-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FgaCVlKZILGKDO/5IHM8XyP7prJiyy0EXQaJFJ6RawXW0y8DZVKj+D/C1wZtT7eQ hBji519xs0ei3mkYJpLGmA== 0000950134-02-005708.txt : 20020515 0000950134-02-005708.hdr.sgml : 20020515 20020515150749 ACCESSION NUMBER: 0000950134-02-005708 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INSITUFORM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000353020 STANDARD INDUSTRIAL CLASSIFICATION: WATER, SEWER, PIPELINE, COMM AND POWER LINE CONSTRUCTION [1623] IRS NUMBER: 133032158 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-10786 FILM NUMBER: 02651443 BUSINESS ADDRESS: STREET 1: 702 SPIRIT 40 PARK DRIVE CITY: CHESTERFIELD STATE: MO ZIP: 63005 BUSINESS PHONE: 6365308000 MAIL ADDRESS: STREET 1: 702 SPIRIT 40 PARK DRIVE CITY: CHESTERFIELD STATE: MO ZIP: 63005 FORMER COMPANY: FORMER CONFORMED NAME: INSITUFORM OF NORTH AMERICA INC DATE OF NAME CHANGE: 19921217 FORMER COMPANY: FORMER CONFORMED NAME: INSITUFORM OF NORTH AMERICA INC/TN/ DATE OF NAME CHANGE: 19930617 10-Q 1 c69654e10-q.txt FORM 10-Q FOR QUARTER ENDING MARCH 31, 2002 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2002 -------------------------------------------------- Commission file number #0-10786 ---------------------------------------------------------- Insituform Technologies, Inc. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 13-3032158 - ------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 702 Spirit 40 Park Drive, Chesterfield, Missouri 63005 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (636) 530-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number including area code) - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at May 10, 2002 - --------------------------------------------- ------------------------------ Class A Common Stock, $.01 par value 26,556,802 Shares INDEX
Page No. Part I Financial Information: Item 1. Financial Statements: Consolidated Statements of Income.................................................3 Consolidated Balance Sheets.......................................................4 Consolidated Statements of Cash Flows.............................................5 Notes to Consolidated Financial Statements........................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..............................................10 Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................13 Part II Other Information: Item 1. Legal Proceedings................................................................13 Item 6. Exhibits and Reports on Form 8-K.................................................13 Signatures................................................................................................14
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 --------- --------- REVENUES $ 111,176 $ 98,850 COST OF REVENUES 82,287 68,951 --------- --------- GROSS PROFIT 28,889 29,899 SELLING, GENERAL AND ADMINISTRATIVE 17,673 20,540 --------- --------- OPERATING INCOME 11,216 9,359 OTHER (EXPENSE) INCOME: Interest expense (2,189) (2,451) Other 451 662 --------- --------- TOTAL OTHER EXPENSE (1,738) (1,789) --------- --------- INCOME BEFORE TAXES ON INCOME 9,478 7,570 TAXES ON INCOME 3,696 3,052 --------- --------- INCOME BEFORE MINORITY INTERESTS AND EQUITY IN EARNINGS 5,782 4,518 MINORITY INTERESTS (31) (98) EQUITY IN EARNINGS OF AFFILIATED COMPANIES 154 122 --------- --------- INCOME FROM CONTINUING OPERATIONS 5,905 4,542 INCOME (LOSS) FROM DISCONTINUED OPERATIONS (1,602) 84 --------- --------- NET INCOME $ 4,303 $ 4,626 ========= ========= EARNINGS PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENTS: Basic: Income from continuing operations $ 0.22 $ 0.18 Discontinued operations (0.06) -- --------- --------- Net income $ 0.16 $ 0.18 ========= ========= Diluted: Income from continuing operations $ 0.22 $ 0.17 Discontinued operations (0.06) -- --------- --------- Net income $ 0.16 $ 0.18 ========= =========
See accompanying notes to consolidated financial statements. 3 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
UNAUDITED MARCH 31, 2002 DECEMBER 31, 2001 -------------- ----------------- ASSETS CURRENT ASSETS Cash and cash equivalents, including restricted cash of $4,086 and $4,262, respectively $ 58,512 $ 74,649 Receivables, net 86,981 86,191 Retainage 21,272 21,327 Costs and estimated earnings in excess of billings 25,749 23,719 Inventories 13,626 13,712 Prepaid expenses and other 10,862 8,135 Assets held for disposal 14,895 32,034 --------- --------- TOTAL CURRENT ASSETS 231,897 259,767 PROPERTY, PLANT AND EQUIPMENT, less accumulated depreciation 72,452 68,547 OTHER ASSETS Goodwill 121,987 117,251 Other assets 17,916 18,057 --------- --------- TOTAL OTHER ASSETS 139,903 135,308 --------- --------- TOTAL ASSETS $ 444,252 $ 463,622 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current maturities of long-term debt and line of credit $ 35,462 $ 35,218 Accounts payable and accrued expenses 68,584 68,302 Billings in excess of costs and estimated earnings 6,876 8,057 Liabilities related to discontinued operations 3,471 9,471 --------- --------- TOTAL CURRENT LIABILITIES 114,393 121,048 --------- --------- LONG-TERM DEBT, less current maturities 73,518 88,853 OTHER LIABILITIES 1,666 2,039 TOTAL LIABILITIES 189,577 211,940 MINORITY INTERESTS 1,579 1,555 STOCKHOLDERS' EQUITY Preferred stock, undesignated, $.10 par - shares authorized 1,400,000; none outstanding -- -- Series A Junior Participating Preferred stock, $.10 par - shares authorized 600,000; none outstanding -- -- Common stock, $.01 par - shares authorized 60,000,000; shares outstanding 26,538,975 and 26,602,385 286 286 Additional paid-in capital 130,143 129,651 Retained earnings 176,415 172,112 Treasury stock -- 2,068,773 and 1,968,773 shares (46,762) (44,563) Cumulative foreign currency translation adjustments (6,986) (7,359) --------- --------- TOTAL STOCKHOLDERS' EQUITY 253,096 250,127 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 444,252 $ 463,622 ========= =========
See accompanying notes to consolidated financial statements. 4 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 -------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 4,303 $ 4,626 Income (loss) from discontinued operations 1,602 (84) -------- -------- INCOME FROM CONTINUING OPERATIONS 5,905 4,542 -------- -------- ADJUSTMENTS TO RECONCILE NET CASH PROVIDED BY OPERATING ACTIVITIES: Depreciation 3,342 3,553 Amortization 358 1,463 Other 884 337 Deferred income taxes 48 22 CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF PURCHASED BUSINESSES: Receivables, including costs and estimated earnings in excess of billings (2,765) 6,218 Inventories 86 90 Prepaid expenses and other assets (726) (215) Accounts payable and accrued expenses (916) (10,581) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES OF CONTINUING OPERATIONS 6,216 5,429 NET CASH USED BY OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS (337) (689) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 5,879 4,740 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (5,499) (3,694) Proceeds from sale of fixed assets 1,200 -- Purchases of businesses, net of cash acquired -- (1,539) Cash from sale of business 1,515 -- Other investing activities 2 124 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (2,782) (5,109) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 492 2,407 Purchases of treasury stock (2,199) (2,513) Principal payments on long-term debt (17,189) (15,655) Increase (decrease) in notes payable (76) 14,332 -------- -------- NET CASH USED IN FINANCING ACTIVITIES (18,972) (1,429) -------- -------- Effect of exchange rate changes on cash (262) (856) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS FOR THE PERIOD (16,137) (2,654) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 74,649 64,107 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 58,512 $ 61,453 ======== ======== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: 2002 2001 -------- -------- CASH PAID DURING THREE MONTHS ENDED MARCH 31, FOR: Interest $ 3,804 $ 4,552 Income taxes $ 1,900 $ 2,049 NONCASH INVESTING AND FINANCING ACTIVITIES: Note receivable on sale of business $ 2,000 $ -- Note payable issued in connection with business acquisitions $ -- $ 5,350 Reissuance of treasury shares in connection with business acquisitions $ -- $ 64,650
See accompanying notes to consolidated financial statements. 5 INSITUFORM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) MARCH 31, 2002 1. GENERAL In the opinion of the Company's management, the accompanying consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 2002 (unaudited) and the unaudited results of operations and cash flows for the three months ended March 31, 2002 and 2001. The financial statements have been prepared in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures normally made in an Annual Report on Form 10-K. Accordingly, the consolidated financial statements included herein should be reviewed in conjunction with the financial statements and the footnotes thereto included in the Company's 2001 Annual Report on Form 10-K. The results of operations for the three months ended March 31, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. 2. BUSINESS ACQUISITIONS On February 28, 2001, the Company acquired 100% of the stock of Kinsel Industries, Inc. ("Kinsel") and an affiliated company, Tracks of Texas, Inc. ("Tracks"). Kinsel has operations in pipebursting, microtunneling, commercial construction and highway construction and maintenance. Tracks is a real estate and construction equipment leasing company that primarily leases equipment to Kinsel. The purchase price was approximately $80 million, paid in a combination of cash, notes and 1,847,165 shares of the Company's common stock valued at $35.51 per share. The transaction was accounted for by the purchase method of accounting, and accordingly, their results are included in the Company's consolidated income statement from the date of acquisition. The purchase price was allocated to assets and liabilities based on their respective fair value at the date of acquisition and resulted in goodwill of $61.2 million, which was being amortized over 20 years through December 31, 2001 at which time amortization ceased. There are no contingent payments, options, or commitments in connection with the acquisition. The Company subsequently decided to sell off portions of Kinsel that did not fit the Company's overall business strategy. Kinsel's wastewater treatment plant construction operations were sold effective January 1, 2002. The following unaudited pro forma summary presents information as if Kinsel and Tracks had been acquired as of January 1, 2001. The pro forma amounts include certain adjustments, primarily to recognize depreciation and amortization, including amortization of goodwill, based on the allocated purchase price of Kinsel and Tracks assets, and do not reflect any benefits from economies which might be achieved from combining operations. The unaudited pro forma information has been presented for comparative purposes and does not necessarily reflect the actual results that would have occurred nor is it necessarily indicative of future results of operations of the combined companies (in thousands, except per share amounts):
FOR THE QUARTER ENDED MARCH 31, 2001 (UNAUDITED) Revenues $108,463 Income from continuing operations 5,000 Loss from discontinued operations (687) Net income 4,313 Earnings (loss) per share: Basic Income from continuing operations 0.19 Loss from discontinued operations (0.03) Net income 0.16 Diluted Income from continuing operations 0.18 Loss from discontinued operations (0.02) Net income 0.16
6 3. DISCONTINUED OPERATIONS In the fourth quarter of 2001, the Company made the decision to sell certain operations acquired in the Kinsel transaction. Accordingly, the Company has classified as discontinued the wastewater treatment plant, commercial construction and highway operations acquired as part of the Kinsel acquisition. These operations are not consistent with the Company's operating strategy of providing differentiated trenchless rehabilitation and tunneling services. In February 2002, the Company completed the sale of the wastewater treatment plant effective January 1, 2002. The Company received $1.5 million in cash and a $2.0 million note for a total sale price of $3.5 million, resulting in a slight loss on the sale. The Company is currently marketing Kinsel's commercial construction and highway operations. As of March 31, 2002 and December 31, 2001, assets held for disposal totaled $14.9 million and $32.0 million, respectively and included $4.9 million and $7.6 million of unbilled receivables, respectively. Liabilities related to discontinued operations totaled $3.5 million and $9.5 million at March 31, 2002 and December 31, 2001, respectively. The results of operations for the discontinued operations are as follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- REVENUES: Wastewater Treatment Plant $ - $2,276 Commercial Construction and Highway Operations 8,622 2,106 INCOME (LOSS) FROM DISCONTINUED OPERATIONS: Wastewater Treatment Plant, net of tax of $348 and $27, respectively (642) 47 Commercial Construction and Highway Operations, net of tax of $563 and $19, respectively (960) 37
4. COMPREHENSIVE INCOME For the quarters ended March 31, 2002 and 2001, comprehensive income was $4.7 million and $3.7 million, respectively. The Company's adjustment to comprehensive income consists solely of cumulative foreign currency translation adjustments. 5. EARNINGS PER SHARE Earnings per share have been calculated using the following share information:
THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Weighted average number of common shares used for basic EPS 26,553,506 25,566,024 Effect of dilutive stock options and warrants 288,655 697,482 ------- ------- Weighted average number of common shares and dilutive potential common stock used in dilutive EPS 26,842,161 26,263,506 ========== ==========
6. SEGMENT REPORTING The Company has three operating segments: rehabilitation, tunneling, and corrosion and abrasion ("TiteLiner(R)"). These operating units represent strategic business units that offer distinct products and services and correspond with the current organizational structure. The following disaggregated financial results have been prepared using a management approach, which is consistent with the basis and manner with which management internally disaggregates financial information for the purpose of assisting in making internal operating decisions. The Company evaluates performance based on standalone operating income. 7 Financial information by segment is as follows (in thousands):
THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Revenues Rehabilitation $ 91,442 $ 81,975 Tunneling 15,176 9,450 TiteLiner(R) 4,558 7,425 -------- -------- Total Revenues $111,176 $ 98,850 ======== ======== Gross Profit Rehabilitation $ 24,307 $ 25,640 Tunneling 3,051 1,947 TiteLiner(R) 1,531 2,312 -------- -------- Total Gross Profit $ 28,889 $ 29,899 ======== ======== Operating Income Rehabilitation $ 8,608 $ 6,879 Tunneling 1,866 967 TiteLiner(R) 742 1,513 -------- -------- Total Operating Income $ 11,216 $ 9,359 ======== ========
7. ACQUIRED INTANGIBLE ASSETS AND GOODWILL In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. This statement also provides that certain intangible assets deemed to have an indefinite useful life, such as goodwill, should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. SFAS 142 is effective for fiscal periods beginning after December 15, 2001. The Company adopted SFAS 142 on January 1, 2002, at which time amortization ceased and a transitional impairment test was performed. Management retained an independent party to perform a valuation of goodwill and other intangibles as of that date and determined that no impairment of goodwill existed. Intangible assets are as follows (in thousands):
AS OF MARCH 31, 2002 GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION Amortized intangible assets: Patents $ 21,889 $(16,497) License Agreements 3,409 (1,300) Non-Compete Agreements 1,688 (1,583) -------- -------- Total $ 26,986 $(19,380) ======== ======== Aggregate Amortization Expense: For quarter ended March 31, 2002 $358 Estimated Amortization Expense: For year ended December 31, 2002 $1,213 For year ended December 31, 2003 1,193 For year ended December 31, 2004 1,159 For year ended December 31, 2005 1,141 For year ended December 31, 2006 1,127
8 There was no goodwill in the tunneling and TiteLiner segments at March 31, 2002. Changes in the carrying amount of goodwill in the rehabilitation segment for the three months ended March 31, 2002 were as follows (in thousands): Balance as of December 31, 2001 $117,251 Reassignment of goodwill due to adoption of SFAS 142 4,792 Impact of foreign exchange rates (56) -------- Balance as of March 31, 2002 $121,987 ========
The effect of the adoption of SFAS 142 on reported net income was as follows (in thousands, except per share information):
FOR THE THREE MONTHS ENDED MARCH 31, 2002 2001 ---- ---- Reported income from continuing operations $ 5,905 $4,542 Add: Goodwill amortization related to continuing operations -- 1,172 ------- ------ Adjusted income from continuing operations $ 5,905 $5,714 Reported net income (loss) from discontinued operations (1,602) 84 Add: Goodwill amortization related to discontinued operations -- 20 ------- ------ Adjusted net income $ 4,303 $5,818 ======= ====== Basic earnings per share: Reported income from continuing operations $ 0.22 $ 0.18 Add: Goodwill amortization related to continuing operations -- 0.05 ------- ------ Adjusted income from continuing operations $ 0.22 $ 0.22 Reported net income (loss) from discontinued operations (0.06) -- Add: Goodwill amortization related to discontinued operations -- -- ------- ------ Adjusted net income $ 0.16 $ 0.23 ======= ======
Diluted earnings per share: Reported income from continuing operations $ 0.22 $ 0.17 Add: Goodwill amortization related to continuing operations -- 0.04 -------- -------- Adjusted income from continuing operations $ 0.22 $ 0.22 Reported net income (loss) from discontinued operations (0.06) -- Add: Goodwill amortization related to discontinued operations -- -- -------- -------- Adjusted net income $ 0.16 $ 0.22 ======== ========
8. LITIGATION The Company is involved in certain litigation incidental to the conduct of its business. The Company does not believe that the outcome of any such litigation will have a material adverse effect on the Company's financial position, results of operations and liquidity. The financial statements include the estimated amounts of liabilities that are likely to be incurred from these and various other pending litigation and claims. 9. SUBSEQUENT EVENTS On May 1, 2002, the Company acquired the business and certain assets and liabilities of Elmore Pipe Jacking, Inc. and an affiliated company. The purchase price was approximately $12.5 million. 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of certain significant factors that have affected the Company's financial condition and results of operations during the periods included in the accompanying consolidated financial statements. RESULTS OF OPERATIONS - Three Months Ended March 31, 2002 and 2001 The following table highlights the results for each of the segments and periods presented (in thousands):
THREE MONTHS ENDED MARCH 31, 2002: REHABILITATION TUNNELING TITELINER TOTAL Revenues $91,442 $15,176 $4,558 $111,176 Gross Profit 24,307 3,051 1,531 28,889 Operating Income 8,608 1,866 742 11,216 THREE MONTHS ENDED MARCH 31, 2001: REHABILITATION TUNNELING TITELINER TOTAL Revenues $81,975 $9,450 $7,425 $98,850 Gross Profit 25,640 1,947 2,312 29,899 Operating Income 6,879 967 1,513 9,359
Consolidated revenues from continuing operations for the first quarter of 2002 were $111.2 million, a 12.5% increase over first quarter 2001 revenues from continuing operations of $98.9 million. Revenues in the Company's tunneling operations increased 60.6%, and rehabilitation revenues increased 11.5% compared to the prior year's first quarter. The inception of work on several large, new tunneling projects is the reason for the significant increase in tunneling revenues. The increase in rehabilitation revenues can be partially attributed to three months of activity in the first quarter of 2002 from the operations acquired in the Kinsel acquisition compared to one month of activity in the first quarter of 2001. Revenues in the Company's TiteLiner segment continue to reflect the impact of depressed copper and palladium prices whose mining operators are traditional customers of the TiteLiner product. Cost of revenues increased 19.3% in the first quarter of 2002 to $82.3 million from $69.0 million in the first quarter of the prior year. Kinsel operations accounted for $7.8 million of the increase, reflecting a full three months of activity in 2002 compared to only one month in the first quarter of 2001. The Company's first quarter 2002 gross profit decreased $1.0 million, or 3.4%, to $28.9 million versus $29.9 million in the same quarter of the prior year. The Company's overall gross margin decreased from 30.2% to 26.0% compared to the first quarter last year. Cost of revenues in the Company's rehabilitation operations outpaced revenue growth due to continuing price pressure in the marketplace leading to the decrease in gross margin. Additionally, high revenue growth in the Company's tunneling operations caused consolidated gross margins to decrease due to the lower relative gross margins from tunneling projects compared to rehabilitation and TiteLiner projects. Selling, general and administrative expenses decreased $2.9 million, or 14.0%, to $17.7 million in the first quarter of 2002 compared to $20.5 million in the first quarter of 2001. Selling, general and administrative expenses decreased to 15.9% of revenues in 2002 compared to 20.8% of revenues in the same quarter last year. Due to adoption of SFAS 142, goodwill is no longer amortized, resulting in a decrease in amortization expense of $1.2 million compared to the first quarter of the prior year. Additionally, a continued focus on reduction of overhead costs across all business units led to significant decreases in overhead costs in the Company's rehabilitation operations compared to the first quarter of 2001. The Company's tunneling segment held selling, general and administrative expenses constant in the first quarter of 2002 compared to the first quarter of the prior year, despite significant increases in operating activity. As a partial offset, incentive compensation and profit sharing expense was higher in the first quarter of 2002 compared to first quarter 2001. Due to cost savings in selling, general and administrative expenses, operating income increased to $11.2 million for the first quarter of 2002, a 19.8% increase over first quarter 2001 operating income of $9.4 million. Significant increases in operating income were achieved in the tunneling and rehabilitation business segments due to increases in tunneling revenues and decreases in rehabilitation selling, general and administrative expenses. 10 Other expense remained relatively unchanged at $1.7 million in the first quarter of 2002 versus $1.8 million in the same period of 2001. Interest expense savings from the scheduled mid-quarter debt payment on the Company's Senior Notes, Series A (the "Senior Notes") was partially offset by short-term borrowing outstanding for a greater portion of the current year first quarter. Investment income was lower in the first quarter of 2002 due to lower interest rates on cash balances compared to the first quarter 2001. The Company's effective tax rate was 39.0% for the first quarter of 2002, compared to a 40.3% effective tax rate in the first quarter of 2001. The effective tax rate decreased primarily due to the elimination of goodwill amortization beginning January 1, 2002. As a result of the above, consolidated income from continuing operations increased 30.0% to $5.9 million in the first quarter of 2002, compared to $4.5 million in the same period of the previous year. A loss from discontinued operations of $1.6 million was realized in the first quarter of 2002, compared to $0.1 million of income in the first quarter of 2001. The loss from discontinued operations was a result of additional cost incurred related to the Company's previous ownership of the Kinsel wastewater treatment plant operations. Difficulties in completion of two large jobs in the Kinsel highway division also contributed to the loss. The resulting net income in the first quarter of 2002 for the Company was $4.3 million, compared to $4.6 million in the first quarter of 2001, a 7.0% decline over the prior year. BACKLOG The following table highlights backlog for each of the segments and at each date presented (in millions):
MARCH 31, 2002: 2002 APPARENT LOW BID AND APPARENT LOW BID AND UNRELEASED TERM CONTRACT BACKLOG UNRELEASED TERM AVAILABLE BEYOND 2002 Rehabilitation $109.9 $77.1 $170.4 Tunneling 95.2 9.8 21.6 TiteLiner(R) 1.9 - - --- --- --- Total $207.0 $86.9 $192.0 ====== ===== ====== DECEMBER 31, 2001: 2002 APPARENT LOW BID AND APPARENT LOW BID AND UNRELEASED TERM CONTRACT BACKLOG UNRELEASED TERM AVAILABLE BEYOND 2002 Rehabilitation $125.8 $87.0 $148.9 Tunneling 36.4 11.0 61.9 TiteLiner(R) 2.1 - - --- --- --- Total $164.3 $98.0 $210.8 ====== ===== ======
Contract backlog is management's expectation of revenues to be generated from received, signed, uncompleted contracts whose cancellation is not anticipated at the time of reporting. Reported contract backlog excludes any term contract amounts for which there is not specific and determinable work released. At March 31, 2002 and December 31, 2001, the Company reported contract backlog (excluding projects where the Company has been advised that it is the low bidder, but not formally awarded the contract) in the amounts of approximately $207.0 million and $164.3 million, respectively. The Company anticipates that a significant portion of contract backlog reported at March 31, 2002 and an additional $86.9 million of unreleased term contracts and jobs on which the Company is the apparent low bidder will be completed in 2002. An additional $192.0 million of unreleased term contract work and work on which the Company is the apparent low bidder is anticipated for completion in 2003 and beyond. All backlog values are the estimate of management based on contracts outstanding at March 31, 2002 and are subject to change due to factors beyond the control of the Company. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2002, cash and cash equivalents were $58.5 million, compared to $74.6 million at December 31, 2001. The cash balance at March 31, 2002 includes $4.1 million of cash and cash equivalents restricted in various escrow accounts. Operating cash flow from continuing operations of $6.2 million was the largest source of funds during the first quarter of 2002. Working capital was $117.5 million at March 31, 2002 compared to $138.7 million at December 31, 2001. The decrease in working capital was primarily due to the sale during the first quarter of 2002 of the Company's wastewater treatment plant operations previously classified as discontinued. Discontinued operations used $0.3 million in the first quarter of 2002, compared to $0.7 million in the first quarter of 2001. 11 The sale of the Company's Kinsel wastewater treatment plant operations in February contributed $1.5 million to cash during the first quarter of 2002. An additional $1.2 million of cash was received on the sale of fixed assets. Significant uses of cash included a scheduled principal installment of $15.7 million on the Company's Senior Notes, $5.5 million in capital expenditures and $2.2 million for the repurchase of the Company's common stock during the quarter. Capital expenditures related primarily to the purchase of replacement equipment and additional machinery necessary to expand operations. A significant portion of first quarter 2002 capital expenditures was for the purchase of machinery and equipment necessary to start several large jobs in the tunneling segment. During the three months ended March 31, 2002, the Company repurchased 100,000 shares of the Company's common stock for a total of $2.2 million, compared to 80,400 shares repurchased for $2.5 million in the first three months of 2001. The Company has used cash in the cumulative amount of $69.6 million for the repurchase of 3,770,115 shares through March 31, 2002 since inception of the stock repurchase program which was originally authorized in 1998. Repurchased shares are held as treasury stock until reissued. Financing activities used $19.0 million in the first quarter of 2002, compared to $1.4 million used in the first quarter of 2001. The difference is due to an increase in notes payable of $14.3 million and proceeds of $2.4 million from the sale of stock related to stock option exercises in the prior year's first quarter, compared to $0.5 million in proceeds from the stock option exercises and a slight decrease in notes payable in the current year's first quarter. Total trade receivables and retainage of $108.3 million on March 31, 2002 remained essentially unchanged from December 31, 2001. Costs and estimated earnings in excess of billings increased 8.6% to $25.7 million compared to the December 31, 2001 balance of $23.7 million. The increase was due to an additional $2.9 million in unbilled revenue in the tunneling segment. Tunneling initiated some large, new projects in the first quarter of 2002. In the tunneling segment, unbilled receivables typically increase at the beginning of new jobs. Significant costs for materials and mobilization are incurred during the start-up phase of large projects, however, these costs cannot be billed to the customer until work begins. At March 31, 2002, the Company had unused committed bank credit facilities under a credit agreement (the "Credit Agreement") totaling $29.9 million. The commitment fee paid per annum by the Company is 0.2% on the unborrowed balance. The interest rates under this facility vary and are based on the prime rate. As of March 31, 2002, the rate was 2.5%. The Company's Senior Notes, due February 14, 2007, bear interest, payable semi-annually in August and February of each year, at the rate per annum of 7.88%. Each year, from February 2002 to February 2006, inclusive, the Company will be required to make principal payments of $15.7 million, together with an equivalent payment at maturity. On March 31, 2002, the principal amount of Senior Notes outstanding was $78.6 million. The Senior Notes may be prepaid at the Company's option, in whole or in part, at any time, together with a make-whole premium. Upon specified change in control events each holder has the right to require the Company to purchase its Senior Note without any premium thereon. The note purchase agreements pursuant to which the Senior Notes were acquired, and the Credit Agreement, obligate the Company to comply with certain financial ratios and restrictive covenants that, among other things, place limitations on operations and sales of assets by the Company or its subsidiaries, limit the ability of the Company to incur further secured indebtedness and liens and of subsidiaries to incur indebtedness, and, in the event of default, limit the ability of the Company to pay cash dividends or make other distributions to the holders of its capital stock or to redeem such stock. The Credit Agreement also obligates certain of the Company's domestic subsidiaries to guaranty the Company's obligations, as a result of which the same subsidiaries have also delivered their guaranty with respect to the Senior Notes. The Company believes it has adequate resources and liquidity to fund future cash requirements for working capital, capital expenditures and debt repayments with cash generated from operations, existing cash balances, additional short- and long-term borrowing and the sale of assets. 12 MARKET RISK The Company is exposed to the effect of interest rate changes and foreign currency fluctuations. INTEREST RATE RISK The fair value of the Company's cash and short-term investment portfolio and the fair value of the line of credit facility at March 31, 2002 approximated carrying value. Given the short-term nature of these instruments, market risk, as measured by the change in fair value resulting from a hypothetical 10% change in interest rates, is not material. The Company's objectives in managing exposure to interest rate changes are to limit the impact of interest rate changes on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, the Company maintains fixed rate debt as a percentage of its net debt in a percentage range set by policy. The impact to earnings and cash flows from a hypothetical 10% change in interest rates is not material. FOREIGN EXCHANGE RISK The Company operates subsidiaries, and is associated with licensees and affiliates operating solely in countries outside of the United States, and in currencies other than the U.S. dollar. Consequently, these operations are inherently exposed to risks associated with fluctuation in the value of the local currencies of these countries compared to the U.S. dollar. The effect of a hypothetical adverse change of 10% in exchange rates (a weakening of the U.S. dollar) is immaterial. FORWARD-LOOKING INFORMATION This quarterly report contains various forward-looking statements that are based on information currently available to management and on management's beliefs and assumptions. When used in this document, the words "anticipate," "estimate," "believes," "plans," and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Such statements are subject to risks and uncertainties. The Company's actual results may vary materially from those anticipated, estimated or projected due to a number of factors, such as the competitive environment for the Company's products and services, the geographical distribution and mix of the Company's work, the timely award or cancellation of projects, political circumstances impeding the progress of work, and other factors set forth in reports and other documents filed by the Company with the Securities and Exchange Commission from time to time. The Company does not assume a duty to update forward-looking statements. Please use caution and do not place reliance on forward-looking statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK For information concerning this item, see "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Market Risk," which information is incorporated herein by reference. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material changes since the filing of the Company's Form 10-K for the year ended December 31, 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) None. (b) During the quarter ended March 31, 2002, the Company did not file any Current Reports on Form 8-K. On May 2, 2002, however, the Company filed a Current Report on Form 8-K, under Item 5, to provide the Company's press release dated May 2, 2002, announcing that it completed the acquisition of the business and certain assets and liabilities of Elmore Pipe Jacking, Inc. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. INSITUFORM TECHNOLOGIES, INC. May 15, 2002 /s/ Joseph A. White ------------------------------------------- Joseph A. White Vice President - Chief Financial Officer Principal Financial and Accounting Officer 14 -----END PRIVACY-ENHANCED MESSAGE-----