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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 2004
Commission file number #0-10786
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
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(636) 530-8000
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(Registrant's telephone number including area code)
N/A
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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 November 4, 2004
- ---------------------------------------- ------------------------------------
Class A Common Stock, $.01 par value 26,762,492 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.............................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 23
Item 4. Controls and Procedures.......................................................... 23
Part II Other Information:
Item 1. Legal Proceedings................................................................ 24
Item 6. Exhibits......................................................................... 24
Signatures......................................................................................... 25
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 NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------------------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES $ 144,821 $ 117,360 $ 415,169 $ 365,486
COST OF REVENUES 114,545 89,941 328,962 280,531
--------- --------- --------- ---------
GROSS PROFIT 30,276 27,419 86,207 84,955
SELLING, GENERAL AND ADMINISTRATIVE 22,201 19,648 67,167 55,713
--------- --------- --------- ---------
OPERATING INCOME 8,075 7,771 19,040 29,242
OTHER (EXPENSE) INCOME:
Interest expense (2,318) (2,391) (7,113) (5,763)
Other 102 331 389 573
--------- --------- --------- ---------
TOTAL OTHER EXPENSE (2,216) (2,060) (6,724) (5,190)
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 5,859 5,711 12,316 24,052
TAXES ON INCOME 2,268 2,228 4,931 9,381
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS
AND DISCONTINUED OPERATIONS 3,591 3,483 7,385 14,671
MINORITY INTERESTS (65) (84) (166) (144)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 0 101 (35) 201
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 3,526 3,500 7,184 14,728
LOSS FROM DISCONTINUED OPERATIONS - (215) - (231)
--------- --------- --------- ---------
NET INCOME $ 3,526 $ 3,285 $ 7,184 $ 14,497
========= ========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS:
Basic:
Income from continuing operations $ 0.13 $ 0.13 $ 0.27 $ 0.56
Discontinued operations - (0.01) - (0.01)
Net income 0.13 0.12 0.27 0.55
Diluted:
Income from continuing operations $ 0.13 $ 0.13 $ 0.27 $ 0.56
Discontinued operations - (0.01) - (0.01)
Net income 0.13 0.12 0.27 0.55
See accompanying notes to consolidated financial statements.
3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 77,678 $ 93,865
Restricted cash 1,062 6,126
Receivables, net 95,616 90,814
Retainage 27,144 24,902
Costs and estimated earnings in excess of billings 40,012 27,853
Inventories 15,902 12,935
Prepaid expenses and other assets 12,289 19,515
Assets related to discontinued operations - 1,263
--------- ---------
TOTAL CURRENT ASSETS 269,703 277,273
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 86,531 75,667
--------- ---------
OTHER ASSETS
Goodwill 131,558 131,613
Other assets 22,949 23,807
--------- ---------
TOTAL OTHER ASSETS 154,507 155,420
--------- ---------
TOTAL ASSETS $ 510,741 $ 508,360
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and line of credit $ 15,856 $ 16,938
Accounts payable and accrued expenses 89,762 82,670
Billings in excess of costs and estimated earnings 9,995 8,495
Liabilities related to discontinued operations - 1,770
--------- ---------
TOTAL CURRENT LIABILITIES 115,613 109,873
--------- ---------
LONG-TERM DEBT, less current maturities 96,528 114,323
OTHER LIABILITIES 3,501 3,530
--------- ---------
TOTAL LIABILITIES 215,642 227,726
--------- ---------
MINORITY INTERESTS 1,640 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 26,750,867 and 26,458,205 291 288
Unearned restricted stock compensation (722) (412)
Additional paid-in capital 137,169 133,794
Retained earnings 205,512 198,328
Treasury stock - 2,357,464 shares (51,596) (51,596)
Accumulated other comprehensive income (loss) 2,805 (1,233)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 293,459 279,169
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 510,741 $ 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 NINE MONTHS
ENDED SEPTEMBER 30,
-------------------------
2004 2003
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 7,184 $ 14,497
Loss from discontinued operations - 231
-------- --------
INCOME FROM CONTINUING OPERATIONS 7,184 14,728
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 12,149 11,213
Amortization 1,570 1,005
Deferred income taxes 430 (30)
Other loss on asset disposals 717 518
Income (loss) from equity investments 35 (201)
Restructuring charge - (261)
Write-off of deferred financing fees 226 -
Minority interest in net income 166 144
Other 3,759 2,037
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES:
Change in restricted cash related to operating activities 462 143
Receivables, including costs and estimated earnings in excess of billings (18,359) 2,451
Inventories (2,966) (415)
Prepaid expenses and other assets 7,591 (3,693)
Accounts payable and accrued expenses 6,822 (1,065)
-------- --------
NET CASH PROVIDED BY CONTINUING OPERATIONS 19,786 26,574
NET CASH USED BY DISCONTINUED OPERATIONS - (1,558)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 19,786 25,016
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (25,521) (12,573)
Proceeds from sale of fixed assets 1,904 780
Purchase of businesses, net of cash acquired - (6,337)
Other investing activities (844) 1,406
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (24,461) (16,724)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock and exercise of stock options 3,042 557
Purchases of treasury stock - (1,597)
Principal payments on long-term debt (18,914) (22,734)
Issuance of long-term debt - 65,000
Decrease in line of credit - (25,835)
Deferred financing charges (633) (692)
Changes in restricted cash related to financing activities 4,602 (4,600)
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (11,903) 10,099
-------- --------
Effect of exchange rate changes on cash 391 673
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (16,187) 19,064
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 93,865 71,401
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 77,678 $ 90,465
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID (RECEIVED) FOR:
Interest $ 6,419 $ 5,859
Income taxes, net (5,940) 8,425
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note payable recovered in settlement $ - $ 5,350
Accrued interest recovered in settlement - 557
Treasury stock recovered in settlement - 254
Noncompete liability recovered in settlement 919 -
See accompanying notes to consolidated financial statements.
5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 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 September 30, 2004 and December 31,
2003, the unaudited consolidated statements of income for the three and
nine months ended September 30, 2004 and 2003 and the unaudited
consolidated statements of cash flows for the nine months ended September
30, 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 and nine months ended September
30, 2004 are not necessarily indicative of the results to be expected for
the full year.
For all periods presented in this Form 10-Q, restricted cash is presented
separately on the consolidated balance sheets and changes in restricted
cash are presented on the consolidated statements of cash flows according
to the purpose for which the restricted cash is held (i.e., operating,
investing or financing activity).
2. STOCK-BASED COMPENSATION
At September 30, 2004, the Company had two 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.
No compensation expense from stock options was reflected in the
consolidated statements of income for the three or nine months ended
September 30, 2004 and 2003, as all options were granted at an exercise
price equal to the market value of the underlying common stock on the date
of the grant. Stock-based compensation expense, net of tax, related to
grants of restricted stock and deferred stock units was $257,000 and
$283,000 in the third quarter and first nine months of 2004, respectively.
Stock-based compensation expense, net of tax, related to grants of
restricted stock was $21,000 and $41,000 in the third quarter and first
nine months of 2003, respectively. 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 No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," to stock-based compensation (in thousands, except share
data):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2004 2003 2004 2003
-------- -------- -------- --------
Net income - as reported $ 3,526 $ 3,285 $ 7,184 $ 14,497
Add: Total stock-based compensation
expense included in net income, net of
related tax benefits 257 21 283 41
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (689) (987) (1,235) (3,456)
-------- -------- -------- --------
Pro forma net income $ 3,094 $ 2,319 $ 6,232 $ 11,082
======== ======== ======== ========
Basic earnings per share:
As reported $ 0.13 $ 0.12 $ 0.27 $ 0.55
Pro forma 0.12 0.09 0.23 0.42
Diluted earnings per share:
As reported 0.13 0.12 0.27 0.55
Pro forma 0.12 0.09 0.23 0.42
6
For SFAS No. 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 employee 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.
For SFAS No. 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
preceding table. 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.
In October 2004, the Company granted to certain of its executive officers
and directors 26,000 shares of restricted stock with a grant date fair
value of $0.5 million, stock appreciation rights with a grant date fair
value of up to $0.6 million and deferred stock units with a grant date
fair value of $0.1 million. The Company will record $0.1 million in
compensation expense related to these grants in the fourth quarter of
2004.
During the third quarter of 2004, the Company granted 12,000 shares of
restricted stock to certain of its executive officers. The grant date fair
value of these shares was $0.1 million.
On July 28, 2004, the Company granted an aggregate of 28,100 deferred
stock units to members of the Board of Directors, excluding the Company's
president and chief executive officer. Each deferred stock unit represents
the Company's obligation to transfer one share of common stock to the
director in the future, and is fully vested at grant. Following
termination of the director's service on the Company's board due to death
or a change in control, or six months after termination of the director's
service for any other reason, shares of the Company's common stock equal
to the number of deferred stock units reflected on the director's account,
will be issued to the director. A director may, while serving on the
Company's board, elect to defer the distribution date in annual
installments over a period up to five years, beginning in the year
following termination of service on the board. The Company recorded $0.4
million ($0.3 million, net of tax) in compensation expense in the third
quarter of 2004 related to this grant.
On May 25, 2004, the Company granted 27,000 shares of restricted stock to
certain key employees, other than executive officers. The grant date fair
value of these shares was $0.4 million.
On May 27, 2003, the Company granted 57,300 shares of restricted stock to
executives and key employees. The grant date fair value of these shares
was $0.9 million. These restricted shares granted to executive officers on
May 27, 2003 also had restrictions providing that certain company
performance goals were met as of March 31, 2004. At September 30, 2004,
8,600 of these shares remained outstanding, as 48,700 shares were
forfeited through the departure of certain members of senior management
and through the failure to meet performance goals.
Each of the restricted stock grants is subject to a three-year service
term before vesting. The value of all restricted stock grants was added to
additional paid-in capital at the grant dates, and an equal amount was
established in unearned restricted stock compensation. All restricted
shares are expensed as compensation through the service term.
3. BUSINESS ACQUISITIONS
In November 2003, the Company acquired the remaining interest in Ka-Te
Insituform AG ("Ka-Te Insituform") for $2.2 million. Net of related party
debt and shared accrued employee liabilities, the cash paid by the Company
was $0.8 million.
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.
In June 2003, the Company completed the acquisition of the business of
Sewer Services, Ltd. ("Sewer Services") for $0.4 million.
On a combined basis, these acquisitions added $5.7 million and $19.3
million in revenue for the three and nine months ended September 30, 2004,
respectively. Operating income was increased by $0.7 million and $0.2
million in the three and nine months ended September 30, 2004. Operating
expenses included $0.1 million and $0.5 million of amortization of
intangibles for the three and nine months ended September 30, 2004,
respectively, as a result of the East acquisition.
Pro forma information for these acquisitions has not been provided given
their relative immateriality on an individual and aggregate basis.
7
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 no longer reports 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 ($0.6 million after-tax), and a net
pre-tax $1.1 million gain in discontinued operations ($0.7 million
after-tax).
5. COMPREHENSIVE INCOME
For the quarters ended September 30, 2004 and 2003, comprehensive income
was $5.3 million and $3.6 million, respectively, with comprehensive income
of $11.2 million and $16.6 million for the nine months ended September 30,
2004 and 2003, respectively. The Company's adjustment to net income to
calculate comprehensive income consists solely of cumulative foreign
currency translation adjustments of $1.8 million and $0.3 million for the
quarters ended September 30, 2004 and 2003, respectively, and $4.0 million
and $2.1 million for the nine months ended September 30, 2004 and 2003,
respectively.
6. SHARE INFORMATION
Earnings per share have been calculated using the following share
information:
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------- ----------
Weighted average number of common shares
used for basic EPS 26,698,170 26,451,421
Effect of dilutive stock options and restricted stock 142,154 186,978
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in diluted EPS 26,840,324 26,638,399
========== ==========
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
---------- ----------
Weighted average number of common shares
used for basic EPS 26,624,037 26,475,029
Effect of dilutive stock options and restricted stock 138,573 118,320
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in diluted EPS 26,762,610 26,593,349
========== ==========
7. SEGMENT REPORTING
The Company has three principal 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.
8
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 segment performance based on stand-alone operating income.
Financial information by segment is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- --------------------------
2004 2003 2004 2003
--------- --------- --------- ---------
REVENUES
Rehabilitation $ 102,924 $ 89,456 $ 303,178 $ 275,706
Tunneling 35,963 22,611 93,158 74,581
Tite Liner 5,934 5,293 18,833 15,199
--------- --------- --------- ---------
TOTAL REVENUES $ 144,821 $ 117,360 $ 415,169 $ 365,486
========= ========= ========= =========
GROSS PROFIT
Rehabilitation $ 25,935 $ 22,005 $ 70,997 $ 70,478
Tunneling 2,255 3,791 8,638 9,725
Tite Liner 2,086 1,623 6,572 4,752
--------- --------- --------- ---------
TOTAL GROSS PROFIT $ 30,276 $ 27,419 $ 86,207 $ 84,955
========= ========= ========= =========
OPERATING INCOME
Rehabilitation $ 7,309 $ 5,090 $ 14,400 $ 22,493
Tunneling (303) 1,876 1,028 4,293
Tite Liner 1,069 805 3,612 2,456
--------- --------- --------- ---------
TOTAL OPERATING INCOME $ 8,075 $ 7,771 $ 19,040 $ 29,242
========= ========= ========= =========
A large tunneling project experienced a reduction in gross profit of $3.7
million. While this project is expected to remain profitable, it
experienced a downward adjustment as a result of revisions to original
estimates and production delays. Partially offsetting this performance in
tunneling were the favorable resolutions of several claims in the ordinary
course of business.
The following summarizes revenues, gross profit and operating income by
geographic region:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2004 2003 2004 2003
-------- -------- -------- --------
REVENUES
United States $119,022 $ 95,915 $341,183 $306,911
Canada 6,738 6,615 18,914 15,641
Other Foreign 19,061 14,830 55,073 42,934
-------- -------- -------- --------
TOTAL REVENUES $144,821 $117,360 $415,169 $365,486
======== ======== ======== ========
GROSS PROFIT
United States $ 22,562 $ 21,261 $ 65,790 $ 69,189
Canada 2,259 2,153 6,074 4,499
Other Foreign 5,455 4,005 14,343 11,267
-------- -------- -------- --------
TOTAL GROSS PROFIT $ 30,276 $ 27,419 $ 86,207 $ 84,955
======== ======== ======== ========
OPERATING INCOME
United States $ 5,551 $ 5,555 $ 14,167 $ 24,309
Canada 1,214 1,231 2,951 2,137
Other Foreign 1,309 985 1,922 2,796
-------- -------- -------- --------
TOTAL OPERATING INCOME $ 8,075 $ 7,771 $ 19,040 $ 29,242
======== ======== ======== ========
9
8. ACQUIRED INTANGIBLE ASSETS AND GOODWILL
Acquired intangible assets include patents, license agreements,
non-compete agreements, purchased backlog and customer relationships.
Intangible assets at September 30, 2004 and amortization expense for the
quarter and nine months ended September 30, 2004 were as follows ($ in
thousands):
AS OF SEPTEMBER 30, 2004
-------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------- ------------
Amortized intangible assets:
Patents and trademarks $ 13,943 $ (12,555)
License agreements 4,803 (2,289)
Non-compete agreements 3,244 (1,647)
Purchased backlog 582 (582)
Customer relationships 1,797 (120)
-------- ---------
Total $ 24,369 $ (17,193)
======== =========
Aggregate amortization expense:
For quarter ended September 30, 2004 $ 381
For nine months ended September 30, 2004 1,570
Estimated amortization expense:
For year ending December 31, 2004 $ 1,910
For year ending December 31, 2005 1,300
For year ending December 31, 2006 1,128
For year ending December 31, 2007 706
For year ending December 31, 2008 446
9. COMMITMENTS AND CONTINGENCIES
Litigation
In the third quarter of 2002, an accident on an Insituform CIPP Process
project in Des Moines, Iowa resulted in the death of two workers and the
injury of five workers. 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 reduced the penalties to $158,000. In the second
quarter of 2004, the Iowa Employment Appeal Board reinstated many of the
original penalties, ordering total penalties in the amount of $733,750.
The Company is vigorously opposing the citations, and has filed a notice
of appeal with the Iowa district court.
In July 2004, three separate civil actions were filed in the Iowa district
court of Polk County with respect to the Des Moines accident. The first
complaint, filed by family members and the Estate of Brian Burford on July
7, 2004, named the Company, Insituform Technologies USA, Inc., a wholly
owned subsidiary of the Company ("Insituform USA"), the City of Des Moines
and 15 current or former employees of the Company as defendants. The two
other actions, filed on July 6, 2004 by (1) family members and the Estate
of Daniel Grasshoff and (2) Michael Walkenhorst, James E. Johnson and
Linda Johnson, named the City of Des Moines and the 15 current or former
employees of the Company as defendants, but did not name the Company or
Insituform USA as defendants. The complaints filed with respect to Messrs.
Burford and Grasshoff alleged wrongful death, negligence, gross negligence
and civil conspiracy. The complaint filed with respect to Messrs.
Walkenhorst and Johnson alleged gross negligence and civil conspiracy. The
Company believes that the allegations in each of the complaints is without
merit and that the workers' compensation statutes provide the exclusive
remedy to the plaintiffs for the deaths and injuries that occurred as a
result of the Des Moines accident. The Company intends to vigorously
defend the actions. Each complaint sought unspecified damages, including
punitive damages.
In December 2003, Environmental Infrastructure Group, L.P. ("EIG") filed
suit in the district court of Harris County, Texas, against several
defendants, including Kinsel Industries, Inc., a wholly-owned subsidiary
of the Company ("Kinsel"), seeking unspecified damages. The suit alleges,
among other things, that Kinsel failed to pay EIG monies due under a
subcontractor agreement (the "Subcontract"). In February 2004, Kinsel
filed an answer, generally denying all claims, and also filed a
counter-claim against EIG based upon EIG's failure to perform work
required of it under the Subcontract. In June 2004, EIG amended its
complaint to add the Company as an additional defendant and include a
claim for lost opportunity damages. The parties currently are conducting
discovery in this matter. The Company believes
10
that the factual allegations and legal claims made against it and Kinsel
are without merit and intends to vigorously defend them.
Boston Installation
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. Following installation, the
owner rejected approximately 4,500 feet of the liner and all proposed
repair methods. All rejected liner was removed and re-installed, and the
Company recorded a loss of $5.1 million on this project in the year ended
December 31, 2003. The lines are now back in service and the contract is
now in a warranty period. The Company will be required to inspect the
lines in early 2005 to determine if any problems exist. The Company
believes that it has adequately reserved for potential warranty costs at
September 30, 2004.
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 relative to rework of the Boston
project. The carrier 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, which has been accrued on the
Company's books.
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.
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
recognize any of the potential excess carrier insurance recovery at
September 30, 2004.
Other Litigation
The Company is involved in certain other litigation incidental to the
conduct of its business and affairs. Management, after consultation with
legal counsel, does not believe that the outcome of any such other
litigation will have a material adverse effect on the consolidated
financial condition, results of operations or cash flows 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 joint venture partner's portion of the contract if the
partner is unable to complete its portion. The Company is liable 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. While the Company would be liable
for additional costs, these costs would be offset by any related revenues
due under that portion of the contract. The Company has not experienced
material adverse results from such arrangements. Based on these facts,
the Company currently does not anticipate any future material adverse
impact on its consolidated financial position, results of operations or
cash flows.
The Company also 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 bonding agents against
losses from third-party claims of customers and subcontractors. The
Company has not experienced material losses under these provisions and
currently does not anticipate any future material adverse impact on its
consolidated financial position, results of operations or cash flows.
The Company regularly reviews its exposure under all its engagements,
including performance guarantees by contractual joint ventures and
indemnification of its bonding agents and licensees. As a result of the
most recent review, the Company has determined that the risk of material
loss is remote under these arrangements and has not recorded a liability
for these risks at September 30, 2004 on its consolidated balance sheet.
11
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 Amended Credit Facility subjects the Company to
less restrictive covenants than the Old Credit Facility, and the Company
is in compliance with its financial covenants under the Amended Credit
Facility as of September 30, 2004. The Amended Credit Facility matures on
September 12, 2005.
Under the Amended Credit Facility, the Company pays a commitment fee equal
to 0.4% per annum on the unborrowed balance at the end of each fiscal
quarter. The Company also will 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 (4.75% per annum as of September 30, 2004). The
Amended Credit Facility contains cross-default provisions to the Company's
amended Senior Notes as summarized below.
At September 30, 2004, $12.0 million in letters of credit were issued and
outstanding as collateral for the benefit of certain of the Company's
insurance carriers. There were no other outstanding borrowings under the
Amended Credit Facility at September 30, 2004, resulting in $13.0 million
of available borrowing capacity under the Amended Credit Facility, at that
date.
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% of
the outstanding principal balance of each series of Senior Notes, or $0.3
million. In addition, the interest rate on each series of Senior Notes
increased 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.
At September 30, 2004, the Senior Notes, Series A, bore interest, payable
semi-annually, at 8.63% per annum. The outstanding principal amount under
the Senior Notes, Series A, at such date 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.
At September 30, 2004, the Senior Notes, Series 2003-A, bore interest,
payable semi-annually, at a rate of 6.04% per annum. The outstanding
principal amount under the Senior Notes, Series 2003-A, at such date 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 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 with respect to the two senior note facilities prior to the
March 12, 2004 amendments.
At September 30, 2004, the Company was in compliance with all debt
covenants under the senior notes facilities, and, while there can be no
certainty, believes that a covenant violation in the next twelve months is
not probable. See Part I, Item 2, "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources -- Financings," for more information regarding debt covenants.
In connection with the refinancing/amendments of its debt agreements as
described above, the Company recorded a charge to interest expense in the
first quarter of 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.
12
Euro Note
In the third quarter of 2004, the Company repaid its Euro Note of
(euro)2.4 million ($3.0 million) in full. The Euro Note's scheduled
maturity was in 2006. The premium paid to the creditor for early
extinguishment was not material.
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 consolidated financial position or
results of operations.
13
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, results of
operations and cash flows during the periods included in the accompanying
consolidated financial statements. This discussion should be read in conjunction
with the consolidated financial statements and notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2003 ("2003 Annual
Report"). See discussion of the Company's critical accounting policies in its
2003 Annual Report; there have been no changes to these policies during the
quarter and nine months ended September 30, 2004.
EXECUTIVE SUMMARY
The Company is a worldwide corporation 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 66.2% of
the Company's revenues in the first nine months 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. Revenues attributable to the tunneling segment have
increased through organic growth during the reported periods. Tunneling revenues
grew from $49.0 million in 2001 to $100.0 million in 2003. See Note 7 to the
Consolidated Financial Statements for additional segment information and
disclosures.
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 82.2% of total revenue in the first nine
months of 2004.
The Company has identified several initiatives that management believes will
reposition the Company to maintain its prominent status in the industry. In
order to accomplish these initiatives, the Company will continue to
strategically invest money over the next twelve to eighteen months. 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 should 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 so
as 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
its financial results in 2005.
UPDATE OF CURRENT ISSUES
As discussed in the Company's 2003 Annual Report, there were a number of
operational issues requiring adjustments to the Company's financial statements
in 2003. A brief discussion of some of those issues follows:
BOSTON INSITUFORM CIPP PROCESS PROJECT
See Note 9 to the Consolidated Financial Statements for an update.
CASUALTY INSURANCE AND HEALTHCARE RESERVES
The Company obtains actuarial estimates of its liabilities on a quarterly basis
and adjusts its reserves accordingly. Net increases (decreases) to these
reserves in 2004 ($ in millions) were:
RESERVES
---------------------
CASUALTY HEALTHCARE
INSURANCE BENEFITS
--------- ----------
Balances at December 31, 2003 $ 9.2 $ 1.7
First quarter 0.8 0.4
Second quarter 0.5 0.3
Third quarter 2.1 (0.4)
----- ------
Nine months ended September 30, 2004 3.4 0.3
----- ------
Balances at September 30, 2004 $12.6 $ 2.0
===== ======
The reserve for healthcare benefits declined in the third quarter of 2004 due to
payments made.
14
RESERVE FOR POTENTIALLY UNCOLLECTIBLE ACCOUNTS
The Company recorded bad debt expense in the fourth quarter of 2003 of $0.6
million. The Company recorded $0.2 million and $0.9 million in the first nine
months of 2004 and 2003, respectively.
WRITE-DOWNS AND RESERVES AGAINST CERTAIN ASSETS
The Company began physical counts of its fixed assets, with original cost below
$50,000, during the third quarter of 2004 and consequentially wrote down an
additional $0.4 million in fixed assets. At September 30, 2004, the majority of
the counts were complete and it is expected that this undertaking will be
concluded during the fourth quarter of 2004.
In the second quarter of 2004, the Company added $0.2 million to its reserve
against assets related to prior discontinued operations, reflecting management's
judgment as to the ultimate collectibility and realizability of these assets.
While the Company believes these assets are appropriately carried at net
realizable value of $0.4 million at September 30, 2004, management will continue
to assess in future periods whether further deterioration in the recoverability
of these assets has occurred which would require additional provisions at a
future date.
At December 31, 2003, the Company established a valuation allowance of $0.8
million for deferred tax assets related to net operating loss carryforwards in
France and Belgium. The Company's total long-lived assets in France and Belgium,
which consist of property, plant and equipment, were $1.4 million, nearly all of
which is in France. French operations had losses in 2002 and 2003 primarily due
to poor market conditions. New management has been put in place, and French
operations have generated a slight profit in the second and third quarters of
2004. It is expected that France will realize positive operating results and
cash flows going forward, and as such, the Company expects to recover the
carrying value of the French assets. The Company will continue to monitor the
recoverability of these assets, and the need for a valuation allowance on
deferred tax assets. The working capital in both countries, which aggregated
$2.5 million at September 30, 2004, is also considered to be appropriately
stated at net realizable value.
The Company's fifty-percent owned Italian joint venture, which is accounted for
under the equity method, has incurred losses over the last three years. In
connection with certain 2004 restructuring initiatives approved by the Company
and its joint venture partner, including transferring management for the Italian
joint venture to management of the profitable German joint venture, the Company
increased its investment in the joint venture by $0.8 million in the second
quarter of 2004. The carrying value of the Company's equity investment in the
Italian joint venture was $0 at September 30, 2004. The Italian joint venture's
losses have been reduced in 2004 and the Company will closely monitor the
viability of this joint venture going forward.
RESULTS OF OPERATIONS - Three and Nine Months Ended September 30, 2004 and 2003
The following table highlights the results for each of the segments and periods
presented ($ in thousands):
THREE MONTHS ENDED SEPTEMBER 30, 2004
GROSS GROSS PROFIT OPERATING OPERATING
REVENUES PROFIT MARGIN EXPENSES INCOME
-------- -------- ------- -------- --------
Rehabilitation $102,924 $ 25,935 25.2% $ 18,626 $ 7,309
Tunneling 35,963 2,255 6.3% 2,558 (303)
Tite Liner 5,934 2,086 35.2% 1,017 1,069
-------- -------- ------- -------- --------
$144,821 $ 30,276 20.9% $ 22,201 $ 8,075
THREE MONTHS ENDED SEPTEMBER 30, 2003
GROSS GROSS PROFIT OPERATING OPERATING
REVENUES PROFIT MARGIN EXPENSES INCOME
-------- -------- ------------ -------- ---------
Rehabilitation $ 89,456 $ 22,005 24.6% $ 16,915 $ 5,090
Tunneling 22,611 3,791 16.8% 1,915 1,876
Tite Liner 5,293 1,623 30.7% 818 805
-------- -------- ----- -------- --------
$117,360 $ 27,419 23.4% $ 19,648 $ 7,771
NINE MONTHS ENDED SEPTEMBER 30, 2004
GROSS GROSS PROFIT OPERATING OPERATING
REVENUES PROFIT MARGIN EXPENSES INCOME
-------- -------- ------------ -------- ---------
Rehabilitation $303,178 $ 70,997 23.4% $ 56,597 $ 14,400
Tunneling 93,158 8,638 9.3% 7,610 1,028
Tite Liner 18,833 6,572 34.9% 2,960 3,612
-------- -------- ----- -------- --------
$415,169 $ 86,207 20.8% $ 67,167 $ 19,040
15
NINE MONTHS ENDED SEPTEMBER 30, 2003
GROSS GROSS PROFIT OPERATING OPERATING
REVENUES PROFIT MARGIN EXPENSES INCOME
-------- -------- ------------ -------- ----------
Rehabilitation $275,706 $ 70,478 25.6% $ 47,985 $ 22,493
Tunneling 74,581 9,725 13.0% 5,432 4,293
Tite Liner 15,199 4,752 31.3% 2,296 2,456
-------- -------- ----- -------- --------
$365,486 $ 84,955 23.2% $ 55,713 $ 29,242
The following table summarizes the increases (decreases) in revenues, gross
profit, operating expenses, interest expense and taxes on income for each of the
periods presented ($ in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2004 VS. 2003 SEPTEMBER 30, 2004 VS. 2003
--------------------------- ---------------------------
TOTAL PERCENTAGE TOTAL PERCENTAGE
INCREASE INCREASE INCREASE INCREASE
(DECREASE) (DECREASE) (DECREASE) (DECREASE)
---------- ---------- ---------- ----------
ALL SEGMENTS
Revenues $ 27,461 23.4% $ 49,683 13.6%
Gross Profit 2,857 10.4% 1,252 1.5%
Operating Expenses 2,553 13.0% 11,454 20.6%
REHABILITATION
Revenues 13,468 15.1% 27,472 10.0%
Gross Profit 3,930 17.9% 519 0.7%
Operating Expenses 1,711 10.1% 8,612 17.9%
TUNNELING
Revenues 13,352 59.1% 18,577 24.9%
Gross Profit (1,536) -40.5% (1,087) -11.2%
Operating Expenses 643 33.6% 2,178 40.1%
TITE LINER
Revenues 641 12.1% 3,634 23.9%
Gross Profit 463 28.5% 1,820 38.3%
Operating Expenses 199 24.3% 664 28.9%
INTEREST EXPENSE AND TAXES
Interest Expense (73) -3.1% 1,350 23.4%
Taxes on Income 40 1.8% (4,450) -47.4%
OVERVIEW
Revenues in the third quarter and first nine months of 2004 reflect the impact
of acquisitions and growth in certain North American CIPP regions, Tunneling and
Europe. Gross profit was impacted by acquisitions, and gross profit increases
due primarily to revenue growth were experienced by certain North American CIPP
regions, manufacturing, Tite Liner and Europe. Gross profit was negatively
impacted by the tunneling segment, which experienced a $3.7 million reduction in
gross profit related to a large project.
Operating income in the third quarter of 2004 was higher due to acquisitions,
which added $0.7 million in operating income, and severance paid to former
Company executives in the third quarter of 2003. For the year, operating income
was down due to higher compensation and benefits costs along with increased
consulting costs experienced in the first nine months of 2004 related to the
implementation of certain strategic initiatives. The implementation of these
strategic initiatives, while resulting in higher operating costs in the short
term, are designed to achieve growth, technological innovation and operational
excellence. In addition, acquisitions in 2003 added $3.3 million to operating
expenses in the first nine months of 2004.
REHABILITATION SEGMENT
Revenues
Revenue growth in certain North American regions was $12.4 million, reflecting
the benefit of moderate increases in backlog levels in late 2003 and early 2004.
European revenues, exclusive of acquisitions, increased $1.6 million, which is
the result of improved performance of operations in France and the Netherlands,
as well as favorable impacts from foreign currency
16
translation in 2004 compared to 2003. Acquisitions added $5.7 million in
revenues in the third quarter of 2004, which includes $2.9 million from
Insituform East, Inc. ("East") in North America and $2.8 million from Ka-Te
Insituform AG ("Switzerland"). Offsetting revenue decreases of $5.9 million were
experienced in certain North American CIPP regions. One region is experiencing
low backlog levels, and others are facing delays in work releases. The
hurricanes that struck the Southeast during the third quarter interrupted
operations in that region causing some projects to be delayed until late fourth
quarter or early 2005.
North American and European acquisitions mentioned in the preceding discussion
added $19.3 million in revenues, while revenue growth in certain North American
CIPP regions added $21.2 million revenues in the first nine months of 2004
compared to the first nine months of 2003. Backlog growth in late 2003 and early
2004, crew expansion in several regions and increased large-diameter work has
combined to boost revenues in 2004. European operations added $4.0 million in
revenues due to stronger performance in France and the Netherlands, and
favorable impacts of foreign currency translation in 2004 over 2003. Offsetting
revenue declines in certain regions of $17.0 million were caused by low backlog
in one region, client work-release delays and, to a lesser extent, the effect of
the third quarter hurricanes described previously.
Gross Profit
Revenue growth discussed previously and overall moderate strengthening of
margins in North America and Europe have contributed to the improved gross
profit and margin. In addition to overall improved performance, unfavorable
results in West Coast operations in the third quarter of 2003 depressed gross
profit and gross profit margin in that region last year. The effect of
acquisitions added $1.4 million, while growth in certain North American CIPP
markets added $4.0 million to gross profit in the third quarter of 2004 compared
to the third quarter of 2003. Gross profit in Europe, influenced by improved
performance in France and the Netherlands, increased $0.6 million in the third
quarter of 2004 compared to the third quarter of 2003. In other North American
CIPP regions, operations in the southeast United States were interrupted by the
four hurricanes that struck the region in the third quarter. The combination of
deferred work and idled crew downtime costs resulted in an estimated $0.9
million of unfavorable impact to gross profit. The effect of these hurricanes,
combined with work release delays in certain regions, caused gross profit to
decline in those affected regions by $2.1 million in the third quarter of 2004
compared to the third quarter of 2003.
Acquisitions added $3.4 million of gross profit in the first nine months of 2004
compared to 2003. Gross profit growth in certain North American regions and
manufacturing added $6.6 million, impacted by improved backlog levels and the
additions of several crews to accommodate higher backlog. European gross profit
increased $1.5 million in the first nine months of 2004 compared to 2003 due to
improved performance in France and the Netherlands. In other North American CIPP
regions, gross profit declined $11.0 million in the first nine months of 2004
compared to 2003 due to lower backlog levels, work release delays, effects of
hurricanes, and decreased large-diameter work.
Operating Expenses
Acquisitions made in 2003 added $0.7 million in operating expenses in the third
quarter of 2004 compared to 2003. Exclusive of acquisitions, operating expenses
generally increased across all operating segments due to the implementation of
certain strategic initiatives including, but not limited to, the redevelopment
of a sales and business development force, improved logistics, product
innovation and operational excellence. The implementation of these initiatives
required additional Company personnel as well as significant consulting costs.
Rehabilitation operating expenses increased in the first nine months of 2004
compared to the first nine months of 2003 due to the same factors as those
described in the preceding paragraph. Spending on strategic initiatives is
expected to continue into 2005.
TUNNELING SEGMENT
Revenues
Higher tunneling revenues in both the third quarter and first nine months of
2004 were primarily due to higher backlog in 2004, primarily from orders
received in late 2003, and strong revenue growth from three significant
tunneling projects.
Gross Profit
A large tunneling project experienced a reduction in gross profit of $3.7
million. While this project is expected to remain profitable, it experienced a
downward adjustment as a result of revisions to original estimates and
production delays. Partially offsetting this performance in tunneling were the
favorable resolutions of several claims in the ordinary course of business.
Overall gross profit margin decreased from 13.0% to 9.3%, again significantly
impacted by the third quarter issues related to the project described in the
preceding paragraph, mainly offset by the favorable resolutions of several
claims in the ordinary course of business.
17
Operating Expenses
Operating expenses generally increased across all operating segments due to the
implementation of certain strategic initiatives, as described in the
Rehabilitation discussion.
TITE LINER SEGMENT
Revenues
In the third quarter of 2004, the Company recognized a claim of $0.3 million
related to the closeout on a foreign project. Other factors favorably impacting
revenue include solid backlog in the United States and Canada.
Gross Profit
The completion of certain projects as well as favorable results in the United
States and Canada have combined to favorably impact gross profit and gross
profit margin.
Operating Expenses
Operating expenses generally increased across all operating segments due to the
implementation of certain strategic initiatives, as described in the
Rehabilitation discussion.
OTHER INCOME (EXPENSE) AND TAXES
Other income (expense) reflects a debt amortization of $15.7 million in the
first quarter of 2004, offset by higher interest rates on the remaining debt. On
April 24, 2003, the Company placed $65.0 million in Senior Notes bearing
interest at 5.29%. In 2004, amendments were made to the Company's debt
agreements, and the interest rate was adjusted to 6.04%. As such, the Senior
Notes were outstanding for the full three quarters of 2004 compared to 67 days
in the second quarter and the entire third quarter of 2003, bearing interest at
the lower 5.29% rate in 2003. Other income in the third quarter and first nine
months of 2004 was impacted by additional fixed asset write offs of
approximately $0.4 million.
The effective tax rate in the first nine months of 2004 was 40.0% compared to
39.0% in the first nine months of 2003 due to lower pre-tax income and the
provision for permanent adjustments to book income.
DISCONTINUED OPERATIONS
See Note 4 to the Consolidated Financial Statements for information on prior
year discontinued operations.
BACKLOG
Contract backlog was $305.1 million at September 30, 2004 compared to $208.1
million as of December 31, 2003. Contract backlog is management's expectation of
revenues to be generated from received, signed, uncompleted contracts whose
cancellation is not anticipated. Contract backlog excludes any term contracts
for which there is not specific and determinable work released and projects
where the Company has been advised that it is the low bidder, but has not been
formally awarded the contract. Backlog from projects where the Company has been
advised that it is the low bidder was $41.7 million at September 30, 2004 and
$60.8 million at December 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
CASH AND EQUIVALENTS
($ in thousands) SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
Cash and equivalents $77,678 $93,865
======= =======
Restricted cash - in escrow $ 1,062 $ 1,524
Restricted cash - held as collateral -- 4,602
------- -------
Total restricted cash $ 1,062 $ 6,126
======= =======
Cash and equivalents in the prior period have been restated to conform to the
current presentation. See Note 1 to the Consolidated Financial Statements for
further discussion. Restricted cash held in escrow relates to deposits made as
escrow for release of retention on specific projects performed for
municipalities and state agencies. Restricted cash held as collateral related to
deposits posted as collateral for a casualty insurance policy. In the first
quarter of 2004, the Company issued letters of credit to satisfy this
requirement and the restricted cash of $4.6 million was released.
18
CASH FLOWS FROM OPERATIONS
Changes in working capital used $6.5 million in the first nine months of 2004
compared to $2.6 million in the first nine months of 2003. Increased accounts
receivables balances, including retention and costs and estimated earnings in
excess of billings, were partially offset by the receipt of $9.1 million in tax
refunds and higher accounts payable balances.
Depreciation was increased $0.9 million to $12.1 million in the first nine
months of 2004 compared to $11.2 million in the first nine months of 2003 due to
the increased capital expenditures and consequently higher depreciation costs.
Amortization increased $0.6 million to $1.6 million in the first nine months of
2004 compared to $1.0 million in the first nine months of 2003 due primarily to
the amortization of intangible assets acquired with East, which was
approximately $0.5 million in the first nine months of 2004.
CASH FLOWS FROM INVESTING ACTIVITIES
Cash flows from investing activities include $25.5 million in capital
expenditures in the first nine months of 2004 compared to $12.6 million in the
first nine months of 2003. The Company also invested an additional $0.8 million
in its fifty-percent owned Italian joint venture in 2004. Significant capital
expenditures in the first nine months of 2004 included $5.8 million for various
components of tunneling equipment and $3.7 million related to the expansion and
upgrade of the Company's manufacturing facility in Batesville, Mississippi.
Other significant additions included equipment necessary to equip new crews and
ongoing replacement or renewal of aging equipment. Capital expenditures are
expected to continue at a higher level into 2005 as the Company continues to
replace field equipment and expand crew capacity.
CASH FLOWS FROM FINANCING ACTIVITIES
Cash flows from financing activities included debt repayments of $18.9 million
in the first nine months of 2004. Debt repayments consisted of a normal
scheduled principal amortization of $15.7 million of the Senior Notes in the
first quarter of 2004 and the satisfaction of the Company's $3.0 million Euro
note, which was repaid in the third quarter of 2004. In the first nine months of
2003, debt repayments and changes in the Company's line of credit used $48.6
million, but were offset by the issuance of $65.0 million in Senior Notes in
April 2003. The release of restricted cash held as collateral provided $4.6
million of cash from financing activities. The Company received $3.0 million
from stock option exercises, primarily by former senior executives of the
Company in the first quarter of this year. The Company had no purchases of
treasury stock in the first nine months of 2004. The Company received $0.6
million from stock option exercises and paid $1.6 million for treasury stock in
the first nine months of 2003.
MATERIAL CHANGES IN FINANCIAL CONDITION
Costs and estimated earnings in excess of billings ("unbilled receivables") were
$40.0 million at September 30, 2004 compared to $27.9 million at December 31,
2003. Unbilled receivables arise when work on projects begin, incurring costs
before billings can be issued. Revenue growth in the third quarter and first
nine months of 2004 contributed to the increase in unbilled receivables.
Prepaid expenses and other assets decreased $7.2 million to $12.3 million as of
September 30, 2004 compared to $19.5 million at December 31, 2003 principally
due to the receipt of $9.1 million in tax refunds in the first quarter of 2004.
FINANCINGS
See Note 10 to the Consolidated Financial Statements regarding the Company's
financings.
At December 31, 2003, the Company was out of compliance with certain covenants
under the following facilities: the Senior Notes, Series A, the Senior Notes,
Series 2003-A, the Old Credit Facility and an insurance collateral agreement. On
March 12, 2004, the covenants under the two senior note facilities were amended.
The amendments included revisions to the covenants applicable at December 31,
2003, thereby bringing the Company back into compliance as of such date. The Old
Credit Facility also was amended on March 12, 2004, and its covenants now
incorporate by reference those under the two series of amended Senior Notes. In
addition, the insurance collateral agreement was terminated as a result of
posting letters of credit in lieu of the cash collateral. The covenants under
the Old Credit Facility and the insurance collateral agreement are not
considered to be relevant for discussion as such agreements no longer exist, and
the Company is currently in compliance with the amended covenants under the
amended March 12, 2004 debt facilities. The Company now has two sets of debt
covenants: one set for
19
the amended Senior Notes, Series A, and one set for the amended Senior Notes,
Series 2003-A. The covenants that were out of compliance at December 31, 2003,
prior to amendment, under each Senior Note facility are presented below:
DECEMBER 31, 2003
------------------------------------------
DESCRIPTION OF COVENANT ORIGINAL COVENANT ACTUAL RATIO AMENDED COVENANT
- ----------------------------------------------- --------------------------- ------------ ---------------------------
$110 MILLION 7.88% SENIOR NOTES,
SERIES A, DUE FEBRUARY 14, 2007
Fixed charge coverage ratio(1) No less than 2.5 to 1.0 2.00 No less than 1.25 to 1.0
$65 MILLION 5.29% SENIOR NOTES,
SERIES 2003-A, DUE APRIL 24, 2013
Ratio of consolidated indebtedness to EBITDA(1) No greater than 3.25 to 1.0 3.68 No greater than 3.75 to 1.0
Fixed charge coverage ratio(1) No less than 2.0 to 1.0 1.96 No less than 1.25 to 1.0
The Company is in compliance with the financial covenants under its 7.88% Senior
Notes, Series A, due February 14, 2007 (the "Series A Notes"), and its 5.29%
Senior Notes, Series 2003-A, due April 24, 2013 (the "Series 2003-A Notes"), as
those financial covenants were amended on March 12, 2004. The Company had been
out of compliance with certain of those covenants as of December 31, 2003, which
necessitated the amendment. The financial covenants will remain in effect until
March 31, 2005, after which the covenants will revert to the original covenants
that were in place prior to the March 12, 2004 amendment. The following table
sets forth the following:
- the ratios required under the amended financial covenants for each
of the Series A Notes and the Series 2003-A Notes, respectively,
that were in place for each of the first three quarters of 2004;
- the actual ratios applicable to the Company, at each such completed
quarter end of 2004;
- the required ratios applicable to each of the Series A Notes and the
Series 2003-A Notes at the end of the fourth quarter of 2004 and the
first quarter of 2005; and
- the required ratios under the financial covenants of each of the
Series A Notes and the Series 2003-A Notes when such covenants
revert to their original levels as of the end of the second quarter
of 2005.
DESCRIPTION OF COVENANT FISCAL QUARTER AMENDED COVENANT(2) ACTUAL RATIO(2)
- ----------------------------------------------- -------------------- -------------------------- ---------------
$110 MILLION 7.88% SENIOR NOTES,
SERIES A, DUE FEBRUARY 14, 2007
Fixed charge coverage ratio(1) First quarter 2004 No less than 1.25 to 1.0 1.64
Second quarter 2004 No less than 1.20 to 1.0 1.56
Third quarter 2004 No less than 1.20 to 1.0 1.58
Fourth quarter 2004 No less than 1.70 to 1.0 n/a
First quarter 2005 No less than 1.70 to 1.0 n/a
Second quarter 2005
and thereafter No less than 2.50 to 1.0 n/a
$65 MILLION 5.29% SENIOR NOTES,
SERIES 2003-A, DUE APRIL 24, 2013
Ratio of consolidated indebtedness to EBITDA(1) First quarter 2004 No greater than 5.00 to 1.0 4.13
Second quarter 2004 No greater than 6.25 to 1.0 4.39
Third quarter 2004 No greater than 6.25 to 1.0 4.29
Fourth quarter 2004 No greater than 4.00 to 1.0 n/a
First quarter 2005 No greater than 4.00 to 1.0 n/a
Second quarter 2005
and thereafter No greater than 3.25 to 1.0 n/a
Fixed charge coverage ratio(1) First quarter 2004 No less than 1.25 to 1.0 1.59
Second quarter 2004 No less than 1.20 to 1.0 1.53
Third quarter 2004 No less than 1.20 to 1.0 1.54
Fourth quarter 2004 No less than 1.70 to 1.0 n/a
First quarter 2005 No less than 1.70 to 1.0 n/a
Second quarter 2005
and thereafter No less than 2.00 to 1.0 n/a
20
(1) The ratios are calculated as defined in the Note Purchase Agreements, which
have been incorporated into the Company's Form 10-K for the fiscal year ended
December 31, 2003 as Exhibits 10.2 and 10.3.
(2) The ratios for each quarter are based on rolling four-quarter calculations
of profitability. The significant loss experienced by the Company in the fourth
quarter of 2003 will have a negative impact on the ratios through the third
quarter of 2004.
At September 30, 2004, the Company was in compliance with all debt covenants
under the senior notes facilities, and, while there can be no certainty,
believes that a covenant violation in the next twelve months is not probable.
The Company is currently evaluating the required financial ratios against its
forecasted results for the next three quarters and, on the basis of that
evaluation, believes that it will remain in compliance under the Series A Notes
and the Series 2003-A Notes at the end of the fourth quarter of 2004 and the
first quarter of 2005. The Company cannot be certain at this time that it will
be in compliance with all required financial ratios when such ratios revert to
the original levels at the end of the second quarter of 2005 and is considering
alternatives to implement so that the Company does not violate any of those
ratios. Among the possible alternatives are prepaying the oldest series of notes
(which have one of the more stringent covenants) using the Company's existing
cash balances, renegotiating new covenants with its noteholders or obtaining an
alternative form of financing and prepaying both series of notes. The Company
always seeks opportunities to enhance its capital structure.
Prepayments of the notes would cause the Company to incur a "make-whole" payment
to its noteholders which is currently estimated to be approximately $3 million
on the Series A Notes and approximately $4 million on the Series 2003-A Notes as
of September 30, 2004.
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 borrowings and the sale of
assets, for the next twelve 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 to the Consolidated Financial Statements for further discussion.
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 joint
venture partner's portion of the contract if the partner were unable to complete
its portion. The Company is liable 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. While the
Company would be liable for additional costs, these costs would be offset by any
related revenues due under that portion of the contract. The Company has not
experienced material adverse results from such arrangements. Based on these
facts, the Company currently does not anticipate any future material adverse
impact on its consolidated financial position, results of operations or cash
flows.
The Company also 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 bonding agents against losses from third party
claims of customers and subcontractors. The Company has not experienced material
losses under these provisions and currently does not anticipate any future
material adverse impact on its consolidated financial position, results of
operations or cash flows.
The Company regularly reviews its exposure under all its engagements, including
performance guarantees by contractual joint ventures and indemnification of its
bonding agents and licensees. As a result of the most recent review, the Company
has determined that the risk of material loss is remote under these arrangements
and has not recorded a liability for these risks at September 30, 2004 on its
consolidated balance sheet.
The following table provides a summary of the Company's financial obligations
and commercial commitments as of September 30, 2004 ($ in thousands). This table
includes cash obligations related to principal outstanding under existing debt
agreements and operating leases.
21
PAYMENTS DUE BY PERIOD
CASH OBLIGATIONS(1) TOTAL 2004 2005 2006 2007 2008 THEREAFTER
- ------------------- -------- ------- ------- ------- ------- ----- ----------
Long-term debt $112,384 $ 214 $15,715 $15,745 $15,710 $ - $65,000
Line of credit facility(2) - - - - - - -
Operating leases 29,397 2,604 7,704 5,779 4,682 3,669 4,959
-------- ------- ------- ------- ------- ----- -------
Total contractual cash
obligations $141,781 $ 2,818 $23,419 $21,524 $20,392 $3,669 $69,959
======== ======= ======= ======= ======= ====== =======
(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 September 30, 2004, there was no borrowing balance on the credit
facility and therefore there was no applicable interest rate as the rate is
determined on the borrowing date. The available balance was $13.0 million, and
the commitment fee was 0.40% per annum. The remaining $12.0 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.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 11 to the Consolidated Financial Statements for discussion of new
accounting pronouncements and their impact on the Company.
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
September 30, 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
September 30, 2004. Market risk was estimated to be $3.0 million as the
potential increase in fair value resulting from a hypothetical 10% decrease in
the Company's debt specific borrowing rates at September 30, 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 September
30, 2004, the Company's holdings in financial instruments denominated in foreign
currencies were 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 $29.4
million at September 30, 2004. The Company also has exposure under performance
guarantees by contractual joint ventures and indemnification of its bonding
agents. However, the Company has not experienced any material adverse effects to
its consolidated financial position, results of operations or cash flows
relative to these arrangements and believes the exposure to any losses in the
future is immaterial. 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.
22
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 results the Company anticipates to
achieve from its strategic initiatives, which results include, among other
things, growth, technological innovation, operational excellence, the Company's
ability to drive costs out of the business and the Company's ability to gain
competitiveness may be other than expected. 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 nine months ended September 30, 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 nine months 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 management's report on internal controls required under Section 404 of the
Sarbanes-Oxley Act.
23
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In the third quarter of 2002, an accident on an Insituform CIPP Process project
in Des Moines, Iowa resulted in the death of two workers and the injury of
five workers. 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 reduced
the penalties to $158,000. In the second quarter of 2004, the Iowa Employment
Appeal Board reinstated many of the original penalties, ordering total penalties
in the amount of $733,750. The Company is vigorously opposing the citations, and
has filed a notice of appeal with the Iowa district court.
In July 2004, three separate civil actions were filed in the Iowa district court
of Polk County with respect to the Des Moines accident. The first complaint,
filed by family members and the Estate of Brian Burford on July 7, 2004, named
the Company, Insituform Technologies USA, Inc., a wholly owned subsidiary of the
Company ("Insituform USA"), the City of Des Moines and 15 current or former
employees of the Company as defendants. The two other actions, filed on July 6,
2004 by (1) family members and the Estate of Daniel Grasshoff and (2) Michael
Walkenhorst, James E. Johnson and Linda Johnson, named the City of Des Moines
and the 15 current or former employees of the Company as defendants, but did not
name the Company or Insituform USA as defendants. The complaints filed with
respect to Messrs. Burford and Grasshoff alleged wrongful death, negligence,
gross negligence and civil conspiracy. The complaint filed with respect to
Messrs. Walkenhorst and Johnson alleged gross negligence and civil conspiracy.
The Company believes that the allegations in each of the complaints is without
merit and that the workers' compensation statutes provide the exclusive remedy
to the plaintiffs for the deaths and injuries that occurred as a result of the
Des Moines accident. The Company intends to vigorously defend the actions. Each
complaint sought unspecified damages, including punitive damages.
ITEM 6. EXHIBITS
The exhibits filed as part of this Quarterly Report on Form 10-Q are listed on
the annexed Index to Exhibits.
24
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.
November 9, 2004 /s/ Christian G. Farman
-------------------------------------------
Christian G. Farman
Vice President - Chief Financial Officer
Principal Financial and Accounting Officer
25
INDEX TO EXHIBITS
10.1 Form of Incentive Stock Option Agreement under the 2001 Employee Equity
Incentive Plan.(1)
10.2 Form of Non-Qualified Stock Option Agreement under the 2001 Employee
Equity Incentive Plan.(1)
10.3 Form of Restricted Stock Agreement for Executives under the 2001 Employee
Equity Incentive Plan.(1)
10.4 Form of Deferred Stock Unit Agreement under the 2001 Employee Equity
Incentive Plan.(1)
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.
- --------------
(1) Management contract or compensatory plan or arrangement.
26