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 September 30, 1998
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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
incorporation or organization) Identification No.)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
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(Address of Principal Executive Offices)
(314) 530-8000
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(Registrant's telephone number including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practicable
date.
Class Outstanding at November 1, 1998
- -------------------------- ---------------------------------
Class A, Common Stock, 26,388,501 Shares
$0.01 par value
INDEX
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Part I Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 11
Part II Other Information and Signatures:
Item 1. Legal Proceedings 19
Item 5. Other Information 19
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Index to Exhibits 23
PART I. - FINANCIAL INFORMATION
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ITEM 1. - FINANCIAL STATEMENTS
-------------------------------
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
September 30, 1998 December 31, 1997
------------------ -----------------
ASSETS
CURRENT ASSETS
--------------
Cash and cash equivalents $54,845 $45,734
Trade receivables, less allowance
for doubtful accounts of $2,744
and $2,587, respectively 51,195 58,660
Costs and estimated earnings in excess
of billings 18,124 15,551
Retainage under construction contracts 13,560 14,480
Refundable income taxes 1,408 2,517
Inventories 11,891 12,214
Deferred income taxes 5,645 5,439
Prepaid expenses and other 6,048 6,678
-------- --------
TOTAL CURRENT ASSETS 162,716 161,273
-------- --------
PROPERTY AND EQUIPMENT, less accumulated
depreciation 57,045 57,983
-------- --------
OTHER ASSETS
- ------------
Goodwill, less accumulated amortization of
$14,616 and $12,483, respectively 57,807 54,133
Patents and patent applications, less
accumulated amortization of $4,918 and
$4,496, respectively 11,923 11,610
Investments in licensees and affiliated
companies 5,121 5,499
Non-compete agreements, less accumulated
amortization of $4,974 and $4,282,
respectively 1,052 1,744
Other 4,548 5,610
-------- --------
TOTAL OTHER ASSETS 80,451 78,596
-------- --------
TOTAL ASSETS $300,212 $297,852
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
September 30, 1998 December 31, 1997
------------------ -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES
-------------------
Notes payable to banks $1,179 $1,231
Accounts payable 38,456 41,698
Income taxes payable 1,535 3,172
Current maturities of long-term debt 2,291 889
-------- --------
TOTAL CURRENT LIABILITIES 43,461 46,990
LONG-TERM DEBT, less current maturities 112,286 111,440
DEFERRED INCOME TAXES 3,225 3,258
OTHER LIABILITIES 1,088 1,017
-------- --------
TOTAL LIABILITIES 160,060 162,705
-------- --------
MINORITY INTERESTS 3,511 3,645
-------- --------
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, undesignated, $.10 par -
shares authorized 2,000,000; none
outstanding 0 0
Common stock, $.01 par - shares authorized
40,000,000; shares outstanding 27,293,967
and 27,214,718 273 272
Additional paid-in capital 68,892 68,119
Retained earnings 81,489 68,468
-------- --------
150,654 136,859
Treasury stock, 836,401 shares (11,175) (3,269)
Cumulative foreign currency translation
adjustments (2,838) (2,088)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 136,641 131,502
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $300,212 $297,852
======== ========
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Rehabilitation revenue $81,047 $85,490 $220,308 $237,888
Cost of rehabilitation 54,664 59,911 147,597 169,397
------ ------ ------- -------
Gross profit 26,383 25,579 72,711 68,491
Operating costs and expenses:
- -----------------------------
Selling, administrative and
general 13,241 14,222 40,369 43,287
Strategic marketing and product
development 1,358 1,691 4,287 5,130
Unusual items 0 0 0 3,845
------ ------ ------- -------
Total operating costs and expenses 14,599 15,913 44,656 52,262
------ ------ ------- -------
Operating income 11,784 9,666 28,055 16,229
Other expense:
- --------------
Interest expense (2,312) (2,250) (6,868) (6,430)
Other income (expense) 701 (516) 2,011 131
------ ------ ------- -------
Total other expense (1,611) (2,766) (4,857) (6,299)
------ ------ ------- -------
Income before taxes on income 10,173 6,900 23,198 9,930
Taxes on income 4,094 2,814 9,263 4,119
------ ------ ------- -------
Income before minority interests
and equity in earnings 6,079 4,086 13,935 5,811
Minority interests in net income (331) 72 (581) (379)
Equity in earnings of affiliated
companies (182) 124 (333) 370
------ ------ ------- -------
Income before extraordinary item 5,566 4,282 13,021 5,802
Extraordinary item - loss on early
retirement of debt 0 0 0 (225)
------ ------ ------- -------
Net income $5,566 $4,282 $13,021 $5,577
====== ====== ======= =======
(continued)
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except share amounts)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Basic and diluted earnings per share:
Income before extraordinary item $0.21 $0.16 $0.48 $0.22
Extraordinary loss, net of income
tax benefits 0 0 0 (0.01)
------ ------ ------- -------
Net income $0.21 $0.16 $0.48 $0.21
====== ====== ======= =======
Weighted average common shares 26,780 26,928 26,905 26,918
====== ====== ======= =======
Weighted average common and
equivalent shares 27,113 26,965 27,149 26,956
====== ====== ======= =======
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months
Ended September 30,
1998 1997
---- ----
Cash flows from operating activities:
- -------------------------------------
Net income $13,021 $5,577
Adjustments to reconcile net income to cash used by
operating activities:
Depreciation and amortization 15,294 14,196
Miscellaneous (438) (505)
Equity in earnings of affiliated companies 333 (370)
Minority interests 581 379
Deferred income taxes (200) 171
Changes in operating assets and liabilities,
net of assets acquired:
Receivables 6,519 (10,370)
Costs in excess of billings under construction (2,573) (5,003)
Inventories 476 2,809
Prepaid expenses and miscellaneous 677 (123)
Miscellaneous other assets 989 (587)
Accounts payable and accruals (3,986) 2,324
Income taxes payable (1,351) 1,517
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Net cash provided by operations 29,342 10,015
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Cash flows from investing activities:
- -------------------------------------
Capital expenditures (9,996) (12,594)
Proceeds on disposal of property and equipment 803 304
Purchases of businesses, net of cash acquired (1,444) 0
Investments in licensees/affiliated companies 76 0
Patents and patent applications (935) (1,602)
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Net cash used by investing activities (11,496) (13,892)
------- ------
(continued)
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months
Ended September 30,
1998 1997
---- ----
Cash flows from financing activities:
- -------------------------------------
Proceeds from issuance of common stock 774 213
Purchases of treasury stock (Note 3) (7,906) 0
Increase (decrease) in short-term borrowings (131) 274
Proceeds from issuance of long-term debt 0 110,056
Repayments of long-term debt (1,547) (85,073)
Minority interests 0 (75)
-------- --------
Net cash provided (used) by financing activities (8,810) 25,395
-------- --------
Effect of exchange rates changes on cash 75 (201)
-------- --------
Net increase in cash and cash equivalents for
the period 9,111 21,317
-------- --------
Cash and cash equivalents, beginning of period 45,734 13,476
-------- --------
Cash and cash equivalents, end of period $54,845 $34,793
======= ========
Supplemental disclosures of cash flows information:
- ---------------------------------------------------
1998 1997
---- ----
Cash paid during nine months ended September 30, for:
--------------------------------------------------
Interest $8,945 $5,644
Income taxes $9,079 $398
Non-cash investing and financing activities:
--------------------------------------------
Deferred consideration for business acquired
(Note 3) $3,571 $0
See accompanying summary of accounting policies and notes to consolidated
financial statements.
/TABLE
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1998
1. GENERAL
In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present
fairly the financial position as of September 30, 1998
(unaudited) and the unaudited results of operations and cash
flows for the nine months ended September 30, 1998 and 1997.
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 1997 Annual Report on Form
10-K.
The results of operations for the nine months ended
September 30, 1998 and 1997 are not necessarily indicative
of the results to be expected for the full year.
2. COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board
issued SFAS No. 130, "Reporting Comprehensive Income" which
establishes for reporting and disclosure of comprehensive
income and its components. Effective January 1, 1998, the
Company adopted SFAS No. 130. For the quarters ended
September 30, 1998 and 1997, comprehensive income was $5.4
million and $4.1 million, respectively. For the nine months
ended September 30, 1998 and 1997, comprehensive income was
$12.1 million and $4.7 million, respectively. The Company's
adjustment to comprehensive income consists solely of
cumulative foreign currency translation adjustments.
3. CURRENT EVENTS
In March 1998, the Company concluded the acquisition of the
entire minority interest in its Chilean subsidiary for an
aggregate purchase price of approximately $2.1 million, $1.0
million of which was paid in connection with closing, $0.6
million of which is due at the first anniversary of closing,
and the remainder of which is due on the second anniversary
of closing.
In July 1998, the Company announced that its Board of
Directors had authorized the repurchase of up to 2,700,000
shares of the Company's class A common stock, $.01 par
value, to be made from time to time over the next five years
in open market transactions. During the third quarter of
1998, the Company repurchased 580,600 shares.
In September 1998, the Company completed its acquisition of
80% of the shares (the "Initial Shares") of Video Injection
S.A.R.L. ("Video Injection"), a company that utilizes
multifunctional robotic devices developed by it in
connection with the inspection and repair of pipelines. The
purchase price for the Initial Shares was 28,000,000FF ($5.0
million), 13,500,000FF ($2.4 million) of which was paid at
closing, 7,020,000FF ($1.3 million) of which is due on the
first anniversary of closing and 7,480,000FF ($1.3 million)
of which is due on the second anniversary of closing, such
additional installments secured by the Company's letter of
credit arrangements. On the fifth anniversary of closing
(or earlier, in specified events), the Company will purchase
the remaining 20% of the shares of Video Injection pursuant
to a formula based on Video Injection's results of
operations. The Company has also obtained non-competition
agreements from the two principals of Video Injection (who
remain employed by Video Injection) that extend three years
beyond the period of employment.
4. LITIGATION
The Company is involved in certain litigation incidental to
the conduct of its business. In the Company's opinion, none
of these proceedings will have a material adverse effect on
the Company's financial position, results of operations and
liquidity. The financial statements include the estimated
amounts of liabilities that are likely to be incurred from
these and various other pending litigation and claims.
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 which have affected the Company's financial
condition and results of operations during the periods included
in the accompanying consolidated financial statements.
GENERAL
- -------
The Company's rehabilitation revenues derive primarily from
direct installation and other contracting activities, generated
by the Company's subsidiaries operating in the United States,
Canada, France, the United Kingdom, Chile, Argentina and Mexico,
and include product sales to, and royalties and license fees
paid by, the Company's 35 unaffiliated Insituform licensees and
sub-licensees and its seven unaffiliated NuPipe(R) licensees.
During the three years ended December 31, 1997, 1996 and 1995,
approximately 62.5%, 69.7% and 71.2%, respectively, of the
Company's consolidated revenues related to the Insituform(R)
process.
Fluctuations in the exchange rates between the United States
dollar and the currencies of other countries in which the
Company operates or has licensees may have an impact on the
Company's consolidated results during the relevant reporting
period. The Company intends to manage any such foreign currency
exposure in the context of discrete commercial transactions and,
when appropriate, to offset such exposure in whole or in part by
entering into foreign currency forward contracts, in order to
reduce the impact of such fluctuations on results of operations.
The Company does not anticipate that the circumstances in which
such hedging activity would be appropriate will have a material
effect on the Company's liquidity.
Statements contained in and preceding management's discussion
and analysis include various forward-looking information that is
based on data currently available to management and management's
beliefs and assumptions. When used in this report, 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, and the
Company's actual results may vary materially from those
anticipated, estimated or projected due to a number of factors,
including, without limitation, the competitive environment for
the Company's products and services, the geographical
distribution and mix of the Company's 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.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At September 30, 1998, the Company had $54.8 million in cash,
U.S. Treasury bills, and short-term investments, as compared to
$45.7 million at December 31, 1997. Cash and cash equivalents
increased $9.1 million primarily as a result of cash generated
from operations of $29.3 million offset somewhat by capital
expenditures of $10.0 million, and repurchases of the Company's
common stock in open market purchases of $7.9 million, pursuant
to the Company's announced stock repurchase program. The
Company's working capital ratio was 3.7-to-1.0 at September 30,
1998, representing an increase from 3.4-to-1.0 at December 31,
1997.
Operations provided cash of $29.3 million in 1998, as compared
to $10.0 million in the first nine months of 1997. The
principal reasons for the favorable increase were increased net
income in the first nine months of $7.4 million compared to the
first nine months of 1997, along with a favorable change in
working capital during 1998 of $0.7 million, compared to an
unfavorable change in 1997 of $9.4 million.
Trade receivables, together with costs and estimated earnings in
excess of billings and retainage under construction contracts,
decreased 6.5% to $82.9 million from $88.7 million at December
1997. This decrease was primarily attributable to strong
collections, along with a decrease in revenue volume in the
first nine months of 1998. The collection cycle for
construction receivables is generally longer than for the
Company's manufacturing and royalty operations due to provisions
for retainage, often 5% to 15% of the contract amount, as well
as the slow internal review processes often employed by the
construction subsidiaries' municipal customers. In the United
States, retainage receivables are generally received within 60
to 90 days after the completion of a contract.
Capital expenditures were $10.0 million for the nine months of
1998, compared to $12.6 million in 1997. During 1997, capital
expenditures reflected approximately $1.5 million related to
moving of the Company's corporate headquarters and the new
research and development center. Capital expenditures generally
reflect replacement equipment required by the Company's
contracting divisions. The Company anticipates expenditures of
approximately $2.5 million in connection with the installation
of an electronic data collection system in each of the Company's
North American rehabilitation operations during the course of
1998, of which $1.7 million was spent as of September 30, 1998.
In addition, the Company anticipates expenditures of
approximately $1.9 million in the fourth quarter of 1998 in
order to acquire additional tunneling equipment. In March 1998,
the Company completed construction of its new research and
development facility entailing a total cost of construction of
approximately $2.9 million, of which $0.5 million was spent in
the first nine months of 1998.
The Company has several information system improvement
initiatives underway that will require increased expenditures
during the next several years. These initiatives, which began
principally in 1997, include the aforementioned data collection
system from our field contracting units, and continual
accounting system upgrades and modifications. See "Year 2000"
below for information concerning the impact of year 2000 issues
on the Company's operations.
Financing activities used $8.8 million in the first nine months
of 1998, as compared to cash provided of $25.4 million in the
first nine months of 1997. In July 1998, the Company announced
that its Board of Directors had authorized the repurchase of up
to 2,700,000 shares of the Company's class A common stock, $.01
par value ("Common Stock"), to be made from time to time over
the next five years in open market transactions. The amount and
timing of purchases will be dependent upon a number of factors,
including the price and availability of the Company's shares,
general market conditions and competing alternative uses of
funds, and may be discontinued at any time. During the third
quarter of 1998, the Company repurchased 580,600 shares at a
cost of $7.9 million. The repurchased shares will be held as
treasury stock.
In February 1997, the Company completed the sale, in a private
transaction, of $110 million principal amount of its 7.88%
Senior Notes Series A, due February 14, 2007 (the "Senior
Notes"), approximately $85 million of which was applied at
closing to the refinancing of outstanding indebtedness of the
Company. In 1998, the Company made principal payments totaling
$1.5 million relating to the Company's existing debt.
The Senior Notes bear interest, payable semi-annually in August
and February of each year, at the rate per annum of 7.88%. Each
year, from February 2001 to February 2006, inclusive, the
Company will be required to make principal payments of $15.7
million, together with an equivalent payment at maturity. The
Senior Notes may be prepaid at the Company's option, in whole or
in part, at any time, together with a make whole premium, and
upon specified change in control events each holder has the
right to require the Company to purchase its Senior Note without
any premium thereon. To the extent not utilized to refinance
indebtedness, proceeds of the sale of the Senior Notes are
available for general corporate purposes, including possible
acquisitions of products, technologies and businesses and
repurchases of Common Stock. Other than its stock repurchase
program announced in July 1998, the Company has not reached any
determination with respect to any such transaction, and there
can be no assurance that any such transaction will be
undertaken.
In August 1997, the Company entered into a credit agreement (the
"Credit Agreement"), whereby the lender will make available to
the Company, until September 1, 2000 (the "Maturity Date"), a
revolving credit line of up to $20,000,000 aggregate principal
amount for working capital and permitted acquisitions, including
amounts available for standby and commercial letters of credit.
Interest on outstanding advances accrues, at the election of the
Company, at either the lender's prime rate, payable monthly, or
its LIBOR rate, plus a margin ranging from .5% to 1.5% depending
on the maintenance of certain financial ratios, payable at the
end of selected interest periods (from one to six months).
Outstanding principal is subject to repayment on the Maturity
Date, except that advances for permitted acquisitions must be
repaid within six months after disbursement.
The note purchase agreements pursuant to which the Senior Notes
were acquired, and the Credit Agreement, obligate the Company to
comply with certain financial ratios and restrictive covenants
that, among other things, place limitations on operations and
sales of assets by the Company or its subsidiaries, and 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. The Credit Agreement
also obligates certain of the Company's domestic subsidiaries to
guaranty the Company's obligations, as a result of which the
same subsidiaries have also delivered their guaranty with
respect to the Senior Notes.
In March 1998, the Company completed the acquisition of the
entire minority interest (40%) in its Chilean subsidiary for an
aggregate purchase price of approximately $2.1 million, $1.0
million of which was paid in connection with closing, $0.6
million of which is due at the first anniversary of closing, and
the remainder of which is due on the second anniversary of
closing.
In September 1998, the Company completed its acquisition of 80%
of the shares of Video Injection, a company that utilizes
multifunctional robotic devices developed by it in connection
with the inspection and repair of pipelines. The purchase price
for the Initial Shares was 28,000,000FF ($5.0 million),
13,500,000FF ($2.4 million) of which was paid at closing,
7,020,000FF ($1.3 million) of which is due on the first
anniversary of closing and 7,480,000FF ($1.3 million) of which
is due on the second anniversary of closing, such additional
installments secured by the Company's letter of credit
arrangements. On the fifth anniversary of closing (or earlier,
in specified events), the Company will purchase the remaining
20% of the shares of Video Injection pursuant to a formula based
on Video Injection's results of operations. The Company has
also obtained non-competition agreements from the two principals
of Video Injection (who remain employed by Video Injection) that
extend three years beyond the period of employment.
Management believes its current working capital will be adequate
to meet its requirements for the foreseeable future.
RESULTS OF OPERATIONS
- ---------------------
Three and Nine Months Ended September 30, 1998 and 1997
Total rehabilitation revenues for the third quarter decreased
5.3% to $81.0 million from $85.5 million in 1997, while revenues
for the first nine months of 1998 decreased 7.4% to $220.3
million from $237.9 million in the prior year. The primary
reason for the decrease for the third quarter was decreased
volume from the Company's corrosion and abrasion operations in
the United States and Latin America. For the nine months, this
decrease was coupled with lower volume from the Company's North
American pipeline rehabilitation operations, primarily due to
the elimination of non-core projects, such as cleaning and
inspection. In addition, there was a decrease in volume from
the Company's pipeline rehabilitation operations in the United
Kingdom, as a result of lower workable backlog during the first
quarter of 1998, caused by a shift in the release of project
work into the second and third quarters. As a result of the
management committee composition of Midsouth Partners, the
Company began accounting for its investment therein on an equity
basis beginning in April 1997, which resulted in revenue of $0.3
million in 1998, compared to $2.0 million in 1997 during which
Midsouth's results were consolidated with the Company.
The Company's gross profit from rehabilitation during the third
quarter increased 3.1% to $26.4 million from $25.6 million in
the comparable period in 1997, while for the first nine months
of 1998, gross profit increased 6.1% to $72.7 million from $68.5
million in 1997. This increase was primarily due to improved
gross profit from the Company's North American and European
pipeline rehabilitation operations, offset somewhat by a
decrease in gross profit from the Company's corrosion and
abrasion operations due to an overall volume decrease.
The overall gross profit margin achieved in the third quarter of
1998 was 32.6% versus 29.9% in the third quarter of 1997, while
for the first nine months of 1998, the gross profit margin was
33.0%, compared to 28.8% in 1997. This increase was primarily
due to improvements made in productivity and efficiency in the
Company's pipeline rehabilitation operations. Much of this
improvement came as a result of extensive reorganization during
1997, where management rationalized field crews and equipment
throughout the organization. In addition, in 1998, more
projects with favorable margins were undertaken, as a result of
the elimination of lower margin non-core projects, such as
cleaning and inspection, along with improved pricing on core
pipeline rehabilitation projects.
For the third quarter, selling, administrative and general
expenses decreased 7.0% to $13.2 million from $14.2 million in
1997, while for the first nine months of 1998, selling,
administrative and general expenses decreased 6.7% to $40.4
million from $43.3 million in the first nine months of 1997.
This decrease was due to cost savings gained from the
reorganization of the Company's pipeline rehabilitation
operations through elimination of positions, facilities, and
realignment of responsibilities, along with the consolidation of
the Company's headquarters in Chesterfield, Missouri. As a
percentage of revenues, selling, administrative and general
expenses decreased in the third quarter to 16.3% from 16.6% in
1997. This decrease was primarily attributable to the foregoing
reasons, offset somewhat by lower revenue volume in 1998. For
the first nine months of 1998, selling, administrative and
general expenses as a percentage of revenues increased to 18.3%
from 18.2%. This slight increase was due primarily to lower
volume in 1998.
For the third quarter, strategic marketing and product
development costs decreased 17.6% to $1.4 million from $1.7
million in 1997. For the first nine months of 1998, strategic
marketing and product development costs decreased 15.7% to $4.3
million from $5.1 million in the first nine months of 1997.
This decrease was primarily attributable to controlled spending
in marketing, along with decreased personnel in engineering,
offset somewhat from increased research and development costs.
During the second quarter of 1997, the Company recorded in
operating expense an unusual item of $3.2 million for employee
severance and moving employees and offices related to the
restructuring of its corporate headquarters and related
facilities, which did not recur in the current year. In
addition, the Company accrued $0.6 million (prior to any effect
of taxes) in the second quarter of 1997, with respect to
non-recurring expenses attendant to activities leading to the
settlement agreement entered into in July 1997 with a group,
including two directors of the Company, who had stated their
intention to propose a slate of individuals to run for election
to the Board of Directors of the Company in opposition to the
slate proposed by the Company.
Interest expense for the third quarter of 1998 and 1997 was
virtually the same, while, for the first nine months, interest
expense increased 7.8% to $6.9 million from $6.4 million due
primarily to the effect of borrowings resulting from the Senior
Note financing completed in February 1997.
In the third quarter of 1998, taxes on income increased to $4.1
million from $2.8 million in 1997 due principally to the
increase in income before taxes on income of $3.3 million from
the third quarter of 1997. In the first nine months of 1998,
taxes on income increased to $9.3 million from $4.1 million due
principally to the increase in income before taxes on income of
$13.3 million from the first nine months of 1997.
In February 1997, as a result of the closing of the Senior Note
financing, certain previous debt facilities were retired. Costs
of $0.4 million ($0.2 million after-tax benefits) associated
with these debt facilities which were capitalized, such as
commitment fees and legal costs, were written off. This expense
was classified as extraordinary in the Company's results of
operations for the first quarter of 1997.
As a result of the foregoing, net income for the third quarter
of 1998 was $5.6 million, representing a 6.9% return on revenue,
compared to $4.3 million in the third quarter of 1997, when a
5.0% return on revenue was achieved. Net income for the first
nine months of 1998 was $13.0 million, or a 5.9% return on
revenue, compared to $5.6 million in the first nine months of
1997, when a 2.3% return was achieved.
YEAR 2000
- ---------
The "year 2000" problem relates to computer systems that have
time and date-sensitive programs that were designed to read
years beginning with "19," but may not properly recognize the
year 2000. If a computer system or software application used by
the Company or a third party dealing with the Company fails
because of the inability of the system or application to
properly read the year "2000," the results may adversely effect
the Company.
Accordingly, the Company is reviewing its internal computer
programs and systems to ensure year 2000 compliance. During its
current fiscal year, the Company has established a project team
to address year 2000 risks facing the Company, and its customers
and suppliers. The project team will coordinate the
identification and implementation of changes to computer
hardware and software applications that will attempt to ensure
the availability and integrity of the Company's information
systems, and the reliability of its operational systems and
manufacturing processes.
The project team is in the process of identifying Company sites
and entities that may harbor assets at risk, collecting
pertinent information, establishing year 2000 disposition
strategies and assessing and reporting risks. The Company's
project team will provide consulting services where needed in
the areas of project planning and estimating, testing and
technical issues, and will run remedial projects as appropriate.
The Company has also engaged an internationally recognized
consulting firm to conduct an independent review of its year
2000 risks or estimates.
In addition, the Company faces risk to the extent that suppliers
of products services and systems purchased by the Company and
others with whom the Company transacts business on a worldwide
basis do not comply with year 2000 requirements. The Company's
project team has initiated formal communications with
significant suppliers and customers to determine the extent to
which the Company is vulnerable to failure by third parties to
remediate their own year 2000 issues. The Company's strategy
will entail proactive compliance assessment in the case of its
principal customers and suppliers.
The Company expects to complete its year 2000 project during
1999 and, based on information collected on a preliminary basis,
presently believes that its computer systems will be year 2000
compliant in a timely manner. However, while the estimated cost
of the Company's efforts is not expected to be material to the
Company's financial position or any year's results of
operations, there can be no assurance to this effect. Based on
management's current assessment that no material exposure to
significant business interruption exists, the Company has not
adopted any formal contingency plan in the event its year 2000
project is not completed in a timely manner, or in the event
unforeseen difficulties arise. The Company will appropriately
modify its strategy as additional circumstances come to its
attention, but there can be no assurance that the Company will
timely identify and remediate all significant year 2000
problems, and that remedial efforts will not involve significant
time and expense, or that such problems will not have a material
adverse effect on the Company's business, results of operations
or financial position.
ACCOUNTING PRONOUNCEMENTS
- -------------------------
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which
establishes reporting requirements related to a business's
operating segments, products and services, geographic areas of
operations and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, and does not
apply to interim financial statements in the year of adoption.
The Company will adopt SFAS No. 131 for the fiscal year ended
December 31, 1998. The Company does not expect SFAS No. 131 to
have a significant impact on its consolidated financial
statements and the related disclosures.
PART II. - OTHER INFORMATION
----------------------------
Item 1. Legal Proceedings
-----------------
Cat Proceeding. On September 2, 1998, in previously
reported legal proceedings initiated by the Company against Cat
Contracting, Inc. ("Cat"), Michigan Sewer Construction Company
("Michigan"), Inliner U.S.A. ("Inliner") and Kanal Sanierung
Hans Muller GmbH & Co., the United States District Court for the
Southern District of Texas issued its opinion and ruling as to
damages sustained by the Company for infringement. The court
awarded to the Company damages in the amount of approximately
$21.9 million for use of both multiple cups and multiple
needles, consisting of reasonable royalties on work performed by
defendants Cat, Michigan and Inliner utilizing the Company's
patented processes and enhanced damages against Cat and Inliner
for willful infringement of the Company's serial vacuum
impregnation patent and prejudgment interest. In addition, the
court awarded to the Company recovery of its attorney's and
expert witness fees.
On September 10, 1998, the United States Court of
Appeals for the Federal Circuit issued its opinion affirming the
December 1996 determination of the lower court that Inliner's
multiple-cup process infringed the Company's serial vacuum
impregnation patent, but reversed the lower court and ruled that
Inliner's process involving the use of multiple needles for
impregnation of cured-in-place tubes did not infringe the
Company's patent. The Company's petition to the Court of
Appeals for reconsideration of the court's determination
regarding infringement of the multiple needle impregnation
method has been denied and the lower court is now permitting
discovery on the issue of when defendants and their licensees in
fact ceased using the multiple cup impregnation method. The
Company is considering its options regarding appeal of the Court
of Appeals' decision. At this time the Company is unable to
estimate what effect the findings in discovery will have on the
lower court's damage award, but the result may be a substantial
reduction in the amount of the damages ultimately awarded to the
Company. In addition, the Company is unable to predict the
likelihood of any recovery from defendants of amounts ultimately
awarded or whether defendants will elect to appeal any decision
awarding damages.
Item 5. Other Information
-----------------
Executive Arrangements. The Company has entered into
additional arrangements with William A. Martin, Senior Vice
President - Chief Financial Officer of the Company, and Robert
L. Kelley, Vice President - General Counsel of the Company,
supplementing the previously reported severance agreements
between them, respectively, and the Company entered into in June
1997.
In the case of Mr. Martin, such additional
arrangements provide that Mr. Martin's employment will continue
until 30 days after prior written notice delivered at any time
by either the Company or Mr. Martin, after which Mr. Martin will
be entitled to the severance benefits under the 1997 agreement
applicable to resignation for any reason during the 30-day
period following the anniversary of the events specified in the
agreement (which extended to the election of two members of the
Company's Board of Directors in October 1997 outside of the
Company's prior merger agreement with Insituform Mid-America,
Inc.). Such benefits include an amount, payable 30 days after
termination, equal to three times compensation (including base
salary and bonus, as defined, and accrued supplemental
retirement benefits), which has been fixed as if termination had
occurred on October 31, 1998, and coverage for a period of three
years under the Company's welfare plans (or equivalent
coverage), which will commence on the actual date of Mr.
Martin's termination. The Company anticipates that Mr. Martin
will continue as chief financial officer until a successor has
been appointed, which the Company is engaged in soliciting.
The Company and Mr. Kelley, whose 1997 severance
agreement contains terms comparable to those extended to Mr.
Martin, have agreed that their continuing discussions with
respect to substitute employment arrangements for Mr. Kelley are
without prejudice to any rights accrued under the existing
severance agreement in connection with timely termination by Mr.
Kelley during the 30-day period following the first anniversary
of the 1997 annual meeting.
Stockholder Proposals. Pursuant to amendments to Rule
14a-4(c) under the Securities Exchange Act of 1934, if a
stockholder who intends to present a proposal at the Company's
1999 annual meeting of stockholders does not notify the Company
of such proposal on or prior to March 20, 1999 (i.e., 45 days
prior to the first anniversary date of the mailing of the
Company's last proxy statement), then, in such event, the
management proxies would be allowed to use their discretionary
voting authority when the proposal is raised at the annual
meeting even though there is no discussion of the proposal in
the 1999 proxy statement. If the date of the 1999 annual
meeting of stockholders changes by more than 30 days from the
prior year, then the management proxies would be allowed to use
such discretionary authority with respect to such proposal if
notice of such proposal is not received by the Company a
reasonable time before the Company mails its proxy materials for
such meeting.
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) During the quarter ended September 30, 1998, the
Company filed: (i) a Current Report on Form 8-K dated July 6,
1998, which, under "Item 5. Other Events" thereunder, reported
the authorization of the Company's stock repurchase program
relating to up to 2,700,000 shares of Common Stock, to be made
from time to time over the next five years in open market
transactions; (ii) a Current Report on Form 8-K dated July 15,
1998 which, under "Item 5. Other Events" thereunder, reported
the execution of an employment letter by the Company and Anthony
W. Hooper; and (iii) a Current Report on Form 8-K dated
September 15, 1998 which, under "Item 5. Other Events"
thereunder reported the completion of the Company's acquisition
of 80% of the shares of Video Injection and certain developments
in legal proceedings initiated by the Company against Cat
Contracting, Inc. No financial statements were filed as part of
any such report.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INSITUFORM TECHNOLOGIES, INC.
November 13, 1998 By: s/William A. Martin
---------------------------------
William A. Martin
Senior Vice President and
Principal Financial and
Accounting Officer
INDEX TO EXHIBITS
-----------------
3.2 - By-laws of the Company
10.1 - Employment Letter dated as of July 15, 1998 between the
Company and Anthony W. Hooper (incorporated by reference
to Exhibit 99 to the Current Report on Form 8-K dated
July 15, 1998).
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange Commission
for information only and is not filed.