form10q10292009.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,
2009
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 63005-1195
(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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes ¨ 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 38,881,556 shares of
common stock, $.01 par value per share, outstanding at October 26,
2009.
TABLE
OF CONTENTS
PART
I—FINANCIAL INFORMATION
|
|
|
|
Item 1. Financial
Statements:
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
20
|
|
|
|
35
|
|
|
|
36
|
|
|
PART
II—OTHER INFORMATION
|
|
|
|
|
37
|
|
|
|
37
|
|
|
|
37
|
|
|
|
38
|
|
|
|
39
|
PART
I—FINANCIAL INFORMATION
Item
1. Financial Statements
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
201,852 |
|
|
|
$
137,877 |
|
|
|
$
513,060 |
|
|
|
$
399,390 |
|
Cost
of revenues
|
|
|
148,730 |
|
|
|
105,655 |
|
|
|
381,349 |
|
|
|
309,152 |
|
Gross
profit
|
|
|
53,122 |
|
|
|
32,222 |
|
|
|
131,711 |
|
|
|
90,238 |
|
Acquisition-related
costs
|
|
|
(1,600 |
) |
|
|
– |
|
|
|
6,619 |
|
|
|
– |
|
Operating
expenses
|
|
|
37,018 |
|
|
|
21,948 |
|
|
|
93,839 |
|
|
|
70,494 |
|
Operating
income
|
|
|
17,704 |
|
|
|
10,274 |
|
|
|
31,253 |
|
|
|
19,744 |
|
Other
income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
120 |
|
|
|
823 |
|
|
|
304 |
|
|
|
2,410 |
|
Interest
expense
|
|
|
(2,327 |
) |
|
|
(1,161 |
) |
|
|
(5,804 |
) |
|
|
(3,546 |
) |
Other
|
|
|
363 |
|
|
|
(68 |
) |
|
|
655 |
|
|
|
937 |
|
Total
other income (expense)
|
|
|
(1,844 |
) |
|
|
(406 |
) |
|
|
(4,845 |
) |
|
|
(199 |
) |
Income
before taxes on income
|
|
|
15,860 |
|
|
|
9,868 |
|
|
|
26,408 |
|
|
|
19,545 |
|
Taxes
on income
|
|
|
4,939 |
|
|
|
2,035 |
|
|
|
7,684 |
|
|
|
4,842 |
|
Income
before equity in earnings (losses) of affiliated
companies
|
|
|
10,921 |
|
|
|
7,833 |
|
|
|
18,724 |
|
|
|
14,703 |
|
Equity
in earnings (losses) of affiliated companies,
net of
tax
|
|
|
1,011 |
|
|
|
351 |
|
|
|
704 |
|
|
|
(243 |
) |
Income
before discontinued operations
|
|
|
11,932 |
|
|
|
8,184 |
|
|
|
19,428 |
|
|
|
14,460 |
|
Loss
from discontinued operations, net of tax
|
|
|
(2,646 |
) |
|
|
(1,139 |
) |
|
|
(3,936 |
) |
|
|
(1,744 |
) |
Net
income
|
|
|
9,286 |
|
|
|
7,045 |
|
|
|
15,492 |
|
|
|
12,716 |
|
Less: net
income attributable to noncontrolling
interests
|
|
|
(139 |
) |
|
|
(393 |
) |
|
|
(1,003 |
) |
|
|
(726 |
) |
Net
income attributable to common stockholders
|
|
|
$
9,147 |
|
|
|
$
6,652 |
|
|
|
$
14,489 |
|
|
|
$
11,990 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share attributable to common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$
0.31 |
|
|
|
$
0.28 |
|
|
|
$
0.50 |
|
|
|
$
0.50 |
|
Loss
from discontinued operations
|
|
|
(0.07 |
) |
|
|
(0.04 |
) |
|
|
(0.10 |
) |
|
|
(0.06 |
) |
Net
income
|
|
|
0.24 |
|
|
|
0.24 |
|
|
|
0.40 |
|
|
|
0.44 |
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
from continuing operations
|
|
|
$
0.30 |
|
|
|
$
0.28 |
|
|
|
$
0.50 |
|
|
|
$
0.49 |
|
Loss
from discontinued operations
|
|
|
(0.07 |
) |
|
|
(0.04 |
) |
|
|
(0.10 |
) |
|
|
(0.06 |
) |
Net
income
|
|
|
$
0.23 |
|
|
|
$
0.24 |
|
|
|
$
0.40 |
|
|
|
$
0.43 |
|
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,
2009
|
|
|
December 31,
2008
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
$
90,663 |
|
|
|
$
99,321 |
|
Restricted
cash
|
|
|
2,072 |
|
|
|
1,829 |
|
Receivables,
net
|
|
|
142,897 |
|
|
|
97,257 |
|
Retainage
|
|
|
21,131 |
|
|
|
21,380 |
|
Costs
and estimated earnings in excess of billings
|
|
|
61,412 |
|
|
|
37,224 |
|
Inventories
|
|
|
31,808 |
|
|
|
16,320 |
|
Prepaid
expenses and other assets
|
|
|
27,238 |
|
|
|
37,637 |
|
Current
assets of discontinued operations
|
|
|
5,852 |
|
|
|
13,704 |
|
Total
current assets
|
|
|
383,073 |
|
|
|
324,672 |
|
Property, plant and
equipment, less accumulated depreciation
|
|
|
138,037 |
|
|
|
71,423 |
|
Other
assets
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
183,999 |
|
|
|
122,961 |
|
Identified
intangible assets, less accumulated amortization
|
|
|
79,287 |
|
|
|
10,353 |
|
Investments
in affiliated companies
|
|
|
27,868 |
|
|
|
6,769 |
|
Other
assets
|
|
|
17,099 |
|
|
|
7,285 |
|
Total
other assets
|
|
|
308,253 |
|
|
|
147,368 |
|
Non-current
assets of discontinued operations
|
|
|
6,039 |
|
|
|
5,843 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
|
$
835,402 |
|
|
|
$
549,306 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
$
137,903 |
|
|
|
$
97,593 |
|
Billings
in excess of costs and estimated earnings
|
|
|
11,737 |
|
|
|
9,596 |
|
Current
maturities of long-term debt and line of credit
|
|
|
10,000 |
|
|
|
– |
|
Notes
payable
|
|
|
4,703 |
|
|
|
938 |
|
Current
liabilities of discontinued operations
|
|
|
1,576 |
|
|
|
1,541 |
|
Total
current liabilities
|
|
|
165,919 |
|
|
|
109,668 |
|
Long-term debt,
less current maturities
|
|
|
100,000 |
|
|
|
65,000 |
|
Other
liabilities
|
|
|
44,791 |
|
|
|
2,831 |
|
Non-current
liabilities of discontinued operations
|
|
|
1,142 |
|
|
|
818 |
|
Total
liabilities
|
|
|
311,852 |
|
|
|
178,317 |
|
|
|
|
|
|
|
|
|
|
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
38,880,443 and
27,977,785
|
|
|
389 |
|
|
|
280 |
|
Additional
paid-in capital
|
|
|
242,197 |
|
|
|
109,235 |
|
Retained
earnings
|
|
|
275,105 |
|
|
|
260,616 |
|
Accumulated
other comprehensive income (loss)
|
|
|
1,025 |
|
|
|
(2,154 |
) |
Total
stockholders’ equity before noncontrolling interests
|
|
|
518,716 |
|
|
|
367,977 |
|
Noncontrolling
interests
|
|
|
4,834 |
|
|
|
3,012 |
|
Total
equity
|
|
|
523,550 |
|
|
|
370,989 |
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Equity
|
|
|
$
835,402 |
|
|
|
$
549,306 |
|
The
accompanying notes are an integral part of the consolidated financial
statements.
INSITUFORM
TECHNOLOGIES, INC. AND SUBSIDIARIES
(Unaudited)
(In
thousands, except number of shares)
|
|
Common Stock
Shares Amount
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Accumulated
Other
Comprehensive
Income
(Loss)
|
|
|
Non-
controlling
Interests
|
|
|
Total
Equity
|
|
|
Comprehensive
Income
|
|
BALANCE,
December 31, 2007
|
|
|
27,470,623 |
|
|
|
$
275 |
|
|
|
$
104,332 |
|
|
|
$
238,976 |
|
|
|
$
8,958 |
|
|
|
$
2,717 |
|
|
|
$
355,258 |
|
|
|
|
Net
income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
11,990 |
|
|
|
– |
|
|
|
726 |
|
|
|
12,716 |
|
|
|
$
12,716 |
|
Issuance
of common stock
|
|
|
14,200 |
|
|
|
– |
|
|
|
76 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
76 |
|
|
|
|
|
Restricted
stock issued
|
|
|
442,553 |
|
|
|
5 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
5 |
|
|
|
|
|
Distribution
of shares pursuant to deferred stock unit awards
|
|
|
27,382 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Amortization
and forfeitures of restricted stock shares
|
|
|
(25,225 |
) |
|
|
(1 |
) |
|
|
(62 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(63 |
) |
|
|
– |
|
Equity-based
compensation expense
|
|
|
– |
|
|
|
– |
|
|
|
3,555 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,555 |
|
|
|
– |
|
Gain from
derivative instruments
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,362 |
|
|
|
– |
|
|
|
3,362 |
|
|
|
3,362 |
|
Foreign
currency translation adjustment
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(10,712 |
) |
|
|
(221 |
) |
|
|
(10,933 |
) |
|
|
(10,933 |
) |
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,145 |
|
Less:
total comprehensive income attributable to noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
505 |
|
Total
comprehensive income attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
4,640 |
|
BALANCE,
September 30, 2008
|
|
|
27,929,533 |
|
|
|
$
279 |
|
|
|
$
107,901 |
|
|
|
$
250,966 |
|
|
|
$
1,608 |
|
|
|
$
3,222 |
|
|
|
$
363,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE,
December 31, 2008
|
|
|
27,977,785 |
|
|
|
$
280 |
|
|
|
$
109,235 |
|
|
|
$
260,616 |
|
|
|
$
(2,154 |
) |
|
|
$
3,012 |
|
|
|
370,989 |
|
|
|
|
|
Net
income
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
14,489 |
|
|
|
– |
|
|
|
1,003 |
|
|
|
15,492 |
|
|
|
$
15,492 |
|
Issuance
of common stock
|
|
|
10,524,369 |
|
|
|
106 |
|
|
|
129,472 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
129,578 |
|
|
|
– |
|
Restricted
stock issued
|
|
|
426,951 |
|
|
|
4 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
4 |
|
|
|
– |
|
Distribution
of shares pursuant to deferred stock unit awards
|
|
|
21,645 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Amortization
and forfeitures of restricted stock shares
|
|
|
(70,307 |
) |
|
|
(1 |
) |
|
|
(113 |
) |
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(114 |
) |
|
|
– |
|
Equity-based
compensation expense
|
|
|
– |
|
|
|
– |
|
|
|
3,603 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,603 |
|
|
|
– |
|
Dividend
to non-controlling interest
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(959 |
) |
|
|
(959 |
) |
|
|
– |
|
Investment
by non-controlling interest in India
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
1,621 |
|
|
|
1,621 |
|
|
|
– |
|
Gain
(loss) from derivative instruments
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
(453 |
) |
|
|
– |
|
|
|
(453) |
|
|
|
(453 |
) |
Foreign
currency translation adjustment
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
|
|
3,632 |
|
|
|
157 |
|
|
|
3,789 |
|
|
|
3,789 |
|
Total
comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,828 |
|
Less:
total comprehensive income attributable to noncontrolling
interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,822 |
|
Total
comprehensive income attributable to common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
17,006 |
|
BALANCE,
September 30, 2009
|
|
|
38,880,443 |
|
|
|
$
389 |
|
|
|
$
242,197 |
|
|
|
$
275,105 |
|
|
|
$
1,025 |
|
|
|
$
4,834 |
|
|
|
$
523,550 |
|
|
|
|
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash flows from
operating activities:
|
|
|
|
|
|
|
Net
income
|
|
|
$
15,492 |
|
|
|
$
12,716 |
|
Loss
from discontinued operations
|
|
|
3,936 |
|
|
|
1,744 |
|
Income
from continuing operations
|
|
|
19,428 |
|
|
|
14,460 |
|
Adjustments
to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
19,966 |
|
|
|
12,973 |
|
Gain
on sale of fixed assets
|
|
|
(171 |
) |
|
|
(1,452 |
) |
Equity-based
compensation expense
|
|
|
3,603 |
|
|
|
3,555 |
|
Deferred
income taxes
|
|
|
641 |
|
|
|
710 |
|
Dividends
received from equity investment, net of equity earnings
|
|
|
1,777 |
|
|
|
– |
|
Other
|
|
|
(3,097 |
) |
|
|
(864 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
(121 |
) |
|
|
327 |
|
Receivables
net, retainage and costs and estimated earnings in excess of
billings
|
|
|
(11,707 |
) |
|
|
(20,510 |
) |
Inventories
|
|
|
403 |
|
|
|
(55 |
) |
Prepaid
expenses and other assets
|
|
|
9,636 |
|
|
|
(4,457 |
) |
Accounts
payable and accrued expenses
|
|
|
(8,889 |
) |
|
|
8,883 |
|
Net
cash provided by operating activities of continuing
operations
|
|
|
31,469 |
|
|
|
13,570 |
|
Net
cash provided by operating activities of discontinued
operations
|
|
|
1,632 |
|
|
|
466 |
|
Net
cash provided by operating activities
|
|
|
33,101 |
|
|
|
14,036 |
|
|
|
|
|
|
|
|
|
|
Cash flows from
investing activities:
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
(15,833 |
) |
|
|
(11,085 |
) |
Net
proceeds from sale of fixed assets
|
|
|
916 |
|
|
|
1,521 |
|
Proceeds
from net foreign investment hedges
|
|
|
6,818 |
|
|
|
– |
|
Purchase
of remaining interests in Hong Kong and Australian joint
ventures
|
|
|
(278 |
) |
|
|
– |
|
Purchase
of Bayou and Corrpro, net of cash acquired
|
|
|
(209,714 |
) |
|
|
– |
|
Net
cash used in investing activities of continuing operations
|
|
|
(218,091 |
) |
|
|
(9,564 |
) |
Net
cash provided by investing activities of discontinued
operations
|
|
|
750 |
|
|
|
1,339 |
|
Net
cash used in investing activities
|
|
|
(217,341 |
) |
|
|
(8,225 |
) |
|
|
|
|
|
|
|
|
|
Cash flows from
financing activities:
|
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
128,204 |
|
|
|
256 |
|
Proceeds
from notes payable
|
|
|
– |
|
|
|
2,580 |
|
Principal
payments on notes payable
|
|
|
(2,438 |
) |
|
|
(2,154 |
) |
Principal
payments on long-term debt
|
|
|
(5,000 |
) |
|
|
– |
|
Dividend
paid to non-controlling interest
|
|
|
(959 |
) |
|
|
– |
|
Proceeds
from long-term debt
|
|
|
50,000 |
|
|
|
– |
|
Net
cash provided by financing activities
|
|
|
169,807 |
|
|
|
682 |
|
Effect
of exchange rate changes on cash
|
|
|
5,775 |
|
|
|
4,608 |
|
Net
increase (decrease) in cash and cash equivalents for the
period
|
|
|
(8,658 |
) |
|
|
11,101 |
|
Cash
and cash equivalents, beginning of period
|
|
|
99,321 |
|
|
|
78,961 |
|
Cash
and cash equivalents, end of period
|
|
|
$
90,663 |
|
|
|
$
90,062 |
|
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 (collectively, “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 as of September 30, 2009 and
the results of operations for the three and nine months ended September 30, 2009
and 2008 and the statements of equity and cash flows for the nine months ended
September 30, 2009 and 2008. The unaudited consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America (“GAAP”), the requirements of Form 10-Q and
Article 10 of Regulation S-X and, consequently, do not include all information
or footnotes required by GAAP for complete financial statements or 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 2008 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 2, 2009.
The
results of operations for the three and nine months ended September 30, 2009 are
not necessarily indicative of the results to be expected for the full
year.
Acquisitions
During
the first quarter of 2009, the Company acquired two companies that significantly
expanded the range of products and services the Company offers in the Energy and
Mining sector.
On
February 20, 2009, the Company acquired the business of The Bayou Companies,
L.L.C. and its related entities (“Bayou”) and the noncontrolling interests of
certain subsidiaries of Bayou. Bayou provides cost-effective solutions to energy
and infrastructure companies primarily in the Gulf of Mexico and North America.
Bayou’s products and services include internal and external pipeline coating,
lining, weighting, insulation, project management and logistics. Bayou also
provides specialty fabrication services for offshore deepwater installations.
The purchase price for Bayou was $127.9 million in cash. Pursuant to the
acquisition agreement, the Company agreed to pay up to an additional $7.5
million plus 50% of Bayou’s excess earnings if the Bayou business achieves
certain financial performance targets over a three-year period (the “earnout”).
The aggregate purchase price for the noncontrolling interests was $8.5 million
and consisted of $4.5 million in cash, a $1.5 million promissory note and
149,016 shares of our common stock. The Company used proceeds from its equity
offering completed in February 2009 to fund the cash purchase price for Bayou
and a portion of the purchase price for the noncontrolling
interests.
On March
31, 2009, the Company acquired Corrpro Companies, Inc. (“Corrpro”). Corrpro is a
premier provider of corrosion protection and pipeline maintenance services in
North America and the United Kingdom. Corrpro’s comprehensive line of
fully-integrated corrosion protection products and services includes:
(i) engineering; (ii) product and material sales;
(iii) construction and installation; (iv) inspection, monitoring and
maintenance; and (v) coatings. The purchase price for Corrpro consisted of
cash consideration paid to the Corrpro shareholders of $65.2 million. In
addition, the Company repaid $26.3 million of indebtedness of Corrpro. The total
acquisition cost for Corrpro was approximately $91.5 million. The Company paid
the purchase price for Corrpro with borrowings under its credit facility entered
into in March 2009.
The
Company has completed its initial accounting for these acquisitions in
accordance with the guidance included in the Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification TM
(“FASB ASC”) ASC 805, Business
Combinations (“FASB ASC 805”). The Company has recorded finite-lived
intangible assets at their determined fair value related to non-compete
agreements, customer relationships, licenses, backlog, favorable lease terms,
tradenames and trademarks. The acquisitions resulted in goodwill related to,
among other things, growth opportunities and unidentified intangible assets.
Approximately $8.0 million of goodwill is expected to be deductible for tax
purposes. Additionally, the Company recorded its estimate of the fair value of
the Bayou earnout at $5.0 million as part of the acquisition accounting in March
2009. In the third quarter of 2009, the Company revised its estimate of the fair
value of the Bayou earnout to $3.4 million and reduced operating expenses in the
third quarter of 2009 by $1.6 million. This reduction primarily relates to the
Company’s expectations that the Bayou earnings target in year one of the
three-year earnout will not be met due to developments that occurred in the
third quarter of 2009.
The
Company has substantially completed its purchase price accounting of the
acquisitions with the exception of income taxes and other certain items, some of
which may be material.
The
Company performed an evaluation of the guidance included in FASB ASC 280, Segment Reporting (“FASB ASC
280”), and FASB ASC 350, Intangibles – Goodwill and
Other (“FASB ASC 350”). Based on that evaluation, the Company included
Bayou and Corrpro as part of its Energy and Mining reportable segment. See Note
10 for additional information regarding the Company’s segments.
In
accordance with FASB ASC 805, the Company expensed all costs related to the
acquisitions in the first quarter of 2009. The total costs related to the
acquisitions were $8.2 million, which consisted of transaction costs of $7.3
million and severance costs for certain Corrpro employees of $0.9 million. In
addition, the Company incurred $1.2 million in costs directly related to its
stock offering. These costs were recorded as a reduction to additional paid-in
capital on the consolidated balance sheet.
Bayou
contributed revenues and net income to the Company for the period from February
20, 2009 through September 30, 2009 of $45.3 million and $0.1 million,
respectively. Corrpro contributed revenues and net income to the Company for the
period from March 31, 2009 through September 30, 2009 of $85.8 million and $3.8
million, respectively. The following unaudited pro forma summary presents
combined information of the Company as if these business combinations had
occurred on January 1, 2008 (in thousands):
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
(2)
|
|
|
2008
|
|
|
2009
(3)
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
N/A |
|
|
|
$
219,295 |
|
|
|
$
564,253 |
|
|
|
$
634,540 |
|
Net
income (loss)(1)
|
|
|
N/A |
|
|
|
13,004 |
|
|
|
(3,225 |
) |
|
|
29,166 |
|
_________
|
(1)
|
Includes
amortization of identified intangibles and depreciation of the excess of
fair value of acquired fixed assets over their pre-acquired recorded value
from purchase price allocation.
|
|
(2)
|
The
third quarter of 2009 is not pro forma information and has
been excluded from the table.
|
|
(3)
|
Includes
$9.7 million of non-recurring expense items related to after-tax
acquisition-related costs incurred by the Company, Bayou and Corrpro and
$8.2 million of after-tax expenses related to mark-to-market of Corrpro
warrants prior to the acquisition, early termination fees and the
write-off of deferred financing fees related to previously outstanding
Corrpro debt.
|
These
amounts have been calculated after applying the Company’s accounting policies
and adjusting the results to reflect additional depreciation and amortization
that would have been charged assuming the fair value adjustments to property,
plant and equipment and intangible assets had been applied on January 1, 2008,
together with the incremental interest expense and consequential tax
effects.
The
following table summarizes the consideration transferred to acquire Bayou and
Corrpro at the respective acquisition date (in thousands):
|
|
Bayou
|
|
|
Corrpro
|
|
Cash
and repayment of debt
|
|
|
$
132,419 |
|
|
|
$
91,549 |
|
Issuance
of Insituform shares to Bayou’s noncontrolling interest
shareholders
|
|
|
2,500 |
|
|
|
– |
|
Six-month
note payable to noncontrolling interest shareholders
|
|
|
1,500 |
|
|
|
– |
|
Estimated
earnout payments to Bayou shareholders
|
|
|
5,000 |
|
|
|
– |
|
Adjustment
for net working capital
|
|
|
(722 |
) |
|
|
– |
|
Total
consideration transferred
|
|
|
$
140,697 |
|
|
|
$
91,549 |
|
The
following table summarizes the amounts of identified assets acquired and
liabilities assumed from Bayou and Corrpro at their respective acquisition date
fair value, as well as the fair value of the noncontrolling interests in Bayou
at the acquisition date (in thousands):
|
|
Bayou
|
|
|
Corrpro
|
|
Cash
|
|
|
$
68 |
|
|
|
$
14,186 |
|
Receivables
and cost and estimated earnings in excess of billings
|
|
|
17,979 |
|
|
|
31,824 |
|
Inventory
|
|
|
3,348 |
|
|
|
10,498 |
|
Prepaid
expenses and other current assets
|
|
|
1,143 |
|
|
|
2,538 |
|
Property,
plant and equipment
|
|
|
50,816 |
|
|
|
14,973 |
|
Identified
intangible assets
|
|
|
32,111 |
|
|
|
38,786 |
|
Investments
|
|
|
21,286 |
|
|
|
– |
|
Other
assets
|
|
|
49 |
|
|
|
1,421 |
|
Accounts
payable, accrued expenses and billings in excess of cost and estimated
earnings
|
|
|
(8,762 |
) |
|
|
(28,622 |
) |
Other
long-term liabilities
|
|
|
(7,997 |
) |
|
|
(20,897 |
) |
Total identifiable net
assets
|
|
|
110,041 |
|
|
|
64,707 |
|
|
|
|
|
|
|
|
|
|
Total
consideration transferred
|
|
|
$
140,697 |
|
|
|
$
91,549 |
|
Less: total
identifiable net assets
|
|
|
110,041 |
|
|
|
64,707 |
|
Goodwill
at acquisition date
|
|
|
30,656 |
|
|
|
26,842 |
|
The
following adjustments were made during the third quarter of 2009 as the Company
continued its purchase price accounting:
|
|
Bayou
|
|
|
Corrpro
|
|
Total
identifiable net assets at June 30, 2009
|
|
|
$
103,110 |
|
|
|
$
67,768 |
|
Inventory
|
|
|
– |
|
|
|
– |
|
Property,
plant and equipment
|
|
|
– |
|
|
|
(302 |
) |
Identifiable
intangible assets
|
|
|
– |
|
|
|
– |
|
Investments
|
|
|
(357 |
) |
|
|
– |
|
Other
long-term liabilities
|
|
|
5,110 |
|
|
|
(504 |
) |
Other
adjustments to working capital
|
|
|
2,178 |
|
|
|
(2,255 |
) |
Total identifiable net assets
at September 30, 2009
|
|
|
110,041 |
|
|
|
64,707 |
|
|
|
|
|
|
|
|
|
|
Goodwill
at June 30, 2009
|
|
|
38,309 |
|
|
|
23,781 |
|
Increase
(decrease) in goodwill related to acquisitions
|
|
|
(7,653 |
) |
|
|
3,061 |
|
Foreign
currency translation
|
|
|
– |
|
|
|
144 |
|
Goodwill
at September 30, 2009
|
|
|
30,656 |
|
|
|
26,986 |
|
During
the third quarter of 2009, the Bayou purchase price was reduced by $0.7 million
due to certain amounts owed back to the Company for working capital targets at
the acquisition date that were not met by Bayou. The reduction of the Bayou
purchase price allocated to investments and other long-term liabilities resulted
from a change in the preliminary valuation and purchase price allocation. Other
adjustments to working capital represent receivables due from the former owners
for pre-acquisition expenditures paid by Bayou subsequent to the acquisition.
The reduction of the Corrpro purchase price allocated to property, plant
and equipment, other long-term liabilities and changes to working capital
resulted from a change in the preliminary valuation and purchase price
allocation. Additional changes may be made as the Company completes the purchase
price allocation for both Bayou and Corrpro, some of which may be
material.
In
accordance with FASB ASC 820, Fair Value Measurements
(“FASB ASC 820”), the Company determined that the non-financial assets and
liabilities summarized above are derived from significant unobservable inputs
(“Level 3 inputs”).
In
connection with its acquisition of Corrpro, the Company assumed an obligation
associated with a contributory defined benefit pension plan sponsored by a
subsidiary of Corrpro located in the United Kingdom. Employees of this Corrpro
subsidiary no longer accrue benefits under the plan; however, Corrpro continues
to be obligated to fund prior period benefits. Corrpro funds the plan in
accordance with recommendations from independent actuaries. The benefit
obligation and plan assets at March 31, 2009, the date of acquisition,
approximated $5.7 million and $4.5 million, respectively. Accordingly, the
Company has recorded the unfunded status of this plan of approximately $1.2
million as part of its purchase accounting for the acquisition of Corrpro, which
is subject to adjustment based on the results of a final actuarial analysis.
Plan assets consist of investments in equity and debt securities as well as
cash. The Company expects both the pension expense and funding requirements for
the year ended December 31, 2009 to be immaterial to the Company’s consolidated
financial position and results of operations.
On June
30, 2009, the Company acquired the shares of its joint venture partner, VSL
International Limited (“VSL”), in Insituform Asia Limited (“IAL”), the Company’s
Hong Kong joint venture, and Insituform Pacific Pty Limited (“IPPL”),
the
Company’s
Australian joint venture, in order to expand the Company’s operations in both
Hong Kong and Australia. Prior to these acquisitions, the Company owned 50% of
the shares in each entity and VSL owned the other 50% interest in each entity.
The aggregate purchase price for VSL’s 50% interests in both companies was
approximately $0.3 million. The Company recorded $3.2 million of goodwill in its
Asia-Pacific Sewer Rehabilitation segment as a result of the IAL and IPPL
transactions. The preliminary goodwill amount exceeds the aggregate purchase
price because the Company’s investment in IAL and IPPL prior to the acquisitions
was a deficit. The Company also contributed additional capital into these
entities in order to allow IAL and IPPL to make payments to VSL in relation to
approximately $1.5 million of intercompany debt. In addition, the Company took
responsibility to provide support under its credit facility for IAL and IPPL’s
existing working capital and performance bonding needs. The Company has not
completed its final purchase price accounting of the acquisitions due to the
timing of the acquisitions. As the Company completes its final accounting for
these acquisitions, there may be changes to its initial accounting, some of
which may be material. In accordance with FASB ASC 805, the Company expensed all
costs related to these acquisitions in the second quarter of 2009. As a result
of the acquisitions, the balance sheets of IAL and IPPL are included in the
Company’s consolidated balance sheet at September 30, 2009. For all periods
prior to June 30, 2009, the Company accounted for these entities using the
equity method of accounting.
2.
ACCOUNTING POLICIES
Newly Adopted Accounting
Pronouncements
Effective
July 1, 2009 FASB issued Statement of Financial Accounting Standards No.
(“SFAS”) 168, “The FASB
Accounting Standards Codification TM and the Hierarchy of Generally
Accepted Accounting Principles – a replacement of FASB Statement
No. 162” (FASB ASC 105-10, Generally Accepted Accounting
Principles). The FASB Accounting Standards Codification TM
(“FASB ASC”) will be the single source of authoritative nongovernmental US GAAP.
The FASB ASC will be effective for financial statements that cover interim and
annual periods ending after September 15, 2009. The Codification does not
change GAAP; instead, it introduces a new structure that is organized in an
easily accessible, user-friendly online research system. Technical references to
GAAP included in this report are provided under the new FASB ASC
structure.
FASB ASC 820, Fair Value Measurements and
Disclosures, defines fair
value, establishes a framework for measuring fair value, and expands disclosures
about fair value measurements. FASB ASC 820 clarifies that fair value is
a market-based measurement that should be based on the assumptions that market
participants would use in pricing an asset or liability. See Note 8 for
additional information on our adoption of FASB ASC 820. The Company adopted FASB
ASC 820 as of January 1, 2008 for financial assets and liabilities and as of
January 1, 2009 for non-financial assets and liabilities, except those already
reported at fair value on a recurring basis. The impact of the adoption of FASB
ASC 820 for financial assets and liabilities at January 1, 2008 was not
material. The impact of the adoption of FASB ASC 820 for non-financial assets
and liabilities at January 1, 2009 impacted the purchase accounting for the
Company’s acquisitions of Bayou and Corrpro as shown in Note 1 to the
consolidated financial statements.
FASB ASC
805, Business
Combinations introduced significant changes in the accounting for and
reporting of business acquisitions and non-controlling interests in a
subsidiary. FASB ASC 805 requires the acquiring entity in a business combination
to recognize assets acquired and liabilities assumed in the transaction at fair
value; it requires certain contingent assets and liabilities acquired be
recognized at their fair values on the acquisition date; and it requires
expensing of acquisition-related costs as incurred, among other provisions. FASB
ASC 805 was effective as of January 1, 2009. It applies prospectively to
business combinations completed on or after that date. Refer to Note 1 for
further information regarding the application of FASB ASC 805 on the Company’s
recent acquisitions.
FASB ASC
810, Consolidation
(“FASB ASC 810”), establishes accounting
and reporting standards for minority interests, which are recharacterized as
noncontrolling interests. Under the provisions of FASB ASC 810, noncontrolling
interests are classified as a component of equity separate from the parent’s
equity; purchases or sales of equity interests that do not result in a change in
control are accounted for as equity transactions; net income attributable to the
noncontrolling interest are included in consolidated net income in the statement
of operations; and upon a loss of control, the interest sold, as well as any
interest retained, is recorded at fair value, with any gain or loss recognized
in earnings. FASB ASC 810 was effective for the Company as of the beginning of
its 2009 fiscal year. It applies prospectively, except for the presentation and
disclosure requirements, for which it applies retroactively. In addition, FASB
ASC 810, amends the consolidation guidance applicable to variable interest
entities. The amendments will significantly affect the overall consolidation
analysis under FASB ASC 810. This phase of FASB ASC 810 becomes effective for
the Company on January 1, 2010. The Company is still assessing the potential
impact of the adoption of this phase of FASB ASC 810.
FASB ASC
815, Derivatives and Hedging
(“FASB ASC 815”), changes the disclosure requirements for derivative
instruments and hedging activities to include enhanced disclosures about how and
why an entity uses derivative instruments, how derivative instruments and
related hedged items are accounted for under FASB ASC 815 and how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows. FASB ASC 815 was effective for the Company
as of January 1, 2009. Refer to Note 8 to this report for further information
regarding our derivative instruments.
FASB ASC
825, Financial Instruments
(“FASB ASC 825”), increases the frequency of
fair value disclosures for financial instruments that are within the scope of
FASB ASC 825, requiring public entities to provide these disclosures on a
quarterly basis rather than just annually. FASB ASC 825 became effective for the
Company during the second quarter of 2009. Refer to Note 5 in this consolidated
report for further information related to the Company's adoption of FASB ASC 825
in relation to its long-term debt. All other recorded book values of assets and
liabilities within the scope of FASB ASC 825 are reasonable estimates of their
fair value as of September 30, 2009 and December 31, 2008.
FASB ASC
855, Subsequent Events
(“FASB ASC 855”), established principles and requirements for subsequent events.
The statement details the period after the balance sheet date during which the
Company should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements, the circumstances under
which the Company should recognize events or transactions occurring after the
balance sheet date in its financial statements and the required disclosures for
such events. FASB ASC 855 is effective for interim or annual reporting periods
ending after June 15, 2009. The Company has evaluated subsequent events through
October 29, 2009, which coincides with the issuance of its financial statements
for the period ended September 30, 2009.
Variable Interest
Entities
The
Company evaluates all transactions and relationships with variable interest
entities (“VIE”) to determine whether the Company is the primary beneficiary of
the entities in accordance with FASB ASC 810. As of September 30, 2009, the
Company consolidated certain VIEs based on this evaluation. Also, as of
September 30, 2009, the Company had significant interests in several VIEs
primarily through its joint venture arrangements for which it did not have
controlling financial interests and, accordingly, was not the primary
beneficiary. See Note 1 to the consolidated financial statements contained in
this report for information regarding the change in the reporting of IAL and
IPPL. There were no additional changes in the status of the Company’s VIE or
primary beneficiary designations that occurred during the first nine months of
2009.
The
Company has entered into several contractual joint ventures in order to develop
joint bids on certain 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. In such cases, the additional
obligations could result in reduced profits or, in some cases, significant
losses for the Company’s joint ventures. The Company currently assesses the
impact of these joint ventures on its consolidated financial position, financial
performance and cash flows to be immaterial.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Weighted
average number of common shares used for basic EPS
|
|
|
38,482,480 |
|
|
|
27,490,413 |
|
|
|
36,665,437 |
|
|
|
27,559,721 |
|
Effect
of dilutive stock options and restricted stock
|
|
|
543,592 |
|
|
|
705,532 |
|
|
|
430,277 |
|
|
|
633,784 |
|
Weighted
average number of common shares and dilutive
potential common
stock used in dilutive EPS
|
|
|
39,026,072 |
|
|
|
28,195,945 |
|
|
|
37,095,714 |
|
|
|
28,193,505 |
|
The
Company excluded 430,627 and 465,434 stock options for the three months ended
September 30, 2009 and 2008, respectively, and 430,627 and 526,212 stock options
for the nine months ended September 30, 2009 and 2008, 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.
ACQUIRED INTANGIBLE ASSETS
Acquired
intangible assets include license agreements, contract backlog, favorable lease
terms, trademarks and tradenames, non-compete agreements, customer relationships
and patents. Intangible assets at September 30, 2009 and December 31, 2008 were
as follows (in thousands):
|
|
|
|
|
As
of September 30, 2009
|
|
|
As
of December 31, 2008
|
|
|
|
Weighted
Average
Useful
Lives (Years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
agreements
|
|
|
11 |
|
|
|
$ 3,894 |
|
|
|
$
(2,261 |
) |
|
|
$
1,633 |
|
|
|
$
3,894 |
|
|
|
$
(2,139 |
) |
|
|
$
1,755 |
|
Contract
backlog
|
|
|
1 |
|
|
|
3,010 |
|
|
|
(1,182 |
) |
|
|
1,828 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Leases
|
|
|
22 |
|
|
|
1,237 |
|
|
|
(25 |
) |
|
|
1,212 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Trademarks and
tradenames
|
|
|
19 |
|
|
|
14,400 |
|
|
|
(387 |
) |
|
|
14,013 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Non-compete
agreements
|
|
|
2 |
|
|
|
740 |
|
|
|
(173 |
) |
|
|
567 |
|
|
|
– |
|
|
|
– |
|
|
|
– |
|
Customer
relationships
|
|
|
16 |
|
|
|
53,307 |
|
|
|
(2,474 |
) |
|
|
50,833 |
|
|
|
1,797 |
|
|
|
(633 |
) |
|
|
1,164 |
|
Patents
|
|
|
16 |
|
|
|
23,378 |
|
|
|
(14,177 |
) |
|
|
9,201 |
|
|
|
21,431 |
|
|
|
(13,997 |
) |
|
|
7,434 |
|
Total
|
|
|
|
|
|
|
$
99,966 |
|
|
|
$
(20,679 |
) |
|
|
$
79,287 |
|
|
|
$
27,122 |
|
|
|
$
(16,769 |
) |
|
|
$
10,353 |
|
Amortization
expense was $1.7 million and $0.8 million for the three months ended September
30, 2009 and 2008, respectively. Amortization expense was $3.9 million and $0.9
million for the nine months ended September 30, 2009 and 2008, respectively.
Estimated amortization expense is estimated as follows (in thousands):
|
|
|
|
Estimated
amortization expense:
|
|
|
|
For year ending December 31,
2009
|
|
$ |
5,676 |
|
For year ending December 31,
2010
|
|
|
6,117 |
|
For year ending December 31,
2011
|
|
|
4,736 |
|
For year ending December 31,
2012
|
|
|
4,464 |
|
For year ending December 31,
2013
|
|
|
4,452 |
|
5.
LONG-TERM DEBT AND CREDIT FACILITY
Financing
Arrangements
On March
31, 2009, the Company entered into a Credit Agreement with Bank of America,
N.A., as Administrative Agent (the “New Facility”), Fifth Third Bank, U.S. Bank,
National Association, Compass Bank, JPMorgan Chase Bank, N.A., Associated Bank,
N.A. and Capital One, N.A. The New Facility is unsecured and consists of a $50.0
million term loan and a $65.0 million revolving line of credit, each with a
maturity date of March 31, 2012. The Company has the ability to increase the
amount of the borrowing commitment under the New Facility by up to $25.0 million
in the aggregate upon the consent of the lenders.
At the
Company’s election, borrowings under the New Facility bear interest at either
(i) a fluctuating rate of interest equal on any day to the higher of Bank of
America, N.A.’s announced prime rate, the Federal Funds Rate plus 0.50% or the
one-month LIBOR plus 1.0%, plus in each case a margin ranging from 1.75% to
3.00%, or (ii) rates of interest fixed for one, two, three or nine months at the
British Bankers Association LIBOR Rate for such period plus a margin ranging
from 2.75% to 4.00%. The applicable margins are determined quarterly based upon
the Company’s consolidated leverage ratio. The current annualized rate on
outstanding borrowings under the New Facility at September 30, 2009 was
3.8%.
The New
Facility is subject to certain financial covenants, including a consolidated
financial leverage ratio and consolidated fixed charge coverage ratio. The New
Facility also provides for events of default, including in the event of
non-payment or certain defaults under other outstanding indebtedness of the
Company. The Company was in compliance with each of these covenants at September
30, 2009.
This New
Facility replaced the Company’s credit facility that was due to expire on April
30, 2009. Letters of credit that were outstanding as of March 31, 2009 under the
expiring facility were converted to letters of credit under the New Facility. As
of September 30, 2009, the Company had $22.4 million in letters of credit issued
and outstanding under the New Facility. Of such
amount,
(i) $13.6 million was collateral for the benefit of certain of the Company’s
insurance carriers, (ii) $1.4 million was collateral for work performance
obligations, (iii) $4.5 million was for security in support of working capital
needs of Insituform Pipeline Rehabilitation Private Limited, the Company’s
Indian joint venture, and the working capital, leasing and performance bonding
needs of IPPL and IAL and (iv) $2.9 million was in support of international
trade transactions. See Note 1 to the consolidated financial
statements.
In
connection with its acquisition of Corrpro on March 31, 2009, the Company
borrowed the entire amount of the term loan of $50.0 million and approximately
$7.5 million under the revolving line of credit. See Note 1 to the consolidated
financial statements contained in this report for more information.
The
Company’s total indebtedness as of September 30, 2009 consisted of the Company’s
$65.0 million 6.54% Senior Notes, Series 2003-A, due April 24, 2013, $45.0
million of the original $50.0 million term loan and $4.7 million of third party
notes and bank debt. The Company’s total indebtedness at December 31, 2008
consisted of the Company’s $65.0 million 6.54% Senior Notes, Series 2003-A, due
April 24, 2013, and $0.9 million of other notes related to the financing of
certain insurance premiums.
At
September 30, 2009 and December 31, 2008, the estimated fair value of the
Company’s long-term debt was approximately $112.0 million and $68.0 million,
respectively. Fair value was estimated using market rates for debt of similar
risk and maturity.
Debt
Covenants
At
September 30, 2009, the Company was in compliance with all of its debt covenants
as required under the Senior Notes and the New 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.
6.
EQUITY-BASED COMPENSATION
At
September 30, 2009, 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 an aggregate of 2.7 million shares authorized for
issuance under these plans. At September 30, 2009, approximately 2.4 million
shares remained available for future issuance under the 2009 Employee Equity
Incentive Plan (the “2009 Employee Plan”) and approximately 0.1 million shares
under the 2006 Non Employee Director Equity Incentive Plan (the “2006 Director
Plan”).
Restricted
Awards
Restricted
awards, which include shares of restricted stock 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 under the 2009 Employee Plan.
Restricted 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 restricted award activity during the nine months ended September 30, 2009
follows:
|
|
Restricted Awards
|
|
|
Weighted
Average
Award Date
Fair Value
|
|
Outstanding
at January 1, 2009
|
|
|
475,787 |
|
|
|
$
14.25 |
|
Awarded
|
|
|
426,951 |
|
|
|
13.26 |
|
Shares
distributed
|
|
|
(28,381 |
) |
|
|
18.64 |
|
Forfeited
|
|
|
(22,249 |
) |
|
|
14.29 |
|
Outstanding
at September 30, 2009
|
|
|
852,108 |
|
|
|
$
13.60 |
|
For the
three months ended September 30, 2009, expense associated with restricted awards
was $0.8 million compared to $0.5 million for the same period in 2008. Expense
associated with restricted awards was $2.3 million and $1.4 million in the first
nine months of 2009 and 2008, respectively. Unrecognized pre-tax expense of $7.7
million related to restricted awards is expected to be recognized over the
weighted average remaining service period of 2.1 years for awards outstanding at
September
30, 2009.
Deferred Stock Unit
Awards
Deferred
stock units are awarded to directors of the Company under the 2006 Director
Plan. Deferred stock units 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. 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, 2009
follows:
|
|
Deferred
Stock
Units
|
|
|
Weighted
Average
Award Date
Fair Value
|
|
Outstanding
at January 1, 2009
|
|
|
130,018 |
|
|
|
$
18.46 |
|
Awarded
|
|
|
35,426 |
|
|
|
16.25 |
|
Shares
distributed
|
|
|
(21,645 |
) |
|
|
17.14 |
|
Forfeited
|
|
|
– |
|
|
|
– |
|
Outstanding
at September 30, 2009
|
|
|
143,799 |
|
|
|
$
18.09 |
|
Expense
associated with awards of deferred stock units in the three and nine months
ended September 30, 2009 was $0.1 million and $0.6 million, respectively. There
was no expense associated with deferred stock units in the three months ended
September 30, 2008 and $1.1 million in expense associated with deferred stock
units for the nine months ended September 30, 2008.
Stock
Options
Stock
options are granted from time to time to executive officers and certain key
employees of the Company under the 2009 Employee Plan. 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, 2009
follows:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Outstanding
at January 1, 2009
|
|
|
1,032,773 |
|
|
|
$
19.18 |
|
Granted
|
|
|
337,060 |
|
|
|
12.97 |
|
Exercised
|
|
|
(25,353 |
) |
|
|
13.79 |
|
Canceled/Expired
|
|
|
(121,328 |
) |
|
|
18.03 |
|
Outstanding
at September 30, 2009
|
|
|
1,223,152 |
|
|
|
$
17.72 |
|
Exercisable
at September 30, 2009
|
|
|
689,224 |
|
|
|
$
20.92 |
|
The
weighted average grant-date fair value of options granted during the nine months
ended September 30, 2009 was $5.95. In the
first nine months of 2009, the Company collected $0.5 million from stock option
exercises that had a total intrinsic value of $0.1 million. 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 third quarters of 2009
and 2008, the Company recorded expense of $0.4 million and $0.2 million,
respectively, related to stock option grants. In the nine months ended September
30, 2009 and 2008, the Company recorded expense of $0.8 million and $0.9
million, respectively, related to stock option grants. The intrinsic value of
in-the-money stock options outstanding was $4.3 million and $0.6 million at
September 30, 2009 and 2008, respectively. The aggregate intrinsic value of
exercisable stock options was $1.2 million and $0.1 million at September 30,
2009 and 2008, respectively. The intrinsic value calculation is based on the
Company’s closing stock price of $19.14 on September 30, 2009. Unrecognized
pre-tax expense of $2.0 million related to stock option grants is expected to be
recognized over the weighted average remaining vesting term of 2.1 years for
grants outstanding at September 30, 2009.
The
Company uses a lattice-based option pricing model. The fair value of stock
options granted during the nine-month periods ended September 30, 2009 and 2008
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Range
|
|
|
Weighted
Average
|
|
|
Range
|
|
|
Weighted
Average
|
|
Volatility
|
|
|
49.5%
– 50.1 |
% |
|
|
50.1 |
% |
|
|
37.3%
– 41.9 |
% |
|
|
40.6 |
% |
Expected
term (years)
|
|
|
7.0 |
|
|
|
7.0 |
|
|
|
4.5 |
|
|
|
4.5 |
|
Dividend
yield
|
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Risk-free
rate
|
|
|
2.5%
– 3.2 |
% |
|
|
2.5 |
% |
|
|
4.4%–4.6 |
% |
|
|
4.4 |
% |
7.
COMMITMENTS AND CONTINGENCIES
Litigation
Environmental
Infrastructure Group
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 $1.6 million in damages. 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). On February 16, 2009, the Court
heard the City of Pasadena’s renewed plea to the jurisdiction and motion for
summary judgment. On March 12, 2009, the Court denied the City’s motion for
summary judgment and found that Kinsel’s claims are statutorily recoverable
because they fall within the statutory sovereign immunity waiver exceptions. The
City has appealed and the case has been stayed pending the
appeal. The Company believes that the factual allegations and legal
claims made against it and Kinsel are without merit and intends to vigorously
defend them.
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 was in an
amount far greater than the costs associated with the liner removal and
re-installation. The Company believed the “Contractor Rework” special
endorsement applied 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 March
2004, the Company filed a lawsuit in United States District Court in Boston,
Massachusetts against its excess insurance carrier for such carrier’s failure to
acknowledge coverage and to indemnify the Company for the entire loss in excess
of the primary coverage. On March 31, 2008, the Court entered a
judgment (the “Judgment”) in favor of the Company and against the excess
insurance carrier in the amount of $7.7 million ($6.1 million in actual damages
and $1.6 million in prejudgment interest). The excess insurance
carrier appealed the judgment to the United States Court of Appeals for the
First Circuit. On May 22, 2009, the Court of Appeals vacated the
Judgment and remanded the case to the District Court for dismissal of the
Company’s complaint against the excess insurance carrier, finding that the
excess policy did not follow form to the primary policy. On July 1, 2009, the
Court of Appeals denied the Company’s Petition for Rehearing and Rehearing En
Banc. On July 17, 2009, the District Court entered its final order in
the case, dismissing the Company’s complaint against the excess insurance
carrier.
During
2005 and 2006, the Company recorded a $6.1 million insurance claim receivable
related to this matter, which was based on actual remediation costs for the
Boston project. In addition, in subsequent periods, the Company
recorded pre-judgment and post-judgment interest associated with the
claim. Based on several factors, including but not limited to
favorable court decisions prior to when the Company recorded the claim
receivable amount, the Company believed the realizability of this claim amount
was probable.
On
December 19, 2008, the Company purchased a judgment protection insurance policy
(the “Judgment Protection Policy”) to ensure the Judgment in the event of
reversal by the Court of Appeals. The full amount of the Judgment was insured,
subject to a $500,000 retention.
Based
upon the Court of Appeals’ adverse ruling in May 2009, during the second quarter
of 2009 the Company reduced the amount of the insurance claim receivable
previously recorded to the amount of the proceeds the Company expected to
receive pursuant to the Judgment Protection Policy. On September 24,
2009, the Company received $7.2 million under the Judgment Protection
Policy.
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, the Company
currently does not anticipate any future material adverse impact on its
consolidated financial position, results of operations or cash flows as a result
of these arrangements.
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 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, 2009 on its consolidated
balance sheet.
8.
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. At September 30, 2009,
the Company did not have any open foreign currency forward contracts. During the
third quarter of 2009, the Company settled its existing outstanding hedges. For
foreign currency contracts that settled in 2009, the Company recorded a
cumulative gain since inception in other comprehensive income (loss) of $6.8
million related to the settlement of its foreign currency forward
contracts.
In May
2009, the Company entered into an interest rate swap agreement, for a notional
amount of $25.0 million, which expires in March 2012. The swap notional amount
mirrors the amortization of $25.0 million of the Company’s $50.0 million term
loan. The swap requires the Company to make a monthly fixed rate
payment of 1.63% calculated on the $25 million notional amount, and provides for
the Company to receive a payment based upon a variable monthly LIBOR interest
rate calculated on the $25.0 million notional amount. The receipt of the monthly
LIBOR based payment offsets a variable monthly LIBOR-based interest cost on a
corresponding $25.0 million portion of the Company’s term loan. This interest
rate swap is used to hedge the interest rate risk associated with the volatility
of monthly LIBOR rate movement, and is accounted for as a cash flow hedge. At
September 30, 2009, a net deferred loss of $0.1 million related to this interest
rate swap was recorded in other current liabilities and other comprehensive loss
on the consolidated balance sheet. This hedge was effective, and therefore, no
gain or loss was recorded in the consolidated statements of
operations.
The
following table summarizes the Company’s foreign currency forward contracts at
December 31, 2008:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
Notional
|
|
|
Maturity
|
|
|
Exchange
|
|
|
Position
|
|
Amount
|
|
|
in
Months
|
|
|
Rate
|
|
Canadian
Dollar
|
Sell
|
|
$ |
13,500,000 |
|
|
|
0.4 |
|
|
|
1.012 |
|
Canadian
Dollar
|
Buy
|
|
$ |
10,500,000 |
|
|
|
0.2 |
|
|
|
1.294 |
|
Euro
|
Sell
|
|
€ |
18,500,000 |
|
|
|
1.8 |
|
|
|
1.472 |
|
Pound
Sterling
|
Buy
|
|
£ |
5,000,000 |
|
|
|
0.2 |
|
|
|
1.445 |
|
Pound
Sterling
|
Sell
|
|
£ |
10,000,000 |
|
|
|
3.2 |
|
|
|
1.745 |
|
In
accordance with FASB ASC 820, the Company determined that the instruments
summarized above are derived from significant unobservable inputs, referred to
as 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, 2009,
which consists only of the items summarized above (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Beginning
balance, July 1
|
|
|
$
(1,208 |
) |
|
|
$
(207 |
) |
Expiration
of prior foreign currency forward
contracts included
in other comprehensive income
|
|
|
1,055 |
|
|
|
– |
|
Gain
included in other comprehensive income
|
|
|
43 |
|
|
|
3,514 |
|
Ending
balance, September 30
|
|
|
$
(110 |
) |
|
|
$
3,307 |
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
Beginning
balance, January 1
|
|
|
$
7,161 |
|
|
|
$
(55 |
) |
Expiration
of prior foreign currency forward
contracts included
in other comprehensive income
|
|
|
(6,818 |
) |
|
|
– |
|
(Loss)/gain
included in other comprehensive income
|
|
|
(453 |
) |
|
|
3,362 |
|
Ending
balance, September 30
|
|
|
$
(110 |
) |
|
|
$
3,307 |
|
The
provisions of FASB ASC 820 were adopted for non-financial assets and liabilities
on January 1, 2009. See Note 1 to the consolidated financial statements
contained in this report for more information about the adoption of this
standard as it relates to the Company’s acquisitions of Bayou and
Corrpro.
9.
DISCONTINUED OPERATIONS
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.
Operating
results for discontinued operations are summarized as follows for the three and
nine months ended September 30, 2009 and 2008 (in thousands):
|
|
Three
Months Ended September 30,
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
|
|
|
$
(2,909 |
) |
|
|
$
(584 |
) |
|
|
$
(3,499 |
) |
|
|
$
6,987 |
|
Gross
loss
|
|
|
(3,141 |
) |
|
|
(995 |
) |
|
|
(3,792 |
) |
|
|
(1,729 |
) |
Operating
expenses
|
|
|
597 |
|
|
|
1,260 |
|
|
|
1,553 |
|
|
|
2,321 |
|
Closure
reversals of tunneling business
|
|
|
– |
|
|
|
(300 |
) |
|
|
– |
|
|
|
(777 |
) |
Operating
loss
|
|
|
(3,738 |
) |
|
|
(1,955 |
) |
|
|
(5,345 |
) |
|
|
(3,273 |
) |
Loss
before tax benefits
|
|
|
(3,562 |
) |
|
|
(1,955 |
) |
|
|
(5,169 |
) |
|
|
(2,902 |
) |
Tax
benefits
|
|
|
(916 |
) |
|
|
(816 |
) |
|
|
(1,233 |
) |
|
|
(1,158 |
) |
Net
loss
|
|
|
(2,646 |
) |
|
|
(1,139 |
) |
|
|
(3,936 |
) |
|
|
(1,744 |
) |
The
Company recorded a $2.9 million write-down associated with the settlement of a
previously recorded tunneling claim during the third quarter of 2009, which
resulted in a reversal of $2.9 million in previously recorded
revenues.
Balance
sheet data for discontinued operations was as follows at September 30, 2009 and
December 31, 2008 (in thousands):
|
|
September
30,
2009
|
|
|
December
31,
2008
|
|
|
|
|
|
|
|
|
Receivables,
net
|
|
|
$
160 |
|
|
|
$
2,235 |
|
Retainage
|
|
|
3,930 |
|
|
|
5,917 |
|
Claims
and costs and estimated earnings in excess of billings
|
|
|
1,627 |
|
|
|
5,104 |
|
Prepaid
expenses and other current assets
|
|
|
135 |
|
|
|
448 |
|
Property,
plant and equipment, less accumulated depreciation
|
|
|
2,903 |
|
|
|
3,256 |
|
Other
assets
|
|
|
3,136 |
|
|
|
2,587 |
|
Total
assets
|
|
|
$
11,891 |
|
|
|
$
19,547 |
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
$
1,576 |
|
|
|
$
1,541 |
|
Other
liabilities
|
|
|
1,142 |
|
|
|
818 |
|
Total
liabilities
|
|
|
$
2,718 |
|
|
|
$
2,359 |
|
10. 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 organized into five reportable
segments: North American Sewer Rehabilitation, European Sewer Rehabilitation,
Asia-Pacific Sewer Rehabilitation, Water Rehabilitation and Energy and Mining.
Each segment is regularly reviewed and evaluated separately.
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Sewer Rehabilitation
|
|
|
$
94,858 |
|
|
|
$
89,346 |
|
|
|
$
259,049 |
|
|
|
$
257,495 |
|
European
Sewer Rehabilitation
|
|
|
23,152 |
|
|
|
27,055 |
|
|
|
62,067 |
|
|
|
79,313 |
|
Asia-Pacific
Sewer Rehabilitation
|
|
|
9,811 |
|
|
|
1,768 |
|
|
|
22,154 |
|
|
|
5,459 |
|
Water
Rehabilitation
|
|
|
4,289 |
|
|
|
5,917 |
|
|
|
8,740 |
|
|
|
9,738 |
|
Energy
and Mining
|
|
|
69,742 |
|
|
|
13,791 |
|
|
|
161,050 |
|
|
|
47,385 |
|
Total
revenues
|
|
|
$
201,852 |
|
|
|
$
137,877 |
|
|
|
$
513,060 |
|
|
|
$
399,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Sewer Rehabilitation
|
|
|
$
24,082 |
|
|
|
$
20,184 |
|
|
|
$
64,915 |
|
|
|
$
56,405 |
|
European
Sewer Rehabilitation
|
|
|
6,212 |
|
|
|
5,941 |
|
|
|
16,354 |
|
|
|
15,936 |
|
Asia-Pacific
Sewer Rehabilitation
|
|
|
2,614 |
|
|
|
614 |
|
|
|
6,382 |
|
|
|
1,699 |
|
Water
Rehabilitation
|
|
|
220 |
|
|
|
1,263 |
|
|
|
(35 |
) |
|
|
1,692 |
|
Energy
and Mining
|
|
|
19,994 |
|
|
|
4,220 |
|
|
|
44,095 |
|
|
|
14,506 |
|
Total
gross profit
|
|
|
$
53,122 |
|
|
|
$
32,222 |
|
|
|
$
131,711 |
|
|
|
$
90,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North
American Sewer Rehabilitation
|
|
|
$
10,322 |
|
|
|
$
6,757 |
|
|
|
$
25,844 |
|
|
|
$
11,910 |
|
European
Sewer Rehabilitation
|
|
|
1,095 |
|
|
|
347 |
|
|
|
2,120 |
|
|
|
(1,084 |
) |
Asia-Pacific
Sewer Rehabilitation
|
|
|
613 |
|
|
|
368 |
|
|
|
2,407 |
|
|
|
722 |
|
Water
Rehabilitation
|
|
|
(334 |
) |
|
|
482 |
|
|
|
(2,371 |
) |
|
|
(780 |
) |
Energy
and Mining
|
|
|
6,008 |
|
|
|
2,320 |
|
|
|
3,253 |
|
|
|
8,976 |
|
Total
operating income
|
|
|
$
17,704 |
|
|
|
$
10,274 |
|
|
|
$
31,253 |
|
|
|
$
19,744 |
|
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,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
130,677 |
|
|
|
$
90,842 |
|
|
|
$
345,553 |
|
|
|
$
252,789 |
|
Canada
|
|
|
28,827 |
|
|
|
12,649 |
|
|
|
63,469 |
|
|
|
38,557 |
|
Europe
|
|
|
27,966 |
|
|
|
28,327 |
|
|
|
68,649 |
|
|
|
82,322 |
|
Other
foreign
|
|
|
14,382 |
|
|
|
6,059 |
|
|
|
35,389 |
|
|
|
25,722 |
|
Total
revenues
|
|
|
$
201,852 |
|
|
|
$
137,877 |
|
|
|
$
513,060 |
|
|
|
$
399,390 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
31,921 |
|
|
|
$
20,181 |
|
|
|
$
82,572 |
|
|
|
$
54,635 |
|
Canada
|
|
|
9,146 |
|
|
|
4,281 |
|
|
|
21,428 |
|
|
|
13,149 |
|
Europe
|
|
|
8,498 |
|
|
|
6,211 |
|
|
|
17,934 |
|
|
|
16,380 |
|
Other
foreign
|
|
|
3,557 |
|
|
|
1,549 |
|
|
|
9,777 |
|
|
|
6,074 |
|
Total
gross profit
|
|
|
$
53,122 |
|
|
|
$
32,222 |
|
|
|
$
131,711 |
|
|
|
$
90,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
|
$
8,188 |
|
|
|
$
6,587 |
|
|
|
$
9,589 |
|
|
|
$
8,845 |
|
Canada
|
|
|
6,804 |
|
|
|
2,549 |
|
|
|
13,381 |
|
|
|
7,941 |
|
Europe
|
|
|
1,693 |
|
|
|
391 |
|
|
|
3,945 |
|
|
|
(630 |
) |
Other
foreign
|
|
|
1,019 |
|
|
|
747 |
|
|
|
4,338 |
|
|
|
3,588 |
|
Total
operating income
|
|
|
$
17,704 |
|
|
|
$
10,274 |
|
|
|
$
31,253 |
|
|
|
$
19,744 |
|
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, 2008.
The
consolidated financial statements are prepared in accordance with accounting
principles generally accepted in the United States of America (see Note 2 to
consolidated financial statements included in this report).
We
believe that certain accounting policies could potentially 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, 2008.
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, 2008, as filed with the Securities
and Exchange Commission on March 2, 2009, 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 and
services for the rehabilitation of municipal sewer and water and other
underground piping systems without digging or disruption and the corrosion
protection of mineral, oil and gas and other industrial 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 and water rehabilitation markets, 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 largest portion 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. We believe that this segment disclosure
provides a high level of transparency into our businesses and insight into our
results. We also believe that this segmentation is helpful in articulating our
strategic direction to our investors.
Our
long-term strategy consists of: first, streamlining our rehabilitation and
energy and mining 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 by identifying opportunities to streamline key
management functions and processes to improve our profitability; second, growing
our water rehabilitation business by leveraging our premier brand and experience
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; and fourth, expanding our position in the growing and profitable
energy and mining and water rehabilitation sectors through organic growth,
selective acquisitions of companies, which may be significant in size, and by
conducting complimentary product and technology acquisitions.
On
February 20, 2009, we acquired the business of The Bayou Companies, L.L.C. and
its related entities, referred to herein as “Bayou,” and the noncontrolling
interests of certain subsidiaries of Bayou. Bayou provides cost-effective
solutions to energy and infrastructure companies primarily in the Gulf of Mexico
and North America. Bayou’s products and services include internal and external
pipeline coating, lining, weighting, insulation, project management and
logistics. Bayou also provides specialty fabrication services for offshore
deepwater installations. The purchase price for Bayou consisted of $127.9
million in cash. Pursuant to the acquisition agreement, we agreed to pay up to
an additional $7.5 million plus 50% of Bayou’s excess earnings if the Bayou
business achieves certain financial performance targets. The aggregate purchase
price for the noncontrolling interests was $8.5 million and consisted of cash, a
promissory note and shares of our common stock. We used proceeds from our equity
offering completed in February 2009 to fund the purchase price for Bayou and a
portion of the cash purchase price for the noncontrolling interests. During the
third quarter of 2009, the Bayou purchase price was reduced by $0.7 million due
to certain amounts owed back to us for working capital targets at the
acquisition date that were not met by Bayou. The financial results of Bayou for
the 39-day period that we owned Bayou in the first quarter and the complete
second and third quarters are included in the results of our Energy and Mining
segment.
On March
31, 2009, we acquired Corrpro Companies, Inc., referred to herein as “Corrpro”.
Corrpro is a premier provider of corrosion protection and pipeline maintenance
services in North America and the United Kingdom. Corrpro’s comprehensive line
of fully-integrated corrosion protection products and services includes:
(i) engineering; (ii) product and material sales;
(iii) construction and installation; (iv) inspection, monitoring and
maintenance; and (v) coatings. The purchase price for Corrpro consisted of
cash consideration paid to the Corrpro shareholders of $65.2 million. In
addition, we repaid $26.3 million of indebtedness of Corrpro. The total
acquisition cost for Corrpro was approximately $91.5 million. We paid the
purchase price for Corrpro with borrowings under our credit facility entered
into in March 2009 and existing cash. The financial results of Corrpro for the
second and third quarters are included in our Energy and Mining
segment.
On June
30, 2009, we acquired the shares of our joint venture partner, VSL International
Limited, referred to herein as VSL, in Insituform Asia Limited, our Hong Kong
joint venture (“IAL”), and Insituform Pacific Pty Limited, our Australian joint
venture (“IPPL”), in order to expand our operations in both Hong Kong and
Australia. Prior to these acquisitions, we owned 50% of the shares in each
entity and VSL owned the other 50% interest in each entity. The aggregate
purchase price for VSL’s 50% interests in both companies was approximately $0.3
million. We recorded $3.2 million of goodwill in our Asia-Pacific Sewer
Rehabilitation segment as a result of the transactions. The preliminary goodwill
amount exceeds the aggregate purchase price because our investment in IAL and
IPPL prior to the acquisitions was a deficit. We also contributed additional
capital into these entities in order to allow IAL and IPPL to pay VSL
approximately $1.5 million in intercompany debt. In addition, we took
responsibility to provide support under our credit facility for IAL’s and IPPL’s
working capital and performance bonding needs. We have not completed the final
purchase price accounting of the acquisitions. As we complete the final
accounting for these acquisitions, there may be changes to our initial
accounting, some of which may be material. In accordance with FASB ASC 805, we
expensed all costs related to these acquisitions in the second quarter of 2009.
As a result of the acquisitions, the balance sheets of IAL and IPPL are included
in our consolidated balance sheet at September 30, 2009.For periods ended on or
prior to June 30, 2009, we accounted for these entities using the equity method
of accounting.
Overview
– Consolidated Results
Key
financial data for our consolidated operations was as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
201,852 |
|
|
|
$
137,877 |
|
|
|
$
63,975 |
|
|
|
46.4 |
% |
Gross
profit
|
|
|
53,122 |
|
|
|
32,222 |
|
|
|
20,900 |
|
|
|
64.9 |
|
Gross
margin
|
|
|
26.3 |
% |
|
|
23.4 |
% |
|
|
|
|
|
|
2.9 |
|
Operating
expenses
|
|
|
35,418 |
|
|
|
21,948 |
|
|
|
13,470 |
|
|
|
61.4 |
|
Operating
income
|
|
|
17,704 |
|
|
|
10,274 |
|
|
|
7,430 |
|
|
|
72.3 |
|
Operating
margin
|
|
|
8.8 |
% |
|
|
7.5 |
% |
|
|
|
|
|
|
1.3 |
|
Net
income from continuing operations
attributable to
common stockholders
|
|
|
11,793 |
|
|
|
7,791 |
|
|
|
4,002 |
|
|
|
51.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
513,060 |
|
|
|
399,390 |
|
|
|
$
113,670 |
|
|
|
28.5 |
% |
Gross
profit
|
|
|
131,711 |
|
|
|
90,238 |
|
|
|
41,473 |
|
|
|
46.0 |
|
Gross
margin
|
|
|
25.7 |
% |
|
|
22.6 |
% |
|
|
|
|
|
|
3.1 |
|
Operating
expenses
|
|
|
100,458 |
|
|
|
70,494 |
|
|
|
29,964 |
|
|
|
42.5 |
|
Operating
income
|
|
|
31,253 |
|
|
|
19,744 |
|
|
|
11,509 |
|
|
|
58.3 |
|
Operating
margin
|
|
|
6.1 |
% |
|
|
4.9 |
% |
|
|
|
|
|
|
1.2 |
|
Net
income from continuing operations
attributable to
common stockholders
|
|
|
18,425 |
|
|
|
13,734 |
|
|
|
4,691 |
|
|
|
34.2 |
|
Consolidated
net income from continuing operations attributable to common stockholders was
$4.0 million, or 51.4%, higher in the third quarter of 2009 than in the third
quarter of 2008, and $4.7 million, or 34.2%, higher in the first nine months of
2009 compared to the prior year period. Revenues during the third quarter of
2009 increased by $64.0 million, or 46.4%, due primarily to the inclusion of
Bayou and Corrpro revenues in the quarter. The increase in revenues was
partially offset by declines in revenues in our European Sewer Rehabilitation,
Water Rehabilitation and United Pipeline Systems businesses. Also, the increase
in revenues was partially offset by a $19.0 million unfavorable impact relating
to foreign currencies on a consolidated basis. The increase in net income from
continuing operations attributable to common stockholders for the third quarter
and first nine months of 2009 was principally due to improved gross profit
results in our North American Sewer Rehabilitation and European Rehabilitation
segments. Our gross margin improvement in both segments, coupled with growth in
our Asia-Pacific Sewer Rehabilitation segment, also helped to drive the improved
results. In the third quarter of 2009, based on the year-to-date results for
Bayou, we revised our estimate of the Bayou earnout, which resulted in a
favorable pre-tax adjustment to transaction expenses of $1.6 million. In the
first nine months of 2009, consolidated income from continuing operations
included $6.6 million in pre-tax transaction and severance costs associated with
the acquisitions of Bayou and Corrpro.
Consolidated
operating expenses increased by $13.5 million, or 61.4%, in the third quarter of
2009 compared to the corresponding prior year period. The increase was primarily
due to the inclusion of $12.1 million of operating expenses for Bayou and
Corrpro. The third quarter 2009 consolidated operating expenses included $1.7
million (net of $1.6 million favorable earnout adjustment) and $10.4 million of
expenses for Bayou and Corrpro, respectively. Excluding the operating expenses
of Bayou and Corrpro, consolidated operating expenses for the quarter would have
increased by $1.4 million, or 6.4%, due primarily to growth in our Asia-Pacific
Sewer Rehabilitation segment. In the first nine months of 2009, operating
expenses increased by $30.0 million due to the $28.5 million in operating
expenses of Bayou and Corrpro, $4.0 million to fund growth in our Asia-Pacific
Sewer Rehabilitation segment and $6.6 million of transaction and severance costs
related to the acquisitions of Bayou and Corrpro. In the first nine months of
2008, we incurred approximately $1.7 million in expenses related to a proxy
contest.
We
experienced a $5.4 million, or 12.2%, decrease in operating expenses in our
North American Sewer Rehabilitation business in the first nine months of 2009
compared to the prior year period, which partially offset the increase in
consolidated operating expenses. This decrease was primarily the result of cost
reduction measures taken in the fourth quarter of 2008. In addition, we reduced
operating expenses by $2.8 million, or 16.4%, in our European Sewer
Rehabilitation business in the first nine months of 2009.
Total
contract backlog improved to $467.7 million at September 30, 2009, a record for
our company, compared to $292.9 million at September 30, 2008 and $249.1 million
at December 31, 2008. The September 30, 2009 level of backlog was significantly
higher than total contract backlog at December 31, 2008 and September 30, 2008
due primarily to the addition of $123.8 million total contract backlog of Bayou
and Corrpro at September 30, 2009. Excluding the backlog from Bayou and Corrpro,
consolidated
backlog
at September 30, 2009 increased by $94.8 million, or 38.1%, and $51.0 million,
or 17.4%, compared to December 31, 2008 and September 30, 2008, respectively,
due to the high backlog levels in our North American Sewer Rehabilitation
segment, European Sewer Rehabilitation segment and Asia-Pacific Rehabilitation
segment. In addition, our United Pipeline Systems business experienced a 17.1%
growth in backlog at September 30, 2009 compared to September 30, 2008. These
increases in backlog are due to improved win-rates and increased market
penetration.
North
American Sewer Rehabilitation Segment
Key
financial data for our North American Sewer Rehabilitation segment was as
follows (dollars in thousands):
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
94,858 |
|
|
|
$
89,346 |
|
|
|
$
5,512 |
|
|
|
6.2 |
% |
Gross
profit
|
|
|
24,082 |
|
|
|
20,184 |
|
|
|
3,898 |
|
|
|
19.3 |
|
Gross
margin
|
|
|
25.4 |
% |
|
|
22.6 |
% |
|
|
|
|
|
|
2.8 |
|
Operating
expenses
|
|
|
13,760 |
|
|
|
13,427 |
|
|
|
333 |
|
|
|
2.5 |
|
Operating
income
|
|
|
10,322 |
|
|
|
6,757 |
|
|
|
3,565 |
|
|
|
52.8 |
|
Operating
margin
|
|
|
10.9 |
% |
|
|
7.6 |
% |
|
|
|
|
|
|
3.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
259,049 |
|
|
|
$ 257,495 |
|
|
|
$
1,554 |
|
|
|
0.0 |
% |
Gross
profit
|
|
|
64,915 |
|
|
|
56,405 |
|
|
|
8,510 |
|
|
|
15.1 |
|
Gross
margin
|
|
|
25.1 |
% |
|
|
21.9 |
% |
|
|
|
|
|
|
3.2 |
|
Operating
expenses
|
|
|
39,071 |
|
|
|
44,495 |
|
|
|
(5,424 |
) |
|
|
(12.2 |
) |
Operating
income
|
|
|
25,844 |
|
|
|
11,910 |
|
|
|
13,934 |
|
|
|
117.0 |
|
Operating
margin
|
|
|
10.0 |
% |
|
|
4.6 |
% |
|
|
|
|
|
|
5.4 |
|
Revenues
Revenues
increased by $5.5 million, or 6.2%, in our North American Sewer Rehabilitation
segment in the third quarter of 2009 compared to the third quarter of 2008. The
increase in revenues was primarily due to increased workable backlog in the
third quarter of 2009. Third-party product sales in this segment were $2.9
million and $2.4 million in the third quarter of 2009 and 2008, respectively.
Revenues increased slightly in our North American Sewer Rehabilitation segment
in the first nine months of 2009 compared to the first nine months of
2008.
Contract
backlog in our North American Sewer Rehabilitation segment at September 30, 2009
was $183.8 million. This represented a $5.3 million, or 3.0%, increase from
backlog at September 30, 2008. Backlog at September 30, 2009 declined 11.2%
compared to June 30, 2009. This decline was primarily attributed to increased
revenue during the third quarter of 2009 and delays in contract awards on
certain large projects. Overall increasing levels of backlog compared to
September 30, 2008 are a result of improved win-rates and slightly increased
market activity some of which is attributable to federal stimulus programs. The
stimulus programs are expected to have a favorable impact on the market in
the upcoming quarters.
Gross
Profit and Gross Margin
Gross
profit in our North American Sewer Rehabilitation segment increased $3.9
million, or 19.3%, in the third quarter of 2009 compared to the prior year
quarter, primarily due to project execution improvements and lower pricing for
resin and fuel. Also, general cost management practices continue to drive a
lower overall cost structure. In the third quarter of 2009, our gross margin
increased to 25.4% from 22.6% in the third quarter of 2008, as a result of the
factors mentioned above.
We will
continue to drive profitability and returns through enhanced project management
and crew training, and the continued implementation of technologies and improved
logistics management. In addition, we continue to seek avenues for taking
advantage of our vertical integration and manufacturing capabilities by further
expanding our third-party product sales efforts.
In the
first nine months of 2009, gross profit increased by $8.5 million, or 15.1%,
over the prior year period, despite an increase in revenues of only $1.6
million. In the first nine months of 2009, our gross margin increased to 25.1%
from 21.9%, a 320 basis point increase. The improvement in our gross profit
margins was primarily due to project execution improvements and lower pricing
for fuel and resin. In addition, gross margins were boosted by increased
third party product sales.
Operating
Expenses
Operating
expenses in our North American Sewer Rehabilitation segment increased by $0.3
million, or 2.5%, during the third quarter of 2009 compared to the third quarter
of 2008. The increase was primarily due to an increase in health care costs.
Operating expenses as a percentage of revenues were 14.5% in the third quarter
of 2009 compared to 15.0% in the third quarter of 2008.
Operating
expenses decreased by $5.4 million, or 12.2%, in the first nine months of 2009
compared to the first nine months of 2008, primarily due to cost reduction and
realignment efforts in this segment. Operating expenses as a percentage of
revenues were 15.2% in the first nine months of 2009 compared to 17.3% in the
first nine months of 2008.
Operating
Income and Operating Margin
The
higher revenue level and improved gross profit led to a $3.6 million, or 52.8%,
increase in operating income in our North American Sewer Rehabilitation segment
in the third quarter of 2009 compared to the third quarter of 2008. Our North
American Sewer Rehabilitation operating margin, which is operating income as a
percentage of revenues, improved to 10.9% in the third quarter of 2009 compared
to 7.6% in the third quarter of 2008, an increase of 330 basis
points.
Operating
income in this segment in the first nine months of 2009 increased to $25.8
million compared to $11.9 million in the first nine months of 2008, a 117.0%
increase. Our North American Sewer Rehabilitation operating margin improved to
10.0% in the first nine months of 2009 compared to 4.6% in the first nine months
of 2008, an increase of 540 basis points. This improvement was primarily due to
the gross margin improvements discussed above.
European
Sewer Rehabilitation Segment
Key
financial data for our European Sewer Rehabilitation segment was as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
23,152 |
|
|
|
$
27,055 |
|
|
|
$
(3,903 |
) |
|
|
(14.4 |
)% |
Gross
profit
|
|
|
6,212 |
|
|
|
5,941 |
|
|
|
271 |
|
|
|
4.6 |
|
Gross
margin
|
|
|
26.8 |
% |
|
|
22.0 |
% |
|
|
|
|
|
|
4.8 |
|
Operating
expenses
|
|
|
5,117 |
|
|
|
5,594 |
|
|
|
(477 |
) |
|
|
(8.5 |
) |
Operating
income
|
|
|
1,095 |
|
|
|
347 |
|
|
|
748 |
|
|
|
215.6 |
|
Operating
margin
|
|
|
4.7 |
% |
|
|
1.3 |
% |
|
|
|
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
62,067 |
|
|
|
$ 79,313 |
|
|
|
$
(17,246 |
) |
|
|
(21.7 |
)% |
Gross
profit
|
|
|
16,354 |
|
|
|
15,936 |
|
|
|
418 |
|
|
|
2.6 |
|
Gross
margin
|
|
|
26.3 |
% |
|
|
20.1 |
% |
|
|
|
|
|
|
6.2 |
|
Operating
expenses
|
|
|
14,234 |
|
|
|
17,020 |
|
|
|
(2,786 |
) |
|
|
(16.4 |
) |
Operating
income (loss)
|
|
|
2,120 |
|
|
|
(1,084 |
) |
|
|
3,204 |
|
|
|
295.6 |
|
Operating
margin
|
|
|
3.4 |
% |
|
|
(1.4 |
)% |
|
|
|
|
|
|
4.8 |
|
Revenues
Revenues
in our European Sewer Rehabilitation segment decreased by $3.9 million, or
14.4%, during the third quarter of 2009 compared to the third quarter of 2008,
primarily due to continued market weakness in the United Kingdom and a $1.9
million unfavorable impact of foreign currencies against the U.S.
dollar.
For the
first nine months of 2009, revenues decreased by $17.2 million, or 21.7%,
compared to the first nine months of 2008, primarily due to a $9.8 million
unfavorable impact of weak European currencies versus the U.S. dollar as well as
a decline in revenues from our United Kingdom operations due to continuing soft
market conditions.
Contract
backlog in our European Sewer Rehabilitation segment was $40.7 million at
September 30, 2009. This represented an increase of $10.0 million, or 32.6%,
compared to September 30, 2008. The increase was principally due to higher
backlog in Switzerland and The Netherlands. European orders and backlog have
been fairly steady for the past several quarters, with the exception of the
United Kingdom, and we believe this trend will continue through the remainder of
2009.
As part
of our continuing efforts to improve our European financial performance, certain
recent operational and management changes have been made. We also are working to
restructure a number of country-based operations to reduce fixed costs and
improve project execution and management. We continue to anticipate only modest
growth in revenues (not accounting for foreign
currency
impacts) for this segment in 2010; however, we expect profitability to improve
year over year due to recent organizational changes and other continuing
restructuring efforts.
Gross
Profit and Gross Margin
Gross
profit in our European Sewer Rehabilitation segment increased by $0.3 million,
or 4.6%, during the third quarter of 2009 compared to the third quarter of 2008,
despite the 14.4% decline in revenues. Our European Sewer Rehabilitation segment
experienced an increase in gross margin year over year of 480 basis points. The
increase in gross profit quarter over quarter was due to improved margins in the
United Kingdom due to improved project execution performance and cost reductions
in Switzerland, Poland and France.
Gross
profit in our European Sewer Rehabilitation segment increased by $0.4 million
during the first nine months of 2009 compared to the first nine months of 2008.
We experienced an improvement in both Switzerland and France after the
restructuring plans were implemented during 2008. We also improved operationally
in Poland. During the first nine months of 2008, gross profit for this segment
was negatively impacted by several large project execution issues in our Eastern
European operations.
While our
recent profitability in Europe has not met our long-term expectations, we
continue to implement changes in this business unit that we expect will result
in significantly improved performance. We are focusing on bottom-line
improvements that should enable this business to achieve our expected financial
returns. With dramatically improved contract backlog, coupled with the
restructuring efforts, we expect to see significant profitability improvements
in future quarters.
Operating
Expenses
Operating
expenses in our European Sewer Rehabilitation segment decreased by $0.5 million,
or 8.5%, during the third quarter of 2009 compared to the third quarter of 2008,
primarily due to a reduction in operating expenses in France, Switzerland and
the United Kingdom due to cost reduction efforts.
Operating
expenses in our European Sewer Rehabilitation segment decreased by $2.8 million,
or 16.4%, during the first nine months of 2009 compared to the first nine months
of 2008. This was primarily due to cost reduction efforts in the United Kingdom,
Switzerland, France and Poland. Operating expenses as a percentage of revenues
increased to 23.0% in the first nine months of 2009 compared to 21.5% in the
first nine months of 2008, primarily due to the decline in
revenues.
Operating
Income (loss) and Operating Margin
Lower
operating expenses and higher gross profit led to a $0.7 million improvement in
operating income in the third quarter of 2009 compared to the third quarter of
2008. Our European Sewer Rehabilitation operating margin, which is operating
income as a percentage of revenues, improved to 4.7% in the third quarter of
2009 compared to 1.3% in the third quarter of 2008.
Lower
operating expenses and higher gross profits led to a $3.2 million improvement in
operating income in the first nine months of 2009 compared to the first nine
months of 2008. Our European Sewer Rehabilitation operating margin improved to
3.4% in the first nine months of 2009 compared to (1.4)% in the first nine
months of 2008.
Asia-Pacific
Sewer Rehabilitation Segment
Key
financial data for our Asia-Pacific Sewer Rehabilitation segment was as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
9,811 |
|
|
|
$
1,768 |
|
|
|
$
8,043 |
|
|
|
454.9 |
% |
Gross
profit
|
|
|
2,614 |
|
|
|
614 |
|
|
|
2,000 |
|
|
|
325.7 |
|
Gross
margin
|
|
|
26.6 |
% |
|
|
34.7 |
% |
|
|
|
|
|
|
(8.1 |
) |
Operating
expenses
|
|
|
2,001 |
|
|
|
246 |
|
|
|
1,755 |
|
|
|
713.4 |
|
Operating
income
|
|
|
613 |
|
|
|
368 |
|
|
|
245 |
|
|
|
66.5 |
|
Operating
margin
|
|
|
6.2 |
% |
|
|
20.8 |
% |
|
|
|
|
|
|
(14.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$ 22,154 |
|
|
|
$
5,459 |
|
|
|
$
16,695 |
|
|
|
305.8 |
% |
Gross
profit
|
|
|
6,382 |
|
|
|
1,699 |
|
|
|
4,683 |
|
|
|
275.6 |
|
Gross
margin
|
|
|
28.8 |
% |
|
|
31.1 |
% |
|
|
|
|
|
|
(2.3 |
) |
Operating
expenses
|
|
|
3,975 |
|
|
|
977 |
|
|
|
2,998 |
|
|
|
306.9 |
|
Operating
income
|
|
|
2,407 |
|
|
|
722 |
|
|
|
1,685 |
|
|
|
233.4 |
|
Operating
margin
|
|
|
10.9 |
% |
|
|
13.2 |
% |
|
|
|
|
|
|
(2.3 |
) |
Revenues
Revenues
in our Asia-Pacific Sewer Rehabilitation segment increased by $8.0 million, or
454.9%, in the third quarter of 2009 compared to the third quarter of 2008. The
increase was due to increased workable backlog in our Indian operations. We
secured several large revenue projects in India in 2008 and 2009 that we believe
will lead to continued revenue growth in this segment in the fourth quarter and
into 2010. In addition, during the third quarter of 2009, IAL and IPPL
contributed revenues of $1.6 million and $1.2 million, respectively. These
companies were not part of our consolidated results for the quarter ended
September 30, 2008.
Revenues
in this segment increased by $16.7 million, or 305.8%, in the first nine months
of 2009 compared to the first nine months of 2008 due the increased work in
India, and the inclusion of revenues in Australia and Hong Kong.
Contract
backlog in our Asia-Pacific Sewer Rehabilitation segment climbed to $84.5
million at September 30, 2009. This represented an increase of $23.6 million, or
38.8%, compared to June 30, 2009. This increase was principally due to the award
of a $27.0 million contract with Sydney Water in Australia. We anticipate
significant bidding opportunities in the Indian market in the fourth quarter of
2009. As compared to September 30, 2008, Asia-Pacific Sewer Rehabilitation
experienced an increase in contract backlog of $30.9 million, or 57.6%, at
September 30, 2009 due primarily to the inclusion of the backlogs of IAL and
IPPL, which are included in our consolidated results since June 30, 2009. This
increase in backlog from September 30, 2008 was offset somewhat by $1.0 million
in unfavorable changes in currency rates against the U.S. dollar that prevailed
at September 30, 2008. We continue to believe that the market opportunity in
India is very robust, and we expect growth to continue as we gain momentum with
sales penetration in major Indian cities. We also are pursuing other growth
opportunities throughout the Asia-Pacific region, including significant
opportunities in Singapore and China.
Gross
Profit and Gross Margin
Gross
profit in the Asia-Pacific Sewer Rehabilitation segment increased by $2.0
million, or 325.7%, in the third quarter of 2009 compared to the third quarter
of 2008. Our gross margin decreased to 26.6% compared to 34.7% in the same
period last year. Gross margins are lower due to work being performed on
installation projects in the current year versus more third-party tube sales in
2008 at higher margins. In addition, during the third quarter of 2009, margins
were lower due to slower than anticipated progress on projects in India as a
result of heavy rains during the monsoon season. Gross profit increased
substantially in the third quarter of 2009 as a result of the increase in
revenues, albeit at lower margins.
Gross
profit in this segment increased by $4.7 million during the first nine months of
2009 compared to the first nine months of 2008, primarily due to increased
revenues. Gross margins declined to 28.8% in the first nine months of 2009 from
to 31.1% in the first nine months of 2008. The year over year decline in gross
margins was due to the reasons stated above.
Operating
Expenses
Operating
expenses increased by $1.8 million in the Asia-Pacific Sewer Rehabilitation
segment during the third quarter of 2009 compared to the third quarter of 2008,
principally due to our continuing investments in our operations in India, Hong
Kong and Australia in order to allow them to pursue growth
opportunities.
Operating
expenses in this segment increased $3.0 million in the first nine months of 2009
compared to the first nine months of 2008. The increase was due to the revenue
growth in this segment during the current year and our continued developmental
efforts in the Asia-Pacific market.
Operating
Income and Operating Margin
Improved
revenues and gross profit, partially offset by higher operating expenses, led to
a $0.2 million increase in operating income in this segment in the third quarter
of 2009 compared to the third quarter of 2008. Operating margin decreased to
6.2% in the third quarter of 2009 compared to 20.8% in the third quarter of
2008. The decrease in operating margin was primarily the result of current year
work being comprised of lower margin installation work versus more third party
tube sales in the prior year.
Operating
income in the first nine months of 2009 increased $1.7 million compared to the
first nine months of 2008. Operating margin decreased to 10.9% in the first nine
months of 2009 compared to 13.2% in the first nine months of 2008. This decrease
was due to the reasons stated above.
Water
Rehabilitation Segment
Key
financial data for our Water Rehabilitation segment was as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
Increase
(Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
4,289 |
|
|
|
$
5,917 |
|
|
|
$
(1,628 |
) |
|
|
(27.5 |
)% |
Gross
profit
|
|
|
220 |
|
|
|
1,263 |
|
|
|
(1,043 |
) |
|
|
(82.6 |
) |
Gross
margin
|
|
|
5.1 |
% |
|
|
21.3 |
% |
|
|
|
|
|
|
(16.2 |
) |
Operating
expenses
|
|
|
554 |
|
|
|
781 |
|
|
|
(227 |
) |
|
|
(29.1 |
) |
Operating
income (loss)
|
|
|
(334 |
) |
|
|
482 |
|
|
|
(816 |
) |
|
|
(169.3 |
) |
Operating
margin
|
|
|
(7.8 |
)% |
|
|
8.2 |
% |
|
|
|
|
|
|
(16.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
8,740 |
|
|
|
$
9,738 |
|
|
|
$
(998 |
) |
|
|
(10.3 |
)% |
Gross
profit (loss)
|
|
|
(35 |
) |
|
|
1,692 |
|
|
|
(1,727 |
) |
|
|
(102.1 |
) |
Gross
margin
|
|
|
(0.4 |
)% |
|
|
17.4 |
% |
|
|
|
|
|
|
(17.8 |
) |
Operating
expenses
|
|
|
2,336 |
|
|
|
2,472 |
|
|
|
(136 |
) |
|
|
(5.5 |
) |
Operating
loss
|
|
|
(2,371 |
) |
|
|
(780 |
) |
|
|
(1,591 |
) |
|
|
(204.0 |
) |
Operating
margin
|
|
|
(27.1 |
)% |
|
|
(8.0 |
)% |
|
|
|
|
|
|
(19.1 |
) |
Revenues
Revenues
from our Water Rehabilitation segment decreased to $4.3 million in the third
quarter of 2009 from $5.9 million in the prior year period, a 27.5% decrease.
Our Water Rehabilitation segment revenues decreased due to low workable backlog
levels, especially in Europe. Revenues decreased by $1.0 million, or 10.3%, in
the Water Rehabilitation segment in the first nine months of 2009 compared to
the first nine months of 2008.
Our Water
Rehabilitation segment contract backlog was $7.5 million at September 30, 2009.
This represented an increase of $0.8 million, or 11.9%, compared to September
30, 2008. During 2009, we launched InsituMain™, our
new pressure-rated cured-in-place pipe system for the rehabilitation of water
transmission and distribution mains. We believe this new product, coupled with
our other Insituform Blue® water
pipe rehabilitation products, firmly establishes our Company in the marketplace.
We believe that prospects for new orders and growth continue to be strong, and
we anticipate growth in backlog over the coming quarters.
The
financial results for our Water Rehabilitation segment were not strong in the
first nine months of 2009, but we made solid progress with respect to the
introduction of InsituMain™ through pilot testing. We have a number of new pilot
projects for InsituMain™
scheduled in the fourth quarter in the U.S., Canada, Europe and
Asia.
Gross
Profit (loss) and Gross Margin
During
the third quarter of 2009, gross profit in our Water Rehabilitation segment
decreased to $0.2 million from $1.3 million in the third quarter of 2008. The
decrease was primarily due to isolated project execution issues on a project in
the Midwest.
Gross
profit (loss) in this segment decreased by $1.7 million during the first nine
months of 2009 compared to the first nine months of 2008 as gross margin
decreased to (0.4)% from 17.4% for the same period. The decrease was primarily
due to isolated project execution issues on a project in the Midwest. Our losses
in the first nine months of 2009 were negatively impacted by lower revenues and
execution issues.
Operating
Expenses
Operating
expenses in our Water Rehabilitation segment decreased by $0.2 million in the
third quarter of 2009 compared to the third quarter of 2008 due to combining
operations and project management resources with our North American Sewer
Rehabilitation structure during the first half of 2009. As a percentage of
revenues, operating expenses were 12.9% in the third quarter of 2009 compared to
13.2% in the third quarter of 2008.
Operating
expenses in our Water Rehabilitation segment decreased by $0.1 million in the
first nine months of 2009 compared to the first nine months of 2008. As a
percentage of revenues, operating expenses were 26.7% in the first nine months
of 2009 compared to 25.4% in the first nine months of 2008. We anticipate
operating costs to remain relatively stable as we have realigned management and
sales resources for our Water Rehabilitation segment within our geographic
operating groups.
Operating
Loss and Operating Margin
Operating
loss in this segment was $0.3 million in the third quarter of 2009 compared to
operating income of $0.5 million in the third quarter of 2008, primarily due to
lower gross profit, partially offset by lower operating expenses. Operating
margin decreased to (7.8)% in the third quarter of 2009 from 8.2% in the third
quarter of 2008.
Operating
loss in the first nine months of 2009 was $1.6 million higher compared to the
first nine months of 2008. Operating margin declined to (27.1)% in the first
nine months of 2009 compared to (8.0)% in the first nine months of
2008.
Energy
and Mining Segment
Key
financial data for our Energy and Mining segment was as follows (dollars in
thousands):
|
|
|
|
|
|
|
|
Increase (Decrease)
|
|
|
|
2009
|
|
|
2008
|
|
|
$ |
|
|
|
% |
|
Three
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
69,742 |
|
|
|
$
13,791 |
|
|
|
$
55,951 |
|
|
|
405.7 |
% |
Gross
profit
|
|
|
19,994 |
|
|
|
4,220 |
|
|
|
15,774 |
|
|
|
373.8 |
|
Gross
margin
|
|
|
28.7 |
% |
|
|
30.6 |
% |
|
|
|
|
|
|
(1.9 |
) |
Operating
expenses
|
|
|
13,986 |
|
|
|
1,900 |
|
|
|
12,086 |
|
|
|
636.1 |
|
Operating
income
|
|
|
6,008 |
|
|
|
2,320 |
|
|
|
3,688 |
|
|
|
159.0 |
|
Operating
margin
|
|
|
8.6 |
% |
|
|
16.8 |
% |
|
|
|
|
|
|
(8.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
|
$
161,050 |
|
|
|
$
47,385 |
|
|
|
$
113,665 |
|
|
|
239.9 |
% |
Gross
profit
|
|
|
44,095 |
|
|
|
14,506 |
|
|
|
29,589 |
|
|
|
204.0 |
|
Gross
margin
|
|
|
27.4 |
% |
|
|
30.6 |
% |
|
|
|
|
|
|
(3.2 |
) |
Acquisition
related expenses
|
|
|
6,619 |
|
|
|
– |
|
|
|
6,619 |
|
|
|
100.0 |
|
Operating
expenses
|
|
|
34,223 |
|
|
|
5,530 |
|
|
|
28,693 |
|
|
|
518.9 |
|
Operating
income
|
|
|
3,253 |
|
|
|
8,976 |
|
|
|
(5,723 |
) |
|
|
(63.8 |
) |
Operating
margin
|
|
|
2.0 |
% |
|
|
18.9 |
% |
|
|
|
|
|
|
(16.9 |
) |
Revenues
Revenues
in our Energy and Mining segment increased by $56.0 million, or 405.7%, from the
third quarter of 2008 to the third quarter of 2009. This increase was driven by
the inclusion of revenues from our recently acquired Bayou and Corrpro
businesses. Revenues attributed to these acquisitions were $59.4 million in the
third quarter of 2009 and $131.1 million in the first nine months of
2009.
Revenues
in our United Pipeline Systems, referred to herein as “UPS,” business were down
$3.5 million versus the prior year quarter primarily due to continued weak
market demand driven by a significant decline in commodity prices. The decline
in revenues was fairly consistent throughout our geographic
regions.
Revenues
for our Energy and Mining segment increased $113.7 million, or 239.9%, for the
first nine months of 2009 compared to the same period of 2008. This increase was
primarily due to the inclusion of $131.1 million of revenues for Bayou and
Corrpro partially offset by our UPS operations which decreased by $17.4 million
compared to the first nine months of 2008 as lower commodity prices and lack of
volume of large projects seen in the prior year period took effect.
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.
Portions of our Energy and Mining segment are somewhat insulated from market
downturns as they are not entirely dependent on new pipelines or expansion, but
rather on rehabilitation and the opportunity for our clients to gain increased
utilization and capacity through existing assets.
Contract
backlog in our Energy and Mining segment at September 30, 2009 increased $5.1
million from June 30, 2009 to $151.2 million primarily due to a $12.4 million
energy and mining contract award in Mexico that benefits UPS, Corrpro and Bayou.
Subsequent to September 30, 2009, we were awarded a second major contract in
Mexico valued at $13.9 million which was not included in backlog as of September
30, 2009.
As
compared to September 30, 2008, backlog increased by $127.8 million, or 546.2%,
due to the inclusion of Bayou and Corrpro backlog. We believe that a modest rise
in commodity prices could result in significant opportunities for our Energy and
Mining segment for future periods, particularly as it relates to new spending in
the sector. We believe the business environment for our Energy and Mining
segment is steady for the near-term.
Gross
Profit and Gross Margin
Gross
profit in the Energy and Mining segment increased from the prior year quarter by
$15.8 million, or 373.8%, while gross margin decreased from the prior year
quarter to 28.7% from 30.6%. Gross profit from our UPS division dropped by $1.0
million in the third quarter of 2009 from the prior year quarter, primarily due
to the decrease in revenues described above. For the quarter, UPS gross margin
improved to 31.4% versus 30.6% in the third quarter of 2008. The contribution to
consolidated gross profit of Bayou and Corrpro was $16.8 million for the third
quarter of 2009.
Gross
profit for our Energy and Mining segment increased by $29.6 million in the first
nine months of 2009 compared to the first nine months of 2008 primarily due to
the $33.9 million gross profit contribution of Bayou and Corrpro, partially
offset by the $4.3 million gross profit decline experienced by UPS.
Operating
Expenses
Operating
expenses in our Energy and Mining segment, inclusive of a $1.6 million credit
related to the Bayou earnout, increased to $14.0 million from $1.9 million in
the third quarter of 2009 compared from the third quarter of 2008. This increase
was mainly due to the $12.3 million of operating expenses from Bayou and
Corrpro. Without these costs, operating expenses for this segment would have
decreased by $0.2 million, or 10.5%, due to continued cost-cutting initiatives.
As a percentage of revenues, operating expenses were 20.1% in the third quarter
of 2009 compared to 13.8% in the third quarter of 2008. This increase in
operating expenses as a percentage of revenues was partially driven by the
disproportionately larger service component of our Corrpro business as compared
to our other businesses included in this segment.
Operating
expenses, inclusive of $6.6 million of transaction and severance expenses, in
our Energy and Mining segment increased to $40.8 million from $5.5 million in
the first nine months of 2009 compared to the first nine months of 2008. The
increase in operating expenses was mainly due to the aforementioned acquisition
costs associated with Bayou and Corrpro as well as their respective operating
expenses of $28.5 million. The acquisition costs were applied solely to the
Energy and Mining segment. Without Bayou and Corrpro-related costs, operating
expenses for this segment would have decreased by $0.6 million, or 10.9%, due to
continued cost-cutting initiatives at UPS. As a percentage of revenues,
operating expenses were 25.4% in the first nine months of 2009 compared to 11.8%
in the first nine months of 2008.
Operating
Income and Operating Margin
Operating
income for this segment was $3.7 million, or 159.0%, higher in the third quarter
of 2009 compared to the third quarter of 2008 primarily due to the inclusion of
$3.1 million from Bayou and Corrpro. Operating margin was 8.6% in the third
quarter of 2009 compared to 16.8% in the third quarter of 2008.
Operating
income was $3.3 million in the first nine months of 2009 compared to $9.0
million in the first nine months of 2008. Operating margin declined to 2.0% in
the first nine months of 2009 compared to 18.9% in the first nine months of
2008. The decline
was
primarily due to the $6.6 million of acquisition costs as well as lower revenue
and profit levels generated by our UPS business compared to the prior
year.
Other
Income (Expense)
Interest
Income
Interest
income decreased by $0.7 million in the third quarter of 2009 compared to the
prior year quarter. Interest income declined $2.1 million for the nine months
ended September 30, 2009 compared to the prior year period primarily due to
significantly lower interest rates on deposits as well as lower deposit balances
as a result of cash used for the acquisition of Corrpro on March 31, 2009. Also,
the decrease for the nine months ended September 30, 2009 compared to the prior
year period was primarily driven by the reversal of interest income in the
second quarter of 2009 resulting from the reversal of an award for post-judgment
interest in connection with a litigation matter.
Interest
Expense
Interest
expense increased by $1.2 million and $2.3 million in the third quarter and
first nine months of 2009, respectively, compared to prior year periods. The
increase in interest expense was due to the additional borrowings under our New
Facility to fund our acquisition of Corrpro.
Other
Income
Other
income increased by $0.4 million in the third quarter of 2009 compared to the
same period in 2008. Other income decreased by $0.3 million in the first nine
months of 2009 compared to the same period in 2008. The primary component of
other income in the first nine months of 2009 was a gain of $0.2 million on the
disposition of excess property and equipment. Likewise, gains of $1.5 million
were recorded on dispositions of excess property and equipment in the first nine
months of 2008.
Taxes
on Income
Taxes on
income increased by $2.9 million and by $2.8 million in the third quarter and
first nine months of 2009, respectively, as compared to the prior year periods,
due to improved operating results. Our effective tax rate for continuing
operations was 31.1% and 29.1% in the third quarter and first nine months of
2009, respectively, compared to 20.6% and 24.8% in the corresponding periods in
2008. The increase in the 2009 effective tax rate was driven by a mix of income
in higher tax jurisdictions.
The
majority of the variance in the effective tax rate for the respective quarters
was attributable to the mix of pre-tax income among tax jurisdictions with
varying tax rates.
Equity
in Earnings (Losses) of Affiliated Companies, Net of Tax
Equity in
earnings of affiliated companies, net of tax, was $1.0 million and $0.4 million
in the third quarter of 2009 and 2008, respectively. Equity in earnings (losses)
of affiliated companies in the first nine months of 2009 and 2008 was $0.7
million and $(0.2) million, respectively. The increase during the third quarter
and first nine months of 2009 was due to improved results from our joint
ventures in Germany and the contribution of Bayou's equity earnings of
affiliated companies. On June 30, 2009, we acquired the outstanding ownership
interests of our joint venture partner, VSL International Limited, in IAL and
IPPL. For all periods prior to June 30, 2009, these joint ventures were reported
as equity in earnings (losses) of affiliated companies, net of tax. At June 30,
2009, IAL and IPPL were accounted for as fully consolidated entities and are no
longer included in equity in earnings (losses) of affiliated companies for
periods after June 30, 2009. Equity losses from IAL and IPPL prior to June 30,
2009 were $(0.3) million and $(0.8) million for the first nine months of
2008.
Loss
from Discontinued Operations, Net of Tax
Revenues
from discontinued operations were $(2.9) million and $(0.6) million in the third
quarters of 2009 and 2008, respectively. Revenues from discontinued operations
were $(3.5) million and $7.0 million in the first nine months of 2009 and 2008,
respectively. Losses from discontinued operations, net of income taxes, were
$(2.6) million and $(3.9) million in the third quarter and first nine months of
2009, respectively, compared to $(1.1) million and $(1.7) million in the third
quarter and first nine months of 2008, respectively. The results in discontinued
operations was due to the winding down of our tunneling business, which was shut
down in March 2007. The losses and expenses in this segment are primarily
related to the settlement of certain outstanding claims and legal expenses
to pursue certain other outstanding claims. We recorded a $2.9 million
write-down associated with the settlement of a previously recorded claim during
the third quarter of 2009, which resulted in a reversal of $2.9 million in
previously recorded revenues.
Discontinued
operations experienced a net loss of $(2.6) million, or $(0.07) per diluted
share, during the quarter. All tunneling projects have been completed. At
September 30, 2009, receivables, including retention, totaled $4.1 million, of
which $3.9 million are currently being held in connection with three active
matters. While there can be no certainty, these matters are expected to be
concluded by year-end, and we believe that the receivables, along with the final
awarded claims, will be collected. Approximately $2.9 million in equipment
relating to discontinued operations remained as of September 30, 2009, 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,
2009
|
|
|
June 30,
2009
|
|
|
March 31,
2009
|
|
|
December 31,
2008
|
|
|
September 30,
2008
|
|
(in
millions)
|
|
North
American sewer rehabilitation
|
|
|
$
183.8 |
|
|
|
$
206.8 |
|
|
|
$
160.4 |
|
|
|
$
150.8 |
|
|
|
$
178.5 |
|
European
sewer rehabilitation
|
|
|
40.7 |
|
|
|
40.9 |
|
|
|
26.1 |
|
|
|
25.2 |
|
|
|
30.7 |
|
Asia-Pacific
sewer rehabilitation
(1)
|
|
|
84.5 |
|
|
|
60.9 |
|
|
|
40.1 |
|
|
|
46.2 |
|
|
|
53.6 |
|
Water
rehabilitation
|
|
|
7.5 |
|
|
|
7.7 |
|
|
|
8.9 |
|
|
|
8.2 |
|
|
|
6.7 |
|
Energy
and mining (2)
|
|
|
151.2 |
|
|
|
146.1 |
|
|
|
153.2 |
|
|
|
18.7 |
|
|
|
23.4 |
|
Total
|
|
|
$
467.7 |
|
|
|
$
462.4 |
|
|
|
$
388.7 |
|
|
|
$
249.1 |
|
|
|
$
292.9 |
|
___________________
(1)
|
Contract
backlog for our Asia-Pacific Sewer Rehabilitation segment includes backlog
for our recently acquired interests in our joint ventures in Hong Kong and
Australia of $13.9 million and $35.1 million, respectively, at September
30, 2009, and $17.7 million and $6.9 million, respectively at June 30,
2009. Contract backlog for these operations were not included
prior to June 30, 2009, as they were not consolidated
operations.
|
(2)
|
Contract
backlog for our Energy and Mining segment includes backlog of our recently
acquired Bayou and Corrpro businesses of $64.8 million and $59.0 million,
respectively, at September 30, 2009, $66.8 million and $64.5 million,
respectively, at June 30, 2009 and $76.7 million and $62.2 million,
respectively, as of March 31, 2009. Such operations were not
part of our company as of December 31, 2008 or September 30,
2008.
|
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,
2009
|
|
|
December
31,
2008
|
|
|
|
(in
thousands)
|
|
Cash
and cash equivalents
|
|
|
$
90,663 |
|
|
|
$
99,321 |
|
Restricted
cash
|
|
|
2,072 |
|
|
|
1,829 |
|
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. Thus far in 2009,
capital expenditures were primarily for an increase in crew resources for our
Indian joint venture, our growing operation in Australia as well as replacement
of older equipment in our North American Sewer Rehabilitation business. We
expect this increase to continue for the foreseeable future, as we expect these
operations to grow more 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 2009 and 2008 is discussed below and is
presented in our consolidated statements of cash flows contained in this report.
Despite the relative flatness in the North American Sewer Rehabilitation market
experienced over the last year and a half, we continue to expect operating cash
flows to increase compared to prior years as a result of improved profitability
and improving market conditions. This improved cash flow, coupled with existing
cash balances and other resources, should be sufficient to fund our operations
in 2009.
We
completed a public offering of our common stock in February 2009, from which we
received net proceeds of $127.8 million. These proceeds were used to pay the
purchase prices for our acquisition of selected assets and liabilities of Bayou
and the non-controlling interests of certain subsidiaries of Bayou.
Cash
Flows from Operations
Cash
flows from continuing operating activities provided $31.5 million in the first
nine months of 2009, which represented a $17.9 million increase compared to the
first nine months of 2008. The increase in cash provided by continuing operating
activities was primarily due to a $5.0 million increase in net income from
continuing operations as well as a $7.0 million increase in depreciation and
amortization in the first nine months of 2009 compared to the prior year period.
The increase in depreciation and amortization was due to the acquisitions of
Bayou and Corrpro. In addition, while revenues increased 28.5% during the first
nine months of 2009 compared to the first nine months of 2008, working capital
only increased by 9.3% during the same time period. As a result, working capital
growth used $10.7 million of cash in the first nine months of 2009 compared to
$15.8 million of cash used in the first nine months of 2008.
Unrestricted
cash decreased to $90.7 million at September 30, 2009 from $99.3 million at
December 31, 2008, as a result of the cash paid for the acquisitions of Bayou
and Corrpro.
Days
sales outstanding (referred to as DSOs) from continuing operations decreased by
4 days to 96 at September 30, 2009 from 100 at June 30, 2009. The reduction in
DSO’s in the last quarter comes from our continuing efforts to reduce DSOs to
facilitate improvements in liquidity, as well as improvement due
to Bayou and Corrpro, which have reduced our overall DSOs. Compared to
December 31, 2008, DSOs at September 30, 2009 decreased by 1 day from 97
days.
The
liquidation of our discontinued operations provided $1.6 million and $0.5
million in operating cash flows in the first nine months of 2009 and 2008,
respectively.
Cash
Flows from Investing Activities
Investing
activities from continuing operations used $218.1 million in the first nine
months of 2009 compared to $9.6 million in the first nine months of 2008. The
largest component of cash used by investing activities was the use of cash to
purchase Bayou and Corrpro. We used $209.7 million, net of cash acquired, to
acquire these two companies. The other main component of investing activities
was capital expenditures of $15.8 million and $11.1 million in the first nine
months of 2009 and 2008, respectively, as well as the $0.3 million used to
acquire our joint venture partner’s interests in IAL and IPPL. Capital
expenditures were primarily for an increase in crew resources for our Indian
joint venture and our Australian operation as well as replacement of older
equipment in our North American Sewer Rehabilitation business. Capital
expenditures in the first nine months of 2009 and 2008 were partially offset by
$0.9 million and $1.5 million, respectively, in proceeds received from asset
disposals. In the first nine months of 2009, $1.3 million of non-cash capital
expenditures was included in accounts payable and accrued expenditures and
excluded from the cash flow statement. In the first nine months of 2008, this
amount was immaterial. The investing activities of our discontinued operations
provided $0.8 million and $1.3 million of cash in the first nine months of 2009
and 2008, respectively and represents proceeds from the sale of fixed
assets. In 2009, we expect to spend approximately $23.0 million on
capital expenditures. The increase from 2008 is driven by the acquisitions of
Bayou and Corrpro and the expected increases to add crew resources in our Asian
operations.
Cash
Flows from Financing Activities
Cash
flows from financing activities from continuing operations provided $169.8
million in the first nine months of 2009 compared to $0.7 million in the first
nine months of 2008. In the first nine months of 2009, we received proceeds of
$50.0 million from a new term loan. In addition, we received $127.8
million from our public offering of common stock. During the third quarter of
2009, we paid dividends of $1.0 million to our non-controlling
interest.
Long-Term
Debt
Our total
indebtedness as of September 30, 2009 consisted of our $65.0 million 6.54%
Senior Notes, Series 2003-A, due April 24, 2013, and amounts drawn under our
$115.0 million credit facility, consisting of $45.0 million of the original
$50.0 million term loan and a $65.0 million revolving line of credit with our
bank lenders with no drawings against our line of credit as of September 30,
2009. In addition, we had $4.7 million of third party notes and bank debt. In
connection with our acquisition of Corrpro on March 31, 2009, we borrowed the
entire amount of the term loan and approximately $7.5 million under the
revolving line of credit, which we repaid during the third quarter of 2009. Our
total indebtedness at December 31, 2008 consisted of our $65.0
million
Senior
Notes, Series 2003-A, due April 24, 2013, and $0.9 million of other notes
related to the financing of certain insurance premiums.
As of
September 30, 2009, we were in compliance with all of our debt covenants. We
anticipate that we will be in compliance with all of our debt covenants over the
next twelve months. Under the terms of our Senior Notes, Series 2003-A,
prepayment would cause us to incur a “make-whole” payment to the holder of the
notes. At September 30, 2009, this make-whole payment would have approximated
$10.7 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 and additional cash flows generated from newly
acquired businesses.
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 7 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,
2009 (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)
|
|
Total
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
Thereafter
|
|
Long-term
debt
|
|
|
$
110,000 |
|
|
|
$
2,500 |
|
|
|
$
10,000 |
|
|
|
$
10,000 |
|
|
|
$
22,500 |
|
|
|
$
65,000 |
|
|
|
$
- |
|
Interest
on long-term debt
|
|
|
20,176 |
|
|
|
2,551 |
|
|
|
5,707 |
|
|
|
5,331 |
|
|
|
4,462 |
|
|
|
2,125 |
|
|
|
- |
|
Operating
leases
|
|
|
37,681 |
|
|
|
6,089 |
|
|
|
12,981 |
|
|
|
8,814 |
|
|
|
4,953 |
|
|
|
2,995 |
|
|
|
1,849 |
|
Total
contractual cash obligations
|
|
|
$
167,857 |
|
|
|
$ 11,140 |
|
|
|
$
28,688 |
|
|
|
$
24,145 |
|
|
|
$
31,915 |
|
|
|
$
70,120 |
|
|
|
$
1,849 |
|
___________________
|
(1)
|
Cash
obligations are not discounted. See Notes 5 and 7 to the consolidated
financial statements contained in this report regarding our long-term debt
and credit facility and commitments and contingencies,
respectively.
|
|
(2)
|
As
of September 30, 2009, we had borrowed the entire amount of the $50.0
million term loan. We also had $22.4 million for non-interest bearing
letters of credit outstanding as of September 30, 2009, $13.6 million of
which was collateral for insurance, $1.4 million of which was collateral
for work performance obligations, $4.5 million of which was for security
in support of working capital, leasing and performance bonding needs for
IPPL and IAL and $2.9 million of which was in support of international
trade transactions.
|
|
(3)
|
Liabilities
related to ASC 740, Income Taxes, 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 7 to our consolidated financial statements
contained in this report regarding commitments and
contingencies.
Revenue
Recognition
We
recognize revenue and costs, as construction, engineering and installation
contracts progress using the percentage-of-completion method of accounting,
which relies on total expected contract revenues and estimated total costs.
Under this method, estimated contract revenues and resulting gross profit margin
are recognized based on actual costs incurred to date as a percentage of total
estimated costs. We follow this method since reasonably dependable estimates of
the revenues and costs applicable to various elements of a contract can be made.
Since the financial reporting of these contracts depends on estimates, which are
assessed continually during the term of these contracts, recognized revenues and
gross profit are subject to revisions as the contract progresses to completion.
Total estimated costs, and thus contract gross profit, are impacted by changes
in productivity, scheduling and the unit cost of labor, subcontracts, materials
and equipment. Additionally, external factors such as weather, customer needs,
customer delays in providing approvals, labor availability, governmental
regulation and politics also may affect the progress and estimated cost of a
project’s completion and thus the timing of revenue recognition and gross
profit. Revisions in profit estimates are reflected in the period in which the
facts that give rise to the revision become known. When current estimates of
total contract costs indicate that the contract will result in a loss, the
projected loss is recognized in full in the period in which the loss becomes
evident. Revenues from change orders, extra work, variations in the scope of
work and claims are recognized when it is probable that they will result in
additional contract revenue and when the amount can be reliably
estimated.
Many of
our contracts provide for termination of the contract at the convenience of the
customer. If a contract were terminated prior to completion, we would typically
be compensated for progress up to the time of termination and any termination
costs. In addition, many contracts are subject to certain completion schedule
requirements with liquidated damages in the event schedules are not met as the
result of circumstances that are within our control. Losses on terminated
contracts and liquidated damages have historically not been
significant.
We
recognize revenue from product sales upon shipment and transfer of ownership.
Certain contracts performed by our Bayou business involve the storage of
customer-supplied pipes on our property following the completion of our
services. We do not take ownership of the pipe subjected to coating and bending
services. The title and risk of loss associated with the pipe remains with the
customer at all times. Accordingly, the customer-supplied pipes are not included
in the consolidated financial statements. In the event that we store pipe at our
customer’s request, title and risk of loss remain with the customer during any
storage period and the only inconsequential obligation of us is to load the
stored pipe on third party carriers when the customer requests delivery. When
pipe storage is requested by the customer, our normal billing and credit terms
are not modified. In these bill and hold arrangements, we continue to recognize
revenue as coating services are completed.
Goodwill
Under
FASB ASC 350, Intangibles - Goodwill and Other, we assess
recoverability of goodwill on an annual basis or when events or changes in
circumstances indicate that the carrying amount of goodwill may not be
recoverable. Our annual assessment was last completed as of October 1, 2008.
Factors that could potentially trigger an impairment review include (but are not
limited to):
|
·
|
significant
underperformance of a segment relative to expected, historical or
projected future operating results;
|
|
·
|
significant
negative industry or economic
trends;
|
|
·
|
significant
changes in the strategy for a segment including extended slowdowns in the
sewer rehabilitation market; and
|
|
·
|
a
decrease in our market capitalization below our book value for an extended
period of time.
|
Our
recorded goodwill by reportable segment was as follows at September 30, 2009 (in
millions):
|
|
|
|
North
American Sewer Rehabilitation
|
|
$ |
102.3 |
|
European
Sewer Rehabilitation
|
|
|
19.7 |
|
Asia-Pacific
Sewer Rehabilitation
|
|
|
3.3 |
|
Energy
and Mining
|
|
|
58.7 |
|
Total Goodwill
|
|
$ |
184.0 |
|
No
goodwill was recorded for our Water Rehabilitation segment at September 30,
2009. In accordance with the provisions of FASB ASC 350, we determined the fair
value of our reporting units at our annual impairment assessment date and
compared such fair value to the carrying value of those reporting units to
determine if there is any indication of goodwill impairment. Our reporting units
for purposes of assessing goodwill are the same as our reportable segments. To
calculate reporting unit fair value, we utilized a discounted cash flow analysis
based upon, among other things, certain assumptions about expected future
operating performance. Estimates of discounted cash flows may differ from actual
cash flows due to, among other things, changes in economic
conditions,
changes
to business models, changes in our weighted average cost of capital or changes
in operating performance. An impairment charge will be recognized to the extent
that the implied fair value of the goodwill balances for each reporting unit is
less than the related carrying value. Given the significant volatility in the
current business climate, we stress tested our goodwill for impairment as part
of our last annual assessment. In performing this analysis, we revised our
estimated future cash flows and discount rates, as appropriate, to reflect a
variety of market conditions. In each case, no impairment was
indicated.
Given the
continued distressed global market and economic conditions, we carefully
considered whether an interim assessment of our goodwill was necessary during
the quarter ended September 30, 2009. In management’s judgment, we do not
believe the fair value of our reporting units is below their carrying value at
September 30, 2009. Accordingly, an interim impairment assessment was not
performed. A future decline in the fair value of North American Sewer
Rehabilitation and European Sewer Rehabilitation could lead to impairment of
their respective goodwill balances. The recorded goodwill related to our
Asia-Pacific Sewer Rehabilitation segment is the result of our recent
acquisitions of IAL and IPPL (see Note 1 to our consolidated financial
statements contained in this report). The recorded goodwill related to our
Energy and Mining segment is the result of our recent acquisitions of Bayou and
Corrpro (see Note 1 to our consolidated financial statements contained in this
report). While not currently anticipated, any significant deterioration in the
earnings of those businesses compared to the forecasted earnings assumptions we
used in the determination of the purchase prices could lead to the need for us
to assess the recoverability of the recorded goodwill and potential
impairment.
Recently
Adopted Accounting Pronouncements
See Note
2 to the consolidated financial statements contained in this
report.
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 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, 2009
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
whenever favorable. At September 30, 2009 and December 31, 2008, the estimated
fair value of our long-term debt was approximately $112.0 million and $68.0
million, respectively. Fair value was estimated using market rates for debt of
similar risk and maturity. 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, 2009 would result in a $0.5 million
increase in interest expense. The increase in interest expense would be offset
by the interest rate swap agreement discussed below.
In May
2009, we entered into an interest rate swap agreement, for a notional amount of
$25.0 million, which expires in March 2012. The swap notional amount mirrors the
amortization of $25.0 million of our $50.0 million term loan. The swap requires
us to make a monthly fixed rate payment of 1.63% calculated on the $25 million
notional amount, and provides for us to receive a payment based upon a variable
monthly LIBOR interest rate calculated on the $25.0 million notional amount. The
receipt of the monthly LIBOR-based payment offsets a variable monthly LIBOR
based interest cost on a corresponding $25.0 million portion of our term loan.
This interest rate swap is used to hedge the interest rate risk associated with
the volatility of monthly LIBOR rate movement, and is accounted for as a cash
flow hedge.
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, 2009, 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 $6.1 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.
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, pipe and iron
ore. 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, 2009. 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.
The scope
of management’s evaluation did not include our recent acquisitions of the
selected assets and liabilities of The Bayou Companies, L.L.C and its related
entities (“Bayou”) on February 20, 2009 or of Corrpro Companies Inc. (“Corrpro”)
on March 31, 2009. Each of Bayou and Corrpro are significant subsidiaries of our
Company.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended
September 30, 2009 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.
There
have been no material changes to the risk factors described in Item 1A in our
Annual Report on Form 10-K for the year ended December 31, 2008.
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.
|
|
|
|
|
|
|
|
/s/
David
A. Martin |
|
|
|
David
A. Martin
|
|
|
|
Senior
Vice President and Chief Financial Officer(Principal
Financial Officer and Principal Accounting Officer)
|
|
|
|
|
|
Date:
October 29,
2009
These exhibits are numbered in
accordance with the Exhibit Table of Item 601 of Regulation S-K.
10.1
|
First
Amendment to Credit Agreement dated as of October 15, 2009 among the
Company and Bank of America, N.A., as Administrative Agent, and each of
the lenders listed therein, filed
herewith.
|
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.
|