form10q09302008.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
þ QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period
ended September 30,
2008
or
|
¨ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the transition period
from ______________________ to
______________________
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 incorporation or organization) (I.R.S.
Employer Identification No.)
17988 Edison Avenue, Chesterfield,
Missouri 63005-3700
(Address of
principal executive
offices) (Zip
Code)
(636)
530-8000
(Registrant’s
telephone number, including area code)
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 þ No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨ Accelerated
filer þ
Non-accelerated filer ¨ Smaller
reporting company ¨
Indicate
by checkmark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes ¨ No þ
There
were 27,932,612 shares of common stock, $.01 par value per share, outstanding at
October 23, 2008.
TABLE
OF CONTENTS
PART
I—FINANCIAL INFORMATION
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3
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4
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5
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6
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17
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29
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30
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PART
II—OTHER INFORMATION
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31
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31
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31
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32
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33
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PART
I—FINANCIAL INFORMATION
INSITUFORM
TECHNOLOGIES, INC. AND SUBSIDIARIES
(Unaudited)
(in
thousands, except per share amounts)
|
|
For
the Three Months Ended
September
30,
|
|
|
For
the Nine Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
137,877 |
|
|
|
$
125,640 |
|
|
|
$
399,390 |
|
|
|
$
365,591 |
|
Cost
of revenues
|
|
|
105,655 |
|
|
|
100,000 |
|
|
|
309,152 |
|
|
|
291,519 |
|
Gross
profit
|
|
|
32,222 |
|
|
|
25,640 |
|
|
|
90,238 |
|
|
|
74,072 |
|
Operating
expenses
|
|
|
21,948 |
|
|
|
21,638 |
|
|
|
70,494 |
|
|
|
69,846 |
|
Operating
income
|
|
|
10,274 |
|
|
|
4,002 |
|
|
|
19,744 |
|
|
|
4,226 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
823 |
|
|
|
689 |
|
|
|
2,410 |
|
|
|
2,348 |
|
Interest
expense
|
|
|
(1,161 |
) |
|
|
(1,331 |
) |
|
|
(3,546 |
) |
|
|
(4,139 |
) |
Other
|
|
|
(68 |
) |
|
|
475 |
|
|
|
937 |
|
|
|
1,043 |
|
Total
other expense
|
|
|
(406 |
) |
|
|
(167 |
) |
|
|
(199 |
) |
|
|
(748 |
) |
Income
before taxes on income
|
|
|
9,868 |
|
|
|
3,835 |
|
|
|
19,545 |
|
|
|
3,478 |
|
Taxes
on income (tax benefits)
|
|
|
2,035 |
|
|
|
(654 |
) |
|
|
4,842 |
|
|
|
(604 |
) |
Income
before minority interests and equity in
earnings (losses)
of affiliated companies
|
|
|
7,833 |
|
|
|
4,489 |
|
|
|
14,703 |
|
|
|
4,082 |
|
Minority
interests
|
|
|
(393 |
) |
|
|
(120 |
) |
|
|
(726 |
) |
|
|
(252 |
) |
Equity
in earnings (losses) of affiliated companies
|
|
|
351 |
|
|
|
311 |
|
|
|
(243 |
) |
|
|
(8 |
) |
Income
from continuing operations
|
|
|
7,791 |
|
|
|
4,680 |
|
|
|
13,734 |
|
|
|
3,822 |
|
Loss
from discontinued operations, net of tax
|
|
|
(1,139 |
) |
|
|
(198 |
) |
|
|
(1,744 |
) |
|
|
(11,421 |
) |
Net
income (loss)
|
|
|
$
6,652 |
|
|
|
$
4,482 |
|
|
|
$
11,990 |
|
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|
$
(7,599 |
) |
|
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Earnings
(loss) per share:
|
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Basic:
|
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|
|
|
|
|
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Income
from continuing operations
|
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|
$
0.28 |
|
|
|
$
0.17 |
|
|
|
$
0.50 |
|
|
|
$
0.14 |
|
Loss
from discontinued operations
|
|
|
(0.04 |
) |
|
|
(0.01 |
) |
|
|
(0.06 |
) |
|
|
(0.42 |
) |
Net
income (loss)
|
|
|
0.24 |
|
|
|
0.16 |
|
|
|
0.44 |
|
|
|
(0.28 |
) |
Diluted:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
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Income
from continuing operations
|
|
|
$
0.28 |
|
|
|
$
0.17 |
|
|
|
$
0.49 |
|
|
|
$
0.14 |
|
Loss
from discontinued operations
|
|
|
(0.04 |
) |
|
|
(0.01 |
) |
|
|
(0.06 |
) |
|
|
(0.42 |
) |
Net
income (loss)
|
|
|
$
0.24 |
|
|
|
$
0.16 |
|
|
|
$
0.43 |
|
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|
$
(0.28 |
) |
The
accompanying notes are an integral part of the consolidated financial
statements.
INSITUFORM
TECHNOLOGIES, INC. AND SUBSIDIARIES
(Unaudited)
(in
thousands, except share amounts)
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
Assets
|
|
|
|
|
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Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
$
90,062 |
|
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|
$
78,961 |
|
Restricted
cash
|
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|
2,058 |
|
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|
2,487 |
|
Receivables,
net
|
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|
96,893 |
|
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|
85,774 |
|
Retainage
|
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|
22,858 |
|
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|
23,444 |
|
Costs
and estimated earnings in excess of billings
|
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|
43,737 |
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40,590 |
|
Inventories
|
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|
17,436 |
|
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|
17,789 |
|
Prepaid
expenses and other assets
|
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|
31,615 |
|
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|
28,975 |
|
Current
assets of discontinued operations
|
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|
17,093 |
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|
31,269 |
|
Total
current assets
|
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|
321,752 |
|
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|
309,289 |
|
Property, plant and
equipment, less accumulated depreciation
|
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|
71,977 |
|
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|
73,368 |
|
Other
assets
|
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|
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Goodwill
|
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|
122,437 |
|
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|
122,560 |
|
Other
assets
|
|
|
24,457 |
|
|
|
26,532 |
|
Total
other assets
|
|
|
146,894 |
|
|
|
149,092 |
|
Non-current
assets of discontinued operations
|
|
|
7,157 |
|
|
|
9,391 |
|
|
|
|
|
|
|
|
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|
Total
Assets
|
|
|
$
547,780 |
|
|
|
$
541,140 |
|
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|
|
|
|
|
|
|
|
Liabilities and
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
maturities of long-term debt and line of credit
|
|
|
$
1,523 |
|
|
|
$
1,097 |
|
Accounts
payable and accrued expenses
|
|
|
99,430 |
|
|
|
87,935 |
|
Billings
in excess of costs and estimated earnings
|
|
|
8,244 |
|
|
|
8,602 |
|
Current
liabilities of discontinued operations
|
|
|
4,361 |
|
|
|
14,830 |
|
Total
current liabilities
|
|
|
113,558 |
|
|
|
112,464 |
|
Long-term debt,
less current maturities
|
|
|
65,000 |
|
|
|
65,000 |
|
Other
liabilities
|
|
|
4,372 |
|
|
|
7,465 |
|
Non-current
liabilities of discontinued operations
|
|
|
874 |
|
|
|
953 |
|
Total
liabilities
|
|
|
183,804 |
|
|
|
185,882 |
|
Minority
interests
|
|
|
3,222 |
|
|
|
2,717 |
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, undesignated, $.10 par – shares authorized 2,000,000; none
outstanding
|
|
|
– |
|
|
|
– |
|
Common
stock, $.01 par – shares authorized 60,000,000; shares issued and
outstanding
27,929,533 and
27,420,623
|
|
|
279 |
|
|
|
275 |
|
Additional
paid-in capital
|
|
|
107,901 |
|
|
|
104,332 |
|
Retained
earnings
|
|
|
250,966 |
|
|
|
238,976 |
|
Accumulated
other comprehensive income
|
|
|
1,608 |
|
|
|
8,958 |
|
Total
stockholders’ equity
|
|
|
360,754 |
|
|
|
352,541 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
$
547,780 |
|
|
|
$
541,140 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
INSITUFORM
TECHNOLOGIES, INC. AND SUBSIDIARIES
(Unaudited)
(in
thousands)
|
|
For
the Nine Months
Ended
September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
|
$
11,990 |
|
|
|
$
(7,599 |
) |
Loss
from discontinued operations
|
|
|
1,744 |
|
|
|
11,421 |
|
Income
from continuing operations
|
|
|
13,734 |
|
|
|
3,822 |
|
Adjustments
to reconcile to net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
12,973 |
|
|
|
11,950 |
|
Gain
on sale of fixed assets
|
|
|
(1,452 |
) |
|
|
(2,401 |
) |
Equity-based
compensation expense
|
|
|
3,555 |
|
|
|
3,005 |
|
Deferred
income taxes
|
|
|
710 |
|
|
|
(5,114 |
) |
Other
|
|
|
(138 |
) |
|
|
(1,692 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
327 |
|
|
|
(1,404 |
) |
Receivables
net, retainage and costs and estimated earnings in excess of
billings
|
|
|
(20,510 |
) |
|
|
(2,556 |
) |
Inventories
|
|
|
(55 |
) |
|
|
(371 |
) |
Prepaid
expenses and other assets
|
|
|
(4,457 |
) |
|
|
(7,470 |
) |
Accounts
payable and accrued expenses
|
|
|
8,883 |
|
|
|
(7,984 |
) |
Net
cash provided by (used in) operating activities of continuing
operations
|
|
|
13,570 |
|
|
|
(10,215 |
) |
Net
cash provided by operating activities of discontinued
operations
|
|
|
466 |
|
|
|
4,360 |
|
Net
cash provided by (used in) operating activities
|
|
|
14,036 |
|
|
|
(5,855 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(11,085 |
) |
|
|
(12,462 |
) |
Proceeds
from sale of fixed assets
|
|
|
1,521 |
|
|
|
2,182 |
|
Net
cash used in investing activities of continuing operations
|
|
|
(9,564 |
) |
|
|
(10,280 |
) |
Net
cash provided by (used in) investing activities of discontinued
operations
|
|
|
1,339 |
|
|
|
(4,175 |
) |
Net
cash used in investing activities
|
|
|
(8,225 |
) |
|
|
(14,455 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
256 |
|
|
|
2,496 |
|
Additional
tax benefit from stock option exercises recorded in additional paid-in
capital
|
|
|
– |
|
|
|
148 |
|
Proceeds
from notes payable
|
|
|
2,580 |
|
|
|
2,648 |
|
Principal
payments on notes payable
|
|
|
(2,154 |
) |
|
|
(1,921 |
) |
Net
proceeds from line of credit
|
|
|
– |
|
|
|
5,000 |
|
Principal
payments on long-term debt
|
|
|
– |
|
|
|
(15,768 |
) |
Net
cash provided by (used in) financing activities
|
|
|
682 |
|
|
|
(7,397 |
) |
Effect
of exchange rate changes on cash
|
|
|
4,608 |
|
|
|
9,326 |
|
Net
increase (decrease) in cash and cash equivalents for the
period
|
|
|
11,101 |
|
|
|
(18,381 |
) |
Cash
and cash equivalents, beginning of period
|
|
|
78,961 |
|
|
|
96,393 |
|
Cash
and cash equivalents, end of period
|
|
|
$
90,062 |
|
|
|
$
78,012 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
INSITUFORM
TECHNOLOGIES, INC. AND SUBSIDIARIES
(Unaudited)
The
accompanying unaudited consolidated financial statements of Insituform
Technologies, Inc. and its subsidiaries (“Insituform” or the “Company”) reflect
all adjustments (consisting only of normal recurring adjustments) that are, in
the opinion of management, necessary for a fair presentation of the Company’s
financial position, results of operations and cash flows as of and for the three
and nine months ended September 30, 2008 and 2007. The unaudited consolidated
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 unaudited consolidated financial
statements included herein should be read in conjunction with the audited
consolidated financial statements and footnotes included in the Company’s 2007
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
March 10, 2008.
The
results of operations for the three and nine months ended September 30, 2008 are
not necessarily indicative of the results to be expected for the full
year.
2.
ACCOUNTING POLICIES
Newly Adopted Accounting
Pronouncements
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Standards (“SFAS”) No. 157, Fair Value Measurements
(“SFAS No. 157”), which defines fair value, establishes a framework for
consistently measuring fair value under generally accepted accounting principles
and expands disclosures about fair value measurements. SFAS No. 157
became partially effective for the Company on January 1, 2008 (SFAS No. 157 is
not yet effective for non-financial assets and liabilities). SFAS No. 157
establishes a hierarchy in order to segregate fair value measurements using
quoted prices in active markets for identical assets or liabilities, significant
other observable inputs and significant unobservable inputs. For assets and
liabilities that are measured at fair value on a recurring basis, SFAS No. 157
requires disclosure of information that enables users of financial statements to
assess the inputs used to determine fair value based on the aforementioned
hierarchy. See Note 10 for further information regarding the Company’s assets
and liabilities that are measured at fair value on a recurring
basis.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement
No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to
choose to measure eligible items at fair value at specified election dates and
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date.
SFAS No. 159 was effective for the Company on January 1, 2008.
However, the Company has not elected to apply the provisions of SFAS No. 159 to
any of the Company’s financial assets and financial liabilities, as permitted by
SFAS No. 159.
Accounting Pronouncements
Not Yet Adopted
In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations (“SFAS
No. 141(R)”), which replaces SFAS No. 141, Business Combinations, and
requires the acquirer of a business to recognize and measure the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at fair value. SFAS No. 141(R) also requires transaction costs
related to the business combination to be expensed as incurred. SFAS No. 141(R)
is effective for business combinations for which the acquisition date is on or
after fiscal years beginning after December 15, 2008. Adoption of this statement
will impact the Company’s consolidated financial position and results of
operations if it completes a business combination subsequent to January 1,
2009.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS No. 160”). This Statement amends
ARB No. 51, Consolidated
Financial Statements, to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008. The Company is currently evaluating the effect that the adoption of
SFAS No. 160 will have on its consolidated financial position, results of
operations and cash flows. However, the Company does have certain noncontrolling
interests in consolidated subsidiaries. If SFAS No. 160 had been applied as of
September 30, 2008, the $3.2 million reported as minority interest in the
liabilities section on the Company’s consolidated balance sheet would have been
reported as $3.2 million of noncontrolling interest in subsidiaries in the
equity section of its consolidated balance sheet.
3.
SHARE INFORMATION
Earnings
(loss) per share have been calculated using the following share
information:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Weighted
average number of common shares used for basic EPS
|
|
|
27,490,413 |
|
|
|
27,316,092 |
|
|
|
27,559,721 |
|
|
|
27,284,067 |
|
Effect
of dilutive stock options and restricted stock
|
|
|
705,532 |
|
|
|
203,507 |
|
|
|
633,784 |
|
|
|
– |
|
Weighted
average number of common shares and dilutive
potential common
stock used in dilutive EPS
|
|
|
28,195,945 |
|
|
|
27,519,599 |
|
|
|
28,193,505 |
|
|
|
27,284,067 |
|
In the
nine-month period ended September 30, 2007, the effect of in-the-money stock
options, restricted stock, restricted stock units and deferred stock units of
322,331 were not considered in the calculation of loss per share as the effect
would have been anti-dilutive.
The
Company excluded 465,434 and 593,656 stock options for the three months ended
September 30, 2008 and 2007, respectively, and 526,212 and 460,056 stock options
for the nine months ended September 30, 2008 and 2007, respectively, from
the diluted earnings per share calculations for the Company’s common stock
because they were anti-dilutive as their exercise prices were greater than the
average market price of common shares for each period.
4.
DISCONTINUED OPERATIONS
On March
29, 2007, the Company announced plans to exit its tunneling business in an
effort to align better its operations with its long-term strategic initiatives.
In the years leading up to 2007, operating results in the tunneling business
limited the Company’s ability to invest in international and inorganic growth
opportunities. The tunneling business also required a significant amount of
senior management’s time. The closure has enabled the Company to realign its
management structure and reallocate management resources and Company capital to
implement its long-term strategy.
The
Company has classified the results of operations of its tunneling business as
discontinued operations for all periods presented. Substantially all existing
tunneling business activity had been completed in early 2008.
In the
first quarter of 2007, the Company recorded $16.8 million in closure costs
related to the tunneling business. The Company recorded a total of $4.8 million
(pre-tax) related to closure activities, including expense for $3.6 million
(pre-tax) associated with lease terminations and buyouts, $1.1 million (pre-tax)
for employee termination benefits and retention incentives and $0.1 million
related to debt financing fees paid on March 28, 2007 in connection with certain
amendments to the Company’s Senior Notes and credit facility relating to the
closure of the tunneling business. The Company also incurred impairment charges
for goodwill and other intangible assets of $9.0 million in the first quarter of
2007. In addition, in 2007, the Company recorded charges totaling $3.0 million
(pre-tax) for equipment and other assets. Net closure (reversals) charges
relating to equipment and other asset transactions of $(0.3) million and $0.9
million were recorded in the third quarter of 2008 and 2007,
respectively.
Operating
results for discontinued operations are summarized as follows (in
thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
Revenues
|
|
|
$
(584 |
) |
|
|
$
13,458 |
|
|
|
$
6,987 |
|
|
|
$
49,163 |
|
Gross
profit (loss)
|
|
|
(995 |
) |
|
|
692 |
|
|
|
(1,729 |
) |
|
|
2,724 |
|
Operating
expenses
|
|
|
1,260 |
|
|
|
411 |
|
|
|
2,321 |
|
|
|
2,072 |
|
Closure
charges (reversals) of tunneling business
|
|
|
(300 |
) |
|
|
940 |
|
|
|
(777 |
) |
|
|
17,783 |
|
Operating
loss
|
|
|
(1,955 |
) |
|
|
(659 |
) |
|
|
(3,273 |
) |
|
|
(17,131 |
) |
Loss
before tax benefits
|
|
|
(1,955 |
) |
|
|
(344 |
) |
|
|
(2,902 |
) |
|
|
(16,730 |
) |
Tax
benefits
|
|
|
816 |
|
|
|
146 |
|
|
|
1,158 |
|
|
|
5,309 |
|
Net
loss
|
|
|
$
(1,139 |
) |
|
|
$
(198 |
) |
|
|
$
(1,744 |
) |
|
|
$
(11,421 |
) |
Balance
sheet data for discontinued operations was as follows at September 30, 2008 and
December 31, 2007 (in thousands):
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
$
4,618 |
|
|
|
$
9,001 |
|
Retainage
|
|
|
7,169 |
|
|
|
9,122 |
|
Costs
and estimated earnings in excess of billings
|
|
|
4,687 |
|
|
|
9,063 |
|
Prepaid
expenses and other current assets
|
|
|
619 |
|
|
|
4,083 |
|
Property,
plant and equipment, less accumulated depreciation
|
|
|
4,483 |
|
|
|
6,434 |
|
Other
assets
|
|
|
2,674 |
|
|
|
2,957 |
|
Total
assets
|
|
|
$
24,250 |
|
|
|
$
40,660 |
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
4,240 |
|
|
|
12,062 |
|
Billings
in excess of costs and estimated earnings
|
|
|
121 |
|
|
|
2,768 |
|
Other
liabilities
|
|
|
874 |
|
|
|
953 |
|
Total
liabilities
|
|
|
$
5,235 |
|
|
|
$
15,783 |
|
5.
ACQUIRED INTANGIBLE ASSETS
Acquired
intangible assets include license agreements, customer relationships and patents
and trademarks. Intangible assets at September 30, 2008 and December 31, 2007
were as follows (in thousands):
|
|
|
|
|
As of
September 30, 2008
|
|
|
As
of December 31, 2007
|
|
|
|
Weighted
Average
Useful
Lives
(Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
agreements
|
|
|
20
|
|
|
|
$
3,840 |
|
|
|
$
(2,044 |
) |
|
|
$
1,796 |
|
|
|
$
3,894 |
|
|
|
$
(1,976 |
) |
|
|
$
1,918 |
|
Customer
relationships
|
|
|
15
|
|
|
|
1,797 |
|
|
|
(602 |
) |
|
|
1,195 |
|
|
|
1,797 |
|
|
|
(512 |
) |
|
|
1,285 |
|
Patents
and trademarks
|
|
|
16
|
|
|
|
20,206 |
|
|
|
(13,867 |
) |
|
|
6,339 |
|
|
|
17,942 |
|
|
|
(13,613 |
) |
|
|
4,329 |
|
Total
|
|
|
|
|
|
|
$
25,843 |
|
|
|
$
(16,513 |
) |
|
|
$
9,330 |
|
|
|
$
23,633 |
|
|
|
$
(16,101 |
) |
|
|
$
7,532 |
|
|
|
2008
|
|
|
2007
|
|
Aggregate
amortization expense:
|
|
|
|
|
|
|
For
the three months ended September 30:
|
|
|
$
282 |
|
|
|
$
68 |
|
For
the nine months ended September 30:
|
|
|
863 |
|
|
|
185 |
|
|
|
|
|
|
|
|
|
|
Estimated
amortization expense:
|
|
|
|
|
|
|
|
|
For year ending December 31,
2008
|
|
|
$
1,026 |
|
|
|
|
|
For year ending December 31,
2009
|
|
|
652 |
|
|
|
|
|
For year ending December 31,
2010
|
|
|
597 |
|
|
|
|
|
For year ending December 31,
2011
|
|
|
541 |
|
|
|
|
|
For year ending December 31,
2012
|
|
|
497 |
|
|
|
|
|
6.
LONG-TERM DEBT AND CREDIT FACILITY
Financing
Arrangements
On April
4, 2008, the Company amended its $35.0 million credit facility with Bank of
America, N.A., to extend the maturity date of the credit facility to April 30,
2009 and increase the Company’s borrowing rates on Eurodollar loans and letters
of credit by 0.25% (now ranging from 1.25% to 2.25%), among other
things.
At
September 30, 2008, the Company had $15.9 million in letters of credit issued
and outstanding under its credit facility with Bank of America, $14.5 million of
which was collateral for the benefit of certain of the Company’s insurance
carriers and $1.4 million was collateral for work performance. The $35.0 million
credit facility allows the Company to borrow under a line of credit and/or
through standby letters of credit. There were no other outstanding borrowings
under the line of credit facility at September 30, 2008, resulting in $19.1
million in available borrowing capacity under the line of credit facility as of
that date. At September 30, 2007, the Company had $5.0 million outstanding
borrowings on its credit facility.
In May
2008, the Company entered into financing arrangements for certain annual
insurance premiums in the amount of $0.7 million. Through the third quarter, the
Company has repaid $0.4 million. In July 2008, the Company entered into
additional financing arrangements for certain annual insurance premiums in the
amount of $1.7 million, of which the Company has repaid $0.6 million. At
September 30, 2008, $1.5 million remained outstanding for the two financing
arrangements. The Company intends to repay these notes in full by the end of the
first quarter of 2009.
Debt
Covenants
At
September 30, 2008, the Company was in compliance with all of its debt covenants
as required under the Senior Notes and credit facility. The Company believes it
has adequate resources to fund future cash requirements and debt repayments for
at least the next twelve months with cash generated from operations, existing
cash balances, additional short- and long-term borrowings and the sale of
assets.
7.
EQUITY-BASED COMPENSATION
At
September 30, 2008, the Company had two active equity-based compensation plans
under which equity-based awards may be granted, including stock appreciation
rights, restricted shares of common stock, performance awards, stock options and
stock units. There are 2.2 million shares authorized for issuance under these
plans. At September 30, 2008, approximately 1.4 million shares remained
available for future issuance under these plans.
On April 14, 2008, the Company granted
J. Joseph Burgess a non-qualified stock option to purchase 118,397 shares of the
Company’s common stock, a performance-based award of 52,784 shares of restricted
stock and a one-time award of 103,092 shares of restricted stock in connection
with his appointment as the Company’s President and Chief Executive Officer.
These awards were issued as “inducement grants” under the rules of the Nasdaq
Global Select Market and, as such, were not issued pursuant to the Company’s
2006 Employee Equity Incentive Plan.
Stock
Awards
Stock
awards, which include restricted stock shares and restricted stock units, of the
Company’s common stock are awarded from time to time to executive officers and
certain key employees of the Company. Stock award compensation is recorded based
on the award date fair value and charged to expense ratably through the
restriction period. Forfeitures of unvested stock awards cause the reversal of
all previous expense recorded as a reduction of current period
expense.
A summary
of stock award activity during the nine months ended September 30, 2008
follows:
|
|
Stock
Awards
|
|
|
Weighted
Average
Award
Date
Fair
Value
|
|
Outstanding
at January 1, 2008
|
|
|
102,089 |
|
|
|
$
19.31 |
|
Awarded
|
|
|
442,553 |
|
|
|
13.56 |
|
Shares
distributed
|
|
|
(37,763 |
) |
|
|
16.91 |
|
Forfeited
|
|
|
(50,284 |
) |
|
|
14.93 |
|
Outstanding
at September 30, 2008
|
|
|
456,595 |
|
|
|
$
14.41 |
|
Expense
associated with stock awards was $1.4 million and $0.7 million in the first nine
months of 2008 and 2007, respectively. Unrecognized pre-tax expense of $4.8
million related to stock awards is expected to be recognized over the weighted
average remaining service period of 2.3 years for awards outstanding at
September 30, 2008.
For the
three months ended September 30, 2008, expense associated with stock awards was
$0.5 million compared to $0.1 million for the same period in 2007.
Deferred Stock Unit
Awards
Deferred
stock units are awarded to directors of the Company and represent the Company’s
obligation to transfer one share of the Company’s common stock to the award
recipient at a future date and generally are fully vested on the date of award.
In addition, certain awards of deferred stock units were made in connection with
the service of the Company’s Chairman of the Board,
Alfred L. Woods, as the Company’s Interim Chief Executive Officer from August
13, 2007 to April 14, 2008. These awards vested on April 14, 2008. The expense
related to the issuance of deferred stock units is recorded according to
vesting.
A summary
of deferred stock unit activity during the nine months ended September 30, 2008
follows:
|
|
Deferred
Stock
Units
|
|
|
Weighted
Average
Award
Date
Fair
Value
|
|
Outstanding
at January 1, 2008
|
|
|
155,098 |
|
|
|
$
18.51 |
|
Awarded
|
|
|
51,364 |
(1) |
|
|
15.61 |
|
Shares
distributed
|
|
|
(27,382 |
) |
|
|
20.69 |
|
Forfeited
|
|
|
(23,816 |
)(1) |
|
|
14.01 |
|
Outstanding
at September 30, 2008
|
|
|
155,264 |
|
|
|
$
17.85 |
|
___________________
|
(1)
|
Mr.
Woods was awarded 26,236 deferred stock units on March 3, 2008 as
compensation for his service as Interim Chief Executive Officer for the
period from February 13, 2008 through August 12, 2008. Pursuant to the
terms of the award agreement, however, on April 14, 2008, the amount of
deferred stock units was adjusted downward to 8,745 deferred stock units
to reflect his actual period of
service.
|
There was
no expense associated with deferred stock unit awards during the third quarter
of 2008 or 2007. Expense associated with awards of deferred stock units in the
nine months ended September 30, 2008 was $1.1 million compared to $0.6 million
in the same period in 2007.
Stock
Options
Stock
options on the Company’s common stock are granted from time to time to executive
officers and certain key employees of the Company. Stock options granted
generally have a term of seven years and an exercise price equal to the market
value of the underlying common stock on the date of grant.
A summary
of stock option activity during the nine months ended September 30, 2008
follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at January 1, 2008
|
|
|
909,987 |
|
|
|
$
21.27 |
|
Granted
|
|
|
424,021 |
|
|
|
13.42 |
|
Exercised
|
|
|
(14,200 |
) |
|
|
14.17 |
|
Forfeited
|
|
|
(149,871 |
) |
|
|
17.02 |
|
Expired
|
|
|
(30,371 |
) |
|
|
21.07 |
|
Outstanding
at September 30, 2008
|
|
|
1,139,566 |
|
|
|
$
18.99 |
|
Exercisable
at September 30, 2008
|
|
|
695,793 |
|
|
|
$
21.46 |
|
The
weighted average grant-date fair value of options granted during the nine months
ended September 30, 2008 was $5.31. In the
first nine months of 2008, the Company collected $0.3 million from stock option
exercises that had a total intrinsic value of $0.1 million. In the first nine
months of 2007, the Company collected $2.5 million for option exercises that had
a total intrinsic value of $0.7 million. In the nine months ended September 30,
2008 and 2007, the Company recorded expense of $0.9 million and $1.7 million,
respectively, related to stock option grants. The intrinsic value calculation is
based on the Company’s closing stock price of $14.96 on September 30, 2008.
Unrecognized pre-tax expense of $1.2 million related to stock option grants is
expected to be recognized over the weighted average remaining contractual term
of 4.4 years for awards outstanding at September 30, 2008.
The
Company uses a lattice-based option pricing model. The fair value of stock
options granted during the nine month periods ended September 30, 2008 and 2007
was estimated at the date of grant based on the assumptions presented in the
table below. Volatility, expected term and dividend yield assumptions were based
on the Company’s historical experience. The risk-free rate was based on a U.S.
treasury note with a maturity similar to the option grant’s expected
term.
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
Range
|
|
|
Weighted
Average
|
|
|
Range
|
|
|
Weighted
Average
|
|
Volatility
|
|
|
37.3%
– 41.9 |
% |
|
|
40.6 |
% |
|
|
44.9%
– 46.4 |
% |
|
|
45.0 |
% |
Expected
term (years)
|
|
|
4.5 |
|
|
|
4.5 |
|
|
|
4.5-4.8 |
|
|
|
4.6 |
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free
rate
|
|
|
4.0 |
% |
|
|
4.0 |
% |
|
|
4.4%-4.6 |
% |
|
|
4.4 |
% |
8.
COMPREHENSIVE INCOME
For the
three months ended September 30, 2008 and 2007, comprehensive income was $1.6
million and 7.8 million, respectively. For the nine months ended September 30,
2008 and 2007, comprehensive income was $4.6 million and $1.4 million,
respectively. The Company’s adjustment to net income (loss) to calculate
comprehensive income (loss) was $(8.2) million and $3.4 million for the three
months ended September 30, 2008 and 2007, respectively, and $(7.3) million and
$9.0 million for the nine months ended September 30, 2008 and 2007,
respectively, and consisted primarily of cumulative foreign currency translation
adjustments and gains or losses associated with our foreign currency hedging
contracts.
9.
COMMITMENTS AND CONTINGENCIES
Litigation
In
December 2003, Environmental Infrastructure Group, L.P. (“EIG”) filed suit in
the District Court of Harris County, Texas, against several defendants,
including Kinsel Industries, Inc. (“Kinsel”), a wholly-owned subsidiary of the
Company, seeking unspecified damages. The suit alleges, among other things, that
Kinsel failed to pay EIG monies due under a subcontractor agreement. In February
2004, Kinsel filed an answer, generally denying all claims, and also filed a
counter-claim against EIG based upon EIG’s failure to perform work required of
it under the subcontract. In June 2004, EIG amended its complaint to add the
Company as an additional defendant and included a claim for lost opportunity
damages. In December 2004, the Company and Kinsel filed third-party petitions
against the City of Pasadena, Texas, on the one hand, and Greystar-EIG, LP, Grey
General Partner, LLC and Environmental Infrastructure Management, LLC
(collectively, the “Greystar Entities”), on the other hand. EIG also amended its
petition to add a fraud claim against Kinsel and the Company and also requested
exemplary damages. The original petition filed by EIG against Kinsel seeks
damages for funds that EIG claims should have been paid to EIG on a wastewater
treatment plant built for the City of Pasadena. Kinsel’s third-party petition
against the City of Pasadena seeks approximately $1.4 million in damages to the
extent EIG’s claims against Kinsel have merit and were appropriately requested.
The third-party petition against the Greystar Entities seeks damages based upon
fraudulent conveyance, alter ego and single business enterprise (the Greystar
Entities are the successors-in-interest to all or substantially all of the
assets of EIG, now believed to be defunct). The parties have agreed upon a
docket control order setting the matter for trial in February 2009. The Company
believes that the factual allegations and legal claims made against it and
Kinsel are without merit and intends to vigorously defend them.
On June
3, 2005, the Company filed a lawsuit in the United States District Court in
Memphis, Tennessee against Per Aarsleff A/S, a publicly traded Danish company,
and certain of its subsidiaries and affiliates. Since approximately 1980, Per
Aarsleff and its subsidiaries held licenses for the Insituform® CIPP
process in various countries in Northern and Eastern Europe, Taiwan, Russia and
South Africa. Per Aarsleff also is a 50% partner in the Company’s German joint
venture and a 25% partner in the Company’s manufacturing company in Great
Britain. The Company’s lawsuit seeks, among other things, monetary damages in an
unspecified amount for the breach by Per Aarsleff of its license and implied
license agreements with the Company and for royalties owed by Per Aarsleff under
the license and implied license agreements. On May 12, 2006, the Company amended
its lawsuit in Tennessee to (i) seek damages based upon Per Aarsleff’s continued
use of Company-patented technology in Denmark, Sweden and Finland following
termination of the license agreements, (ii) seek damages based upon Per
Aarsleff’s use of Company trade secrets in connection with the operation of its
Danish manufacturing facility and (iii) seek an injunction against Per
Aarsleff’s continued operation of its manufacturing facility. Per Aarsleff filed
its Answer and Affirmative Defenses to the Company’s Amended Complaint on May
25, 2006. On October 25, 2006, Per Aarsleff filed a two count counterclaim
against the Company seeking to recover royalties payments paid to the Company.
On December 29, 2006, the Company and Per Aarsleff’s 50%-owned Taiwanese
subsidiary (“PIEC”) settled their respective claims against each other in
exchange for PIEC paying the Company $375,000, which amount was paid on December
29, 2006 (settlement of Taiwanese claims only, remainder of lawsuit continues).
The trial for this matter is scheduled to begin November 10, 2008. At September
30, 2008, excluding the effects of the claims specified in the lawsuit, Per
Aarsleff owed the Company approximately $0.5 million related to royalties due
under the various license and implied license agreements (over and above the
Taiwanese settlement
amount and the amounts allegedly underreported or misreported by Per Aarsleff)
based upon royalty reports prepared and submitted by Per Aarsleff. The Company
believes that these receivables are fully collectible at this time. At September
30, 2008, the Company had not recorded any receivable related to this
lawsuit.
Boston
Installation
In August
2003, the Company began a CIPP process installation in Boston. The $1.0 million
project required the Company to line 5,400 feet of a 109-year-old, 36- to
41-inch diameter unusually shaped hand-laid rough brick pipe. Many aspects of
this project were atypical of the Company’s normal CIPP process installations.
Following installation, the owner rejected approximately 4,500 feet of the liner
and all proposed repair methods. All rejected liner was removed and
re-installed, and the Company recorded a loss of $5.1 million on this project in
the year ended December 31, 2003. During the first quarter of 2005, the Company,
in accordance with its agreement with the client, inspected the lines. During
the course of such inspection, it was determined that the segment of the liner
that was not removed and re-installed in early 2004 was in need of replacement
in the same fashion as all of the other segments replaced in 2004. The Company
completed its assessment of the necessary remediation and related costs and
began work with respect to such segment late in the second quarter of 2005. The
Company’s remediation work with respect to this segment was completed during the
third quarter of 2005. The Company incurred costs of approximately $2.3 million
with respect to the 2005 remediation work, which costs were recorded in the
second quarter of 2005.
Under the
Company’s “Contractor Rework” special endorsement to its primary comprehensive
general liability insurance policy, the Company filed a claim with its primary
insurance carrier relative to rework of the Boston project. The carrier paid the
Company the primary coverage of $1 million, less a $250,000 deductible, in
satisfaction of its obligations under the policy.
The
Company’s excess comprehensive general liability insurance coverage is in an
amount far greater than the costs associated with the liner removal and
re-installation. The Company believes the “Contractor Rework” special
endorsement applies to the excess insurance coverage; it incurred costs in
excess of the primary coverage and it notified its excess carrier of the claim
in 2003. The excess insurance carrier denied coverage in writing without
referencing the “Contractor Rework” special endorsement, and subsequently
indicated that it did not believe that the “Contractor Rework” special
endorsement applied to the excess insurance coverage.
In March
2004, the Company filed a lawsuit in United States District Court in Boston,
Massachusetts against its excess insurance carrier, American Home Assurance
Company, a subsidiary of American Insurance Group, Inc. (“American Home”), for
American Home’s failure to acknowledge coverage and to indemnify the Company for
the entire loss in excess of the primary coverage. In March 2005, the Court
granted the Company’s partial motion for summary judgment, concluding that the
Company’s policy with American Home followed form to the Company’s primary
insurance carrier’s policy. On May 25, 2006, the Court entered an order denying
a motion for reconsideration previously filed by American Home, thereby
reaffirming its earlier opinion. In September 2006, the Company filed a motion
for summary judgment as to the issue of whether the primary insurance carrier’s
policy provided coverage for the underlying claim and as to the issue of
damages. American Home also filed a motion for summary judgment as to the issue
of primary coverage. On September 28, 2007, the Court entered an order that
granted the Company’s motion for summary judgment as to liability and denied
American Home’s motion. The Court found that American Home’s policy followed
form to the primary policy and that the claim was covered under both policies.
However, the Court found that there were factual questions as to the amount of
the Company’s claim. The case was set for a jury trial as to damages on February
4, 2008. The day before trial was to begin, American Home advised the Court that
it would stipulate to a damage award equal to the award the Company would ask
the jury to award, $6.1 million. On March 31, 2008, the Court entered a final
judgment in favor of the Company in the amount of $7.7 million ($6.1 million in
actual damages and $1.6 million in prejudgment interest). American Home has
appealed the judgment to the United States Court of Appeals for the First
Circuit and the Company has filed a cross appeal. In connection with its appeal,
American Home secured the Company’s judgment with an appellate bond issued by
National Union Fire Insurance Company of Pittsburgh, another AIG Company
(“National Union”). Given AIG’s recent financial difficulties, the Company is
closely monitoring the financial condition of each of American Home and National
Union. As of September 30, 2008, each of American Home and National Union had a
rating of “A” (Excellent) with the leading insurance industry rating
service.
During
the second quarter of 2005, the Company, in consultation with outside legal
counsel, determined that the likelihood of recovery from American Home was
probable and that the amount of such recovery was reliably estimable. An
insurance claims expert retained by the Company’s outside legal counsel reviewed
the documentation produced with respect to the claim and, based on this review,
provided the Company with an estimate of the costs that had been sufficiently
documented and substantiated to date. American Home’s financial viability also
was investigated during this period and was determined to have a strong rating
of A+ with the leading insurance industry rating service. Based on these
factors, the favorable court decisions in March
2005 and September 2007, the Company believed that recovery from American Home
was both probable and reliably estimable and recorded an insurance claim
receivable in connection with this matter.
The total
claim receivable was $7.9 million at September 30, 2008, and was included in the
prepaid and other assets caption on the consolidated balance sheet. The claim
receivable is composed of actual remediation costs, pre-judgment interest and
post-judgment interest as outlined in the table below. At September 30, 2008,
the Company continued to believe that recovery of the recorded insurance claim
receivable is probable.
|
|
Documented
Remediation
Costs
|
|
|
Interest
|
|
|
Total
|
|
|
|
(in
thousands)
|
|
Claim
recorded June 30, 2005
|
|
|
$
5,872 |
|
|
|
$
275 |
|
|
|
$
6,147
|
|
Adjustment
based on subsequent developments(1)
|
|
|
183 |
|
|
|
– |
|
|
|
183 |
|
Interest
recorded(2)
|
|
|
– |
|
|
|
1,546 |
|
|
|
1,546 |
|
Claim
receivable balance, September 30, 2008
|
|
|
$
6,055 |
|
|
|
$
1,821 |
|
|
|
$
7,876 |
|
___________________
|
(1)
|
During
the second quarter of 2006, the claim was adjusted up by $0.5 million, as
a result of documented remediation costs. During the second quarter of
2007, the claim was adjusted down by $0.3 million, as a result of
subsequent developments in the matter. Interest was adjusted
accordingly.
|
|
(2)
|
During the third quarter of 2008,
the Company recorded interest income of $0.1 million for post-judgment
interest. During the first nine months of 2008, the Company recorded
interest income of $0.3 million ($0.1 million in pre-judgment interest and
$0.2 million in post-judgment interest). In the third quarter of 2007, no
interest was recorded for this claim. For the nine months ended September
30, 2007, the Company recorded $0.1 million in pre-judgment interest
income. In total, the Company has recorded $1.6 million in pre-judgment
interest and $0.2 million in post-judgment
interest.
|
Department
of Justice Investigation
The
Company has incurred costs in responding to two United States government
subpoenas relating to the investigation of alleged public corruption and bid
rigging in the Birmingham, Alabama metropolitan area during the period from 1997
to 2003. The Company has produced hundreds of thousands of documents in an
effort to comply fully with these subpoenas, which the Company believes were
issued to most, if not all, sewer repair contractors and engineering firms that
had public sewer projects in the Birmingham area. Indictments of public
officials, contractors, engineers and contracting and engineering companies were
announced in February, July and August of 2005, including the indictment of a
former joint venture partner of the Company. A number of those indicted,
including the Company’s former joint venture partner and its principals, have
been convicted or pleaded guilty and have now been sentenced and fined. The
Company has been advised by the government that the Company is not considered a
target of the investigations at this time. The investigations are ongoing and
the Company may have to incur additional legal expenses in complying with its
obligations in connection with the investigations. The Company has been fully
cooperative throughout the investigations.
Other
Litigation
The
Company is involved in certain other litigation incidental to the conduct of its
business and affairs. Management, after consultation with legal counsel, does
not believe that the outcome of any such other litigation will have a material
adverse effect on the Company’s consolidated financial condition, results of
operations or cash flows.
Guarantees
The
Company has entered into several contractual joint ventures in order to develop
joint bids on contracts for its installation business. In these cases, the
Company could be required to complete the joint venture partner’s portion of the
contract if the partner were unable to complete its portion. The Company would
be liable for any amounts for which the Company itself could not complete the
work and for which a third party contractor could not be located to complete the
work for the amount awarded in the contract. While the Company would be liable
for additional costs, these costs would be offset by any related revenues due
under that portion of the contract. The Company has not experienced material
adverse results from such arrangements. Based on these facts, while there can be
no assurances, the Company currently does not anticipate any future material
adverse impact on its consolidated financial position, results of operations or
cash flows.
The
Company also has many contracts that require the Company to indemnify the other
party against loss from claims of patent or trademark infringement. The Company
also indemnifies its surety against losses from third party claims of
subcontractors. The Company has not experienced material losses under these
provisions and, while there can be no assurances, currently does not anticipate
any future material adverse impact on its consolidated financial position,
results of operations or cash flows.
The
Company regularly reviews its exposure under all its engagements, including
performance guarantees by contractual joint ventures and indemnification of its
surety. As a result of the most recent review, the Company has determined that
the risk of material loss is remote under these arrangements and has not
recorded a liability for these risks at September 30, 2008 on its consolidated
balance sheet.
10.
DERIVATIVE FINANCIAL INSTRUMENTS
From time
to time, the Company may enter into foreign currency forward contracts to fix
exchange rates for net investments in foreign operations. The Company’s currency
forward contracts as of September 30, 2008, relate only to Canadian Dollar, Euro
and Pound Sterling exchange rates. At September 30, 2008, a net deferred gain of
$3.3 million related to these hedges was recorded in prepaid expenses and other
assets and other comprehensive income on the consolidated balance sheet. All
hedges were effective, and therefore, no gain or loss was recorded in the
consolidated statements of operations.
The
following table summarizes the Company’s derivative instrument positions at
September 30, 2008:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Notional
|
|
|
Maturity
|
|
|
Exchange
|
|
|
Position
|
|
Amount
|
|
|
in
Months
|
|
|
Rate
|
|
Canadian
Dollar
|
Sell
|
|
$
|
13,500,000 |
|
|
|
3.2
|
|
|
|
1.012
|
|
Euro
|
Sell
|
|
€
|
13,500,000 |
|
|
|
3.2
|
|
|
|
1.543
|
|
Pound
Sterling
|
Sell
|
|
£
|
5,000,000 |
|
|
|
3.2
|
|
|
|
1.964
|
|
At
December 31, 2007, a net deferred loss of $0.1 million related to hedges was
recorded in accounts payable and accrued expenses and other comprehensive income
on the consolidated balance sheet. At December 31, 2007, there were three open
derivative positions, with notional amounts of $20.0 million Canadian Dollars,
€5.0 million and £5.0 million, respectively.
In
accordance with SFAS No. 157, the Company determined that the instruments
summarized above are derived from significant unobservable inputs (“Level 3
inputs”).
The
following table presents a reconciliation of the beginning and ending balances
of the Company’s assets and liabilities measured at fair value on a recurring
basis using Level 3 inputs at September 30, 2008 (in thousands), which consists
only of the items summarized above:
|
|
Derivatives,
net
|
|
Beginning
balance, January 1, 2008
|
|
|
$
(55 |
) |
Gain
included in other comprehensive income
|
|
|
3,362 |
|
Ending
balance, September 30, 2008
|
|
|
$
3,307 |
|
11.
INCOME TAXES
The
expiration of certain statutes of limitation and the impact of tax positions
taken during a prior period resulted in a decrease of $0.4 million and $0.7
million, respectively, to the Company’s uncertain tax positions recorded as a
tax benefit in the third quarter and first nine months of 2008.
At
September 30, 2007, the expiration of certain statutes of limitations resulted
in the recognition of uncertain tax positions in the amount of $0.4 million to
the Company’s uncertain tax positions in each of the third quarter and first
nine months of 2007.
12.
SEGMENT REPORTING
The
Company operates in three distinct markets: sewer rehabilitation, water
rehabilitation and energy and mining services. Management organizes the
enterprise around differences in products and services, as well as by geographic
areas. Within the sewer rehabilitation market, the Company operates in three
distinct geographies: North America, Europe and internationally outside
of North America and Europe. As such, the Company is now organized into five
reportable segments: North American Sewer Rehabilitation, European Sewer
Rehabilitation, Asia-Pacific Sewer Rehabilitation, Water Rehabilitation and
Energy and Mining. Each segment will be regularly reviewed and evaluated
separately.
In 2008,
the Company has been in transition following the appointment of a new Chief
Executive Officer in April. The Company has also realigned management of certain
of its operations and experienced growth in certain previously immaterial
operations. As a result of a review and assessment of the Company’s business
operations by the Company’s new Chief Executive Officer, and in connection with
the Company’s regular review and evaluation of its reportable segments, the
Company identified new reportable segments according to the guidance of SFAS No.
131, Disclosures about
Segments of an Enterprise and Related Information. The Company previously
had two reportable segments – Rehabilitation and Tite Liner. In connection with
the realignment, the Company divided the Rehabilitation segment into four new
reportable segments, and renamed the Tite Liner segment as its Energy and Mining
segment. Previously reported data has been updated to reflect this
change.
The
following disaggregated financial results have been prepared using a management
approach that is consistent with the basis and manner with which management
internally disaggregates financial information for the purpose of making
internal operating decisions. The Company evaluates performance based on
stand-alone operating income (loss).
Financial
information by segment was as follows (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Sewer Rehabilitation
|
|
|
$
89,346 |
|
|
|
$
88,258 |
|
|
|
$
257,495 |
|
|
|
$
261,455 |
|
European
Sewer Rehabilitation
|
|
|
27,055 |
|
|
|
25,057 |
|
|
|
79,313 |
|
|
|
68,216 |
|
Asia-Pacific
Sewer Rehabilitation
|
|
|
1,768 |
|
|
|
670 |
|
|
|
5,459 |
|
|
|
783 |
|
Water
Rehabilitation
|
|
|
5,917 |
|
|
|
1,108 |
|
|
|
9,738 |
|
|
|
2,241 |
|
Energy
and Mining
|
|
|
13,791 |
|
|
|
10,547 |
|
|
|
47,385 |
|
|
|
32,896 |
|
Total
revenues
|
|
|
$
137,877 |
|
|
|
$
125,640 |
|
|
|
$
399,390 |
|
|
|
$
365,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Sewer Rehabilitation
|
|
|
$
20,184 |
|
|
|
$
15,226 |
|
|
|
$
56,405 |
|
|
|
$
45,188 |
|
European
Sewer Rehabilitation
|
|
|
5,941 |
|
|
|
6,320 |
|
|
|
15,936 |
|
|
|
15,130 |
|
Asia-Pacific
Sewer Rehabilitation
|
|
|
614 |
|
|
|
394 |
|
|
|
1,699 |
|
|
|
444 |
|
Water
Rehabilitation
|
|
|
1,263 |
|
|
|
189 |
|
|
|
1,692 |
|
|
|
320 |
|
Energy
and Mining
|
|
|
4,220 |
|
|
|
3,511 |
|
|
|
14,506 |
|
|
|
12,990 |
|
Total
gross profit
|
|
|
$
32,222 |
|
|
|
$
25,640 |
|
|
|
$
90,238 |
|
|
|
$
74,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Sewer Rehabilitation
|
|
|
$
6,757 |
|
|
|
$
1,444 |
|
|
|
$
11,910 |
|
|
|
$
(2,586 |
) |
European
Sewer Rehabilitation
|
|
|
347 |
|
|
|
1,113 |
|
|
|
(1,084 |
) |
|
|
324 |
|
Asia-Pacific
Sewer Rehabilitation
|
|
|
368 |
|
|
|
(11 |
) |
|
|
722 |
|
|
|
(214 |
) |
Water
Rehabilitation
|
|
|
482 |
|
|
|
(322 |
) |
|
|
(780 |
) |
|
|
(1,099 |
) |
Energy
and Mining
|
|
|
2,320 |
|
|
|
1,778 |
|
|
|
8,976 |
|
|
|
7,801 |
|
Total
operating income
|
|
|
$ 10,274 |
|
|
|
$
4,002 |
|
|
|
$
19,744 |
|
|
|
$
4,226 |
|
The
following table summarizes revenues, gross profit and operating income (loss) by
geographic region (in thousands):
|
|
Three
Months Ended
September
30,
|
|
|
Nine
Months Ended
September
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
90,842 |
|
|
|
$
84,038 |
|
|
|
$
252,789 |
|
|
|
$
249,839 |
|
Canada
|
|
|
12,649 |
|
|
|
11,916 |
|
|
|
38,557 |
|
|
|
35,905 |
|
Europe
|
|
|
28,327 |
|
|
|
25,549 |
|
|
|
82,322 |
|
|
|
69,443 |
|
Other
foreign
|
|
|
6,059 |
|
|
|
4,137 |
|
|
|
25,722 |
|
|
|
10,404 |
|
Total
revenues
|
|
|
$
137,877 |
|
|
|
$
125,640 |
|
|
|
$
399,390 |
|
|
|
$
365,591 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
20,181 |
|
|
|
$
14,121 |
|
|
|
$
54,635 |
|
|
|
$
43,126 |
|
Canada
|
|
|
4,281 |
|
|
|
3,741 |
|
|
|
13,149 |
|
|
|
11,862 |
|
Europe
|
|
|
6,211 |
|
|
|
6,478 |
|
|
|
16,380 |
|
|
|
15,393 |
|
Other
foreign
|
|
|
1,549 |
|
|
|
1,300 |
|
|
|
6,074 |
|
|
|
3,691 |
|
Total
gross profit
|
|
|
$
32,222 |
|
|
|
$
25,640 |
|
|
|
$
90,238 |
|
|
|
$
74,072 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
6,587 |
|
|
|
$
(251 |
) |
|
|
$
8,845 |
|
|
|
$
(4,288 |
) |
Canada
|
|
|
2,549 |
|
|
|
2,441 |
|
|
|
7,941 |
|
|
|
6,708 |
|
Europe
|
|
|
391 |
|
|
|
1,330 |
|
|
|
(630 |
) |
|
|
(68 |
) |
Other
foreign
|
|
|
747 |
|
|
|
482 |
|
|
|
3,588 |
|
|
|
1,874 |
|
Total
operating income
|
|
|
$
10,274 |
|
|
|
$
4,002 |
|
|
|
$
19,744 |
|
|
|
$
4,226 |
|
The
following is management’s discussion and analysis of certain significant factors
that have affected our financial condition, results of operations and cash flows
during the periods included in the accompanying unaudited consolidated financial
statements. This discussion should be read in conjunction with the consolidated
financial statements and notes included in our Annual Report on Form 10-K for
the year ended December 31, 2007.
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (see Note 1 to
Consolidated Financial Statements included as part of this Quarterly Report on
Form 10-Q for the period ended September 30, 2008).
We
believe that certain accounting policies have the potential to have a more
significant impact on our consolidated financial statements, either because of
the significance of the consolidated financial statements to which they relate
or because they involve a higher degree of judgment and complexity. A summary of
such critical accounting policies can be found in the “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” section of our
Annual Report on Form 10-K for the year ended December 31, 2007.
Forward-Looking
Information
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements. The Company makes forward-looking statements in the
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section of this Quarterly Report on Form 10-Q that represent the
Company’s beliefs or expectations about future events or financial performance.
These forward-looking statements are based on information currently available to
the Company and on management’s beliefs, assumptions, estimates and projections
and are not guarantees of future events or results. When used in this report,
the words “anticipate,” “estimate,” “believe,” “plan,” “intend,” “may,” “will”
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 known and unknown risks, uncertainties and assumptions, including
those referred to in the “Risk Factors” section of the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007, as filed with the Securities
and Exchange Commission on March 10, 2008, and in our subsequent Quarterly
Reports on Form 10-Q, including this report. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed may not
occur. In addition, our actual results may vary materially from those
anticipated, estimated, suggested or projected. Except as required by law, we do
not assume a duty to update forward-looking statements, whether as a result of
new information, future events or otherwise. Investors should, however, review
additional disclosures made by the Company from time to time in its periodic
filings with the Securities and Exchange Commission. Please use caution and do
not place reliance on forward-looking statements. All forward-looking statements
made by the Company in this Form 10-Q are qualified by these cautionary
statements.
Executive
Summary
We are a
leading vertically integrated global provider of proprietary technologies for
the rehabilitation, without digging or disruption, of municipal sewer and water
and industrial mineral, oil and gas piping systems. Our operations are organized
based on differences in products and services, as well as by geographic areas.
We operate in three distinct markets: sewer rehabilitation, water rehabilitation
and energy and mining services. Within the sewer rehabilitation market, we
operate in three distinct geographies: North America, Europe and internationally
outside of North America and Europe. While we use a variety of technologies in
many different locations, the majority of our revenues are derived from the
Insituform®
cured-in-place-pipe (“CIPP”) process in the United States.
We are
organized into five reportable segments: North American Sewer Rehabilitation,
European Sewer Rehabilitation, Asia-Pacific Sewer Rehabilitation, Water
Rehabilitation and Energy and Mining. In 2008, we have been in an organizational
transition following the appointment of our new Chief Executive Officer in
April. We have also realigned management of certain of our operations and
experienced growth in certain previously immaterial operations. As a result of
this appointment and our Chief Executive Officer’s review and assessment of our
business operations, and in connection with our regular review and evaluation of
our reportable segments, we have identified new reportable segments. We
previously had two reportable segments – Rehabilitation and Tite Liner. In
connection with the realignment, we divided the Rehabilitation segment into four
reportable segments (North American Sewer Rehabilitation, European Sewer
Rehabilitation, Asia-Pacific Sewer Rehabilitation and Water Rehabilitation), and
renamed the Tite Liner segment as our Energy and Mining segment. Previously
reported data has been updated to reflect this change.
We
believe that this expanded segment disclosure will provide improved transparency
into our business and greater insight into our results. We also believe that
this segmentation will be helpful in articulating our strategic direction to our
investors.
Our
revenues are generated principally in the United States, Canada, The
Netherlands, the United Kingdom, France, Switzerland, Chile, Spain, Mexico,
Poland, Belgium and India and include product sales and royalties from our joint
ventures in Europe and Asia and our unaffiliated licensees and sub-licensees
throughout the world. The United States remains our single largest market,
representing approximately 63.3% of total revenues in the first nine months of
2008 compared to 68.3% of total revenues in the first nine months of 2007. We
currently have initiatives under way in connection with our strategic plan to
reduce further our reliance on the United States sewer rehabilitation market.
Revenues outside of North America increased by $28.2 million, or 35.3%, in the
first nine months of 2008 compared to the prior year period.
Our
long-term strategy consists of: first, expanding our position in the
growing and profitable energy and mining sector through organic growth,
selective acquisitions of companies, which may be significant in size, and by
conducting complimentary product and technology acquisitions; second, growing
our water rehabilitation business by leveraging our premier brand and history of
successfully innovating and delivering technologies and services; third,
expanding all of our businesses in key emerging markets such as Eastern Europe,
India and Asia; fourth, streamlining our rehabilitation operations in North
America and in Europe by improving project execution, cost management practices,
including the reduction of redundant fixed costs, and product mix; and finally,
identifying opportunities to streamline key management functions and processes
to improve our profitability.
Results of Operations – Three and Nine Months Ended
September 30, 2008 and 2007
Overview
– Consolidated Results
Key
financial data for our consolidated operations is as follows (dollars in
thousands):
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
137,877 |
|
|
|
$
125,640 |
|
|
|
$
12,237 |
|
|
|
9.7 |
% |
Gross
profit
|
|
|
32,222 |
|
|
|
25,640 |
|
|
|
6,582 |
|
|
|
25.7 |
|
Gross
margin
|
|
|
23.4 |
% |
|
|
20.4 |
% |
|
|
3.0 |
% |
|
|
|
|
Operating
expenses
|
|
|
21,948 |
|
|
|
21,638 |
|
|
|
310 |
|
|
|
1.4 |
|
Operating
income
|
|
|
10,274 |
|
|
|
4,002 |
|
|
|
6,272 |
|
|
|
156.7 |
|
Operating
margin
|
|
|
7.5 |
% |
|
|
3.2 |
% |
|
|
4.3 |
% |
|
|
|
|
Net
income from continuing operations
|
|
|
7,791 |
|
|
|
4,680 |
|
|
|
3,111 |
|
|
|
66.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
399,390 |
|
|
|
365,591 |
|
|
|
33,799 |
|
|
|
9.2 |
|
Gross
profit
|
|
|
90,238 |
|
|
|
74,072 |
|
|
|
16,166 |
|
|
|
21.8 |
|
Gross
margin
|
|
|
22.6 |
% |
|
|
20.3 |
% |
|
|
2.3 |
% |
|
|
|
|
Operating
expenses
|
|
|
70,494 |
|
|
|
69,846 |
|
|
|
647 |
|
|
|
0.9 |
|
Operating
income
|
|
|
19,744 |
|
|
|
4,226 |
|
|
|
15,518 |
|
|
|
367.2 |
|
Operating
margin
|
|
|
4.9 |
% |
|
|
1.2 |
% |
|
|
3.8 |
% |
|
|
|
|
Net
income from continuing operations
|
|
|
13,734 |
|
|
|
3,822 |
|
|
|
9,912 |
|
|
|
259.3 |
|
Consolidated
net income from continuing operations was $3.1 million, or 66.5%, higher in the
third quarter of 2008 than in the third quarter of 2007 and $9.9 million, or
259.3%, higher in the first nine months of 2008 than in the first nine months of
2007. The increase in consolidated income from continuing operations for the
third quarter and first nine months of 2008 was principally due to improved
margins in our North American Sewer Rehabilitation segment, coupled with growth
in our Energy and Mining segment. In addition, operating expenses decreased as a
percentage of revenues to 15.9% in the third quarter of 2008 compared to 17.2%
in the third quarter of 2007, and to 17.7% in the first nine months of 2008
compared to 19.1% in the first nine months of 2007.
In the
third quarter and first nine months of 2008, results in our combined sewer and
water rehabilitation segments were improved over the prior corresponding
periods, and results in our Energy and Mining segment were very strong. The
strength in the oil, gas and mining industries positively impacted our Energy
and Mining segment results. Market changes between the segments are typically
independent of each other, unless a macroeconomic event affects both the sewer
and water rehabilitation markets and the oil, mining and gas markets. These
changes exist for a variety of reasons, including, but not limited to, local
economic conditions, weather-related issues and levels of government
funding.
Consolidated
operating expenses were $0.3 million, or 1.4%, higher in the third quarter of
2008 than in the third quarter of 2007 and $0.7 million, or 0.9%, higher in the
first nine months of 2008 compared to the first nine months of 2007. As a
percentage of revenues, consolidated operating expenses were 15.9% versus 17.2%
in the third quarters of 2008 and 2007, respectively, and 17.7% and 19.1% in the
first nine months of 2008 and 2007, respectively.
Operating
expenses for the first nine months of 2008 included a total of $1.7 million in
expenses in connection with a proxy contest initiated by a dissident stockholder
and its affiliates. Results in the first nine months of 2008 also included $0.8
million in expenses related to compensation in connection with the transition of
the office of the chief executive. Additionally, operating expenses increased by
approximately $1.4 million in the first nine months of 2008 related to growth
initiatives in our Asia-Pacific Sewer Rehabilitation and Water Rehabilitation
businesses. In addition, approximately $0.3 million of the operating expenses in
the third quarter of 2008, and $1.6 million in the nine months ended September
30, 2008, related to the impact of higher foreign currency exchange rates versus
the U.S dollar from one year ago.
Partially
offsetting these increases in operating expenses were decreases in operating
expenses of our North American Sewer Rehabilitation business of $3.3 million in
the first nine months of 2008. We have been focused on cost reduction and
realignment efforts, particularly in our North American Sewer Rehabilitation
business and corporate support group over the last nine months. We experienced
approximately $2.7 million in decreases in our corporate support costs in the
first nine months of 2008. Our efforts to reduce our fixed overhead costs will
continue as we progress through the remainder of 2008 and into
2009.
Total
contract backlog improved to $292.9 million at September 30, 2008 compared to
$289.8 million at June 30, 2008. The September 30, 2008 level of backlog was
significantly higher than total contract backlog of $259.0 million and $224.6
million at December 31, 2007 and September 30, 2007, respectively.
North
American Sewer Rehabilitation Segment
Key
financial data for our North American Sewer Rehabilitation segment is as follows
(dollars in thousands):
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
89,346 |
|
|
|
$
88,258 |
|
|
|
$
1,088 |
|
|
|
1.2 |
% |
Gross
profit
|
|
|
20,184 |
|
|
|
15,226 |
|
|
|
4,958 |
|
|
|
32.6 |
|
Gross
margin
|
|
|
22.6 |
% |
|
|
17.3 |
% |
|
|
5.3 |
% |
|
|
|
|
Operating
expenses
|
|
|
13,427 |
|
|
|
13,782 |
|
|
|
(355 |
) |
|
|
(2.6 |
) |
Operating
income
|
|
|
6,757 |
|
|
|
1,444 |
|
|
|
5,313 |
|
|
|
368.0 |
|
Operating
margin
|
|
|
7.6 |
% |
|
|
1.6 |
% |
|
|
6.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
257,495 |
|
|
|
$
261,455 |
|
|
|
$
(3,960 |
) |
|
|
(1.5 |
) |
Gross
profit
|
|
|
56,403 |
|
|
|
45,188 |
|
|
|
11,216 |
|
|
|
24.8 |
|
Gross
margin
|
|
|
21.9 |
% |
|
|
17.3 |
% |
|
|
4.6 |
% |
|
|
|
|
Operating
expenses
|
|
|
44,494 |
|
|
|
47,774 |
|
|
|
(3,280 |
) |
|
|
(6.9 |
) |
Operating
income (loss)
|
|
|
11,911 |
|
|
|
(2,586 |
) |
|
|
14,497 |
|
|
|
560.7 |
|
Operating
margin
|
|
|
4.6 |
% |
|
|
(1.0 |
)% |
|
|
5.6 |
% |
|
|
|
|
Revenues
Revenues
increased 1.2% in our North American Sewer Rehabilitation segment in the third
quarter of 2008 compared to the third quarter of 2007, primarily driven by
strong growth in third-party product sales in North America. Although we
experienced a slight increase in revenues this quarter, market conditions in our
North American Sewer Rehabilitation business in the third quarter of 2008
remained flat as compared to the prior year period. We expect market conditions
to continue to be weak for the remainder of 2008 and into 2009.
Revenues
decreased 1.5% in our North American Sewer Rehabilitation segment in the
first nine months of 2008 compared to the first nine months of 2007 for the
reasons mentioned above.
Contract
backlog in our North American Sewer Rehabilitation segment at September 30, 2008
was $178.5 million. This represented a $6.9 million, or 3.7%, decrease from
backlog at June 30, 2008 due to weak market conditions. As compared to December
31, 2007 and September 30, 2007, however, North American Sewer Rehabilitation
experienced an increase in contract backlog of $18.6 million, or 11.6%, and
$13.8 million, or 8.4%, respectively, despite the continued unfavorable market
conditions.
Gross
Profit and Gross Margin
Gross
profit in our North American Sewer Rehabilitation segment increased $5.0
million, or 32.6%, in the third quarter of 2008 compared to the prior year
quarter, primarily due to project execution improvements and our cost-cutting
initiatives. In addition, positive pricing trends, improved cost management
practices and product mix improvements also contributed to the growth in gross
profit. Gross profit was primarily impacted by the increase in gross margins in
our North American Sewer Rehabilitation segment, as a result of improved project
execution and lower fixed crew costs, partially offset by certain commodity
price increases, most notably fuel. Our gross profit and gross margins for North
American Sewer Rehabilitation segment were also boosted by increased third-party
product sales in North America. Direct field expenses within our North American
Sewer Rehabilitation business decreased by $0.4 million due to our continued
rationalization of fixed costs and overhead.
Our North
American Sewer Rehabilitation segment gross profit increased 24.8% in the first
nine months of 2008 compared to the same period of 2007. Our results were very
poor in the first quarter of 2007 in the United States, due to a variety of
reasons, including competitive pricing pressures, poor productivity,
installation problems in several geographic regions and a high level of small
diameter installations with lower margins. We had begun to experience a downturn
of bidding in the market in the second half of 2006, which created increased
pricing pressure from heightened competition.
A large
portion of the profitability improvements made in recent quarters relates to the
initiatives we have implemented with our cost structure and crew productivity.
We will continue driving improvements in productivity through enhanced project
management and crew training and continued implementation of technologies, along
with improved logistics management. We are also seeking avenues for taking
advantage of our vertical integration and manufacturing capabilities by
expanding our third-party product sales efforts. In addition, a substantial
portion of the revenues in 2007 came from backlog that had reduced gross margins
as a result of lower market pricing from increased competitive pressures. As
mentioned earlier, the U.S. sewer rehabilitation market experienced a downturn
in 2007, due to a number of factors, including decreased federal and state
funding for underground pipeline infrastructure projects. In the third quarter
of 2008, our gross profit margin percentage increased to 22.6% from 17.3% in the
third quarter of 2007 as a result of the factors mentioned earlier. In the first
nine months of 2008, the gross profit margin percentage increased to 21.9%
compared to 17.3% in the first nine months of 2007.
Operating
Expenses
Operating
expenses in our North American Sewer Rehabilitation segment decreased by $0.4
million during the third quarter of 2008 compared to the third quarter of 2007,
despite increased revenues, primarily due to the cost-cutting and performance
improvement initiatives described above. Operating expenses, as a percentage of
revenues, were 15.0% in the third quarter of 2008 compared to 15.6% in the third
quarter of 2007.
Operating
expenses decreased by $3.3 million, or 6.9%, in the first nine months of 2008
compared to the first nine months of 2007, despite the allocation to the segment
of one-time costs associated with the proxy contest and one-time compensation
matters primarily due to the cost cutting and performance improvement
initiatives described above. The one-time compensation matters include the
allocation of expenses in connection with the transition of the office of the
chief executive. While corporate costs are allocated across all segments, North
American Sewer Rehabilitation receives the largest allocation due to its
relative size. Operating expenses, as a percentage of revenues, were 17.3% in
the first nine months of 2008 compared to 18.3% in the first nine months of
2007.
We have
been focused on cost reduction and realignment efforts, particularly within this
segment, over the last nine months. A large portion of these savings was offset
by the allocation of costs related to the proxy contest and one-time
compensation matters discussed previously. Our efforts to reduce our fixed
overhead costs will continue as we progress through the remainder of 2008 and
into 2009.
Operating
Income (Loss) and Operating Margin
Improved
revenues and gross profit, as well as lower operating expenses, led to a $5.3
million increase in operating income in our North American Sewer Rehabilitation
segment in the third quarter of 2008 compared to the third quarter of 2007. The
North American Sewer Rehabilitation operating margin, which is operating income
as a percentage of revenues, improved to 7.6% in the third quarter of 2008
compared to 1.6% in the third quarter of 2007.
Operating
income in this segment in the first nine months of 2008 increased $14.5 million
compared to an operating loss of $2.6 million in the first nine months of 2007,
primarily due to the substantial improvement in first quarter results in 2008
versus 2007, which was particularly weak. The North American Sewer
Rehabilitation operating margin improved to 4.6% in the first nine months of
2008 compared to (1.0)% in the first nine months of 2007.
European
Sewer Rehabilitation Segment
Key
financial data for our European Sewer Rehabilitation segment is as follows
(dollars in thousands):
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
27,055 |
|
|
|
$
25,057 |
|
|
|
$
1,998 |
|
|
|
8.0 |
% |
Gross
profit
|
|
|
5,941 |
|
|
|
6,320 |
|
|
|
(379 |
) |
|
|
(6.0 |
) |
Gross
margin
|
|
|
22.0 |
% |
|
|
25.2 |
% |
|
|
(3.2 |
)% |
|
|
|
|
Operating
expenses
|
|
|
5,594 |
|
|
|
5,207 |
|
|
|
387 |
|
|
|
7.4 |
|
Operating
income
|
|
|
347 |
|
|
|
1,113 |
|
|
|
(766 |
) |
|
|
(68.8 |
) |
Operating
margin
|
|
|
1.3 |
% |
|
|
4.4 |
% |
|
|
(3.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
79,313 |
|
|
|
$
68,216 |
|
|
|
$
11,097 |
|
|
|
16.3 |
|
Gross
profit
|
|
|
15,936 |
|
|
|
15,130 |
|
|
|
806 |
|
|
|
5.3 |
|
Gross
margin
|
|
|
20.1 |
% |
|
|
22.2 |
% |
|
|
(2.1 |
)% |
|
|
|
|
Operating
expenses
|
|
|
17,020 |
|
|
|
14,806 |
|
|
|
2,214 |
|
|
|
15.0 |
|
Operating
income (loss)
|
|
|
(1,084 |
) |
|
|
324 |
|
|
|
(1,408 |
) |
|
|
(434.6 |
) |
Operating
margin
|
|
|
(1.4 |
)% |
|
|
0.5 |
% |
|
|
(1.9 |
)% |
|
|
|
|
Revenues
Revenues
in our European Sewer Rehabilitation segment increased by $2.0 million, or 8.0%,
during the third quarter of 2008 compared to the third quarter of 2007 primarily
due to a $2.1 million impact of strong European currencies versus the U.S.
dollar, and a $1.6 million, or 72.8%, increase in revenues from our Eastern
European operations exclusive of the aforementioned currency impact, partially
offset by shortfalls in other geographies.
For the
first nine months of 2008, revenues increased by $11.1 million, or 16.3%,
compared to the first nine months of 2007, primarily due to an $8.0 million
impact of strong European currencies versus the U.S. dollar, and a $1.5 million,
or 33.4%, increase in revenues from our Eastern European operations
exclusive of the aforementioned currency impact, partially offset by shortfalls
in other geographies.
Contract
backlog in our European Sewer Rehabilitation segment was $30.6 million at
September 30, 2008. This represented a decrease of $4.3 million, or 12.3%,
compared to June 30, 2008. Approximately $3.6 million of this decrease was due
to weaker foreign currencies against the U.S. dollar that prevailed at the end
of the third quarter of 2008. The remainder of the decrease was principally due
to lower backlog in Poland, due principally to timing of project bids and
awards. As compared to December 31, 2007 and September 30, 2007, European Sewer
Rehabilitation experienced a decrease in contract backlog of $5.0 million, or
14.0%, and $11.0 million, or 26.3%, respectively.
Gross
Profit and Gross Margin
Gross
profit in our European Sewer Rehabilitation segment decreased by $0.4 million
during the third quarter of 2008 compared to the third quarter of 2007, despite
the increase in revenues. This segment experienced a decrease in gross margin
due to operations in several countries experiencing pricing pressures from
competition and difficult market conditions.
For the
first nine months of 2008, gross profit in our European Sewer Rehabilitation
segment increased by $0.8 million, or 5.3%, compared to the first nine months of
2007, primarily due to increased revenues, and the impact of stronger European
currencies against the U.S dollar.
Operating
Expenses
Operating
expenses in our European Sewer Rehabilitation segment increased by $0.4 million
during the third quarter of 2008 compared to the third quarter of 2007 primarily
due to the impact of strong European currencies versus the U.S. dollar of $0.2
million. Operating expenses, as a percentage of revenues, decreased to 20.7% in
the third quarter of 2008 compared to 20.8% in the third quarter of
2007.
Operating
expenses in this segment increased $2.2 million in the first nine months of 2008
compared to the first nine months of 2007. Of this increase, $1.0 million was
due to strengthening European currencies against the U.S. dollar. The remaining
increase was due to restructuring costs in certain regional operations, the
addition of a new Vice President of the European Group and continued growth in
contracting operations. As a percentage of revenues, operating expenses were
21.5% in the first nine months of 2008 compared to 21.7% in the first nine
months of 2007.
Operating
Income (Loss) and Operating Margin
Lower
gross profit as well as higher operating expenses led to a $0.8 million decrease
in operating income in the third quarter of 2008 compared to the third quarter
of 2007. The European Sewer Rehabilitation operating margin, which is operating
income as a percentage of revenues, declined to 1.3% in the third quarter of
2008 compared to 4.4% in the third quarter of 2007.
Operating
income in the first nine months of 2008 decreased $1.4 million compared to the
first nine months of 2007, primarily due to the lower gross profit combined with
higher operating expenses. European Sewer Rehabilitation operating margin
declined to (1.4)% in the first nine months of 2008 compared to 0.5% in the
first nine months of 2007.
As a
result of the recent poor financial performance in our European operations, we
have made certain operational and management changes, including the addition of
a new Vice President of the European Group. We have also restructured a number
of country-based operations to reduce fixed costs and improve project
execution.
Asia-Pacific
Sewer Rehabilitation Segment
Key
financial data for our Asia-Pacific Sewer Rehabilitation segment is as follows
(dollars in thousands):
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
1,768 |
|
|
|
$
670 |
|
|
|
$
1,098 |
|
|
|
163.9 |
% |
Gross
profit
|
|
|
614 |
|
|
|
394 |
|
|
|
220 |
|
|
|
55.7 |
|
Gross
margin
|
|
|
34.7 |
% |
|
|
58.8 |
% |
|
|
(24.1 |
)% |
|
|
|
|
Operating
expenses
|
|
|
246 |
|
|
|
405 |
|
|
|
(159 |
) |
|
|
(39.4 |
) |
Operating
income (loss)
|
|
|
368 |
|
|
|
(11 |
) |
|
|
379 |
|
|
|
3,355.1 |
|
Operating
margin
|
|
|
20.8 |
% |
|
|
(1.7 |
)% |
|
|
22.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
5,459 |
|
|
|
$
783 |
|
|
|
$
4,676 |
|
|
|
597.4 |
|
Gross
profit
|
|
|
1,699 |
|
|
|
444 |
|
|
|
1,255 |
|
|
|
282.4 |
|
Gross
margin
|
|
|
31.1 |
% |
|
|
56.7 |
% |
|
|
(25.6 |
)% |
|
|
|
|
Operating
expenses
|
|
|
977 |
|
|
|
658 |
|
|
|
319 |
|
|
|
48.4 |
|
Operating
income (loss)
|
|
|
722 |
|
|
|
(214 |
) |
|
|
936 |
|
|
|
437.0 |
|
Operating
margin
|
|
|
13.2 |
% |
|
|
(27.4 |
)% |
|
|
40.6 |
% |
|
|
|
|
Revenues
Revenues
in our Asia-Pacific Sewer Rehabilitation segment increased by $1.1 million, or
163.9%, in the third quarter of 2008 compared to the third quarter of 2007. We
have improved the geographic diversification of our business in 2007 and in the
first nine months of 2008 with significant new business wins in India, Hong
Kong and Australia through joint ventures. We secured large revenue projects in
India that we believe will lead to continued revenue growth in this segment in
the upcoming quarters.
Revenues
in this segment increased by $4.7 million, or 597.4%, in the Asia-Pacific Sewer
Rehabilitation segment in the first nine months of 2008 compared to the first
nine months of 2007. This segment of our business was in its infancy during
2007, and we continue to see increased revenues from the geographic regions
served by this segment.
As
recently announced, we secured an additional $21.0 million in sewer
rehabilitation contracts in India, bringing total contract backlog in India to
$53.6 million at September 30, 2008. This compares to $33.2 million in backlog
at June 30, 2008 and $35.1 million at December 31, 2007. There was no contract
backlog one year ago in this segment as this business was not yet operational at
that time. During the third quarter of 2008, work in India progressed slowly, as
cleaning of the pipes continued. Lining of the pipes will begin in the fourth
quarter, and activity will ramp up over the coming quarters. The Indian market
continues to be very robust, and we expect growth to continue as we gain
momentum with sales penetration in the major Indian cities.
Gross
Profit and Gross Margin
Gross
profit in the Asia-Pacific Sewer Rehabilitation segment increased by $0.2
million, or 55.7%, compared to the third quarter of 2007. Our gross profit
margin decreased to 34.7% compared to 58.8% in the same period, principally due
to a large majority of revenues being driven by contracting revenues in India
related to early-stage cleaning contracts during the third quarter of 2008,
whereas third quarter 2007 revenues were primarily from royalties and tube and
equipment sales, which carried higher margins.
Gross
profit in this segment increased by $1.3 million during the first nine months of
2008 compared to the first nine months of 2007 primarily due to increased
revenues, albeit at lower margins for the reasons discussed above.
Operating
Expenses
Operating
expenses decreased $0.2 million in the Asia-Pacific Sewer Rehabilitation segment
during the third quarter of 2008 compared to the third quarter of 2007 as we
incurred certain non-recurring startup costs in the prior year period. Operating
expenses, as a percentage of revenues, decreased to 13.9% in the third quarter
of 2008 compared to 60.5% in the third quarter of 2007, as expenses were spread
among a much larger revenue base.
Operating
expenses in this segment increased $0.3 million in the first nine months of 2008
compared to the first nine months of 2007. We are continuing our focus on
business development efforts in international markets, which will require us to
dedicate additional resources to these efforts. Operating expenses, as a
percentage of revenues, decreased to 17.9% in the first nine months of 2008
compared to 84.1% in the first nine months of 2007.
Operating
Income (Loss) and Operating Margin
Improved
revenues and gross profit, as well as lower operating expenses, led to a $0.4
million increase in operating income in this segment in the third quarter of
2008 compared to the third quarter of 2007. Operating margin improved to 20.8%
in the third quarter of 2008 compared to (1.7)% in the third quarter of
2007.
Operating
income in the first nine months of 2008 increased $0.9 million compared to the
first nine months of 2007. Operating margin improved to 13.2% in the first nine
months of 2008 compared to (27.4)% in the first nine months of
2007.
Water
Rehabilitation Segment
Key
financial data for our Water Rehabilitation segment is as follows (dollars in
thousands):
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
5,917 |
|
|
|
$
1,108 |
|
|
|
$
4,809 |
|
|
|
434.0 |
% |
Gross
profit
|
|
|
1,263 |
|
|
|
189 |
|
|
|
1,074 |
|
|
|
568.1 |
|
Gross
margin
|
|
|
21.3 |
% |
|
|
17.1 |
% |
|
|
4.2 |
% |
|
|
|
|
Operating
expenses
|
|
|
781 |
|
|
|
511 |
|
|
|
270 |
|
|
|
52.8 |
|
Operating
income (loss)
|
|
|
482 |
|
|
|
(322 |
) |
|
|
804 |
|
|
|
250.0 |
|
Operating
margin
|
|
|
8.2 |
% |
|
|
(29.0 |
)% |
|
|
37.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
9,738 |
|
|
|
$
2,241 |
|
|
|
$
7,497 |
|
|
|
334.5 |
|
Gross
profit
|
|
|
1,692 |
|
|
|
320 |
|
|
|
1,372 |
|
|
|
429.4 |
|
Gross
margin
|
|
|
17.4 |
% |
|
|
14.3 |
% |
|
|
3.1 |
% |
|
|
|
|
Operating
expenses
|
|
|
2,472 |
|
|
|
1,419 |
|
|
|
1,053 |
|
|
|
74.2 |
|
Operating
loss
|
|
|
(780 |
) |
|
|
(1,099 |
) |
|
|
319 |
|
|
|
29.1 |
|
Operating
margin
|
|
|
(8.0 |
)% |
|
|
(49.1 |
)% |
|
|
41.1 |
% |
|
|
|
|
Revenues
Revenues
from our Water Rehabilitation segment grew to $5.9 million in the third quarter
of 2008 from $1.1 million in the prior year period, primarily due to work
completed on the Madison Avenue project in New York City. The 434.0%
quarter-over-quarter growth is indicative of the start-up nature of this
business. We have performed water rehabilitation projects in the U.S., Europe
and Asia in 2008.
Revenues
increased by $7.5 million, or 334.5%, in the Water Rehabilitation segment in the
first nine months of 2008 compared to the first nine months of 2007. The
expansion in this segment is consistent with our strategy of geographic and
product diversification, aimed at reducing our dependency on the U.S. sewer
rehabilitation market and minimizing the impact of market downturns, which we
experienced in 2007.
Our Water
Rehabilitation segment contract backlog was $6.7 million at September 30, 2008
compared to $11.6 million at June 30, 2008. New orders for the quarter were low
at $1.0 million primarily due to the timing of project awards. Revenues for the
third quarter of 2008 were the strongest on record for the short history of this
business operation. Approximately $1.9 million of the contract backlog at
September 30, 2008 related to the ongoing project work in New York City that, by
design, will resume in early 2009. Prospects for new orders and growth in this
segment continue to be robust.
Gross
Profit and Gross Margin
During
the third quarter of 2008, gross profit in the Water Rehabilitation segment
increased to $1.3 million from $0.2 million in the third quarter of 2007. In
addition, our gross margin percentage increased by 420 basis points for the same
period primarily due to revenue
increasing at a rate faster than fixed costs to fund the business. As we
continue to increase volume, fixed costs will be spread over a larger revenue
base, which we believe will lead to more profitable results.
Gross
profit in this segment increased by $1.4 million during the first nine months of
2008 compared to the first nine months of 2007 as gross margin increased 310
basis points primarily due to increased volume as discussed above.
Operating
Expenses
Operating
expenses in our Water Rehabilitation segment increased by $0.3 million in the
third quarter of 2008 compared to the third quarter of 2007. As a percentage of
revenues, operating expenses were 13.2% in the third quarter of 2008 compared to
46.1% in the third quarter of 2007, as we were able to hold down operating
expenses even with the $4.8 million increase in revenues.
Operating
expenses in this segment increased by $1.1 million in the first nine months of
2008 compared to the first nine months of 2007. Operating expenses as a
percentage of revenues were 25.4% in the first nine months of 2008 compared to
63.3% in the first nine months of 2007.
Operating
Income (Loss) and Operating Margin
Operating
income in this segment was $0.8 million higher in the third quarter of 2008
compared to the third quarter of 2007, primarily due to higher
revenues. Operating margin increased to 8.0% in the third quarter of 2008
from a loss in the third quarter of 2007.
Operating
income in the first nine months of 2008 increased by $0.3 million compared to
the first nine months of 2007. Our Water Rehabilitation segment operating margin
decreased to (8.0)% in the first nine months of 2008 compared to (49.1)% in the
first nine months of 2007.
Energy
and Mining Segment
Key
financial data for our Energy and Mining segment is as follows (dollars in
thousands):
|
|
2008
|
|
|
2007
|
|
|
Increase
(Decrease)
|
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
13,791 |
|
|
|
$
10,547 |
|
|
|
$
3,244 |
|
|
|
30.8 |
% |
Gross
profit
|
|
|
4,220 |
|
|
|
3,511 |
|
|
|
709 |
|
|
|
20.2 |
|
Gross
margin
|
|
|
30.6 |
% |
|
|
33.3 |
% |
|
|
(2.7 |
)% |
|
|
|
|
Operating
expenses
|
|
|
1,900 |
|
|
|
1,733 |
|
|
|
167 |
|
|
|
9.6 |
|
Operating
income
|
|
|
2,320 |
|
|
|
1,778 |
|
|
|
542 |
|
|
|
30.5 |
|
Operating
margin
|
|
|
16.8 |
% |
|
|
16.9 |
% |
|
|
(0.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
47,385 |
|
|
|
$
32,896 |
|
|
|
$
14,489 |
|
|
|
44.0 |
|
Gross
profit
|
|
|
14,506 |
|
|
|
12,990 |
|
|
|
1,516 |
|
|
|
11.7 |
|
Gross
margin
|
|
|
30.6 |
% |
|
|
39.5 |
% |
|
|
(8.9 |
)% |
|
|
|
|
Operating
expenses
|
|
|
5,530 |
|
|
|
5,189 |
|
|
|
341 |
|
|
|
6.6 |
|
Operating
income
|
|
|
8,976 |
|
|
|
7,801 |
|
|
|
1,175 |
|
|
|
15.1 |
|
Operating
margin
|
|
|
18.9 |
% |
|
|
23.7 |
% |
|
|
(4.8 |
)% |
|
|
|
|
Revenues
Revenues
in our Energy and Mining segment increased by 30.8% in the third quarter of 2008
compared to the third quarter of 2007. Our Energy and Mining segment is divided
into four primary geographic regions: the United States, Canada, South America
and Latin America. Each of these four regions experienced a growth in revenues,
with the largest increase in the United States. In that region alone, revenues
increased by 53.2%. In addition, we continued work in South America on two large
revenue projects in Chile, leading to a 27.9% increase in revenues that
geographic region quarter over quarter.
Revenues
for our Energy and Mining segment increased by 44.0% in the first nine months of
2008 compared to the first nine months of 2007. This increase was primarily due
to substantial revenue growth in our United States and South American
operations. In South America, revenues increased $9.8 million compared to the
first nine months of 2007. In addition, revenues in our United States operations
increased $3.1 million for the first nine months of 2008 compared to the same
prior year period.
Unlike in
our sewer rehabilitation segments and our Water Rehabilitation segment, revenues
in our Energy and Mining segment are responsive to market conditions in the oil
and gas and mining industries. Substantially all of our Energy and Mining
revenues are derived from customers in these sectors and, as such, the market
conditions are unlike those of our sewer and water rehabilitation segments.
Our Energy and Mining segment is somewhat insulated from market downturns as it
is not dependent on new pipe lines or expansion, but rather on rehabilitation
and the opportunity for our clients to gain increased utilization and capacity
through existing assets.
Our
Energy and Mining segment contract backlog at September 30, 2008 decreased from
the prior quarter end by $1.3 million to $23.4 million due to strong revenue
performance during the third quarter. As compared to December 31, 2007, backlog
decreased by $2.8 million, or 10.8%. As compared to September 30, 2007, however,
backlog improved by $7.1 million, or 43.2%. Notwithstanding the recent decrease
in backlog, prospects remain strong in this segment.
Gross
Profit and Gross Margin
Gross
profit in the Energy and Mining segment increased from the prior year quarter by
20.2%, while gross margin percentage decreased from the prior year quarter to
30.6% from 33.3%. The decrease in gross margin percentage was primarily due to
an increase in work performed in South America in the third quarter of 2008 at a
lower margin than work performed in other areas of the world, and work performed
in Australia, which had a high amount of subcontract work at lower
margins.
Our
Energy and Mining segment gross profit increased by $0.7 million in the first
nine months of 2008 compared to the same period of 2007. Gross margin percentage
during the same period declined from the prior year to 30.6% from 39.5%. This
decline was principally due to the lower margin, large revenue projects in South
America as well as the favorable impact on results in the first nine months of
2007 from large gains realized from project closeouts of $1.3 million in South
America and Africa. The decrease in margins for South America was also partially
due to an increase in the percentage of revenue from subcontractors as well as
an increase in competitive bidding. The gross margin level experienced in the
first nine months of 2008 is more in line with the normal range of expectations,
while still subject to variability due to different market prices in various
locations throughout the world.
Operating
Expenses
Operating
expenses in our Energy and Mining segment increased 9.6% in the third quarter of
2008 compared to the third quarter of 2007, despite the 30.8% increase in
revenues. As a percentage of revenues, operating expenses were 13.8% in the
third quarter of 2008 compared to 16.4% in the third quarter of 2007, as we were
able to contain costs even in light of the rapid growth in
revenues.
Operating
expenses in this segment increased by $0.3 million in the first nine months of
2008 compared to the first nine months of 2007, primarily due to additional
staffing costs in the first quarter of 2008 to support our ongoing geographical
expansion initiatives. Operating expenses as a percentage of revenues were 11.7%
in the first nine months of 2008 compared to 15.8% in the first nine months of
2007.
Operating
Income and Operating Margin
Operating
income was 30.5% higher in the third quarter of 2008 compared to the third
quarter of 2007 primarily due to the higher revenue, although at lower gross
margins. Operating margin was relatively flat in the third quarter of 2008
compared to the third quarter of 2007.
Operating
income in the first nine months of 2008 increased by $1.2 million, or 15.1%,
compared to the first nine months of 2007. Our Energy and Mining segment
operating margin decreased to 18.9% in the first nine months of 2008 compared to
23.7% in the first nine months of 2007, relatively consistent with the drop in
our gross margins described above.
Other
Income (Expense)
Interest
Income
Interest
income increased by $0.1 million in the third quarter and first nine months of
2008 compared to the same periods in 2007. These small variations were primarily
driven by fluctuating interest rates on deposits and higher deposit
balances.
Interest
Expense
Interest
expense decreased $0.2 million and $0.6 million in the third quarter and first
nine months of 2008, respectively, compared to the prior year periods, primarily
related to the payoff of our Senior Notes, Series A, in February 2007 and lower
interest rates on insurance premium financing in the current year versus the
prior year.
Other
Income
Other
income decreased by $0.5 million in the third quarter and $0.1 million in the
first nine months of 2008 compared to the same periods in 2007. The primary
component of other income in the first nine months of 2008 included gains of
$1.5 million on the disposition of excess property and equipment. Likewise,
gains of $2.4 million were recorded on dispositions of excess property and
equipment in the first nine months of 2007.
Taxes
on Income (Tax Benefits)
Taxes on
income increased $2.7 million and $5.4 million in the third quarter and first
nine months of 2008, respectively, compared to the prior year periods, due to an
increase in income before taxes. Our effective tax rate was 20.6% and 24.8% in
the third quarter and first nine months of 2008, respectively, compared to
(17.1)% and (17.4)% in the corresponding periods in 2007.
The
effective tax rate for the third quarter and first nine months of 2007 varied
substantially from the statutory rates primarily due to certain foreign tax
developments and adjustments related to our uncertain tax
positions.
Equity
in Earnings (Losses) of Affiliated Companies
Equity in
earnings of affiliated companies in the third quarter of 2008 was relatively
flat compared to the same period of 2007. Equity in losses of affiliated
companies in the first nine months of 2008 was $0.2 million compared to an
immaterial amount in same period of 2007. We have recently invested in start-up
joint ventures in Hong Kong and Australia, and losses have been incurred in the
early stages of start-up. We expect to see improvements in earnings from these
ventures in the foreseeable future.
Loss
from Discontinued Operations, Net of Tax
On March
29, 2007, we announced plans to exit our tunneling business in an effort to
align better our operations with our long-term business strategy. In the years
leading up to 2007, operating results in our tunneling business caused us to
divert cash away from our pursuit of international and inorganic growth. The
tunneling business also was management intensive. The closure has enabled us to
realign our management structure and reallocate management resources to
implement our long-term strategy.
We have
classified the results of operations of our tunneling business as discontinued
operations for all periods presented. Substantially all existing tunneling
business activity had been completed in early 2008. Corporate expenses
previously allocated to our tunneling business have been re-allocated to our
five reportable segments for all periods presented.
Revenues
from discontinued operations were $(0.6) million and $13.4 million in the third
quarters of 2008 and 2007, respectively. Revenues from discontinued operations
were $7.0 million and $49.1 million in the first nine months of 2008 and 2007,
respectively. Losses from discontinued operations, net of income taxes, were
$(1.1) million and $(1.7) million in the third quarter and first nine months of
2008, respectively, compared to $(0.2) million and $(11.4) million in the third
quarter and first nine months of 2007, respectively. The lower activity in
discontinued operations was due to the winding down of the
business.
Discontinued
operations experienced a net loss of $1.1 million, or $0.04 per diluted share,
during the quarter, related primarily to legal fees and an unfavorable claim
adjustment resulting from a final arbitration award issued in August 2008. Our
final award amount was $1.7 million compared to the recorded claim and
associated receivables of $2.2 million. We expect that this award will be
collected in the fourth quarter of 2008. All tunneling projects have been
substantially completed, and only minor warranty or subcontracted work remains
before final completion. At September 30, 2008, receivables, including
retention, totaled $11.9 million, of which $7.3 million are currently being held
in connection with five active claim negotiations or litigation. The total
potential of all claims approximated $12.9 million at September 30, 2008, of
which $4.5 million has been recorded. While there can be no certainty, the
claims proceedings are expected to conclude within the next twelve months, and
we believe that the receivables, along with the final awarded claims, will
be collected. We anticipate that, for the next few quarters, there will be
continued costs associated with the pursuit of these claims, as well as costs
associated with a number of defensive lawsuits involving discontinued
operations. Approximately $3.4 million in equipment relating to
discontinued operations remained as of September 30, 2008, and we continue to
pursue the sale of the equipment through a variety of sources.
Contract
Backlog
Contract
backlog is our expectation of revenues to be generated from received, signed and
uncompleted contracts, the cancellation of which is not anticipated at the time
of reporting. Contract backlog excludes any term contract amounts for which
there is not specific and determinable work released and projects where we have
been advised that we are the low bidder, but have not formally been awarded the
contract. The following table sets forth our consolidated backlog by
segment:
Backlog
|
|
September
30,
2008
|
|
|
June
30,
2008
|
|
|
March
31,
2008
|
|
|
December
31,
2007
|
|
|
September
30,
2007
|
|
(in
millions)
|
|
North
American sewer rehabilitation
|
|
|
$
178.5 |
|
|
|
$
185.4 |
|
|
|
$
174.2 |
|
|
|
$
160.0 |
|
|
|
$
164.7 |
|
European
sewer rehabilitation
|
|
|
30.7 |
|
|
|
34.9 |
|
|
|
39.0 |
|
|
|
35.6 |
|
|
|
41.6 |
|
Asia-Pacific
sewer rehabilitation
|
|
|
53.6 |
|
|
|
33.2 |
|
|
|
34.4 |
|
|
|
35.1 |
|
|
|
0.0 |
|
Water
rehabilitation
|
|
|
6.7 |
|
|
|
11.6 |
|
|
|
5.8 |
|
|
|
2.1 |
|
|
|
2.0 |
|
Energy
and mining
|
|
|
23.4 |
|
|
|
24.7 |
|
|
|
32.2 |
|
|
|
26.2 |
|
|
|
16.3 |
|
Total
|
|
|
$
292.9 |
|
|
|
$
289.8 |
|
|
|
$
285.6 |
|
|
|
$
259.0 |
|
|
|
$
224.6 |
|
Although
backlog represents only those contracts that are considered to be firm, there
can be no assurance that cancellation or scope adjustments will not occur with
respect to such contracts.
Liquidity
and Capital Resources
Cash
and Equivalents
|
|
September
30,
2008
|
|
|
December
31,
2007
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
|
$
90,062 |
|
|
|
$
78,961 |
|
Restricted
cash
|
|
|
2,058 |
|
|
|
2,487 |
|
Restricted
cash held in escrow relates to deposits made in lieu of retention on specific
projects performed for municipalities and state agencies or advance customer
payments in Europe.
Sources
and Uses of Cash
We expect
the principal use of funds for the foreseeable future will be for capital
expenditures, working capital, debt servicing and investments. In the first nine
months of 2008, capital expenditures were primarily for impregnation facility
improvements and equipment used for our steam-inversion process and replacement
of older equipment, primarily in the United States. Our additional capital
expenses came from an increase in crew resources for both our Indian joint
venture as well as water rehabilitation projects. We expect this increase to
continue for the foreseeable future, as we expect these operations to grow
rapidly.
Our
primary source of cash is operating activities. Besides operating activities, we
occasionally borrow under our line of credit to fund operating activities,
including working capital investments. Information regarding our cash flows for
the nine months ended September 30, 2008 and 2007 is discussed below and is
presented in our consolidated statements of cash flows contained in this report.
Despite the relative flatness in the U.S. sewer rehabilitation market
experienced over the last year and a half, we continue to expect operating cash
flows to increase compared to 2007 as a result of improved profitability. This
improved cash flow, coupled with existing cash balances, should be sufficient to
fund our operations in 2008. As such, we do not believe that the flatness in the
U.S. sewer rehabilitation market will have a material adverse impact on our
liquidity to this point.
On
October 23, 2008, the Company filed a shelf registration statement for the
issuance of up to $250 million in securities, which could include debt
securities, common stock, preferred stock and/or warrants. We believe that this
registration will allow us to take full advantage of appropriate opportunities
in the marketplace, as they may become available to us.
Cash
Flows from Operations
Operating
activities provided $14.0 million in the first nine months of 2008 compared to
$5.9 million used in the first nine months of 2007. We had $13.7 million in net
income from continuing operations in the first nine months of 2008 compared to
$3.8 million in the prior year period. Changes in operating assets and
liabilities used $15.8 million in the first nine months of 2008 compared to
$19.8 million used in the same period last year. Compared to December 31, 2007,
net accounts receivable at September 30, 2008, including retainage and costs and
estimated earnings in excess of billings (unbilled receivables), increased by
$20.5 million, prepaid expenses and other assets increased by $4.5 million and
accounts payable and accrued expenses increased by $8.9 million. Depreciation
and amortization was slightly higher in the first nine months of 2008 compared
to the first nine months of 2007.
Unrestricted
cash decreased slightly during the third quarter of 2008 to $90.1 million, from
$93.2 million at June 30, 2008, as a result of increased working capital needs
during the third quarter of 2008. Unrestricted cash increased from $79.0 million
at December 31, 2007 due to overall improved working capital management and the
collection of $4.5 million in the first quarter of 2008 from the CAT Contracting
patent infringement litigation settlement.
Days
sales outstanding (“DSOs”) from continuing operations increased by 3.4 days to
102.5 at September 30, 2008 from 99.1 at December 31, 2007. DSOs were 102.4 at
September 30, 2007. DSOs have generally increased over the last two years due to
more stringent customer requirements for project documentation for billings.
Additionally, payment cycles have generally lengthened. Notwithstanding these
issues, we continually target reductions in DSOs to facilitate improvements in
liquidity.
The
liquidation of our discontinued operations provided $0.5 million and $4.4
million in the first nine months of 2008 and 2007, respectively.
Cash
Flows from Investing Activities
In the
first nine months of 2008, cash used by investing activities included $11.1
million in capital expenditures. Capital expenditures were primarily for
impregnation facility improvements and equipment used for our steam-inversion
process and replacement of older equipment, primarily in the United States. In
the first nine months of 2007, $12.5 million was spent on capital expenditures
primarily related to equipment used for our steam-inversion process, and
replacement of older equipment, primarily in the United States. In addition,
$2.6 million was invested in 2007 to remodel an existing facility to be our new
headquarters in Chesterfield, Missouri. In the first nine months of 2008,
investing activities used $8.2 million compared to $14.5 million in the first
nine months of 2007.
Cash
Flows from Financing Activities
In the
first nine months of 2008, cash provided by financing activities was $0.7
million compared to $12.4 million used in the first nine months of 2007. During
the first quarter of 2007, we made the final amortization payment of $15.7
million on our Senior Notes, Series A. In addition, in 2008, we had $0.3 million
in proceeds from the issuance of common stock related to stock option exercises,
as compared to $2.5 million in the prior year period. The decline correlates
with the timing of grants and the decrease in stock prices during 2008, leading
to fewer option exercises.
Long-Term
Debt
Our total
indebtedness as of September 30, 2008 consisted of our $65.0 million Senior
Notes, Series 2003-A, due April 24, 2013, and $1.5 million of other notes
related to the financing of certain insurance premiums. Our total indebtedness
at December 31, 2007 consisted of our $65.0 million Senior Notes, Series 2003-A,
due April 24, 2013, and $1.1 million of other notes related to the financing of
certain insurance premiums.
As of
September 30, 2008, we were in compliance with all of our debt covenants. We had
no debt covenant violations in 2008 or 2007. We anticipate that we will be in
compliance with all of our debt covenants over the next 12 months. Under the
terms of the Senior Notes, Series 2003-A, prepayment could cause the Company to
incur a “make-whole” payment to the holder of the notes. At September 30, 2008,
this make-whole payment would have approximated $7.4 million.
We
believe that we have adequate resources and liquidity to fund future cash
requirements and debt repayments with cash generated from operations, existing
cash balances, additional short- and long-term borrowing and the sale of assets
for the next twelve months. We expect cash generated from operations to continue
to improve going forward due to increased profitability and improved working
capital management initiatives.
Disclosure
of Contractual Obligations and Commercial Commitments
We have
entered into various contractual obligations and commitments in the course of
our ongoing operations and financing strategies. Contractual obligations are
considered to represent known future cash payments that we are required to make
under existing contractual arrangements, such as debt and lease agreements.
These obligations may result from both general financing activities or from
commercial arrangements that are directly supported by related revenue-producing
activities. Commercial commitments represent contingent obligations, which
become payable only if certain pre-defined events were to occur, such as funding
financial guarantees. See Note 9 to the consolidated financial statements
contained in this report for further discussion regarding our commitments and
contingencies.
The
following table provides a summary of our contractual obligations and commercial
commitments as of September 30, 2008 (in thousands). This table includes cash
obligations related to principal outstanding under existing debt agreements and
operating leases.
Payments
Due by Period
|
|
Cash
Obligations(1)(2)(3)(4)
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Long-term
debt
|
|
|
$
65,000 |
|
|
|
$
- |
|
|
|
$
- |
|
|
|
$
- |
|
|
|
$
- |
|
|
|
$
- |
|
|
|
$
65,000 |
|
Interest
on long-term debt
|
|
|
17,929 |
|
|
|
262 |
|
|
|
3,926 |
|
|
|
3,926 |
|
|
|
3,926 |
|
|
|
3,926 |
|
|
|
1,963 |
|
Operating
leases
|
|
|
22,574 |
|
|
|
3,773 |
|
|
|
7,065 |
|
|
|
4,544 |
|
|
|
2,982 |
|
|
|
2,016 |
|
|
|
2,194 |
|
Total
contractual cash obligations
|
|
|
$
105,503 |
|
|
|
$
4,035 |
|
|
|
$
10,991 |
|
|
|
$
8,470 |
|
|
|
$
6,908 |
|
|
|
$
5,942 |
|
|
|
$
69,157 |
|
___________________
(1)
|
Cash
obligations are not discounted. See Notes 6 and 9 to the consolidated
financial statements contained in this report regarding our long-term debt
and credit facility and commitments and contingencies,
respectively.
|
(2)
|
Resin
supply contracts are excluded from this table. See “Commodity Risk” under
Part I, Item 3 of this report for further
discussion.
|
(3)
|
As
of September 30, 2008, we had no outstanding borrowings on our $35.0
million credit facility. The available balance was $19.1 million and the
commitment fee was 0.175%. The remaining $15.9 million was used for
non-interest bearing letters of credit, $14.5 million of which was
collateral for insurance and $1.4 million of which was collateral for work
performance.
|
(4)
|
Liabilities
related to Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109, have not
been included in the table above because we are uncertain as to if or when
such amounts may be settled.
|
Off-Balance
Sheet Arrangements
We use
various structures for the financing of operating equipment, including
borrowings, operating and capital leases, and sale-leaseback arrangements. All
debt is presented in the balance sheet. Our contractual obligations and
commercial commitments are disclosed above. We also have exposure under
performance guarantees by contractual joint ventures and indemnification of our
surety. However, we have never experienced any material adverse effects to our
consolidated financial position, results of operations or cash flows relative to
these arrangements. All of our unconsolidated joint ventures are accounted for
using the equity method. We have no other off-balance sheet financing
arrangements or commitments. See Note 9 to our consolidated financial statements
contained in this report regarding commitments and contingencies.
Recently
Adopted Accounting Pronouncements
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for consistently measuring
fair value under generally accepted accounting principles and expands
disclosures about fair value measurements. As is permissible, we partially
adopted the provisions of SFAS No. 157 on January 1, 2008 (SFAS No.
157 is not yet effective for non-financial assets and liabilities). See the
additional disclosures in Note 10 to our consolidated financial statements
contained in this report regarding our assets and liabilities that are measured
at fair value on a recurring basis.
In
February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement
No. 115. SFAS No. 159 permits entities to choose to
measure eligible items at fair value at specified election dates and report
unrealized gains and losses on items for which the fair value option has been
elected in earnings at each subsequent reporting date. SFAS No. 159 was
effective for us on January 1, 2008. However, as is permissible, we have not
elected to apply its provisions to any of our financial assets and financial
liabilities.
Item
3. Quantitative and Qualitative Disclosures About
Market Risk
Market
Risk
We are
exposed to the effect of interest rate changes and of foreign currency and
commodity price fluctuations. We currently do not use derivative contracts to
manage interest rate and commodity risks. From time to time, we may enter into
foreign currency forward contracts to fix exchange rates for net investments in
foreign operations to hedge our foreign exchange risk.
Interest
Rate Risk
The fair
value of our cash and short-term investment portfolio at September 30, 2008
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 100 basis point change in interest rates, would not be
material.
Our
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, we maintain fixed rate debt. The
fair value of our long-term debt, including current maturities and the amount of
outstanding borrowings on the line of credit facility, approximated its carrying
value at September 30, 2008. Market risk related to the potential increase in
fair value resulting from a hypothetical 100 basis point increase in our debt
specific borrowing rates at September 30, 2008 would not be
material.
Foreign
Exchange Risk
We
operate subsidiaries and are associated with licensees and affiliates operating
solely outside of the U.S. and in foreign currencies. Consequently, we are
inherently exposed to risks associated with the fluctuation in the value of the
local currencies compared to the U.S. dollar. At September 30, 2008, a
substantial portion of our cash and cash equivalents were denominated in foreign
currencies, and a hypothetical 10.0% change in currency exchange rates could
result in an approximate $3.0 million impact on our equity through accumulated
other comprehensive income.
In order
to help mitigate this risk, we may enter into foreign exchange forward contracts
to minimize the short-term impact of foreign currency fluctuations. We do not
engage in hedging transactions for speculative investment reasons. There can be
no assurance that our hedging operations will eliminate or substantially reduce
risks associated with fluctuating currencies. At September 30, 2008, there were
foreign currency hedge instruments outstanding with notional amounts of $13.5
million Canadian dollars, €13.5 million and £5.0 million related to our net
investment in our foreign operations. See Note 10 to the consolidated financial
statements contained in this report for additional information and disclosures
regarding our derivative financial instruments.
Commodity
Risk
We have
exposure to the effect of limitations on supply and changes in commodity pricing
relative to a variety of raw materials that we purchase and use in our operating
activities, most notably resin, chemicals, staple fiber, fuel and pipe. We
manage this risk by entering into agreements with certain suppliers utilizing a
request for proposal, or RFP, format and purchasing in bulk, when possible. We
also manage this risk by continuously updating our estimation systems for
bidding contracts so that we are able to price our products and services
appropriately to our customers. However, we face exposure on contracts in
process that have already been priced and are not subject to any cost
adjustments in the contract. This exposure is potentially more significant on
our longer-term projects.
We obtain
a majority of our global resin requirements, one of our primary raw materials,
from multiple suppliers in order to diversify our supplier base and thus reduce
the risks inherent in concentrated supply streams. We have qualified a number of
vendors in North America that can deliver, and are currently delivering,
proprietary resins that meet our specifications.
Our
management, under the supervision and with the participation of our Chief
Executive Officer (our principal executive officer) and Chief Financial Officer
(our principal financial officer), has conducted an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2008.
Based upon and as of the date of this evaluation, our Chief Executive Officer
and Chief Financial Officer have concluded that our disclosure controls were
effective to ensure that the information required to be disclosed by us in the
reports that we file or submit under the Exchange Act (a) is recorded,
processed, summarized and reported within the time period specified in the
Securities and Exchange Commission’s rules and forms and (b) is accumulated and
communicated to our management, including our principal executive and principal
financial officers, as appropriate to allow timely decisions regarding required
disclosure.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended September 30, 2008 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II—OTHER INFORMATION
We are
involved in certain actions incidental to the conduct of our business and
affairs. Management, after consultation with legal counsel, does not believe
that the outcome of any such actions will have a material adverse effect on our
consolidated financial condition, results of operations or cash
flows.
Since the
filing of our Annual Report on Form 10-K for the year ended December 31, 2007,
we have become aware of certain risks related to the macroeconomic events of the
past quarter. We have revised our risk factors by adding the risk factors set
forth below.
We
occasionally access the financial markets to finance a portion of our working
capital requirements and support our liquidity needs. Our ability to access
these markets at all or on satisfactory terms may be adversely affected by
factors beyond our control and could negatively impact our ability to finance
our operations, meet certain obligations or implement our operating
strategy.
We
occasionally borrow under our existing credit facility to fund operations,
including working capital investments. Market disruptions such as those
currently being experienced in the United States and abroad have materially
impacted liquidity in the credit and debt markets, making financing terms for
borrowers less attractive, and, in certain cases, have resulted in the
unavailability of certain types of financing. Continued uncertainty in the
financial markets may negatively impact our ability to access additional
financing or to refinance our existing credit facility or existing debt
arrangements on favorable terms or at all, which could negatively affect our
ability to fund current and future expansion as well as future acquisitions and
development. These disruptions may include turmoil in the financial services
industry, unprecedented volatility in the markets where our outstanding
securities trade, and general economic downturns in the areas where we do
business. If we are unable to access funds at competitive rates, or if our
short-term or long-term borrowing costs increase, our ability to finance our
operations, meet our short-term obligations and implement our operating strategy
could be adversely affected.
The
execution of our growth strategy is dependent upon the continued availability of
third-party financing arrangements for our customers.
The
recent economic downturn has resulted in tighter credit markets, which could
adversely affect our customers’ ability to secure the financing necessary to
proceed or continue with pipe installation and rehabilitation projects. Our
customers’ or potential customers’ inability to secure financing for projects
could result in the delay, cancellation or downsizing of new projects or the
suspension of projects already under contract, which could cause a decline in
the demand for our services and negatively impact our revenues and
earnings.
The
exhibits required to be filed as part of this Quarterly Report on Form 10-Q are
listed on the Index to Exhibits attached hereto.
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
|
|
|
Date:
October 31, 2008
|
/s/ David A.
Martin
|
|
David
A. Martin
|
|
Vice
President and Chief Financial Officer
(Principal
Financial Officer)
|
These exhibits are numbered in
accordance with the Exhibit Table of Item 601 of Regulation S-K.
31.1
|
Certification
of J. Joseph Burgess pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
|
31.2
|
Certification
of David A. Martin pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, filed herewith.
|
32.1
|
Certification
of J. Joseph Burgess pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
32.2
|
Certification
of David A. Martin pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, filed
herewith.
|
33