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, 2003
-------------------------------------------------
Commission file number #0-10786
---------------------------------------------------------
Insituform Technologies, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3032158
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
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(Address of Principal Executive Offices)
(636) 530-8000
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(Registrant's telephone number including area code)
- --------------------------------------------------------------------------------
(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, 2003
- ---------------------------------------- ----------------------------------
Class A Common Stock, $.01 par value 26,465,915 Shares
INDEX
<Table>
<Caption>
Page No.
--------
Part I Financial Information:
Item 1. Financial Statements (unaudited):
Consolidated Statements of Income............................................ 3
Consolidated Balance Sheets.................................................. 4
Consolidated Statements of Cash Flows........................................ 5
Notes to Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................... 16
Item 4. Controls and Procedures...................................................... 16
Part II Other Information:
Item 1. Legal Proceedings............................................................ 18
Item 6. Exhibits and Reports on Form 8-K............................................. 18
Signatures............................................................................................... 19
Certifications........................................................................................... 20
</Table>
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)
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED MARCH 31,
2003 2002
------------ ------------
REVENUES $ 123,348 $ 111,176
COST OF REVENUES 95,079 82,287
------------ ------------
GROSS PROFIT 28,269 28,889
SELLING, GENERAL AND ADMINISTRATIVE 17,083 17,655
------------ ------------
OPERATING INCOME 11,186 11,234
OTHER (EXPENSE) INCOME:
Interest expense (1,197) (2,189)
Other 431 451
------------ ------------
TOTAL OTHER EXPENSE (766) (1,738)
------------ ------------
INCOME BEFORE TAXES ON INCOME 10,420 9,496
TAXES ON INCOME 4,064 3,696
------------ ------------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS
AND DISCONTINUED OPERATIONS 6,356 5,800
MINORITY INTERESTS (30) (31)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 25 153
------------ ------------
INCOME FROM CONTINUING OPERATIONS 6,351 5,922
INCOME (LOSS) FROM DISCONTINUED OPERATIONS 276 (1,602)
------------ ------------
NET INCOME $ 6,627 $ 4,320
============ ============
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS:
Basic:
Income from continuing operations $ 0.24 $ 0.22
Discontinued operations 0.01 (0.06)
Net income 0.25 0.16
Diluted:
Income from continuing operations $ 0.24 $ 0.22
Discontinued operations 0.01 (0.06)
Net income 0.25 0.16
</Table>
See accompanying notes to consolidated financial statements.
3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<Table>
<Caption>
MARCH 31, 2003 DECEMBER 31, 2002
---------------- ------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$3,409 and $3,985, respectively $ 83,371 $ 75,386
Receivables, net 91,519 82,962
Retainage 24,651 23,726
Costs and estimated earnings in excess of billings 29,397 36,680
Inventories 12,276 12,402
Prepaid expenses and other assets 8,358 13,586
Assets held for disposal 5,359 7,909
---------------- ------------------
TOTAL CURRENT ASSETS 254,931 252,651
---------------- ------------------
PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 69,604 71,579
---------------- ------------------
OTHER ASSETS
Goodwill 131,045 131,032
Other assets 17,868 17,751
---------------- ------------------
TOTAL OTHER ASSETS 148,913 148,783
---------------- ------------------
TOTAL ASSETS $ 473,448 $ 473,013
================ ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and line of credit $ 58,540 $ 49,360
Accounts payable and accrued expenses 71,110 69,776
Billings in excess of costs and estimated earnings 5,431 5,992
Liabilities related to discontinued operations 5,286 3,293
---------------- ------------------
TOTAL CURRENT LIABILITIES 140,367 128,421
---------------- ------------------
LONG-TERM DEBT, less current maturities 50,912 67,014
OTHER LIABILITIES 3,936 3,530
---------------- ------------------
TOTAL LIABILITIES 195,215 198,965
---------------- ------------------
MINORITY INTERESTS 1,458 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 26,440,224 and 26,558,165 288 288
Additional paid-in capital 132,910 132,820
Retained earnings 201,430 194,803
Treasury stock - 2,347,164 and 2,218,273 shares (51,416) (49,745)
Accumulated other comprehensive loss (6,437) (5,548)
---------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 276,775 272,618
---------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 473,448 $ 473,013
================ ==================
</Table>
See accompanying notes to consolidated financial statements.
4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<Table>
<Caption>
FOR THE THREE MONTHS
ENDED MARCH 31,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 6,627 $ 4,320
(Income) loss from discontinued operations (276) 1,602
------------ ------------
INCOME FROM CONTINUING OPERATIONS 6,351 5,922
------------ ------------
ADJUSTMENTS TO RECONCILE TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 3,339 3,342
Amortization 319 358
Deferred income taxes 10 48
Other (167) 884
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES:
Receivables, including costs and estimated earnings in excess of billings (2,197) (2,765)
Inventories 125 86
Prepaid expenses and other assets 3,266 (726)
Accounts payable and accrued expenses 2,877 (916)
------------ ------------
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
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,138) (5,499)
Proceeds from sale of fixed assets 346 1,200
Cash from sale of business -- 1,515
Other investing activities 347 (15)
------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (1,445) (2,799)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 91 492
Purchases of treasury stock (1,417) (2,199)
Principal payments on long-term debt (18,652) (17,189)
Increase (decrease) in line of credit 14,516 (76)
Deferred financing charges (213) --
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (5,675) (18,972)
------------ ------------
Effect of exchange rate changes on cash (616) (262)
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD 7,985 (16,137)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 75,386 74,649
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 83,371 $ 58,512
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest $ 3,323 $ 3,804
Income taxes 883 1,900
NONCASH INVESTING AND FINANCING ACTIVITIES:
Note receivable on sale of business $ -- $ 2,000
Note payable recovered in settlement 5,350 --
Accrued interest recovered in settlement 557 --
Treasury stock recovered in settlement 254 --
</Table>
See accompanying notes to consolidated financial statements.
5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 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, 2003
and December 31, 2002 and the unaudited consolidated statements of
income and cash flows for the three months ended March 31, 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 months ended March 31, 2003 and
2002 are not necessarily indicative of the results to be expected for
the full year.
2. STOCK-BASED COMPENSATION
At March 31, 2003, the Company had two plans under which options may be
granted. 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 was reflected in the
net income for the quarters ended March 31, 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. 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):
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
Net income - as reported $ 6,627 $ 4,320
Deduct: Total stock-based compensation expense
determined under fair value method for all awards,
net of related tax effects (1,469) (2,215)
------------ ------------
Pro forma net income $ 5,158 $ 2,105
============ ============
Basic earnings per share:
As reported $ 0.25 $ 0.16
Pro forma 0.19 0.08
Diluted earnings per share:
As reported 0.25 0.16
Pro forma 0.19 0.08
</Table>
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.
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 million of revenues
and $2.5 million of operating loss in the tunneling segment for the
first three months of 2003. Pro forma information relative to the
quarter ended March 31, 2002 is immaterial and has not been presented
relative to the Elmore acquisition.
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 are 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 complete 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 which
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-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, 2003 and December 31, 2002, assets held for disposal
totaled $5.4 million and $7.9 million, respectively, and included $0.6
million and $0.7 million of unbilled receivables, respectively. Assets
held for disposal also included $1.3 million in retainage receivables,
$0.7 of trade receivables, $2.3 million of prepaid and other assets,
and $0.4 million of fixed assets at March 31, 2003. Liabilities related
to discontinued operations totaled $4.6 million and $3.3 million at
March 31, 2003 and December 31, 2002, respectively. The results of
operations for the discontinued operations are as follows (in
thousands):
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2003 2002
------------ ------------
REVENUES:
Wastewater Treatment Plant $ -- $ --
Commercial Construction and Highway Operations 1,398 8,622
INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Wastewater Treatment Plant, net of tax of $448 and
$(348), respectively 700 (642)
Commercial Construction and Highway Operations, net
of tax of ($272) and $(563), respectively (424) (960)
</Table>
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, 2003, the remaining
liability on this restructuring was $0.3 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), $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, 2003, the remaining liability
was $0.4 million, $0.2 million of which is for retirement of equipment,
and $0.2 million relates to facilities closure costs, both of which are
expected to be substantially settled in 2003.
The following table illustrates each of the restructuring reserve
components and the related balances at March 31, 2003 (in thousands):
<Table>
<Caption>
Balance at 2002 Charged During Charged During Balance at
December 31, 2001 Reserve 2002 First Quarter 2003 March 31, 2003
------------------ ---------- ------------------------ ---------------------------- ------------------
2001 RESERVE Cash Non-Cash Cash Non-Cash
---------- ---------- ------------ ------------
Severance $ 844 $ (844) $ -- $ -- $ -- $ --
Equipment 616 (122) (237) (38) (31) 188
Facility 1,702 (1,171) (302) (11) -- 218
------------------ ---------- ---------- ------------ ------------ ------------------
Total $ 3,162 $ (2,137) $ (539) $ (49) $ (31) $ 406
================== ========== ========== ============ ============ ==================
2002 RESERVE
Severance $ -- $ 1,258 $ (465) $ -- $ (449) $ -- $ 344
Equipment -- 1,200 (852) -- -- (348) --
------------------ ---------- ---------- ---------- ------------ ------------ ------------------
Total $ -- $ 2,458 $ (1,317) $ -- $ (449) $ (348) $ 344
================== ========== ========== ========== ============ ============ ==================
</Table>
6. COMPREHENSIVE INCOME
For the quarters ended March 31, 2003 and 2002, comprehensive income
was $5.7 million and $4.7 million, respectively. The Company's
adjustment to net income to calculate comprehensive income consists
solely of cumulative foreign currency translation adjustments of $(0.9
million) and $0.4 million for the quarters ended March 31, 2003 and
2002, respectively.
7. SHARE INFORMATION
Earnings per share have been calculated using the following share
information:
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2003 2002
-------------- --------------
Weighted average number of common shares
used for basic EPS 26,529,602 26,553,506
Effect of dilutive stock options 46,248 288,655
-------------- --------------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,575,850 26,842,161
============== ==============
</Table>
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.
Financial information by segment is as follows (in thousands):
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
2003 2002
-------------- --------------
Revenues
Rehabilitation $ 92,367 $ 91,442
Tunneling 25,585 15,176
TiteLiner 5,396 4,558
-------------- --------------
Total Revenues $ 123,348 $ 111,176
============== ==============
Gross Profit
Rehabilitation $ 23,468 $ 24,307
Tunneling 3,161 3,051
TiteLiner 1,640 1,531
-------------- --------------
Total Gross Profit $ 28,269 $ 28,889
============== ==============
Operating Income
Rehabilitation $ 8,814 $ 8,626
Tunneling 1,441 1,866
TiteLiner 931 742
-------------- --------------
Total Operating Income $ 11,186 $ 11,234
============== ==============
</Table>
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):
<Table>
<Caption>
AS OF MARCH 31, 2003
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- --------------
Amortized intangible assets:
Patents $ 13,943 $ (11,993)
License agreements 3,263 (1,933)
Non-compete agreements 4,628 (2,172)
-------------- --------------
Total $ 21,834 $ (16,098)
============== ==============
Aggregate amortization expense:
For quarter ended March 31, 2003 $ 319
Estimated amortization expense:
For year ended December 31, 2003 $ 1,166
For year ended December 31, 2004 1,072
For year ended December 31, 2005 730
For year ended December 31, 2006 725
For year ended December 31, 2007 332
</Table>
9
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, 2003, the interest rate on the credit facility was 4.25% and the
balance was $40.0 million. The Company 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, 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):
<Table>
<Caption>
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
</Table>
<Table>
<Caption>
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
</Table>
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:
<Table>
<Caption>
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
============ ================== ================== ==================
</Table>
12
DECEMBER 31, 2002:
<Table>
<Caption>
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
============ ================== ================== ==================
</Table>
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.
<Table>
<Caption>
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
======== ======== ======== ======== ======== ======== ==========
</Table>
*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.
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
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.
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"
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 does not expect that the adoption of FIN 46 will have a material
impact on its future consolidated financial statements.
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, 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, 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.
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 remains Chairman
and Chief Executive Officer. The new position was created to lead all of the
Company's operating segments, which now report directly to Mr. Rooney. The
addition 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 development of the Company's business units.
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"), the Company's Chief Executive Officer and Chief Financial
Officer carried out an evaluation of the effectiveness of the Company's
"disclosure controls and procedures" (as defined in 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, the Company's disclosure
controls and
16
procedures were adequate and designed to ensure 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 or in other factors that could significantly affect the Company's
internal controls subsequent to the Evaluation Date.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 arise out of the January 2002 sale of the Kinsel
wastewater treatment division and alleged the valuation of the assets sold was
overstated. No litigation was commenced. The Company negotiated a settlement,
without litigation, during the first quarter of 2003 between the Company and
the purchasers of the wastewater treatment plant operations.
The Company is involved in certain litigation incidental to the conduct of its
business and affairs. Management does not believe that the outcome of any such
litigation will have a material adverse effect on the financial condition,
results of operations or liquidity of the Company.
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.
18
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, 2003 /s/ Joseph A. White
------------------------------------
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
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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.
10.2 Amended and Restated Intercreditor Agreement dated as of April 24, 2003
among Bank of America, N.A. and the Noteholders.
10.3 Employment Letter dated March 7, 2003 between the Company and Thomas S.
Rooney, Jr. (1)
99.1 Certification of Anthony W. Hooper pursuant to 18 U.S.C Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of Joseph A. White pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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(1) Management contract or compensatory plan or arrangement.
22