Back to GetFilings.com
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, 2002
--------------------------------------------------
Commission file number #0-10786
----------------------------------------------------------
Insituform Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3032158
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
702 Spirit 40 Park Drive, Chesterfield, Missouri 63005
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(636) 530-8000
- --------------------------------------------------------------------------------
(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 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 12, 2002
- ------------------------------------ -----------------------------------------
Class A Common Stock, $.01 par value 26,512,527 Shares
INDEX
Page No.
--------
Part I Financial Information:
Item 1. Financial Statements (Unaudited):
Consolidated Statements of Income.................................................3
Consolidated Balance Sheets.......................................................4
Consolidated Statements of Cash Flows.............................................5
Notes to Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................17
Item 4. Controls and Procedures..........................................................17
Part II Other Information:
Item 1. Legal Proceedings................................................................18
Item 6. Exhibits and Reports on Form 8-K.................................................18
Signatures...................................................................................................19
Certifications...............................................................................................20
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
--------------------------------------------------
REVENUES $ 125,523 $ 112,310 $ 355,187 $ 329,231
COST OF REVENUES 92,765 85,913 262,543 235,091
--------------------------------------------------
GROSS PROFIT 32,758 26,397 92,644 94,140
Selling, general and administrative 17,720 18,593 52,134 57,198
Restructuring charges 2,458 - 2,458 -
Impairment charges 3,499 - 3,499 -
--------------------------------------------------
TOTAL SELLING, GENERAL AND ADMINISTRATIVE 23,677 18,593 58,091 57,198
OPERATING INCOME 9,081 7,804 34,553 36,942
OTHER (EXPENSE) INCOME:
Interest expense (2,103) (2,355) (5,935) (7,180)
Other 1,736 270 2,520 1,245
--------------------------------------------------
TOTAL OTHER EXPENSE (367) (2,085) (3,415) (5,935)
--------------------------------------------------
INCOME BEFORE TAXES ON INCOME 8,714 5,719 31,138 31,007
TAXES ON INCOME 3,326 2,130 11,921 12,093
--------------------------------------------------
INCOME BEFORE MINORITY INTERESTS, EQUITY IN EARNINGS
AND DISCONTINUED OPERATIONS 5,388 3,589 19,217 18,914
MINORITY INTERESTS (56) (75) (124) (246)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES 333 381 715 850
--------------------------------------------------
INCOME FROM CONTINUING OPERATIONS 5,665 3,895 19,808 19,518
INCOME (LOSS) FROM DISCONTINUED OPERATIONS (788) 106 (3,317) 546
--------------------------------------------------
NET INCOME $ 4,877 $ 4,001 $ 16,491 $ 20,064
==================================================
EARNINGS PER SHARE OF COMMON STOCK AND COMMON
STOCK EQUIVALENTS:
Basic:
Income from continuing operations $ 0.21 $ 0.15 $ 0.75 $ 0.74
Discontinued operations (0.03) - (0.13) 0.02
Net income 0.18 0.15 0.62 0.76
Diluted:
Income from continuing operations $ 0.21 $ 0.14 $ 0.74 $ 0.72
Discontinued operations (0.03) - (0.12) 0.02
Net income 0.18 0.15 0.62 0.74
See accompanying notes to consolidated financial statements.
3
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED
SEPTEMBER 30, 2002 DECEMBER 31, 2001
--------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$3,692 and $4,262, respectively $ 66,662 $ 74,649
Receivables, net 81,840 86,191
Retainage 23,757 21,327
Costs and estimated earnings in excess of billings 33,499 23,719
Inventories 13,633 13,712
Prepaid expenses and other assets 12,059 8,135
Assets held for disposal 9,903 32,034
-----------------------------
TOTAL CURRENT ASSETS 241,353 259,767
-----------------------------
PROPERTY, PLANT AND EQUIPMENT, less accumulated
depreciation 80,821 68,547
-----------------------------
OTHER ASSETS
Goodwill 125,888 117,251
Other assets 16,662 18,057
-----------------------------
TOTAL OTHER ASSETS 142,550 135,308
-----------------------------
TOTAL ASSETS $ 464,724 $ 463,622
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and short-term borrowings $ 49,677 $ 35,218
Accounts payable and accrued expenses 68,689 68,302
Billings in excess of costs and estimated earnings 6,186 8,057
Liabilities related to discontinued operations 2,812 9,471
-----------------------------
TOTAL CURRENT LIABILITIES 127,364 121,048
-----------------------------
LONG-TERM DEBT, less current maturities 67,891 88,853
OTHER LIABILITIES 3,412 2,039
-----------------------------
TOTAL LIABILITIES 198,667 211,940
-----------------------------
MINORITY INTERESTS 1,387 1,555
-----------------------------
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 26,517,527 and 26,602,385 287 286
Additional paid-in capital 131,287 129,651
Retained earnings 188,604 172,112
Treasury stock - 2,198,773 and 1,968,773 shares (49,413) (44,563)
Cumulative foreign currency translation adjustments (6,095) (7,359)
-----------------------------
TOTAL STOCKHOLDERS' EQUITY 264,670 250,127
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 464,724 $ 463,622
=============================
See accompanying notes to consolidated financial statements.
4
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
2002 2001
----------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME $ 16,491 $ 20,064
Loss (income) from discontinued operations 3,317 (546)
----------------------
INCOME FROM CONTINUING OPERATIONS 19,808 19,518
----------------------
ADJUSTMENTS TO RECONCILE NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 10,861 12,254
Amortization 1,099 5,090
Deferred income taxes 61 175
Gain on sale of investment (1,225) -
Other (gain) loss on asset sales (551) 420
Income from equity investments (715) (850)
Impairment of intangibles 3,499 -
Restructuring charge 2,458 -
Other (16) (339)
CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES:
Receivables, including costs and estimated earnings in excess of billings and
retainage (1,442) 1,410
Inventories 82 5,146
Prepaid expenses and other assets (2,388) (2,054)
Accounts payable, accrued expenses and billings in excess of costs and
estimated earnings (9,614) (7,990)
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 21,917 32,780
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS 1,718 (7,918)
----------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 23,635 24,862
----------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (18,174) (15,703)
Proceeds from sale of fixed assets 1,605 704
Proceeds from sale of investment 1,920 -
Proceeds from sale of businesses (discontinued operations) 4,065 -
Purchases of businesses, net of cash acquired (8,459) (2,648)
Other investing activities (372) (325)
----------------------
NET CASH USED IN INVESTING ACTIVITIES (19,415) (17,972)
----------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,637 5,105
Purchases of treasury stock (4,850) (11,471)
Principal payments on long-term debt (19,959) (19,258)
Increase in short-term borrowings 10,052 20,312
----------------------
NET CASH USED IN FINANCING ACTIVITIES (13,120) (5,312)
----------------------
Effect of exchange rate changes on cash 913 (450)
----------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (7,987) 1,128
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 74,649 64,107
----------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 66,662 $ 65,235
======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
CASH PAID FOR:
Interest expense $ 7,353 $ 9,121
Income taxes 12,083 6,119
NONCASH INVESTING AND FINANCING ACTIVITIES:
Notes receivable on sale of business (discontinued operations) $ 3,500 $ -
Liabilities established in connection with business acquisitions 1,690 -
Amounts due to the Company settled in business acquisitions 2,300 -
Reissuance of treasury shares in connection with business acquisitions - 64,650
Note payable issued in connection with business acquisitions - 5,350
See accompanying notes to consolidated financial statements.
5
INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SEPTEMBER 30, 2002
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 financial
position, results of operations and cash flows. 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 notes thereto included in the Company's 2001 Annual
Report on Form 10-K/A.
The results of operations for the three and nine months ended September 30,
2002 and 2001 are not necessarily indicative of the results to be expected
for the full year.
2. NEW ACCOUNTING PRONOUNCEMENT
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. Management
is currently reviewing the new standard and evaluating the impact on its
future consolidated financial statements and accounting policies and
practices.
3. BUSINESS ACQUISITIONS
On May 2, 2002, the Company acquired the business and certain assets and
liabilities of Elmore Pipe Jacking, Inc. ("Elmore") for approximately $12.5
million. The purchase price included $8.5 million in cash, settlement of
$2.3 million of liabilities owed by Elmore to the Company, and an
additional $1.7 million of non-interest bearing liabilities, including
covenants not to compete, owed to the former owners of the Elmore assets.
Total goodwill resulting from the Elmore acquisition was approximately $3.7
million. The Company expects to finalize the purchase price allocation
before December 31, 2002. The Company's results reflect the results of
operating Elmore's former assets from the date of acquisition. Elmore added
revenues of $6.1 million and $10.3 million in the tunneling segment for the
third quarter and first nine months of 2002, respectively. Elmore is a
regional provider of trenchless tunneling, microtunneling, segmented lining
and pipe jacking services in the western United States.
On February 28, 2001, the Company acquired 100% of the stock of Kinsel
Industries, Inc. ("Kinsel") and an affiliated company, Tracks of Texas,
Inc. ("Tracks"). Kinsel has operations in pipebursting, microtunneling,
commercial construction and highway construction and maintenance. Tracks is
a real estate and construction equipment leasing company that primarily
leases equipment to Kinsel. The purchase price was approximately $80
million, paid in a combination of cash, notes and 1,847,165 shares of the
Company's common stock valued at $35.51 per share. The transaction was
accounted for by the purchase method of accounting, and accordingly,
Kinsel's and Tracks' results are included in the Company's consolidated
income statements from the date of acquisition. The purchase price was
allocated to assets and liabilities based on their respective fair value at
the date of acquisition and resulted in goodwill of $61.2 million (see Note
10). There are no contingent payments, options, or commitments in
connection with the acquisition. However, the hold-back escrow associated
with the deal was extended to the first quarter of 2003. The Company
subsequently decided to sell off portions of Kinsel that did not fit the
Company's overall business strategy, and these operations have been
segregated in the Company's consolidated financial statements as
discontinued operations. Kinsel's wastewater treatment plant construction,
heavy highway, and highway maintenance operations have all been sold. Also
see Note 4.
The following unaudited pro forma summary presents information as if Kinsel
and Tracks had been acquired as of January 1, 2001. The pro forma amounts
include certain adjustments, primarily to recognize depreciation and
amortization, including amortization of goodwill, based on the allocated
purchase price of Kinsel and Tracks assets, and do not reflect any benefits
from economies which might be achieved from combining operations. The
unaudited pro forma information has been presented for comparative purposes
and does not necessarily reflect the actual results
6
that would have occurred nor is it necessarily indicative of future results
of operations of the combined companies (in thousands, except per share
amounts):
NINE MONTHS ENDED
SEPTEMBER 30, 2001
(UNAUDITED)
------------------
Revenues $338,843
Income from continuing operations 20,486
Income (loss) from discontinued operations (226)
Net income 20,260
Earnings (loss) per share:
Basic
Income from continuing operations $ 0.78
Income (loss) from discontinued operations (0.01)
Net income 0.77
Diluted
Income from continuing operations $ 0.76
Income (loss) from discontinued operations (0.01)
Net income 0.75
4. DISCONTINUED OPERATIONS
In the fourth quarter of 2001, the Company made the decision to sell
certain operations acquired in the Kinsel transaction. Accordingly, the
Company has classified as discontinued the wastewater treatment plant
construction, commercial construction and highway operations acquired as
part of the Kinsel acquisition. These operations are not consistent with
the Company's operating strategy. The Company completed the sale of the
wastewater treatment plant construction 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
business previously classified as discontinued operations for $2.9 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, which is reflected in income (loss)
from discontinued operations in the table below. The Company completed the
sale of certain assets and contracts of the Kinsel highway maintenance
business effective October 31, 2002 to Main Lane Industries, Ltd. for $4.2
million, comprised of $2.7 million in cash and a $1.5 million subordinated
note. No gain or loss is expected to be recorded for the sale. Consequent
to the sale agreements described above, the Company retained responsibility
for some uncompleted jobs, which has resulted in the absorption of
additional trailing costs. These jobs are expected to be substantially
completed in the second quarter of 2003. This completes the disposition of
all material assets classified as discontinued pursuant to the acquisition
of Kinsel.
For the third quarter of 2002, including an after-tax gain of $0.9 million
on the sale of the heavy highway business, discontinued operations lost
$0.8 million on $4.0 million in revenues. As of September 30, 2002 and
December 31, 2001, assets held for disposal totaled $9.9 million and $32.0
million, respectively, and included $0.6 million and $7.6 million of
unbilled receivables, respectively. Assets held for disposal also included
$3.9 million of trade accounts receivable and $1.3 million of fixed assets
at September 30, 2002, and $6.8 million and $3.3 million of trade
receivables and fixed assets, respectively, at December 31, 2001.
Liabilities related to discontinued operations totaled $2.8 million and
$9.5 million at September 30, 2002 and December 31, 2001, respectively. The
results of operations for the discontinued operations are as follows (in
thousands):
7
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------------------------------------------------------
REVENUES:
Wastewater treatment plant construction $ - $ 9,223 $ - $17,468
Commercial construction and highway
construction 4,034 8,977 20,904 21,793
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS:
Wastewater treatment plant construction,
net of tax of $0, $120, $(348) and $303,
respectively - 187 (642) 478
Commercial construction and highway
construction, net of tax expense (benefit)
of $(489), $(52), $(1,052), and $38,
respectively (788) (81) (2,675) 68
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 cost associated with the elimination of an estimated 75 salaried
positions, primarily related to administrative and other overhead
functions. An additional $1.2 million relates to information technology
asset write-downs, lease cancellations, and disposal of certain
identifiable fixed assets primarily at the corporate level. As of September
30, 2002, the remaining liability on this restructuring was $2.0 million,
of which $0.9 relates to future severance costs.
In the fourth quarter of 2001, the Company recorded a restructuring charge
of $4.1 million, $0.9 million of which was severance cost associated with
the elimination of 112 company-wide positions specifically identified as of
December 31, 2001. An additional $3.2 million of the charge relates 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 September 30, 2002, the remaining liability was
$0.9 million, which is expected to be settled by December 31, 2002. Of the
remaining liability, $0.4 million is for retirement of equipment, $0.3
million is for severance liabilities, and $0.2 million relates to facility
closure costs.
6. OTHER SPECIAL ITEMS
During the nine months ended September 30, 2002, the Company sold the
Kinsel wastewater treatment plant and heavy highway businesses, previously
classified as discontinued operations (see Note 4). On September 30, 2002,
the Company completed the sale of a real estate venture acquired as part of
the Kinsel purchase in February 2001. The Company received approximately
$1.9 million in cash and recorded an after-tax gain of approximately $0.8
million as a result of the real estate venture sale. The pre-tax gain of
$1.2 million is reflected in other non-operating income.
7. COMPREHENSIVE INCOME
For the quarters ended September 30, 2002 and 2001, comprehensive income
was $5.9 million and $4.1 million, respectively. For the nine months ended
September 30, 2002 and 2001, comprehensive income was $17.8 million and
$19.9 million, respectively. The Company's adjustment to comprehensive
income consists solely of cumulative foreign currency translation
adjustments.
8
8. EARNINGS PER SHARE
Earnings per share have been calculated using the following share
information:
THREE MONTHS ENDED SEPTEMBER 30,
2002 2001
-------------------------------
Weighted average number of common shares
used for basic EPS 26,506,967 26,795,354
Effect of dilutive stock options and warrants 108,091 489,587
-------------------------------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,615,058 27,284,941
-------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
2002 2001
-------------------------------
Weighted average number of common shares
used for basic EPS 26,534,329 26,387,869
Effect of dilutive stock options and warrants 228,614 611,874
------------------------------
Weighted average number of common shares
and dilutive potential common stock used in dilutive EPS 26,762,943 26,999,743
-------------------------------
9. SEGMENT REPORTING
The Company has three operating segments: rehabilitation, tunneling, and
TiteLiner(R), the Company's corrosion and abrasion segment ("TiteLiner").
These operating segments represent strategic business units that offer
distinct products and services and correspond with the current
organizational structure.
The following disaggregated financial results have been prepared using a
management approach, which is consistent with the basis and manner with
which management internally disaggregates financial information for the
purpose of assisting in making internal operating decisions. The Company
evaluates performance based on stand-alone operating income.
Financial information by segment is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------------------------------------------------------
REVENUES
Rehabilitation $ 96,601 $ 91,808 $ 281,395 $ 273,910
Tunneling 24,682 13,096 62,107 33,010
TiteLiner 4,240 7,406 11,685 22,311
----------------------------------------------------------
TOTAL REVENUES $ 125,523 $ 112,310 $ 355,187 $ 329,231
==========================================================
GROSS PROFIT
Rehabilitation $ 25,963 $ 22,477 $ 76,348 $ 81,399
Tunneling 4,776 2,113 12,052 6,103
TiteLiner 2,019 1,808 4,244 6,639
----------------------------------------------------------
TOTAL GROSS PROFIT $ 32,758 $ 26,398 $ 92,644 $ 94,141
==========================================================
OPERATING INCOME
Rehabilitation $ 5,155 $ 5,389 $ 25,668 $ 29,096
Tunneling 2,738 1,433 7,100 3,618
TiteLiner 1,188 982 1,785 4,228
----------------------------------------------------------
TOTAL OPERATING INCOME $ 9,081 $ 7,804 $ 34,553 $ 36,942
==========================================================
10. ACQUIRED INTANGIBLE ASSETS AND GOODWILL
In June 2001, the 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.
9
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.
Management retained an independent party to perform a valuation of goodwill
as of that date and determined that no impairment of goodwill existed.
During the third quarter of 2002, the Company determined that certain
patent, trademark, license and non-compete intellectual property assets had
become impaired due to recent business decisions and other circumstances.
The impairment analysis was conducted in accordance with SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," which the
Company adopted in 2001. The impact of the impairment charge was $3.5
million ($2.2 million after tax).
There was no goodwill in the TiteLiner segment at September 30, 2002.
Changes in the carrying amount of goodwill in the rehabilitation and
tunneling segment for the nine months ended September 30, 2002 were as
follows (in thousands):
REHABILITATION TUNNELING TOTAL
-----------------------------------------
Balance as of December 31, 2001 $117,251 $ - $ 117,251
Reassignment of goodwill due to adoption of SFAS 142 4,792 - 4,792
Goodwill acquired as part of Elmore purchase - 3,748 3,748
Impact of foreign exchange rates 97 - 97
---------------------------------------
Balance as of September 30, 2002 $122,140 $ 3,748 $ 125,888
=======================================
Intangible assets are as follows (in thousands):
AS OF SEPTEMBER 30, 2002
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-----------------------------
Amortized intangible assets:
Patents and trademarks $ 13,943 $ (11,801)
License agreements 3,264 (1,818)
Non-compete agreements 4,628 (1,853)
--------------------------
Total $ 21,835 $ (15,472)
==========================
Aggregate amortization expense:
For three months ended September 30, 2002 $ 378
For nine months ended September 30, 2002 1,099
Estimated amortization expense:
For year ended December 31, 2002 $ 1,392
For year ended December 31, 2003 1,166
For year ended December 31, 2004 1,045
For year ended December 31, 2005 730
For year ended December 31, 2006 725
The effect of the adoption of SFAS 142 on reported net income was as
follows (in thousands, except per share information):
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
2002 2001 2002 2001
-------------------------------------------
Reported income from continuing operations $5,665 $ 3,895 $ 19,808 $ 19,518
Add: Goodwill amortization related to continuing operations - 1,679 - 4,517
-------------------------------------------
Adjusted income from continuing operations $5,649 $ 5,574 $ 19,808 $ 24,035
Reported net income (loss) from discontinued operations (788) 106 (3,317) 546
Add: Goodwill amortization related to discontinued operations - 62 - 146
-------------------------------------------
Adjusted net income $4,877 $ 5,742 $ 16,491 $ 24,727
===========================================
10
Basic earnings per share:
Reported income from continuing operations $ 0.21 $ 0.15 $ 0.75 $ 0.74
Add: Goodwill amortization related to continuing operations - 0.06 - 0.17
-------------------------------------------
Adjusted income from continuing operations $ 0.21 $ 0.21 $ 0.75 $ 0.91
Reported net income (loss) from discontinued operations (0.03) - (0.13) 0.02
Add: Goodwill amortization related to discontinued operations - - - 0.01
-------------------------------------------
Adjusted net income $ 0.18 $ 0.21 $ 0.62 $ 0.94
-------------------------------------------
Diluted earnings per share:
Reported income from continuing operations $ 0.21 $ 0.14 $ 0.74 $ 0.72
Add: Goodwill amortization related to continuing operations - 0.06 - 0.17
-------------------------------------------
Adjusted income from continuing operations $ 0.21 $ 0.20 $ 0.74 $ 0.89
Reported net income (loss) from discontinued operations (0.03) - (0.12) 0.02
Add: Goodwill amortization related to discontinued operations - - - 0.01
-------------------------------------------
Adjusted net income $ 0.18 $ 0.21 $ 0.62 $ 0.92
-------------------------------------------
11. LITIGATION AND OTHER CONTINGENCIES
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. The financial statements
include the estimated amounts of liabilities that are likely to be incurred
from these and various other pending litigation and other contingencies.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors that have affected the Company's financial condition and results of
operations during the periods included in the accompanying consolidated
financial statements. See the discussion of the Company's critical accounting
policies in its Form 10-K for the year ended December 31, 2001.
RESULTS OF OPERATIONS - Three and Nine Months Ended September 30, 2002 and 2001
The following table highlights the results for each of the segments and periods
presented (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2002 SEPTEMBER 30, 2002
REVENUES GROSS PROFIT OPERATING INCOME REVENUES GROSS PROFIT OPERATING INCOME
-------------------------------------------- --------------------------------------------
Rehabilitation $ 96,601 $ 25,963 $ 5,155 $281,395 $ 76,348 $ 25,668
Tunneling 24,682 4,776 2,738 62,107 12,052 7,100
TiteLiner 4,240 2,019 1,188 11,685 4,244 1,785
-------------------------------------------- --------------------------------------------
Total $ 125,523 $ 32,758 $ 9,081 $355,187 $ 92,644 $ 34,553
-------------------------------------------- --------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2001
REVENUES GROSS PROFIT OPERATING INCOME REVENUES GROSS PROFIT OPERATING INCOME
-------------------------------------------- --------------------------------------------
Rehabilitation $ 91,808 $ 22,477 $ 5,389 $273,910 $ 81,399 $ 29,096
Tunneling 13,096 2,113 1,433 33,010 6,103 3,618
TiteLiner 7,406 1,808 982 22,311 6,639 4,228
-------------------------------------------- --------------------------------------------
Total $ 112,310 $ 26,398 $ 7,804 $329,231 $ 94,141 $ 36,942
-------------------------------------------- --------------------------------------------
For the three months ended September 30, 2002, consolidated revenues from
continuing operations were $125.5 million, an increase of 11.8% over revenues of
$112.3 million for the third quarter of 2001. Revenues in the rehabilitation
segment were $96.6 million for the quarter ended September 30, 2002, an increase
of 5.2% over revenues of $91.8 million for the quarter ended September 30, 2001.
Rehabilitation revenues performed well in North America in spite of the
production slowdowns related to poor weather in Texas and Louisiana during the
quarter and a serious accident in Des Moines. The inception of several large
projects in the Southwest also contributed significantly to the performance of
the rehabilitation segment during the third quarter of 2002. Tunneling continued
to be a major contributor to consolidated financial results, generating $24.7
million in revenues for the quarter ended September 30, 2002, an 88.5% increase
over the $13.1 million in revenues for the quarter ended September 30, 2001.
Tunneling segment revenues increased to 19.7% of the Company's consolidated
revenues for the third quarter of 2002 compared to 11.7% of consolidated
revenues in the third quarter of 2001. The addition of the Elmore operations
contributed $6.1 million to tunneling revenues for the third quarter of 2002.
Excluding Elmore, tunneling revenues were $18.6 million for the third quarter of
2002, a 42.0% increase over the third quarter of 2001 revenues. TiteLiner
segment revenues for the three months ended September 30, 2002 were low compared
to revenues for the three months ended September 30, 2001, as the segment
suffers the effects of a cyclical downturn in its client base.
For the nine months ended September 30, 2002, consolidated revenues from
continuing operations were $355.2 million, an increase of 7.9% from $329.2
million through the first nine months of 2001. Consolidated revenues from
continuing operations for the nine months ended September 30, 2002 include $10.3
million from the Elmore operations and a full nine months of Kinsel operations
in 2002 compared to only seven months of Kinsel results in 2001.
Consolidated cost of revenues from continuing operations increased $6.9 million
in the third quarter of 2002 compared to the same period a year ago, an 8.0%
increase. The increase is primarily due to the current year addition of $5.5
million in costs from Elmore operations through the third quarter of 2002.
Excluding Elmore, cost of revenues in the tunneling segment increased 31.0%,
which compares favorably to revenue growth of 42.0% in the third quarter of 2002
versus the same quarter of 2001. Comparing third quarter 2002 to third quarter
2001, TiteLiner segment cost of revenues reflected a favorable impact from
closing out a large project in Peru.
Consolidated cost of revenues for the nine months ended September 30, 2002 was
$262.5 million, an 11.7% increase compared to $235.1 million cost of revenues in
the first nine months of 2001. Cost of revenues is inclusive of additional
12
costs from Elmore in 2002, which were not incurred in 2001, and Kinsel costs for
the full nine months in 2002 compared to only seven months in 2001.
Consolidated gross profit from continuing operations for the third quarter of
2002 was $32.8 million, resulting in a gross margin of 26.1%. This represents an
improvement over the third quarter of 2001 gross profit and gross margin of
$26.4 million and 23.5%, respectively. The Company achieved the improved margins
despite the increased significance of the lower-margin tunneling segment to
overall operational results. For the third quarter ended September 30, 2002,
gross profit increased in the rehabilitation, tunneling and TiteLiner segments
by 15.5%, 126.0% and 11.7%, respectively, as compared to the quarter ended
September 30, 2001. A small portion of the tunneling segment increase is
attributable to Elmore, which posted a gross profit of $0.6 million for the
quarter. Gross margins as a percent of revenues were also up in every segment.
Rehabilitation gross margin percentages remained relatively flat in the third
quarter of 2002 at 26.9% of revenues compared to 27.1% for the first nine months
of 2002. However, third quarter 2002 gross margin percentages for rehabilitation
show marked improvement over the 24.5% gross margin percentages of the third
quarter in 2001. Although the Company is encouraged by the apparent firming in
rehabilitation margins and is optimistic for the future, the outlook for
rehabilitation gross margins in 2003 still remains uncertain. Albeit usually the
division with the lowest gross margins, tunneling continues to improve direct
cost management and has become a greater factor in consolidated gross margin,
posting a 19.4% gross margin in the third quarter of 2002 versus 16.1% in the
third quarter of 2001.
For the nine months ended September 30, 2002, consolidated gross profit
decreased 1.6% to $92.6 million from $94.1 million in gross profit in the first
nine months in 2001. The increase in tunneling gross profit was more than offset
by decreases in rehabilitation and TiteLiner gross profit. Gross margin was
26.1% in the first nine months of 2002 versus 28.6% gross margin in the same
period of the prior year. Gross margins are down for the first nine months of
2002 due to pricing pressure, particularly in the first half of 2002, as well as
the increasing contributions from the tunneling segment, which has historically
had lower gross margins.
Selling, general and administrative expenses for third quarter 2002 increased
27.4% to $23.7 million from $18.6 million in third quarter 2001. As previously
announced, the Company took two special charges in the third quarter of 2002.
The first was a $3.5 million pre-tax write-down of intangible assets, primarily
patents and license agreements, deemed to be impaired due to recent changes in
the Company's strategic intent for those assets and consistent with SFAS 144,
which was adopted by the Company effective January 1, 2002. The Company took a
$2.5 million pre-tax charge for a restructuring plan started during the third
quarter of 2002. Before these items, selling, general and administrative
expenses decreased 4.7% to $17.7 million in the third quarter of 2002 compared
to $18.6 million in the third quarter of 2001. The termination of goodwill
amortization as of January 1, 2002 in accordance with SFAS 142 was a significant
factor ($1.7 million) in the decrease in overhead expenses from the prior year.
An increase in incentive compensation and related accruals partially offset the
cost savings derived from this change in accounting principle. Selling, general
and administrative expenses increased to $58.1 million over the first nine
months of 2002, a 1.6% increase from $57.2 million in the same period of 2001.
Overall, for the nine months ended September 30, 2002, selling, general and
administrative expenses were down 8.9% before special charges compared to the
same time period of 2001. This primarily reflects the cessation of goodwill
amortization ($4.5 million), changes to incentive compensation, and the impact
of recent restructuring programs. These decreases were achieved despite the
addition of Kinsel operations for a full nine months in 2002 versus only seven
months of operations in 2001 and five months of selling, general and
administrative expenses from the addition of Elmore's operations in 2002,
combining for an additional $2.2 million. The Company expects additional gains
in efficiencies and overhead costs primarily as a result of current and future
efforts related to the recent restructuring plans.
Consolidated operating income from continuing operations was $9.1 million in the
third quarter of 2002, a 16.4% increase over the third quarter of 2001 operating
income of $7.8 million. Before special charges, consolidated operating income
from continuing operations was $15.0 million in the third quarter of 2002, up
92.7% from $7.8 million of operating income in the third quarter of 2001.
Operating income in the tunneling segment was $2.7 million in the third quarter
of 2002, up 91.1% over the third quarter last year. Operating income before
special charges in the rehabilitation segment increased 105.9% to $11.1 million
in the third quarter of 2002 compared to $5.4 million in the same period a year
ago. For the nine months ended September 30, 2002, consolidated operating income
from continuing operations was down 6.5% to $34.6 million from $36.9 million in
the first nine months of the prior year. Before special charges, consolidated
operating income was up $3.6 million, or 9.7%, to $40.5 million for the nine
months ended September 30, 2002. The absence of goodwill amortization in 2002
was a significant contribution to the improvement in operating income.
For the three months ended September 30, 2002, consolidated income from
continuing operations increased 45.4% to $5.7 million, or $0.21 per diluted
share, from $3.9 million, or $0.14 per diluted share in the third quarter of
2001. Before special charges, consolidated income from continuing operations was
$9.3 million, or $0.35 per diluted share, an increase of 139.4% over the same
time period of last year. All segments reported increases in net income over the
prior year third quarter with rehabilitation, tunneling, and TiteLiner up
182.6%, 81.8%, and 20.5%, respectively. Discontinued operations lost $0.8
million, or $0.03 per diluted share for the three months ended September 30,
2002. The loss is after the reported
13
$0.04 per share gain on the sale of heavy highway construction operations.
Significant cost overruns in the heavy highway businesses continued to reduce
earnings in that segment before the divestiture was finalized. Trailing costs on
jobs retained after the sale of the wastewater treatment plant and heavy highway
businesses might result in some continued losses on discontinued operations for
the near future. For the nine months ended September 30, 2002, consolidated
income from continuing operations was $19.8 million, or $0.74 per diluted share,
compared to $19.5 million, or $0.72 per diluted share, for the first nine months
of 2001, a 1.5% increase. Before special charges, consolidated income from
continuing operations for the nine months ended September 30, 2002 was $23.5
million, up 20.3% over the same period in the prior year. For the nine months
ended September 30, 2002, rehabilitation and tunneling were up 23.8% and 88.6%,
respectively. Earnings in the rehabilitation segment benefited from an
additional two months of operations in the Kinsel division in 2002 versus 2001.
Net income, including the impact of a $3.3 million loss in discontinued
operations for the first nine months of 2002, was $16.5 million, or $0.62 per
diluted share, a decrease of 17.8% from $20.1 million, or $0.74 per diluted
share, in net income for the first nine months of 2001. See the "Recent Events"
section which follows for further discussion of items impacting 2002 results.
RECENT EVENTS
The financial impact of the Des Moines, Iowa, accident in July 2002 resulting
from the temporary shutdown of two crews, time spent by all cured-in-place pipe
process field crews in additional training, insurance deductibles and potential
Iowa OSHA penalties, was estimated to be a $0.04 loss per diluted share in the
third quarter of 2002.
During the third quarter of 2002, the Company sold the Kinsel heavy highway
business previously classified as discontinued operations for a pre-tax gain of
$1.5 million, or $0.9 million after tax. The Company also sold an investment in
a real estate venture owned by Kinsel for a pre-tax gain of $1.2 million, or
$0.8 million after tax, which is included in continuing operations. Effective
October 31, 2002, the Company sold the Kinsel highway maintenance business
previously classified as discontinued operations. The Company retained
responsibility for some uncompleted jobs. This completes the disposition of all
significant businesses classified as discontinued operations.
The Company previously announced that up to $98.6 million of total recorded
backlog associated with the Jacksonville Electric Authority ("JEA") term
contract was potentially at risk. The five-year JEA term contract was awarded to
PM Construction & Rehabilitation, L.P. and Kinsel Industries, Inc., a Joint
Venture (the "Joint Venture") in November 2000, for a not to exceed amount of
$380 million. JEA has informed the Company that while they do not plan to cancel
the contract, they intend to release $20 million to the Joint Venture this year
with the remainder of the work being sent to bid. The contract calls for a
minimum of 150,000 feet installed per year or the Company will receive pay for
downtime. The Company estimates this to be the equivalent of approximately $20
million per year, of which the Company's interest is approximately $10 million.
JEA has not changed the "not to exceed amount" under the contract. As a result,
the Company adjusted reported backlog as of September 30, 2002 to reflect only
the contract minimums of $30 million for the Company's portion of work expected
between October 2002 and September 2005. The impact is a reduction in unreleased
backlog of $98.2 million.
BACKLOG
The following table highlights backlog for each of the segments and at each date
presented (in millions):
SEPTEMBER 30, 2002:
APPARENT LOW BID AND APPARENT LOW BID AND
UNRELEASED TERM EXPECTED UNRELEASED TERM
CONTRACT BACKLOG IN NEXT 12 MONTHS AVAILABLE BEYOND 12 MONTHS
-------------------------------------------------------------------------------
Rehabilitation $124.4 $ 76.0 $ 44.0
Tunneling 125.9 - -
TiteLiner 2.5 - -
-------------------------------------------------------------------------------
Total $252.8 $ 76.0 $ 44.0
-------------------------------------------------------------------------------
14
DECEMBER 31, 2001:
2002 APPARENT LOW BID AND
APPARENT LOW BID AND UNRELEASED TERM
CONTRACT BACKLOG UNRELEASED TERM AVAILABLE BEYOND 2002
-------------------------------------------------------------------------------
Rehabilitation $125.8 $ 87.0 $ 148.9
Tunneling 36.4 11.0 61.9
TiteLiner 2.1 - -
-------------------------------------------------------------------------------
Total $164.3 $ 98.0 $ 210.8
-------------------------------------------------------------------------------
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 excluded any term contract
amounts for which there was not specific and determinable work released. At
September 30, 2002 and December 31, 2001, the Company reported contract backlog
(excluding projects where the Company was advised that it was the low bidder,
but not formally awarded the contract) in the amounts of approximately $252.8
million and $164.3 million, respectively. The Company anticipates that a
significant portion of contract backlog reported at September 30, 2002 and an
additional $76.0 million of unreleased term contracts and jobs on which the
Company was the apparent low bidder will be completed through September 30,
2003. An additional $44.0 million of unreleased term contract work and work on
which the Company was the apparent low bidder was anticipated for completion
beyond September 30, 2003. As disclosed in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Recent Events," the
Company has adjusted reported backlog by $98.2 million of backlog available
beyond 12 months in the Kinsel operations due to its re-estimation of the JEA
contracts. All backlog values were the estimate of management based on contracts
outstanding at September 30, 2002 and are subject to change due to factors
beyond the control of the Company.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $66.7 million at September 30, 2002, representing
a 2.3% increase over the September 30, 2001 balance of $65.2 million. The cash
balance at September 30, 2002 was $8.0 million less than the balance at December
31, 2001. The cash balance at September 30, 2002 included $3.7 million of cash
and cash equivalents restricted in various escrow accounts. For the first nine
months of 2002, operating activities from continuing operations contributed
$21.9 million, a decrease of 33.1% from the $32.8 million contributed for the
first nine months of the previous year. Working capital changes, specifically an
increase in receivables and a prior year net decrease on inventories, were the
primary reasons for the decrease in the first nine months of 2002, compared to
the first nine months of 2001. Operating activities of discontinued operations
generated $1.7 million in cash flow during the first nine months of 2002,
compared to a $7.9 million use of cash during the same period in 2001. Including
discontinued operations, net cash provided by operating activities for the first
nine months of 2002 was $23.6 million, a decrease of 4.9% from the $24.9 million
in operating cash flow for the first nine months of 2001.
Investing activities used $19.4 million in cash in the first nine months of
2002. The most significant use was $18.2 million for capital expenditures, a
15.7% increase over the $15.7 million used during the first nine months of 2001.
Capital expenditures during the first nine months of 2002 were principally for
support of continued growth in the tunneling segment and for normal operations
in the rehabilitation segment. Proceeds from the sale of investment property and
the Kinsel heavy highway business in the third quarter of 2002, the Kinsel
wastewater treatment plant business in the second quarter of 2002, and the sale
of fixed assets during the first nine months of 2002 combined for a $7.6 million
source of cash in the nine months ended September 30, 2002. These proceeds were
significantly offset by the $8.5 million of net cash outlay for the purchase of
Elmore, which is now part of the tunneling segment.
Financing activities consumed $13.1 million in cash for the nine months ended
September 30, 2002 compared to $5.3 million for the same period of 2001. A
scheduled $15.7 million principal payment on the Company's Senior Notes, Series
A (the "Senior Notes") in the first quarter of 2002 along with $4.3 million in
additional repayments of long-term debt were the most significant uses of cash
during the nine months ended September 30, 2002. The Company received an
additional $10.1 million cash from short-term borrowings over the first nine
months of 2002 compared to $20.3 million from short-term borrowings over the
same period of 2001. During the first nine months of 2002, option exercises
provided the Company with $1.6 million in cash, a decrease from the $5.1 million
generated from option exercises in the first nine months of 2001. The Company
purchased 30,000 shares of its stock in the third quarter of 2002, placing the
total shares purchased during the first nine months of 2002 at 230,000 at an
average price of $21.09 per share and total cash outlay of $4.9 million. The
Company purchased 522,600 shares at an average price of $21.95 per share for a
total of $11.5 million during the same time period in 2001. The Company has
spent $72.3 million for 3,790,115 shares on a cumulative basis through September
30, 2002 under the stock repurchase program since its inception in 1998.
Repurchased shares are held as treasury stock until reissued.
15
At September 30, 2002, trade receivables and retainage totaled $105.6 million, a
1.8% decrease from December 31, 2001. Costs and estimated earnings in excess of
billings were $33.5 million at September 30, 2002, a 41.2% increase over the
$23.7 million balance at December 31, 2001. The large increase was due primarily
to the launch of several new projects in the tunneling segment in the first nine
months of 2002. In general, significant costs are incurred for equipment cost,
construction materials, and mobilization of equipment and crews at project
initiation. On many contracts, these costs cannot be invoiced until tunneling
commences.
The Company has a line of credit facility under a credit agreement (the "Credit
Agreement") to borrow up to $50 million. At September 30, 2002, the Company had
unused committed bank credit facilities under the Credit Agreement totaling
$16.5 million. Of the $33.5 million used under the Credit Agreement, $25.0
million related to short-term borrowings and $8.5 million was for various
standby letters of credit. The commitment fee paid per annum by the Company is
0.2% on the unborrowed balance. The interest rates under this facility vary and
are based on the prime rate. As of September 30, 2002, the rate was 2.5%. The
current line of credit facility expires March 31, 2003. The Company is in the
process of negotiating a renewal of the line of credit.
The Company's Senior Notes, 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 2002 to February 2006, inclusive, the Company
will be required to make principal payments of $15.7 million, together with an
equivalent payment at maturity. On September 30, 2002, the principal amount of
Senior Notes outstanding was $78.6 million. 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. Upon specified change in control events each holder has the
right to require the Company to purchase its Senior Notes without any premium.
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, 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. The Company is in
compliance with all of its 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.
MARKET RISK
The Company is exposed to the effect of interest rate changes and foreign
currency fluctuations.
INTEREST RATE RISK
The fair value of the Company's cash and short-term investment portfolio and the
fair value of the line of credit facility at September 30, 2002 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, was 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
maintained fixed rate debt as a percentage of its net debt in a percentage range
set by practice. The impact to earnings and cash flows from a hypothetical 10%
change in interest rates is 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 weakening of the U.S.
dollar) is immaterial.
16
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 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
There have been no material changes since the filing of the Company's Form 10-Q
for the period ended June 30, 2002.
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 September 10, 2002, the Company filed a Current Report on Form
8-K, under Item 9, to provide the Company's press release dated September 10,
2002, announcing that Iowa OSHA had issued a citation for the Des Moines
accident.
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.
November 13, 2002 /s/ Joseph A. White
--------------------------------------------
Joseph A. White
Vice President - Chief Financial Officer
Principal Financial and Accounting Officer
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: November 13, 2002
/s/ Anthony W. Hooper
-----------------------------------------------
Anthony W. Hooper
Chairman, President 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: November 13, 2002
/s/ Joseph A. White
------------------------------------------
Joseph A. White
Vice President and Chief Financial Officer
21
INDEX TO EXHIBITS
2 - Not applicable.
3(i) - Not applicable.
3(ii) - Not applicable.
4 - Not applicable.
10 - Not applicable.
11 - Not applicable.
15 - Not applicable.
18 - Not applicable.
19 - Not applicable.
22 - Not applicable.
23 - Not applicable.
24 - Not applicable.
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.
22