income, increased $1.0 million, or 81.1%, to
$2.2 million in the first quarter of 2004 compared to $1.2 million in the first
quarter of 2003 due principally to the placement of $65.0 million in Senior
Notes in April 2003. In addition, there were $0.3 million in costs and interest
expense in connection with the refinancing/amendments to the debt agreements in
March 2004. See discussion of debt in the Liquidity and Capital Resources
portion of this discussion. Other expense was $0.2 million in the first quarter
of 2004 compared to other income of $0.4 million in the first quarter of 2003.
Other income in 2003 included a settlement from the former owners of Kinsel
Industries, Inc. ("Kinsel") which the Company acquired in February 2001.
Taxes on income in the first quarter of 2004 were $0.4 million compared to $4.1
million in the first quarter of 2003 due to the lower taxable income in the
first quarter of 2004. The effective tax rate increased 1.8 percentage points in
the first quarter of 2004 to 40.8% compared to 39.0% in the first quarter of
2003. This increase was due primarily to having lower pre-tax income and the
fixed provision for permanent adjustments to book income.
DISCONTINUED OPERATIONS
See discussion in Note 4 to the Consolidated Financial Statements for an update
on discontinued operations.
NET INCOME AND EARNINGS PER SHARE
Net income from continuing operations decreased $5.8 million, or 92.1%, to $0.5
million in the first quarter of 2004 compared to $6.4 million in the first
quarter of 2003. Discontinued operations contributed $0.3 million in net income
in the first quarter of 2003, causing net income in the first quarter of 2003 to
be $6.6 million. Earnings per share were $0.02 in the first quarter of 2004
compared to $0.24 in the first quarter of 2003. Discontinued operations added
$0.01 to earnings per share in the first quarter of 2003.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND EQUIVALENTS
(In millions) MARCH 31, 2004 DECEMBER 31, 2003
-------------- -----------------
Cash and cash equivalents $ 93.5 $ 93.9
Cash restricted - in escrow 1.3 1.5
Cash held as collateral - 4.6
------- -------
Total $ 94.8 $ 100.0
======= =======
Cash and cash equivalents were $94.8 million at March 31, 2004, which was a $5.2
million, or 5.2%, decrease from the $100.0 million cash and cash equivalent
balances at December 31, 2003. Cash and cash equivalents included $1.3 million
and $6.1 million in restricted cash at March 31, 2004 and December 31, 2003,
respectively. At March 31, 2004, restricted cash related to deposits made as
escrow for release of retention on specific projects performed for certain
municipalities and state agencies. At December 31, 2003, $4.6 million related to
deposits posted as collateral for casualty insurance policies, and the remaining
$1.5 million related to deposits made as escrow for release of retention on
specific projects as discussed above. All restricted cash is held in escrow
accounts.
CASH FLOWS FROM OPERATIONS
Cash flows from continuing operations increased $2.0 million, or 14.4%, to $15.9
million in the first quarter of 2004 compared to $13.9 million in the first
quarter of 2003. During the first quarter of 2003, discontinued operations
15
contributed cash of $1.8 million, for an overall operating cash flow of $15.7
million. Cash flows from operating activities comprised the most significant
portion of the Company's total cash flow for the three months ended March 31,
2004. The largest component of operating cash flows at March 31, 2004 related to
changes in working capital. Working capital changes provided $9.7 million in
operating cash flow compared to $4.1 million in the first quarter of 2003. The
primary source of funds in the first quarter of 2004 was the receipt of tax
refunds of approximately $9.1 million, causing a significant decrease in prepaid
expenses and other assets. Depreciation and amortization increased to $4.7
million in the first quarter of 2004 from $3.7 million in the first quarter of
2003 due primarily to the effect of recent acquisitions and increased capital
expenditures.
CASH FLOWS FROM INVESTING ACTIVITIES
The Company used $7.5 million on investing activities in the first quarter of
2004 compared to $1.4 million in the first quarter of 2003. In the first quarter
of 2004, investing activities were comprised of capital expenditures of $7.7
million, offset by $0.2 million of proceeds from the sale of certain assets. The
most significant component of capital expenditures in the first quarter of 2004
was $3.1 million on a continuing expansion project at the Company's
manufacturing facility in Batesville, Mississippi. Other expenditures were for
various equipment across the Company's North American and European operations.
Capital expenditures in the first quarter of 2003 were $2.1 million, offset by
proceeds from the sale of assets or other investing activities of $0.7 million.
CASH FLOWS FROM FINANCING ACTIVITIES
Financing activities used $13.6 million in the first quarter of 2004 compared to
$5.7 million in the first quarter of 2003. In the first quarter of 2004, the
Company paid the scheduled debt repayment of $15.7 million offset by $2.8
million received from the exercise of stock options. In addition, $0.6 million
in financing costs were capitalized as part of the debt restructuring completed
in March 2004 which is discussed in more detail in Note 10 to the Consolidated
Financial Statements. In the first quarter of 2003, debt repayments of $18.7
million and repurchases of treasury stock of $1.4 million were offset by a net
increase in notes payable of $14.5 million.
MATERIAL CHANGES IN FINANCIAL CONDITION
Trade receivables, including retainage under certain construction contracts,
were $110.1 million at March 31, 2004 compared to $115.7 million at December 31,
2003. The Company has experienced improved cash collections from receivables
during the first quarter of 2004. Another factor in the decrease in receivables
is an increase in cost and earnings in excess of billings (unbilled
receivables). Unbilled receivables arise when work on projects begins, incurring
costs before billings can be issued. Unbilled receivables increased $7.8 million
to $35.7 million at March 31, 2004, compared to $27.9 million at December 31,
2003.
Prepaid and miscellaneous current assets decreased $9.4 million in the first
quarter of 2004 compared to December 31, 2003 primarily due to the receipt of
tax refunds mentioned previously.
FINANCINGS
See discussion in Note 10 to the Consolidated Financial Statements regarding the
Company's financings.
The Company believes it has adequate resources and liquidity to fund future cash
requirements and debt repayments with cash generated from operations, existing
cash balances, additional short- and long-term borrowing and the sale of assets,
for the next 12 months.
DISCLOSURE OF FINANCIAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
The Company has entered into various financial obligations and commitments in
the course of its ongoing operations and financing strategies. Financial
obligations are considered to represent known future cash payments that the
Company is required to make under existing contractual arrangements, such as
debt and lease agreements. These obligations may result from both general
financing activities or from commercial arrangements that are directly supported
by related revenue-producing activities. Commercial commitments represent
contingent obligations of the Company, which become payable only if certain
pre-defined events were to occur, such as funding financial guarantees. See Note
9 for further discussion.
The following table provides a summary of the Company's financial obligations
and commercial commitments as of March 31, 2004 ($ in thousands). This table
includes cash obligations related to principal outstanding under existing debt
agreements and operating leases.
16
PAYMENTS DUE BY PERIOD
CASH OBLIGATIONS(1) TOTAL 2004 2005 2006 2007 2008 THEREAFTER
- ------------------- -------- ------ ------- ------- ------- ---------- ----------
Long-term debt $115,437 $1,114 $16,881 $16,732 $15,710 $ - $65,000
Line of credit facility(2) - - - - - - -
Operating leases 34,492 8,309 7,410 5,529 4,618 3,671 4,955
-------- ------ ------- ------- ------- ---------- -------
Total contractual cash
obligations $149,929 $9,423 $24,291 $22,261 $20,328 $ 3,671 $69,955
======== ====== ======= ======= ======= ========== =======
(1) Cash obligations are not discounted and do not include related interest. See
Notes 9 and 10 to the Consolidated Financial Statements regarding commitments
and contingencies and financings, respectively.
(2) As of March 31, 2004, there was no borrowing balance on the credit facility
and therefore there was no applicable interest rate as the rates are determined
on the borrowing date. The available balance was $15.8 million, and the
commitment fee was 0.40%. The remaining $9.2 million was used for non-interest
bearing letters of credit, all of which were collateral for insurance. The
Company generally used the credit facility for short-term borrowings and
disclosed amounts outstanding as a current liability. See Note 10 to the
Consolidated Financial Statements regarding refinancing of the line of credit
facility.
MARKET RISK
The Company is exposed to the effect of interest rate changes and foreign
currency fluctuations. Due to the relative immateriality of potential impacts
from changes in these rates, the Company does not use derivative contracts to
manage these risks.
INTEREST RATE RISK
The fair value of the Company's cash and short-term investment portfolio at
March 31, 2004 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, is 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
typically borrows under fixed rate agreements. The fair value of the Company's
long-term debt, including current maturities, approximated its carrying value at
March 31, 2004. Market risk was estimated to be $3.1 million as the potential
increase in fair value resulting from a hypothetical 10% decrease in the
Company's debt specific borrowing rates at March 31, 2004.
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. At March 31,
2004, approximately $3.1 million of financial instruments, primarily long-term
debt, were denominated principally in Euros. The effect of a hypothetical change
of 10% in year-end exchange rates would be immaterial.
OFF-BALANCE SHEET ARRANGEMENTS
The Company uses various structures for the financing of operating equipment,
including borrowing, operating and capital leases, and sale-leaseback
arrangements. All debt, including the discounted value of future minimum lease
payments under capital lease arrangements, is presented in the balance sheet.
The Company's future commitments under operating lease arrangements were $34.5
million at March 31, 2004. The Company also has exposure under performance
guarantees by contractual joint ventures and indemnification of its surety
companies. However, the Company has never experienced any material adverse
effects to its financial position, results of operations or cash flows relative
to these arrangements. All foreign joint ventures are accounted for using the
equity method. The Company has no other off-balance sheet financing arrangements
or commitments. See Note 9 in the Notes to Consolidated Financial Statements
regarding commitments and contingencies.
17
NEW ACCOUNTING PRONOUNCEMENTS
There have been no significant new accounting pronouncements since the filing of
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003. However, see Note 11 for discussion of the Company's adoption of FIN 46.
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.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer carried out an
evaluation of the effectiveness of the Company's disclosure controls and
procedures (as defined in Securities Exchange Act Rules 13a-15(e) and
15(d)-15(e)) as of the end of the period covered by this report. Based on their
evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that the Company's disclosure controls and procedures were effective
at the reasonable assurance level.
There were changes in the Company's internal controls over financial reporting
that occurred during the Company's fiscal quarter ended March 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Specifically, and as
previously described in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2003, the Company took the following steps during the
first quarter of 2004 to enhance its internal controls over financial reporting:
- appointing a Corporate Controller;
- instituting enhanced detailed senior and regional management reviews
of financial accounts of regional operations;
- enhancing regional management's and controllers' ownership and
accountability over financial accounts and reporting;
- enhancing detailed reviews of collectibility of accounts receivable;
- enhancing detailed reviews of fixed asset accounts and reconciliations
to the Company's general ledger;
- increasing supervisory and management reviews of procedures,
reconciliation activities and financial reporting; and
- improving information technology system integrity management and
enhancement of systems controls.
The Company also evaluated and implemented, and will continue to evaluate and
implement, other improvements to the system of internal controls, as it prepares
for the implementation of new rules required under Section 404 of the
Sarbanes-Oxley Act.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material changes since the filing of the Company's Form 10-K
for the year ended December 31, 2003.
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 January 22, 2004, the Company filed a Current Report on Form
8-K, under Items 7 and 12, to provide the Company's press
release, dated January 22, 2004, announcing that it would report
its 2003 fourth-quarter and full-year results by March 15, with
the filing of its 10-K.
On March 22, 2004, the Company filed a Current Report on Form
8-K, under Items 7 and 12, to provide the Company's earnings
release, dated March 15, 2004, announcing fourth quarter and 2003
year-end results and resumption of compliance with debt
covenants, and to provide a transcript of the Company's March 16,
2004, conference call held to announce and discuss its financial
results for the fourth quarter and 2003 year-end.
19
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.
May 10, 2004 /s/ Christian G. Farman
------------------------------------------
Christian G. Farman
Vice President - Chief Financial Officer
Principal Financial and Accounting Officer
20
INDEX TO EXHIBITS
31.1 Certification of Thomas S. Rooney, Jr. pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Christian G. Farman pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Thomas S. Rooney, Jr. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Christian G. Farman pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
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