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,June 30, 2003
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Commission file number #0-10786
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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 May 9,August 8, 2003
- ---------------------------------------- ---------------------------------------------------------------------- -----------------------------
Class A Common Stock, $.01 par value 26,465,91526,448,086 Shares
INDEX
Page No.
--------
Part I Financial Information:
Item 1. Financial Statements (unaudited):
Consolidated Statements of Income............................................Income............................... 3
Consolidated Balance Sheets..................................................Sheets..................................... 4
Consolidated Statements of Cash Flows........................................Flows........................... 5
Notes to Consolidated Financial Statements...................................Statements...................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 11Operations............................. 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 16Risk...... 18
Item 4. Controls and Procedures...................................................... 16Procedures......................................... 18
Part II Other Information:
Item 1. Legal Proceedings............................................................ 18Proceedings............................................... 19
Item 4. Submission of Matters to a Vote of Security Holders............. 19
Item 6. Exhibits and Reports on Form 8-K............................................. 18
Signatures...............................................................................................8-K................................ 19
Certifications........................................................................................... 20Signatures.............................................................................. 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED MARCH 31,JUNE 30, ENDED JUNE 30,
-------------- --------------
2003 2002 ------------ ------------2003 2002
---- ---- ---- ----
REVENUES $ 123,348124,778 $ 111,176118,488 $ 248,126 $ 229,663
COST OF REVENUES 95,079 82,287
------------ ------------95,511 87,491 190,590 169,777
--------- --------- --------- ---------
GROSS PROFIT 28,269 28,88929,267 30,997 57,536 59,886
SELLING, GENERAL AND ADMINISTRATIVE 17,083 17,655
------------ ------------18,982 16,741 36,065 34,396
--------- --------- --------- ---------
OPERATING INCOME 11,186 11,23410,285 14,256 21,471 25,490
OTHER (EXPENSE) INCOME:
Interest expense (1,197) (2,189)(2,175) (1,643) (3,372) (3,831)
Other 431 451
------------ ------------(189) 333 242 783
--------- --------- --------- ---------
TOTAL OTHER EXPENSE (766) (1,738)
------------ ------------(2,364) (1,310) (3,130) (3,048)
--------- --------- --------- ---------
INCOME BEFORE TAXES ON INCOME 10,420 9,4967,921 12,946 18,341 22,442
TAXES ON INCOME 4,064 3,696
------------ ------------3,089 4,899 7,153 8,595
--------- --------- --------- ---------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS
AND DISCONTINUED OPERATIONS 6,356 5,8004,832 8,047 11,188 13,847
MINORITY INTERESTS (30) (31)(37) (60) (68)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 25 153
------------ ------------75 228 100 381
--------- --------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 6,351 5,922
INCOME (LOSS)4,877 8,238 11,228 14,160
LOSS FROM DISCONTINUED OPERATIONS 276 (1,602)
------------ ------------(292) (927) (16) (2,529)
--------- --------- --------- ---------
NET INCOME $ 6,6274,585 $ 4,320
============ ============7,311 $ 11,212 $ 11,631
========= ========= ========= =========
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS:
Basic:
Income from continuing operations $ 0.240.18 $ 0.220.31 $ 0.42 $ 0.53
Discontinued operations 0.01 (0.06)(0.01) (0.03) (0.00) (0.09)
Net income 0.25 0.160.17 0.28 0.42 0.44
Diluted:
Income from continuing operations $ 0.240.18 $ 0.220.31 $ 0.42 $ 0.53
Discontinued operations 0.01 (0.06)(0.01) (0.03) (0.00) (0.09)
Net income 0.25 0.160.17 0.27 0.42 0.43
See accompanying notes to consolidated financial statements.
3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
MARCH 31,JUNE 30, 2003 DECEMBER 31, 2002
---------------- ------------------------------- -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$3,409$3,313 and $3,985, respectively $ 83,371117,552 $ 75,386
Receivables, net 91,51987,258 82,962
Retainage 24,65125,468 23,726
Costs and estimated earnings in excess of billings 29,39723,952 36,680
Inventories 12,27612,481 12,402
Prepaid expenses and other assets 8,35812,891 13,586
Assets held for disposal 5,359related to discontinued operations 4,054 7,909
---------------- --------------------------- ---------
TOTAL CURRENT ASSETS 254,931283,656 252,651
---------------- --------------------------- ---------
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 69,60469,142 71,579
---------------- --------------------------- ---------
OTHER ASSETS
Goodwill 131,045131,188 131,032
Other assets 17,86817,528 17,751
---------------- --------------------------- ---------
TOTAL OTHER ASSETS 148,913148,716 148,783
---------------- --------------------------- ---------
TOTAL ASSETS $ 473,448501,514 $ 473,013
================ =========================== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and line of credit $ 58,54018,192 $ 49,360
Accounts payable and accrued expenses 71,11068,413 69,776
Billings in excess of costs and estimated earnings 5,4318,690 5,992
Liabilities related to discontinued operations 5,2861,148 3,293
---------------- --------------------------- ---------
TOTAL CURRENT LIABILITIES 140,36796,443 128,421
---------------- --------------------------- ---------
LONG-TERM DEBT, less current maturities 50,912116,078 67,014
OTHER LIABILITIES 3,9363,327 3,530
---------------- --------------------------- ---------
TOTAL LIABILITIES 195,215215,848 198,965
---------------- --------------------------- ---------
MINORITY INTERESTS 1,4581,521 1,430
---------------- --------------------------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
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 26,440,22426,447,024 and 26,558,165 288 288
Unearned restricted stock compensation (961) --
Additional paid-in capital 132,910133,965 132,820
Retained earnings 201,430206,016 194,803
Treasury stock - 2,347,164 and 2,218,273 shares (51,416) (49,745)
Accumulated other comprehensive loss (6,437)(3,747) (5,548)
---------------- --------------------------- ---------
TOTAL STOCKHOLDERS' EQUITY 276,775284,145 272,618
---------------- --------------------------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 473,448501,514 $ 473,013
================ =========================== =========
See accompanying notes to consolidated financial statements.
4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE THREESIX MONTHS
ENDED MARCH 31,JUNE 30,
--------------
2003 2002
------------ ---------------- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 6,62711,212 $ 4,320
(Income) loss11,631
Loss from discontinued operations (276) 1,602
------------ ------------16 2,529
--------- --------
INCOME FROM CONTINUING OPERATIONS 6,351 5,922
------------ ------------11,228 14,160
--------- --------
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 3,339 3,3427,247 7,197
Amortization 319 358653 721
Deferred income taxes 10 48(20) 42
Other (167) 8841,510 (1,349)
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES:
Receivables, including costs and estimated earnings in excess of billings (2,197) (2,765)6,690 (6,098)
Inventories 125 86(63) 1,121
Prepaid expenses and other assets 3,266 (726)341 (2,470)
Accounts payable and accrued expenses 2,877 (916)
------------ ------------1,574 3,240
--------- --------
NET CASH PROVIDED BY CONTINUING OPERATIONS 29,160 16,564
NET CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS (1,299) 1,800
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 13,923 6,216
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS 1,798 (337)
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,721 5,879
------------ ------------27,861 18,364
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,138) (5,499)(5,734) (11,561)
Proceeds from sale of fixed assets 346 1,200349 2,520
Purchase of business, net of cash acquired (300) (8,484)
Cash from sale of business -- 1,515
Other investing activities 347 (15)
------------ ------------1,089 (501)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (1,445) (2,799)
------------ ------------(4,596) (16,511)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 91 492185 1,257
Purchases of treasury stock (1,417) (2,199)(4,357)
Principal payments on long-term debt (18,652) (17,189)(19,271) (17,870)
Issuance of long-term debt 65,000 --
Increase (decrease) in line of credit 14,516 (76)(25,778) 7,929
Deferred financing charges (213)(692) --
------------ --------------------- --------
NET CASH USED INPROVIDED (USED) BY FINANCING ACTIVITIES (5,675) (18,972)
------------ ------------18,027 (13,041)
--------- --------
Effect of exchange rate changes on cash (616) (262)
------------ ------------874 833
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD 7,985 (16,137)42,166 (10,355)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 75,386 74,649
------------ --------------------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 83,371117,552 $ 58,512
============ ============64,294
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 3,3233,450 $ 3,8044,074
Income taxes 883 1,9005,329 5,786
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note receivable on sale of business $ -- $ 2,000
Liabilities established in connection with business acquisition -- 1,690
Amounts due to the Company settled in business acquisitions -- 2,300
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,JUNE 30, 2003
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,June 30, 2003 and December 31, 2002 and
the unaudited consolidated statements of income and cash flows for the
three and six months ended March 31,June 30, 2003 and 2002. 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
2002 Annual Report on Form 10-K.
The results of operations for the three and six months ended March 31,June 30, 2003
and 2002 are not necessarily indicative of the results to be expected for
the full year.
2. STOCK-BASED COMPENSATION
At March 31,June 30, 2003, the Company had two plans under which optionsequity incentives
may be granted. On May 29, 2003, shareholders approved an increase in the
number of shares available under the 2001 Employee Equity Incentive Plan
from 1,000,000 to 2,000,000. 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 stock-based compensation expense from stock options was
reflected in the net income for the quarters ended March 31,June 30, 2003 and 2002,
respectively, as all 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. Compensation expense related to
restricted stock grants was $33 thousand for the three and six months
ended June 30, 2003. There were no shares of restricted stock granted in
2002. 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 MARCH 31,JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 ------------ ------------2003 2002
---- ---- ---- ----
Net income - as reported $ 6,6274,585 $ 4,3207,311 $ 11,212 $ 11,631
Deduct: Total stock-based compensation
expense determined under fair value
method for all awards, net of related
tax effects (1,469) (2,215)
------------ ------------(980) (1,361) (2,449) (3,576)
---------- ---------- ---------- ----------
Pro forma net income $ 5,1583,605 $ 2,105
============ ============5,950 $ 8,763 $ 8,055
========== ========== ========== ==========
Basic earnings per share:
As reported $ 0.250.17 $ 0.160.28 $ 0.42 $ 0.44
Pro forma 0.19 0.080.14 0.22 0.33 0.30
Diluted earnings per share:
As reported 0.25 0.160.17 0.27 0.42 0.43
Pro forma 0.19 0.080.14 0.22 0.33 0.30
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.
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.
On May 27, 2003, the Company granted 57,300 shares of restricted stock to
executives and key employees. The grant of restricted stock to executives
is contingent on meeting performance goals over a one-year period, and all
restricted stock is generally subject to a three-year service term before
vesting. The grant date fair value of these shares was
6
$0.9 million. The value of the restricted stock grant was added to
additional paid-in capital at the grant date and an equal amount was
established in unearned restricted stock compensation. All shares subject
to performance restrictions are revalued at each reporting date to reflect
the then current market price of the Company's stock. Revaluations are
treated as a change in accounting estimate and accounted for prospectively
with an appropriate increase or decrease to additional paid-in capital,
unearned restricted stock compensation and a current period adjustment in
compensation expense. All restricted shares are expensed as compensation
through the service restriction term.
On July 22, 2003, Anthony W. (Tony) Hooper resigned as Chairman of the
Board and Chief Executive Officer. Consequently, Mr. Hooper forfeited
21,900 shares of restricted stock.
3. BUSINESS ACQUISITIONS
Effective May 1, 2002, the Company acquired the business and certain
assets and liabilities of Elmore Pipe Jacking, Inc. ("Elmore") for
approximately $12.5 million. Elmore was a regional provider of trenchless
tunneling, microtunneling, segmented lining and pipe jacking services in
the western United States. The purchase price included $8.5 million in
cash, settlement of $2.3 million of debt owed by Elmore to the Company,
and the assumption of an additional $1.7 million of liabilities, of which
$0.2 million was interest-bearing and the remainder, including 6
covenants
not to compete, owed to the former owners of the Elmore assets. The
purchase price was allocated to assets acquired and liabilities assumed
based on their respective fair values at the date of acquisition and
resulted in goodwill of $8.9 million. The Company's results reflect the
operation of Elmore's former assets from the date of acquisition. The
Elmore acquisition added $4.2$2.7 million of revenues and $2.5$2.6 million of
operating loss in the tunneling segment for the second quarter of 2003,
with the resulting revenues and operating loss for the first threesix months of
2003.2003 equaling $6.9 million and $5.1 million, respectively. Pro forma
information relative to the quarter and six months ended March 31,June 30, 2002 is
immaterial and has not been presented relative to the Elmore acquisition.
On June 19, 2003, the Company announced that it had reached an agreement
to acquire the rehabilitation business of Insituform East, Inc., the
Company's final remaining unaffiliated domestic licensee of the
Insituform(R) cured-in-place pipe process (the "Insituform CIPP Process"),
at an estimated purchase price of $5.5 million. The transaction is
expected to close in the third quarter.
4. DISCONTINUED OPERATIONS
In 2001, the Company made the decision to sell certain operations acquired
in the Kinsel acquisition. Accordingly, the Company classified as
discontinued the wastewater treatment plant, commercial construction and
highway operations acquired as part of the Kinsel acquisition. These
operations arewere not consistent with the Company's operating strategy of
providing differentiated trenchless rehabilitation and tunneling services.
The Company completed the sale of the wastewater treatment plant
operations effective January 1, 2002. The Company received $1.5 million in
cash and a $2.0 million note for a total sale price of $3.5 million,
resulting in a slight loss on the sale. During the third quarter of 2002,
the Company sold the heavy highway construction business for $2.6 million
in cash and $1.5 million in notes, resulting in a pre-tax gain of $1.5
million, or $0.9 million after-tax. The Company completed the sale of
certain assets and contracts of the Kinsel highway maintenance business
during the fourth quarter of 2002 for certain assumed liabilities, $1.4
million in cash and a $1.5 million subordinated note, with no material
gain or loss for the sale. Pursuant to the terms of the sale agreements
described above, the Company retained responsibility for some uncompleted
jobs, which has resulted in the absorption of additional trailing costs.
The Company expects to substantially completecompleted these jobs in the second quarter of
2003. This completes the disposition of all material assets classified as
discontinued pursuant to the acquisition of Kinsel.
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 Tracks. Those claims were settled in March 2003 without
litigation. Under the terms of the settlement, 18,891 shares of Company
common stock 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
to be returned to the Company from the claim collateral escrow account
established at the time of the acquisition. The Company shares and promissory note were held in escrow on behalf of
the Company at March 31, 2003. The remaining 56,672 shares of
Company common stock held in the escrow account were to be distributed to the
former Kinsel shareholders. The settlement of the escrow account primarily
related to matters associated with Kinsel operations whichthat have been sold
and presented as discontinued operations. 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 $0.6 million after-taxafter-
7
tax non-operating gain in the results of continuing operations and a net
after-tax $0.7 million gain in discontinued operations for the quarter
ended March 31, 2003.
As of March 31,June 30, 2003 and December 31, 2002, assets held for disposalrelated to discontinued
operations totaled $5.4$4.1 million and $7.9 million, respectively, and
included $0.6$0.2 million and $0.7 million of unbilled receivables,
respectively. Assets held for disposalrelated to discontinued operations also included $1.3$0.7
million in retainage receivables, $0.7$0.3 million of trade receivables, $2.3$2.4
million of prepaid and other assets, and $0.4 million of fixed assets at
March 31,June 30, 2003. Liabilities related to discontinued operations totaled $4.6$1.1
million and $3.3 million at March 31,June 30, 2003 and December 31, 2002,
respectively. The results of operations for the discontinued operations
arewere as follows (in thousands):
THREE MONTHS ENDED MARCH 31,JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 ------------ ------------2003 2002
---- ---- ---- ----
REVENUES:
Wastewater Treatment Planttreatment plant $ -- $ -- $ -- $ --
Commercial Constructionconstruction and Highway Operations 1,398 8,622highway
operations 753 8,248 2,151 16,870
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS:
Wastewater Treatment Plant,treatment plant,
net of tax expense (benefit)
of $448$(104), $0, $(866), and $(348), respectively 700(163) -- (1,355) (642)
Commercial Constructionconstruction and Highway Operations,highway
operations, net of tax expense (benefit)
of ($272)$(83), $(659), $856, and $(563), respectively (424) (960)(129) (927) 1,339 (1,887)
7
5. RESTRUCTURING
In the third quarter of 2002, the Company recorded a pre-tax restructuring
charge of $2.5 million ($1.5 million after-tax), $1.3 million of which was
severance costs associated with the elimination of 75 salaried positions,
primarily related to administrative and other overhead functions. An
additional $1.2 million involved related decisions for information
technology asset write-downs, lease cancellations, and disposal of certain
identifiable fixed assets primarily at the corporate level. As of March 31,June 30,
2003, the remaining liability on this restructuring was $0.3$0.2 million
related entirely to future severance costs that are expected to be
substantially settled in 2003.
In the fourth quarter of 2001, the Company recorded a pre-tax
restructuring charge of $4.1 million ($2.5 million after tax)after-tax), $0.9
million of which was severance costs associated with the elimination of
112 company-wide positions specifically identified as of December 31,
2001. An additional $3.2 million of the charge related to asset
write-downs, lease cancellations and other costs associated with the
closure of eight facilities in the United States and the disposal of the
associated assets. As of March 31,June 30, 2003, the remaining liability was $0.4$0.3
million, $0.2$0.1 million of which iswas for retirement of equipment, and $0.2
million relatesof which related to facilities closure costs, both of which are
expected to be substantially settled in 2003.
8
The following table illustrates each of the restructuring reserve
components and the related balances at March 31,June 30, 2003 (in thousands):
Balance atBALANCE AT 2002 Charged During Charged During Balance at
DecemberCHARGED DURING CHARGED DURING BALANCE AT
DECEMBER 31, 2001 ReserveRESERVE 2002 First QuarterFIRST HALF OF 2003 March 31,JUNE 30, 2003
----------------- ------- ---- ------------------ -----------------------
2001 RESERVE CASH NON-CASH CASH NON-CASH
------------------------ ---------------------------- --------------------------------------
2001 RESERVE Cash Non-Cash Cash Non-Cash
---------- ---------- ------------ ------------
Severance $ 844 $ (844) $ -- $ -- $ -- $ --
Equipment 616 (122) (237) (38) (31) 188(104) (57) 96
Facility 1,702 (1,171) (302) (11)(12) -- 218
------------------ ---------- ---------- ------------ ------------ ------------------217
------ ------- ------- ------ ----- ----- -----
Total $ 3,162 $ (2,137)$3,162 $(2,137) $ (539) $(116) $ (49)(57) $ (31) $ 406
================== ========== ========== ============ ============ ==================313
====== ======= ======= ====== ===== ===== =====
2002 RESERVE
Severance $ -- $ 1,258 $ (465) $ -- $ (449)$(559) $ -- $ 344234
Equipment -- 1,200 (852) -- -- (348) --
------------------ ---------- ---------- ---------- ------------ ------------ ------------------------ ------- ------- ------ ----- ----- -----
Total $ -- $ 2,458 $ (1,317)$(1,317) $ -- $(559) $(348) $ (449) $ (348) $ 344
================== ========== ========== ========== ============ ============ ==================234
====== ======= ======= ====== ===== ===== =====
6. COMPREHENSIVE INCOME
For the quarters ended March 31,June 30, 2003 and 2002, comprehensive income was
$5.7$7.3 million and $4.7$7.2 million, respectively, with comprehensive income of
$13.0 million and $11.8 million for the six months ended June 30, 2003 and
2002, respectively. The Company's adjustment to net income to calculate
comprehensive income consists solely of cumulative foreign currency
translation adjustments of $(0.9
million)$2.7 million and $0.4$(0.1) million for the
quarters ended March 31,June 30, 2003 and 2002, respectively, and $1.8 million and
$0.2 million for the six months ended June 30, 2003 and 2002,
respectively.
7. SHARE INFORMATION
Earnings per share have been calculated using the following share
information:
THREE MONTHS ENDED MARCH 31,JUNE 30,
2003 2002
-------------- ------------------ ----
Weighted average number of common shares
used for basic EPS 26,529,602 26,553,50626,444,923 26,543,025
Effect of dilutive stock options 46,248 288,655
-------------- --------------and restricted stock 102,815 275,858
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,575,850 26,842,161
============== ==============26,547,738 26,818,883
========== ==========
SIX MONTHS ENDED JUNE 30,
2003 2002
---- ----
Weighted average number of common shares
used for basic EPS 26,487,028 26,548,236
Effect of dilutive stock options and restricted stock 86,665 281,797
---------- ----------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,573,693 26,830,033
========== ==========
8. SEGMENT REPORTING
The Company has principally three operating segments: rehabilitation,
tunneling, and TiteLiner(R), the Company's corrosion and abrasion segment
("TiteLiner"). 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 8
assisting in making internal operating decisions. The Company
evaluates performance based on stand-alone operating income.
9
Financial information by segment is as follows (in thousands):
THREE MONTHS ENDED MARCH 31,JUNE 30, SIX MONTHS ENDED JUNE 30,
2003 2002 -------------- --------------2003 2002
---- ---- ---- ----
Revenues
REVENUES
Rehabilitation $ 92,36793,883 $ 91,44293,351 $186,250 $184,793
Tunneling 25,585 15,17626,385 22,249 51,970 37,425
TiteLiner 5,396 4,558
-------------- --------------
Total Revenues4,510 2,888 9,906 7,445
-------- --------- -------- --------
TOTAL REVENUES $124,778 $ 123,348 $ 111,176
============== ==============
Gross Profit118,488 $248,126 $229,663
======== ========= ======== ========
GROSS PROFIT
Rehabilitation $ 23,46825,004 $ 24,30726,080 $ 48,472 $ 50,386
Tunneling 3,161 3,0512,773 4,224 5,934 7,275
TiteLiner 1,640 1,531
-------------- --------------
Total Gross Profit1,490 693 3,130 2,225
-------- --------- -------- --------
TOTAL GROSS PROFIT $ 28,26929,267 $ 28,889
============== ==============
Operating Income30,997 $ 57,536 $ 59,886
======== ========= ======== ========
OPERATING INCOME
Rehabilitation $ 8,8148,589 $ 8,62611,904 $ 17,403 $ 20,530
Tunneling 1,441 1,866976 2,497 2,417 4,363
TiteLiner 931 742
-------------- --------------
Total Operating Income720 (145) 1,651 597
-------- --------- -------- --------
TOTAL OPERATING INCOME $ 11,18610,285 $ 11,234
============== ==============14,256 $ 21,471 $ 25,490
======== ========= ======== ========
9. ACQUIRED INTANGIBLE ASSETS AND GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 ("SFAS 142"),
"Goodwill and Other Intangible Assets," which requires that an intangible
asset that is acquired shall be initially recognized and measured based on
its fair value. This statement also provides that certain intangible
assets deemed to have an indefinite useful life, such as goodwill, should
not be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment, through a
comparison of fair value to its carrying amount. SFAS 142 is effective for
fiscal periods beginning after December 15, 2001. The Company adopted SFAS
142 on January 1, 2002, at which time amortization of goodwill ceased and
a transitional impairment test was performed. The annual impairment test
for goodwill was performed in the fourth quarter of 2002. Management
retained an independent party to perform a valuation of the Company's
reporting units as of these dates and determined that no impairment of
goodwill existed. The Company's 2003 annual impairment test of goodwill
will be performed in the fourth quarter of 2003.
Intangible assets were as follows (in thousands):
AS OF MARCH 31,JUNE 30, 2003
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- -------------------- ------------
Amortized intangible assets:
Patents $ 13,943 $ (11,993)$13,943 $(12,090)
License agreements 3,263 (1,933)(1,989)
Non-compete agreements 4,628 (2,172)
-------------- --------------(2,332)
------- --------
Total $ 21,834 $ (16,098)
============== ==============$21,834 $(16,411)
======= ========
Aggregate amortization expense:
For quarter ended March 31,June 30, 2003 $ 319334
For six months ended June 30, 2003 653
Estimated amortization expense:
For year endedending December 31, 2003 $ 1,166
For year endedending December 31, 2004 1,072
For year endedending December 31, 2005 730
For year endedending December 31, 2006 725
For year endedending December 31, 2007 332
9Effective June 1, 2003, the Company completed the acquisition of the
business of Sewer Services Ltd., a United Kingdom based contractor
specializing in the rehabilitation of man-entry pipes and culverts. The
acquisition, with a purchase price of $0.4 million, resulted in an
increase of $143 thousand in goodwill. Pro forma information relative to
this acquisition was not considered material.
10
10. COMMITMENTS AND CONTINGENCIES
Litigation
The Company is involved in certain litigation incidental to the conduct of
its business. The Company does not believe that the outcome of any such
litigation will have a material adverse effect on the Company's financial
position, results of operations and liquidity. During the third quarter of
2002, a Company crew had an accident on a cured-in-place pipe project in
Des Moines, Iowa. Two workers died and five workers were injured in the
accident. The financial statements include the estimated amounts of
liabilities that are likely to be incurred from these and various other
pending litigation and claims.
Guarantees
The Company has entered into several contractual joint ventures to develop
joint bids on contracts for its installation 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 bonding agents 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.
11. FINANCINGS
Credit Facility
Effective March 27, 2003, the Company entered into a new three-year bank
revolving credit facility to replace its expiring bank credit facility.
This new facility provides the Company with borrowing capacity of up to
$75 million. The quarterly commitment fee ranges from 0.2% to 0.3% per
annum on the unborrowed balance depending on the leverage ratio determined
as of the last day of the Company's preceding fiscal quarter. At the
Company's option, the interest rates will be either (i) the LIBOR plus an
additional percentage that varies from 0.75% to 1.5% depending on the
leverage ratio or (ii) the higher of (a) the prime rate or (b) the federal
funds rate plus 0.50%. As of March
31,June 30, 2003, the interest ratethere was no borrowing on the
credit facility and therefore there is no applicable interest rate as
rates are determined on the borrowing date. The available balance was
4.25%$68.7 million and the balancecommitment fee was $40.0 million.0.20%. The remaining $6.3 million
was used for non-interest bearing letters of credit, the majority of which
was collateral for insurance. The Company generally uses the credit
facility for short-term borrowings and discloses amounts outstanding as a
current liability.
Senior Notes
On April 24, 2003, the Company placed $65 million of Senior Notes, Series
2003-A, due April 24, 2013 and bearing interest, payable semi-annually in
April and October of each year, at a rate of 5.29% per annum, with certain
institutional investors through a private offering. The principal amount
is due in a single payment on April 24, 2013. The Senior Notes, Series
2003-A, may be prepaid at the Company's option, in whole or in part, at
any time, together with a make-whole premium. Upon specified change in
control events each holder has the right to require the Company to
purchase its Senior Notes, Series 2003-A, without any premium thereon.
At March 31,June 30, 2003, the Company was in compliance with all debt covenants.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and results of
operations during the periods included in the accompanying consolidated
financial statements. See the discussion of the Company's critical accounting
policies in its Annual Report on Form 10-K for the year ended December 31, 2002;
there have been no changes to these policies during the first quarter of 2003.
RESULTS OF OPERATIONS - Three Months Ended March 31, 2003 and 2002
The following table highlights the results for each of the segments and periods
presented (in thousands):
THREE MONTHS ENDED MARCH 31, 2003
REHABILITATION TUNNELING TITELINER(R) TOTAL
-------------- -------------- -------------- --------------
Revenues $ 92,367 $ 25,585 $ 5,396 $ 123,348
Gross Profit 23,468 3,161 1,640 28,269
Operating Income 8,814 1,441 931 11,186
THREE MONTHS ENDED MARCH 31, 2002
REHABILITATION TUNNELING TITELINER(R) TOTAL
-------------- -------------- -------------- --------------
Revenues $ 91,442 $ 15,176 $ 4,558 $ 111,176
Gross Profit 24,307 3,051 1,531 28,889
Operating Income 8,626 1,866 742 11,234
Consolidated revenues from continuing operations for the first quarter of 2003
were $123.3 million, a 10.9% increase compared to first quarter 2002 revenues of
$111.2 million. The tunneling segment, which increased revenues 68.6% to $25.6
million from $15.2 million in the first quarter of 2002, contributed most of the
overall increase in revenues. First quarter 2003 tunneling revenues included
$4.2 million directly attributable to the acquisition of Elmore Pipe Jacking,
Inc. in May of 2002. The rest of the growth in tunneling was organic. First
quarter 2003 rehabilitation revenues of $92.4 million represented a 1.0%
increase over 2002 first quarter revenues. The relatively flat rehabilitation
revenues were primarily a result of continued weak market conditions in North
America, and problems in France. The Company is in the process of making changes
to improve the French operation. Revenues for the Company's TiteLiner(R) segment
("TiteLiner") for the first quarter of 2003 were $5.4 million, 18.4% greater
than 2002 first quarter revenues. In late 2002, the TiteLiner segment
experienced an increase in orders and backlog, which translated into increased
revenues in the first quarter of 2003. Orders were up in the tunneling segment
in the first quarter of 2003 compared to the fourth quarter of 2002. This was
offset by a decline in orders in the rehabilitation segment during the same time
period. There is no apparent order trend going forward.
Cost of revenues from continuing operations for the first quarter of 2003 were
$95.1 million, a 15.5% increase compared to first quarter 2002 cost of revenues
of $82.3 million. Most of the increase in cost of revenues was attributable to
growth in the tunneling segment. This growth increased cost of revenues $10.3
million in the first quarter of 2003 compared to the first quarter of 2002. Of
the first quarter 2003 tunneling segment increase, $6.1 million was related to
Elmore operations which were not added until May 2002.
Gross profit in the first quarter of 2003 decreased 2.1% to $28.3 million from
$28.9 million in the first quarter of 2002. Overall gross margin for the first
quarter of 2003 was 22.9%, a decrease from the 26.0% gross margin in the first
quarter of 2002. All segments experienced decreases in gross margin percentage,
but the most pronounced change was in tunneling, where margins were 12.4% in the
first quarter of 2003 compared to 20.1% in the first quarter of 2002. Unexpected
costs from amounts owed to subcontractors on a project acquired from Elmore were
primarily to blame for the lower margins in the tunneling segment. The tunneling
segment has historically had operating income ratios comparable to or better
than the Company's other segments. However, this is achieved with a lower and
more volatile gross margin and lower operating expenses. As the tunneling
segment becomes a more significant part of consolidated results, the tunneling
segment results will tend to reduce the consolidated gross margin ratio but
contribute to the consolidated operating income ratio.
Selling, general and administrative expenses were $17.1 million for the first
quarter of 2003, a 3.3% improvement compared to $17.7 million for the first
three months of 2002. The decrease in selling, general and administrative
expenses was achieved despite an additional $0.6 million of selling, general and
administrative expenses related to Elmore and is due primarily to a decrease in
incentive compensation expense. Otherwise, selling, general and administrative
expenses
11
were flat over the same time period comparison. The Company has substantially
completed cost reduction and restructuring efforts announced in the fourth
quarter of 2001 and the third quarter of 2002. See Note 5 regarding
restructuring and discussion of amounts charged against the reserves during the
first quarter of 2003.
Consolidated operating income from continuing operations remained unchanged at
$11.2 million for the first quarter of 2003 compared to the first quarter of
2002. Rehabilitation and TiteLiner showed modest increases in operating income
for the first quarter of 2003, which were offset by decreased operating income
in tunneling. The previously discussed job acquired from Elmore primarily caused
the decrease in tunneling operating income, but this unexpected cost item is
expected to be a one-time event. In rehabilitation, strong profit performance in
some domestic units was offset by weaker results in others. One of the normally
strong rehabilitation units suffered from low backlog and under-performed
significantly. The Company incurred large losses on unprofitable cured-in-place
pipe ("CIPP") contracts in New York. The Kinsel rehabilitation operation had a
difficult quarter with a combination of under-loading and operating
difficulties. In Europe, performance in the Netherlands and Spain exceeded prior
year while the French operation was unprofitable.
Interest expense of $1.2 million in the first quarter of 2003 was a 45.3%
improvement compared to interest expense of $2.2 million in the first quarter of
2002. Approximately half of the decrease was due to the reversal of interest
expense forgiven in a settlement with the former owners of the Kinsel
operations. The remaining decrease in interest expense stems from lower interest
rates on debt in 2003. Other income fell slightly to $0.4 million in the first
quarter of 2003 from $0.5 million in the first quarter of 2002 due to interest
rate decreases. The effective tax rate remained unchanged at 39.0% in the first
quarter of 2003 compared to the first quarter of 2002.
Equity in earnings of affiliated companies decreased 83.7% in the first quarter
of 2003 compared to the first quarter of 2002 due primarily to the discontinued
affiliation with a joint venture partner in the third quarter of 2002. Minority
interests remained flat during the same time periods.
Income from continuing operations for the first quarter of 2003 was $6.4
million, a 7.2% increase compared to $5.9 million in the first quarter of 2002.
As operating income was consistent in the first quarter of 2003 compared to
first quarter 2002, much of this increase in income from continuing operations
resulted from the lower interest expense described above. Included in the
results from continuing operations was a one-time gain of $0.6 million or $0.02
per diluted share from the settlement of claims against the former Kinsel
owners. Discontinued operations provided $0.3 million of additional income due
primarily to negotiated settlements between the Company and the former Kinsel
owners, and between the Company and the purchasers of the wastewater treatment
plant operations acquired from Kinsel. See Note 4 to the Consolidated Financial
Statements for further discussion. This compares to a loss of $1.6 million from
discontinued operations in the first quarter of 2002. Resulting net income was
$6.6 million in the first quarter of 2003, a 53.4% increase compared to $4.3
million in net income in the first quarter of 2002.
The level of CIPP work bid by the Company in North America in the first quarter
of 2003 was up slightly from 2002 but down from 2001. Bidding was stronger in
March 2003. The Company's domestic CIPP bidding and order acquisition in April
2003 was high and comparable to the strong results for the same period in 2002.
Tunneling prospects continue to be very strong but delays in bringing projects
to market continue.
There is heightened uncertainty about the levels of municipal spending in fiscal
2004. While local budgets for water and sewer are relatively unaffected by the
budget problems of state governments, there is concern about potential
reductions in overall spending by cities.
BACKLOG
The following table highlights backlog for each of the segments and at each date
presented (in millions):
MARCH 31, 2003:
APPARENT LOW BID
APPARENT LOW BID UNRELEASED TERM AND UNRELEASED
CONTRACT EXPECTED IN EXPECTED IN TERM AVAILABLE
BACKLOG NEXT 12 MONTHS NEXT 12 MONTHS BEYOND 12 MONTHS
------------ ------------------ ------------------ ------------------
Rehabilitation $ 93.4 $ 32.0 $ 38.2 $ 20.3
Tunneling 98.1 -- -- --
TiteLiner 5.5 -- -- --
------------ ------------------ ------------------ ------------------
Total $ 197.0 $ 32.0 $ 38.2 $ 20.3
============ ================== ================== ==================
12
DECEMBER 31, 2002:
APPARENT LOW BID
APPARENT LOW BID UNRELEASED TERM AND UNRELEASED
CONTRACT EXPECTED IN EXPECTED IN TERM AVAILABLE
BACKLOG NEXT 12 MONTHS NEXT 12 MONTHS BEYOND 12 MONTHS
------------ ------------------ ------------------ ------------------
Rehabilitation $ 112.1 $ 27.2 $ 34.3 $ 20.9
Tunneling 110.0 -- -- --
TiteLiner 5.1 -- -- --
------------ ------------------ ------------------ ------------------
Total $ 227.2 $ 27.2 $ 34.3 $ 20.9
============ ================== ================== ==================
Contract backlog is management's expectation of revenues to be generated from
received, signed, uncompleted contracts whose cancellation is not anticipated at
the time of reporting. Reported contract backlog excludes any term contract
amounts for which there is not specific and determinable work released. At March
31, 2003, the Company reported contract backlog (excluding projects where the
Company has been advised that it is the low bidder, but not formally awarded the
contract) of $197.0 million, a $30.2 million decrease from December 31, 2002
contract backlog of $227.2 million. The Company anticipates that a significant
portion of contract backlog reported at March 31, 2003 and an additional $70.2
million of unreleased term contracts and jobs on which the Company is the
apparent low bidder will be completed in the next twelve-month period. An
additional $20.3 million of unreleased term contract work and work on which the
Company is the apparent low bidder is anticipated for completion beyond the
twelve-month period. Backlog estimates beyond one year are inherently subject to
greater uncertainty due to their long-term nature. All backlog values are the
estimate of management based on contracts outstanding at March 31, 2003 and are
subject to change due to factors beyond the control of the Company, such as
modification or cancellation of the contract award.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $83.4 million at March 31, 2003, an $8.0 million
increase in the first quarter of 2003 compared to $75.4 million at December 31,
2002. The balance of cash and cash equivalents included $3.4 million and $4.0
million at March 31, 2003 and December 31, 2002, respectively, restricted in
various escrow accounts. Operating activities from continuing operations
contributed $13.9 million to the increase, primarily from net income of
continuing operations and a $4.1 million decrease in working capital. Operating
cash flow from continuing activities contributed $6.2 million in the first
quarter of 2002 when working capital increases used $4.3 million of cash.
Discontinued operations provided an additional $1.8 million during the first
quarter of 2003 mainly from the settlement of claims against the former Kinsel
owners. This compares to the use of $0.3 million of cash by discontinued
operations in the first quarter of 2002.
Spending on investing and financing activities was down 48.1% and 71.2%,
respectively, in the first quarter of 2003 compared to the first quarter of
2002. The primary use of cash for investing in the first quarter of 2003 was
$2.1 million in capital expenditures compared to the first quarter of 2002 when
$5.5 million was spent on capital projects, $1.2 million was collected on the
sale of fixed assets, and $1.5 million was contributed from the sale of Kinsel's
wastewater treatment plant operations. Primary uses of cash for financing during
the first three months of 2003 were $1.4 million for the repurchase of the
Company's stock and $18.7 million to repay long-term debt, $15.7 million of
which was a scheduled annual payment on the Company's Senior Notes. This was
offset by the borrowing of an additional $14.5 million on the lines of credit
during the quarter. By comparison, in the first quarter of 2002, $2.2 million
was expended for the repurchase of Company stock and $17.2 million was paid on
long-term debt. Much of the decrease in spending for capital items is due to
cost containment and focused capital preservation efforts for the purpose of
maintaining operational flexibility. The Company purchased 110,000 shares in the
first quarter of 2003 for $1.4 million compared to 100,000 repurchased shares in
the first quarter of 2002 for $2.2 million. On a cumulative basis, the Company
has spent $74.0 million to repurchase 3,919,615 shares through March 31, 2003
since the inception of the stock repurchase program originally authorized in
1998. In April 2003, the Company indefinitely extended its repurchase program,
which was due to expire in June 2003. Repurchased shares are held as treasury
stock until reissued.
Trade receivables, along with retainage under construction contracts, totaled
$116.2 million at March 31, 2003, an 8.9% increase compared to $106.7 million in
combined receivables at December 31, 2002. A majority of this increase was due
to the invoicing and reclassification of a significant amount of unbilled
revenue in the tunneling segment for services rendered prior to December 31,
2002. Consolidated unbilled revenue decreased $7.3 million from $36.7 million at
December 31, 2002 to $29.4 million at March 31, 2003.
Effective March 27, 2003, the Company entered into a new three-year bank
revolving credit facility (the "Credit Agreement") to replace its expiring bank
credit facility. This new facility provides the Company with borrowing capacity
13
of up to $75 million. The quarterly commitment fee ranges from 0.2% to 0.3% per
annum on the unborrowed balance depending on the leverage ratio determined as of
the last day of the Company's preceding fiscal quarter. At the Company's option,
the interest rates will be either (i) the LIBOR plus an additional percentage
that varies from 0.75% to 1.5% depending on the leverage ratio or (ii) the
higher of (a) the prime rate or (b) the federal funds rate plus 0.50%. At March
31, 2003, the Company had unused committed bank credit facilities under the
Credit Agreement totaling $28.8 million and the commitment fee was 0.25%. The
interest rate under the Credit Agreement was 4.25% and the balance was $40.0
million as of March 31, 2003.
The Company's Senior Notes, Series A, due February 14, 2007, bear interest,
payable semi-annually in August and February of each year, at the rate per annum
of 7.88%. Each year, from February 2004 to February 2007, inclusive, the Company
will be required to make principal payments of $15.7 million, together with an
equivalent payment at maturity. On March 31, 2003, the principal amount of
Senior Notes, Series A, outstanding was $62.9 million.
On April 24, 2003, the Company placed an additional $65 million of Senior Notes,
Series 2003-A, with certain institutional investors through a private offering,
bringing the total Series A and Series 2003-A Senior Notes outstanding to $127.9
million at that date. The Senior Notes, Series 2003-A, are due April 24, 2013
and bear interest, payable semi-annually in April and October of each year, at a
rate of 5.29% per annum. The principal amount is due in a single payment on
April 24, 2013. The Senior Notes, Series 2003-A, may be prepaid at the Company's
option, in whole or in part, at any time, together with a make-whole premium.
Upon specified change in control events, each holder has the right to require
the Company to purchase its Senior Notes, Series 2003-A, without any premium
thereon. The proceeds of the Senior Notes, Series 2003-A, were used to pay off
the balance on the line of credit and to provide future liquidity.
The note purchase agreements pursuant to which the Senior Notes, Series A and
Series 2003-A, were issued, and the Credit Agreement, obligate the Company to
comply with certain financial ratios and restrictive covenants that, among other
things, place limitations on operations and sales of assets by the Company or
its subsidiaries, limit the ability of the Company to incur further secured
indebtedness and liens and of subsidiaries to incur indebtedness, and, in the
event of default, limit the ability of the Company to pay cash dividends or make
other distributions to the holders of its capital stock or to redeem such stock.
At March 31, 2003, the Company was in compliance with all debt covenants.
The Company believes it has adequate resources and liquidity to fund future cash
requirements for working capital, capital expenditures and debt repayments with
cash generated from operations, existing cash balances, additional short- and
long-term borrowing and the sale of assets.
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 as well as 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 14 to the Consolidated Financial Statements included in the Company's
2002 Annual Report on Form 10-K for additional disclosure of financial
obligations and commercial commitments.
The following table provides a summary of the Company's financial obligations
and commercial commitments as of March 31, 2003 (in thousands). This table
includes cash obligations related to principal outstanding under existing debt
arrangements and operating leases.
PAYMENTS DUE BY PERIOD
TOTAL 2003 2004 2005 2006 2007 THEREAFTER
-------- -------- -------- -------- -------- -------- ----------
Cash Obligations*
Long-term debt** $155,374 $ 23,360 $ 17,377 $ 17,007 $ 16,764 $ 15,822 $ 65,044
Line of credit facility*** 40,498 40,498 -- -- -- -- --
Operating leases 44,472 13,531 9,386 6,062 4,470 3,952 7,071
-------- -------- -------- -------- -------- -------- ----------
Total contractual cash
obligations $240,344 $ 77,389 $ 26,763 $ 23,069 $ 21,234 $ 19,774 $ 72,115
======== ======== ======== ======== ======== ======== ==========
*Cash obligations herein are not discounted and do not include related interest.
See Notes 10 and 11 to the Consolidated Financial Statements regarding
commitments and contingencies and debt issued subsequent to the balance sheet
date, respectively.
14
**On April 24, 2003, the Company placed an additional $65 million of Senior
Notes, Series 2003-A, with principal due in a single payment on April 24, 2013.
See Note 11 to the Consolidated Financial Statements for additional discussion
regarding the Senior Notes.
***Effective March 27, 2003, the Company entered into a new three-year bank
revolving credit facility to replace its expiring bank credit facility. The
Company uses the credit facility for short-term borrowing and discloses amounts
outstanding as a current liability. See Note 11 to the Consolidated Financial
Statements for additional discussion regarding the credit facility.12. NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146 ("SFAS 146"),
"Accounting for Costs Associated with Exit or Disposal Activities." SFAS
146 requires an entity to recognize, and measure at fair value, a
liability for costs associated with an exit or disposal activity in the
period in which the liability is incurred. SFAS 146 supercedes Emerging
Issues Task Force Issue ("EITF") No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an
11
Activity (Including Certain Costs Incurred in a Restructuring)." SFAS 146
is effective for exit or disposal activities that are initiated after
December 31, 2002. The Company has adopted the provisions of SFAS 146
effective January 1, 2003. There was no material impact upon adoption.exit or disposal activity
initiated during the first six months of 2003.
In November 2002, FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," which elaborates
on the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under certain guarantees that
it has issued along with expanded disclosures of warranty reserves. It
also requires that a guarantor recognize a liability for the fair value of
the obligation undertaken in issuing the guarantee at the inception of the
guarantee. This interpretation incorporates the guidance in FIN 34,
"Disclosure of Indirect Guarantees of Indebtedness of Others," which is
being superseded. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end and the disclosure requirements are effective
for financial statements of interim or annual periods ending after
December 15, 2002. Adoption of FIN 45 did not have a material impact on
the consolidated financial statements. See Note 10 to the Consolidated
Financial Statements regarding commitments and contingencies.
In December 2002, FASB issued Statement of Financial Accounting Standards
No. 148 ("SFAS 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS 148 amends SFAS 123, "Accounting for
Stock-Based Compensation"Compensation," and allows two alternative methods of
transition for a voluntary change to the more preferable fair value based
method of accounting for stock-based employee compensation. These methods
avoid the ramp-up effect arising from prospective application of the fair
value based method. The Statement also amends Accounting Principles Board
Opinion No. 28 ("APB 28"), "Interim Financial Reporting," and requires
disclosure of comparable information for all companies regardless of
whether, when, or how an entity adopts the fair value based method of
accounting and requires the inclusion of the disclosure in financial
reports for interim periods. SFAS 148 is effective for interim and
year-end financial statements for fiscal years ending after December 15,
2002. As previously disclosed, the Company will continue to account for
stock compensation pursuant to APB 25. However, it has adopted the
disclosure provisions of SFAS 148 and continues to evaluate its options.
In January 2003, FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which addresses the
reporting and consolidation of variable interest entities as they relate
to a business enterprise. This interpretation incorporates and supercedes
the guidance set forth in Accounting Research Bulletin No. 51 ("ARB 51"),
"Consolidated Financial Statements." It requires the consolidation of
variable interests into the financial statements of a business enterprise
if that enterprise holds a controlling financial interest via other means
than the traditional voting majority. The requirements of FIN 46 are
effective immediately for variable interest entities created after January
31, 2003 and thereafter, or the first reporting period after June 15, 2003
for variable interest entities for which an enterprise holds a variable
interest that it acquired prior to February 1, 2003. The Company doesis
evaluating FIN 46 relative to its equity investments and lease agreements,
among other things.
13. SUBSEQUENT EVENT
Effective July 22, 2003, Anthony W. (Tony) Hooper resigned as Chairman of
the Board and Chief Executive Officer. Effective on that same date, the
Company's board of directors named Thomas S. Rooney, Jr. as Chief
Executive Officer. Mr. Rooney retained the responsibilities of his
previous position and was elected as a new member to the board of
directors. The Company expects to record associated severance costs of
approximately $1.2 million during the third quarter of 2003. See Note 2
regarding forfeiture of restricted stock.
12
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, 2002;
there have been no changes to these policies during the quarter and six months
ended June 30, 2003.
RESULTS OF OPERATIONS - Three and Six Months Ended June 30, 2003 and 2002
The following table highlights the results for each of the segments and periods
presented (in thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2003 JUNE 30, 2003
REVENUES GROSS PROFIT OPERATING INCOME REVENUES GROSS PROFIT OPERATING INCOME
-------- ------------ ---------------- -------- ------------ ----------------
Rehabilitation $ 93,883 $25,004 $ 8,589 $186,250 $48,472 $17,403
Tunneling 26,385 2,773 976 51,970 5,934 2,417
TiteLiner 4,510 1,490 720 9,906 3,130 1,651
-------- ------- -------- -------- ------- -------
Total $124,778 $29,267 $ 10,285 $248,126 $57,536 $21,471
======== ======= ======== ======== ======= =======
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2002 JUNE 30, 2002
REVENUES GROSS PROFIT OPERATING INCOME REVENUES GROSS PROFIT OPERATING INCOME
-------- ------------ ---------------- -------- ------------ ----------------
Rehabilitation $ 93,351 $26,080 $ 11,904 $184,793 $50,386 $20,530
Tunneling 22,249 4,224 2,497 37,425 7,275 4,363
TiteLiner 2,888 693 (145) 7,445 2,225 597
-------- ------- -------- -------- ------- -------
Total $118,488 $30,997 $ 14,256 $229,663 $59,886 $25,490
======== ======= ======== ======== ======= =======
Consolidated revenues from continuing operations were $124.8 million in the
second quarter of 2003, an increase of 5.3% from $118.5 million in the second
quarter of 2002. Second quarter 2003 tunneling revenues increased $4.1 million,
or 18.6%, to $26.4 million, and TiteLiner revenues increased $1.6 million, or
56.2%, to $4.5 million compared to the second quarter of 2002. Tunneling
revenues increased despite a decrease in revenue contribution from the Elmore
division during the second quarter of 2003 compared to the same quarter of 2002.
High productivity on large tunneling jobs in Dallas, Chicago, and St. Louis
primarily accounted for the revenues increase in the segment. Rehabilitation
revenues increased only slightly compared to the second quarter of 2002 to $93.9
million for the second quarter of 2003 as strong performances in some domestic
rehabilitation units were more than offset by weak performances in two areas of
the United States. Rehabilitation revenues increased in total on the strength of
growth in the European unit. For the first half of 2003, consolidated revenues
from continuing operations were up 8.0% to $248.1 million from $229.7 million in
the first six months of 2002. Growth in rehabilitation revenues came primarily
from increases in the Kinsel unit and in European operations. The tunneling and
TiteLiner segments, up 38.9% and 33.0%, respectively, were primarily responsible
for the first half increase in 2003 compared to 2002. Approximately two-thirds
of the increase in tunneling revenues in the first six months of 2003 compared
to the first six months of 2002 was due to the addition of Elmore operations,
which contributed a full six months of revenue in 2003 compared to two months in
2002.
Cost of revenues increased 9.2% in the second quarter of 2003 to $95.5 million
from $87.5 million in the second quarter of 2002, outpacing revenue growth for
the quarter. Higher than expected casualty, workers compensation and healthcare
claims in the second quarter of 2003 impacted cost of revenues in all segments
compared to the second quarter of 2002, and inventory and equipment write-offs
associated with obsolete small diameter installation methods increased the cost
of revenues in rehabilitation during the second quarter of 2003 relative to the
second quarter of 2002. Poor performance on specific identifiable projects and
in some regions in domestic rehabilitation operations during the quarter
resulted in crew downtime and excessive costs. Additional unanticipated costs
were incurred in the second quarter of 2003 on some of the contracts acquired
with Elmore, a division of tunneling. The Company has not expectyet been able to
finalize settlement of its related customer claims and change orders or its
claim against the sellers of the Elmore business that would have offset some of
the unanticipated costs. The Company is not able to predict when its claims
relating to these contracts will be settled, nor the amount it may recover. The
original Elmore contracts have been completed. Consolidated cost of revenues for
the six months ended June 30, 2003 was $190.6 million, an increase of 12.3%
compared to $169.8 million for the first half of 2002. Most of the increase in
cost of revenues during the first six months of 2003 compared to 2002 occurred
in
13
tunneling. The sources of tunneling cost of revenues increases were in almost
equal parts due to growth in the Affholder division and previously mentioned
excess costs on contracts acquired from Elmore. The remaining cost of revenues
increase primarily resulted from costs due to poor crew utilization at one of
the locations in the Company's Kinsel operation included in the rehabilitation
segment.
Gross profit from continuing operations was $29.3 million in the second quarter
of 2003, a 5.6% decrease from gross profit of $31.0 million in the second
quarter of 2002. Based on the increase in cost of revenues described above,
gross margin decreased to 23.5% in the second quarter of 2003 from 26.2% in the
second quarter of 2002. As tunneling grows in its contribution to the
consolidated results, its historical lower margins also continue to lower the
consolidated margins. For the first six months of 2003, gross profit was down
3.9% to $57.5 million from $59.9 million in the first half of 2002. Projects
associated with the Elmore acquisition were completed in the second quarter of
2003 at low or negative margins, which reduced tunneling gross margin;
consequently, tunneling margins are expected to improve for the remainder of
2003. Higher casualty, workers compensation and healthcare claims for all
segments, the write-off of obsolete equipment and regional domestic
rehabilitation issues as well as unexpectedly high costs to complete projects
acquired from Elmore accounted for decreased gross margins for both the three
and six months ended June 30, 2003 compared to the same periods of 2002.
TiteLiner gross margin increases over the same time periods were generally the
result of revenue growth resulting from renewed cyclical demand for the
segment's products.
Selling, general and administrative costs were 13.4% higher in the second
quarter of 2003 at $19.0 million compared to $16.7 million in the second quarter
of 2002. This increase was primarily due to approximately $1.0 million in
additional casualty, workers compensation and healthcare costs to reflect
increased casualty losses and healthcare costs, as well as an increase in bad
debt expense. Nearly all of the increases were associated with the
rehabilitation segment, which experienced a 15.8% increase in overhead expenses
in the second quarter of 2003 compared to 2002. For the six months ended June
30, 2003, selling, general and administrative expenses were $36.1 million, a
4.9% increase compared to $34.4 million in the first six months of 2002. An
additional four months of Elmore operations in 2003 compared to 2002 caused
year-to-date operating expenses in the Elmore segment to be up $0.8 million in
the first six months of 2003 compared to the first six months of 2002.
For the second quarter of 2003, consolidated operating income from continuing
operations was $10.3 million, a 27.8% decrease from operating income from
continuing operations of $14.3 million in the second quarter of 2002. The
previously mentioned unanticipated excess costs in the Elmore operation were a
significant reason for the shortfall, as the tunneling segment dropped 60.9% to
$1.0 million from $2.5 million in the second quarter of 2002. In addition,
project execution and a decrease in the amount of work available on Kinsel
contracts decreased operating income from $2.4 million in the second quarter of
2002 to a $0.1 million operating loss attributable to Kinsel in the second
quarter of 2003. Performance problems in some domestic rehabilitation units,
including Kinsel, combined with the increase in casualty, workers compensation
and healthcare claims, write-offs of obsolete small diameter equipment and
inventory, and bad debt expense drove operating income down 27.8% in the
rehabilitation segment in the second quarter of 2003 compared to the second
quarter of 2002. The TiteLiner segment turned a $0.1 million operating loss in
the second quarter of 2002 into a $0.7 million operating income gain in the
second quarter of 2003. The turnaround in TiteLiner is predominantly due to
United States' operations returning to normal financial health in 2003 after
suffering abnormally low operating results in 2002, especially in the first half
of the year. For the first six months of 2003, operating income from continuing
operations was $21.5 million, a 15.8% decrease from operating income from
continuing operations of $25.5 million in the second quarter of 2002. During the
first six months of 2003, tunneling and rehabilitation fell short of 2002
operating income by 44.6% and 15.2%, respectively. TiteLiner's operating income
was up $1.1 million, or 176.5%, during the first six months of 2003 compared to
2002.
Interest expense in the second quarter of 2003 was $2.2 million, up 32.4%
compared to second quarter 2002 interest expense of $1.6 million. Although
interest rates have declined in the second quarter of 2003 compared to 2002, the
Company financed an additional $65 million in Senior Notes in April 2003,
resulting in an overall increase in interest expense. Interest expense for the
first six months of 2003 was $3.4 million, down 12.0% from $3.8 million in the
first six months of 2002, a reflection of the lower interest rates on the
Company's line of credit in the first six months of 2003 and a lower balance in
the second quarter of 2003. The Company incurred $0.2 million in other expenses,
down from $0.3 million in other income in the second quarter of 2002. For the
first six months of 2003, other income was down 69.1% to $0.2 million from $0.8
million in the first half of 2002. Much of this decrease is due to reduced
interest income earned on cash balances as a result of declining interest rates.
The effective tax rate for the first six months of 2003 was 39.0% compared to
38.3% for the first six months of 2002.
Income from continuing operations was $4.9 million for the second quarter of
2003, or $0.18 per diluted share, down 40.8% from $8.2 million in income from
continuing operations for the second quarter of 2002, or $0.31 per diluted
share, due to the factors described previously. Discontinued operations lost
$0.3 million in the second quarter of 2003, an improvement from the $0.9 million
loss in the second quarter of 2002. Resulting net income was $4.6 million for
the
14
second quarter of 2003, or $0.17 per diluted share, down 37.3% from $7.3 million
in net income for the second quarter of 2002. For the six months ended June 30,
2003, income from continuing operations was down 20.7% to $11.2 million, or
$0.42 per diluted share, from $14.2 million in the first six months of 2002, or
$0.53 per diluted share. The loss from discontinued operations during the first
six months of 2003 was substantially zero, while the loss from discontinued
operations in the first six months of 2002 was $2.5 million, or $0.09 per
diluted share. Net income was $11.2 million, or $0.42 per diluted share, down
3.6% from $11.6 million in the first six months of 2002, or $0.43 per diluted
share.
Based on current economic conditions, uncertainty still remains about the levels
of municipal spending for the remainder of 2003 and fiscal 2004. Orders during
the second quarter of 2003 were relatively strong, particularly in the domestic
CIPP business where orders exceeded revenues by 26.9%. However, the distribution
of backlog is not even. One of the domestic CIPP units, Kinsel, and the Elmore
division of Affholder face sub-optimal backlog levels. At June 30, 2003, the
Company eliminated all remaining Jacksonville Electric Authority term contract
backlog due to changes in planned releases from the customer. These units will
continue to confront the challenges posed by their backlog positions for the
balance of the year.
BACKLOG
In addition to the Company's decision not to give specific earnings guidance for
the third and fourth quarters of 2003, the Company has decided to discontinue
voluntary disclosure of backlog balances for the remainder of the year. See
preceding paragraph for narrative commentary on the Company's backlog situation.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents at June 30, 2003 totaled $117.6 million, an increase
of $42.2 million from the December 31, 2002 balance of $75.4 million. Continuing
operations contributed $29.2 million in operating cash flow during the first six
months of 2003, with working capital changes comprising $8.5 million of this
amount. This is a 76.0% increase compared to operating cash flow from continuing
operations of $16.6 million in the first six months of 2002. Operating cash flow
benefited from accelerated collections during the second quarter, specifically
in the tunneling segment where production on large projects began generating
strong cash flow. These receivables had been classified as costs in excess of
billings in recent prior quarters. Discontinued operations used $1.3 million of
cash in the first six months of 2003 compared to a contribution of $1.8 million
in the first six months of 2002.
The Company decreased spending on investing activities by 72.2% in the first
half of 2003 to $4.6 million from $16.5 million in the first six months of 2002.
Decreased capital asset acquisitions and the purchase of Elmore in the second
quarter of 2002 were the primary reasons for the difference. The Company spent
$5.7 million on capital assets during the first half of 2003 compared to $11.6
million in the first half of 2002, a 50.4% decline in spending. However, due to
the planned expansion of the Company's manufacturing facility in Batesville,
Mississippi, the Company expects an increase in capital expenditures for the
second half of the year, resulting in total capital expenditures for the year
ending December 31, 2003 that are consistent with recent years. The Company
spent $0.3 million in purchasing certain identifiable assets from Sewer
Services, Ltd. in the first half of 2003 while it paid $8.5 million for Elmore
last year. The Company received $18.0 million in cash from financing activities
in the first six months of 2003, up significantly from the use of $13.0 million
in the first half of 2002. The primary cause of the increase in cash from
financing activities was $65 million provided by the Company's new Senior Notes
issued during the second quarter of 2003. Additionally, the Company paid down
its long-term debt by $19.3 million and paid $25.8 million towards the line of
credit in the six months ended June 30, 2003.
The Company did not purchase shares of its own stock in the second quarter of
2003 due to overlapping blackout periods. During the second quarter of 2002, the
Company purchased 100,000 shares of its stock. During the first six months of
2003, the Company has purchased 110,000 shares of its own stock for $1.4 million
compared to 200,000 repurchased shares in the first six months of 2002 for $4.4
million. On a cumulative basis, the Company has spent $74.0 million to
repurchase 3,919,615 shares through June 30, 2003 since the inception of the
stock repurchase program originally authorized in 1998. In April 2003, the
Company indefinitely extended its repurchase program, which was due to expire in
June 2003. Repurchased shares are held as treasury stock until reissued.
Trade receivables and retainage totaled $112.7 million at June 30, 2003, up 5.7%
from December 31, 2002 trade receivables and retainage of $106.7 million. The
increase is primarily a result of the movement of unbilled receivables to trade
receivables in the tunneling segment based on production cycle. Based on the
percentage of completion method of revenue recognition, typically, work is
started on large jobs and substantial costs are incurred with no revenue
recognized, as was the case on three large tunneling jobs in Dallas, Chicago,
and St. Louis in late 2002. As production continues, these revenues are
generated and the receivable is moved into trade receivables. The tunneling
segment has also seen accelerated collection of much of these receivables as
well. This is evident in the fact that costs and estimated earnings in
15
excess of billings in the tunneling segment decreased 68.1% from December 31,
2002 to $6.9 million at June 30, 2003. On a consolidated basis, costs and
estimated earnings in excess of billings were down 34.7% to $24.0 million at
June 30, 2003 from $36.7 million at December 31, 2002.
Effective March 27, 2003, the Company entered into a new three-year bank
revolving credit facility (the "Credit Agreement") to replace its expiring bank
credit facility. This new facility provides the Company with borrowing capacity
of up to $75 million. The quarterly commitment fee ranges from 0.2% to 0.3% per
annum on the unborrowed balance depending on the leverage ratio determined as of
the last day of the Company's preceding fiscal quarter. At the Company's option,
the interest rates will be either (i) the LIBOR plus an additional percentage
that varies from 0.75% to 1.5% depending on the leverage ratio or (ii) the
higher of (a) the prime rate or (b) the federal funds rate plus 0.50%. The
Company paid $40 million in principal towards the line of credit facility during
the second quarter of 2003. At June 30, 2003, the Company had unused committed
bank credit facilities under the Credit Agreement totaling $68.7 million and the
commitment fee was 0.20%. The remaining $6.3 million was utilized for
non-interest bearing letters of credit, the majority of which was collateral for
insurance. As of June 30, 2003, there was no borrowing on the credit facility
and therefore there is no applicable interest rate as rates are determined on
the borrowing date.
Under the Credit Agreement, the Company has certain debt covenant provisions
that require, among other things, a minimum fixed charge coverage ratio of 1.1
and a maximum leverage ratio of 2.25. The fixed charge coverage ratio was 1.34
at June 30, 2003 and 1.45 at March 31, 2003. The leverage ratio was 2.02 and
1.03 at June 30 and March 31, 2003, respectively. If the Company's net income
from continuing operations drops below $25 million for a twelve-month period,
the Company will be at risk of violating one, or both, of these covenant
restrictions. At June 30, 2003, the Company was in compliance with all debt
covenants under the Credit Agreement.
The Company's Senior Notes, Series A, due February 14, 2007, bear interest,
payable semi-annually in August and February of each year, at the rate per annum
of 7.88%. Each year, from February 2004 to February 2007, inclusive, the Company
will be required to make principal payments of $15.7 million, together with an
equivalent payment at maturity. On June 30, 2003, the principal amount of Senior
Notes, Series A, outstanding was $62.9 million.
On April 24, 2003, the Company placed an additional $65 million of Senior Notes,
Series 2003-A, with certain institutional investors through a private offering,
bringing the total Series A and Series 2003-A Senior Notes outstanding to $127.9
million at that date. The Senior Notes, Series 2003-A, are due April 24, 2013
and bear interest, payable semi-annually in April and October of each year, at a
rate of 5.29% per annum. The principal amount is due in a single payment on
April 24, 2013. The Senior Notes, Series 2003-A, may be prepaid at the Company's
option, in whole or in part, at any time, together with a make-whole premium.
Upon specified change in control events, each holder has the right to require
the Company to purchase its Senior Notes, Series 2003-A, without any premium
thereon. The proceeds of the Senior Notes, Series 2003-A, were used to pay off
the balance on the line of credit and to provide future liquidity.
The note purchase agreements pursuant to which the Senior Notes, Series A and
Series 2003-A, were issued, and the Credit Agreement, obligate the Company to
comply with certain financial ratios and restrictive covenants that, among other
things, place limitations on operations and sales of assets by the Company or
its subsidiaries, limit the ability of the Company to incur further secured
indebtedness and liens and of subsidiaries to incur indebtedness, and, in the
event of default, limit the ability of the Company to pay cash dividends or make
other distributions to the holders of its capital stock or to redeem such stock.
At June 30, 2003, the Company was in compliance with all debt covenants under
the note purchase agreements.
The Company believes it has adequate resources and liquidity to fund future cash
requirements for working capital, capital expenditures and debt repayments with
cash generated from operations, existing cash balances, additional short- and
long-term borrowing and the sale of assets.
On May 27, 2003, the Company granted 57,300 shares of restricted stock to
executives and key employees. The grant of restricted stock to executives is
contingent on meeting performance goals over a one-year period, and all
restricted stock is generally subject to a three-year service term before
vesting. The grant date fair value of these shares was $0.9 million. The value
of the restricted stock grant was added to additional paid-in capital at the
grant date, and an equal amount was established in unearned restricted stock
compensation. All restricted shares are expensed as compensation through the
service restriction term. On July 22, 2003, Anthony W. (Tony) Hooper resigned as
Chairman of the Board and Chief Executive Officer. Consequently, Mr. Hooper
forfeited 21,900 shares of restricted stock.
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
adoptionCompany is
16
required to make under existing contractual arrangements, such as
debt and lease agreements. These obligations may result from both general
financing activities as well as from commercial arrangements that are directly
supported by related revenue-producing activities. Commercial commitments
represent contingent obligations of FIN 46 will havethe Company, which become payable only if
certain pre-defined events were to occur, such as funding financial guarantees.
See Note 14 to the Consolidated Financial Statements included in the Company's
2002 Annual Report on Form 10-K for additional disclosure of financial
obligations and commercial commitments.
The following table provides a materialsummary of the Company's financial obligations
and commercial commitments as of June 30, 2003 (in thousands). This table
includes cash obligations related to principal outstanding under existing debt
arrangements and operating leases.
PAYMENTS DUE BY PERIOD
REMAINING
Cash Obligations* TOTAL 2003 2004 2005 2006 2007 THEREAFTER
- ----------------- ----- ---- ---- ---- ---- ---- ----------
Long-term debt** $134,270 $2,477 $16,994 $16,730 $16,582 $16,454 $65,033
Line of credit facility*** -- -- -- -- -- -- --
Operating leases 38,589 6,513 9,877 6,587 4,578 3,963 7,071
-------- ------ ------- ------- ------- ------- -------
Total contractual cash
obligations $172,859 $8,990 $26,871 $23,317 $21,160 $20,417 $72,104
======== ====== ======= ======= ======= ======= =======
*Cash obligations herein are not discounted and do not include related interest.
See Notes 10 and 11 to the Consolidated Financial Statements regarding
commitments and contingencies and debt issued, respectively.
**On April 24, 2003, the Company placed an additional $65 million of Senior
Notes, Series 2003-A, with principal due in a single payment on April 24, 2013.
See Note 11 to the Consolidated Financial Statements for additional discussion
regarding the Senior Notes.
***Effective March 27, 2003, the Company entered into a new three-year bank
revolving credit facility to replace its expiring bank credit facility. The
Company uses the credit facility for short-term borrowing and discloses amounts
outstanding as a current liability. See Note 11 to the Consolidated Financial
Statements for additional discussion regarding the credit facility.
NEW ACCOUNTING PRONOUNCEMENTS
See Note 12 to the Consolidated Financial Statements for discussion of new
accounting pronouncements and their impact on its future consolidated financial statements.the Company.
MARKET RISK
The Company is exposed to the effect of interest rate changes and foreign
currency fluctuations. Due to the immateriality of potential impacts from
changes in these rates, the Company does not use derivative contracts to manage
these risks.
15
INTEREST RATE RISK
The fair value of the Company's cash and short-term investment portfolio at March 31,June
30, 2003 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
maintains fixed rate debt as a percentage of its net debt in a percentage range
set by policy. The impact to earnings and cash flows from a hypothetical 10%
decrease in the Company's debt specific borrowing rates at March 31,June 30, 2003 was not
material.
FOREIGN EXCHANGE RISK
The Company operates subsidiaries, and is associated with licensees and
affiliates operating solely in countries outside of the United States, and in
currencies other than the U.S. dollar. Consequently, these operations are
inherently exposed to risks associated with fluctuation in the value of the
local currencies of these countries compared to the U.S. dollar. The effect of a
hypothetical adverse change of 10% in exchange rates (a strengthening of the
U.S. dollar) was immaterial and would be largely offset by cash activity.
17
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 also has exposure under performance guarantees by contractual joint
ventures and indemnification of its bonding agent and licensees. However, the
Company has never experienced any material adverse effects to financial
position, results of operations or cash flows relative to these arrangements.
The Company has no other off-balance sheet financing arrangements or
commitments.
MANAGEMENT CHANGES
Effective April 1, 2003, Thomas S. Rooney, Jr. was named President and Chief
Operating Officer, reporting to Anthony W. (Tony) Hooper, who remainsremained Chairman
of the Board and Chief Executive Officer. Effective July 22, 2003, Anthony W.
(Tony) Hooper resigned as Chairman of the Board and Chief Executive Officer.
Effective on that same date, the Company's board of directors named Thomas S.
Rooney, Jr. as Chief Executive Officer. Mr. Rooney retained the responsibilities
of his previous position and was elected as a new member to the board of
directors. The new position was createdCompany expects to lead allrecord associated severance costs of
approximately $1.2 million during the third quarter of 2003.
Also effective July 22, 2003, Alfred L. Woods, an independent member of the
Company's operating segments, which now report directly to Mr. Rooney. The
additionboard of Mr. Rooney, who has over 20 years of experience with large
construction companies, brings additional strength to the management team and
will aid in the integration and developmentdirectors, was elected non-executive Chairman of the Board.
Mr. Woods has been an independent member of Insituform's board since 1997. He
has served as chair of the Corporate Governance & Nominating Committee and as a
member of the Compensation Committee. He is president of Woods Group, a
management consulting company based in Williamsburg, Virginia.
Effective July 31, 2003, Carroll W. Slusher resigned his position as the
Company's business units.Vice President - North America.
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
(a) Within the 90 days prior to the date of this report (the
"Evaluation Date"), theThe 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 the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15(d)-14(c)). Based on that evaluation, these officers have concluded that
as of the Evaluation Date,June 30, 2003, the Company's disclosure controls and
16
procedures were
adequate and designed to ensureprovide reasonable assurance that material information
relating to the Company and the Company's consolidated subsidiaries would be
made known to them by others within those entities.
(b) There were no significant changes in the Company's internal controls over financial
reporting that occurred during the Company's fiscal quarter ended June 30, 2003
that has materially affected, or in other factors that could significantlyis reasonably likely to materially affect, the
Company's internal controls subsequent to the Evaluation Date.
17control over financial reporting.
18
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In January 2003,There have been no material changes since the Company received notice of multiple claims, totaling more
than $3.5 million, from the buyerfiling of the former Kinsel wastewater treatment
division. The claims arise outCompany's Form 10-Q
for the period ended March 31, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's Annual Meeting of Stockholders held on May 29, 2003,
stockholders elected the following persons as directors of the January 2002 saleCompany:
WITHHOLD
FOR AUTHORITY
--- ---------
Robert W. Affholder 25,429,555 124,040
Paul A. Biddelman 25,404,948 148,647
Stephen P. Cortinovis 25,430,538 123,057
John P. Dubinsky 25,406,038 147,557
Juanita H. Hinshaw 25,405,828 147,767
Anthony W. Hooper 25,357,423 196,172
Thomas N. Kalishman 25,430,029 123,566
Sheldon Weinig 25,404,198 149,397
Alfred L. Woods 25,430,076 123,519
In addition, at the Company's Annual Meeting of Stockholders, stockholders voted
in favor of the Kinsel
wastewater treatment divisionfollowing proposals:
WITHHOLD
FOR AUTHORITY ABSTAIN
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Approve and adopt amendment to and 24,525,441 614,257 413,897
restatement of the 2001 Non-Employee
Director Equity Incentive Plan (1)
Approve and adopt amendment to and 20,379,744 4,771,737 402,114
restatement of the 2001 Employee Equity
Incentive Plan (2)
(1) The amendment and alleged the valuationrestatement of the assets sold was
overstated. No litigation was commenced. The Company negotiated a settlement,
without litigation, during2001 Non-Employee Director Equity
Incentive Plan expanded the first quarter of 2003 between the Company and
the purchasersterms of the wastewater treatment plant operations.plan to permit the award of stock units
to non-employee directors.
(2) The Company is involved in certain litigation incidental to the conduct of its
businessamendment 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 liquidityrestatement of the Company.2001 Employee Equity Incentive Plan
increased the number of shares available for issuance under the plan from
1,000,000 to 2,000,000.
There were no broker non-votes at this year's Annual Meeting of Stockholders.
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 March 12, 2003, the Company filed a Current Report on Form 8-K,
under Item 9, to provide the Company's press release, dated March 12, 2003,
announcing the creation of a Chief Operating Officer position. In addition, on April 25, 2003, the Company filed a Current Report on Form 8-K,
under Item 9 and pursuant to Item 12, to provide the Company's earnings release,
dated April 24, 2003, announcing its financial results for the fiscal quarter
ended March 31, 2003. The Company also filed a Current Report on Form 8-K on May
1, 2003, under Item 9 and pursuant to Item 12, to provide a transcript of its
April 25, 2003 conference call held to announce and discuss its financial
results for the fiscal quarter ended March 31, 2003.
18On June 19, 2003, the Company filed a Current Report on Form 8-K,
under Item 9, to provide the Company's press release, dated June 19, 2003,
announcing an agreement to acquire the rehabilitation business of Insituform
East, Inc. On July 14, 2003, the Company filed a Current Report on Form 8-K,
under Item 9 and pursuant to Item 12, to provide the Company's press release,
dated July 9, 2003, announcing that it lowered its guidance for the second
quarter of 2003, and to provide a transcript of the Company's July 10, 2003
conference call held to announce and discuss that it lowered its guidance for
the second quarter of 2003. On July 24, 2003, the Company filed a Current Report
on Form 8-K, under Item 5, regarding the issuance of the Company's press
release, dated July 22, 2003, concerning the election of Thomas S. Rooney, Jr.,
President and Chief Operating Officer, as Chief Executive Officer and a member
of the board of directors,
19
and the election of Alfred L. Woods, an independent member of the Company's
board of directors, as Non-executive Chairman of the Board. The Company also
filed a Current Report on Form 8-K on July 30, 2003, under Item 12, to provide
the Company's press release, dated July 24, 2003, announcing its financial
results for the fiscal quarter ended June 30, 2003, and to provide a transcript
of the Company's July 25, 2003 conference call held to announce and discuss its
financial results for the fiscal quarter ended June 30, 2003.
20
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 15,August 14, 2003 /s/ Joseph A. White
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Joseph A. White
Vice President - Chief Financial Officer
Principal Financial and Accounting Officer
19
CERTIFICATIONS
I, Anthony W. Hooper, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Insituform
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Anthony W. Hooper
---------------------------------------
Anthony W. Hooper
Chairman and Chief Executive Officer
20
I, Joseph A. White, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Insituform
Technologies, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/ Joseph A. White
------------------------------------------
Joseph A. White
Vice President and Chief Financial Officer
21
INDEX TO EXHIBITS
10.1 Note Purchase Agreement (the "Note Purchase Agreement") dated as of
April 24, 2003 among the Company and each of the lenders listed
therein.
10.23.1 Amended and Restated IntercreditorBy-Laws of the Company, as amended through July 22,
2003.
10.1 Executive Separation Agreement datedand Release effective as of April 24,July 22, 2003
among Bank of America, N.A.by and the Noteholders.
10.3 Employment Letter dated March 7, 2003 between the Company and Anthony W. Hooper. (1)
10.2 Employee Separation Agreement and Release effective as of July 1, 2003 by
and between the Company and Carroll W. Slusher. (1)
31.1 Certification of Thomas S. Rooney, Jr. (1)
99.1pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Anthony W. HooperJoseph A. White pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of Thomas S. Rooney, Jr. pursuant to 18 U.S.CU.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.232.2 Certification of Joseph A. White pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(1) Management contract or compensatory plan or arrangement.
22