UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
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þ ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the fiscal year
ended December 31,
2007
or
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¨ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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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)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each
class
Name of each exchange on
which registered
Class A Common Shares, $.01 par
value The Nasdaq Global
Select Market
Preferred
Stock Purchase
Rights The Nasdaq Global
Select Market
Securities
registered pursuant to Section 12(g) of the
Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 of 15(d) of the Act. Yes o No þ
Indicate
by a 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 o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer.
Large
accelerated o
Accelerated filer þ
Non-accelerated filer o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No þ
State the
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of such common
equity, as of June 30, 2007: $592,919,397
Indicate
the number of shares outstanding of each of the registrant’s classes of common
stock, as of the latest practicable date. Class A common shares, $.01 par value,
as of March 1, 2008: 27,470,623 shares
DOCUMENTS
INCORPORATED BY REFERENCE
As
provided herein, portions of the documents below are incorporated by
reference:
Document Part – Form
10-K
Registrant’s
Proxy Statement for the 2008 Annual Meeting of
Stockholders
Part III
TABLE
OF CONTENTS
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PART
I
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Item
1. Business
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3
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Item
1A. Risk
Factors
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9
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Item
1B. Unresolved Staff
Comments
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13
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Item
2. Properties
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13
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Item
3. Legal
Proceedings
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13
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Item
4. Submission of Matters to a Vote of Security
Holders
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13
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Item
4A. Executive Officers of the
Registrant
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14
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PART
II
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Item
5. Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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15
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Item
6. Selected Financial
Data
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18
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Item
7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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19
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Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
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30
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Item
8. Financial Statements and Supplementary
Data
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31
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INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS
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31
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Item
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
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60
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Item
9A. Controls and
Procedures
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60
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Item
9B. Other
Information
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60
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PART
III
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Item
10. Directors, Executive Officers and Corporate
Governance
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61
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Item
11. Executive
Compensation
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61
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Item
12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters
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61
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Item
13. Certain Relationships and Related Transactions, and
Director Independence
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61
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Item
14. Principal Accountant Fees and
Services
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61
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PART
IV
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Item
15. Exhibits and Financial Statement
Schedules
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62
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SIGNATURES
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63
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2
Note
About 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 this
Annual Report on Form 10-K 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 this Annual Report on Form 10-K for the year ended December
31, 2007. 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 Annual
Report on Form 10-K are qualified by these cautionary statements.
PART
I
Overview
Insituform
Technologies, Inc. is a leading worldwide provider of proprietary technologies
and services for rehabilitating sewer, water and other underground piping
systems without digging or disruption. While we use a variety of trenchless
technologies, the Insituformâ cured-in-place pipe
(“CIPP”) process contributed 79.8%, 80.9% and 79.4% of our revenues in 2007,
2006 and 2005, respectively.
Revenues
are generated by our Company and our subsidiaries operating principally in the
United States, Canada, The Netherlands, the United Kingdom, France, Switzerland,
Chile, Spain, Poland, Mexico, Belgium and Romania, and include product sales and
royalties from our joint ventures in Europe, Asia and Australia and unaffiliated
licensees and sub-licensees throughout the world. The United States remains our
single largest market, representing 66.4%, 71.9% and 72.6% of total revenues in
2007, 2006 and 2005, respectively.
We were
incorporated in Delaware in 1980, under the name Insituform of North America,
Inc. We were originally formed to act as the exclusive licensee of the
Insituform® CIPP process in most of the United States. When we acquired our
licensor in 1992, our name changed to Insituform Technologies, Inc. As a result
of our successive licensee acquisitions, our business model has evolved from
purely licensing technology and manufacturing materials to performing the entire
Insituform® CIPP process and other trenchless technologies, in most geographic
locations.
On March
29, 2007, we announced plans to exit our tunneling business in an effort to
align better our operations with our long-term strategic initiatives. We have
classified the results of operations of our tunneling business as discontinued
operations for all periods presented. At December 31, 2007, substantially all
existing tunneling business activity has been completed.
As used
in this Annual Report on Form 10-K, the terms “Company” and “Insituform
Technologies” refer to Insituform Technologies, Inc. and, unless the context
otherwise requires, its direct and indirect wholly-owned
subsidiaries.
Available
Information
Our
website is www.insituform.com.
We make available on this website under “Investors – SEC,” free of charge, our
proxy statements used in conjunction with stockholder meetings, our annual
reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K and Section 16 beneficial ownership reports (as well as any amendments to
those reports) as soon as reasonably practicable after we electronically file
such material with, or furnish it to, the Securities and Exchange Commission. In
addition, our Code of Ethics for our Chief Executive Officer, Chief Financial
Officer and senior financial employees, our Code of Conduct applicable to all of
our officers, directors and employees, our Corporate Governance Guidelines and
our Board committee charters are available, free of charge, on our website under
“Investors – Corporate Governance.” In addition, paper copies of these documents
will be furnished to any stockholder, upon request, free of charge.
3
Technologies
Pipeline System
Rehabilitation
The Insituform® CIPP
Process for the rehabilitation of sewers, pipelines and other conduits
utilizes a custom-manufactured tube, or liner, made of a synthetic fiber. After
the tube is saturated (impregnated) with a thermosetting resin mixture, it is
installed in the host pipe by various processes, and the resin is then hardened,
usually by heating it using various means, including steam, forming a new rigid
pipe within a pipe.
The iPlus™ Infusion™ Process is a
trenchless method used for the rehabilitation of small-diameter sewer pipelines,
whereby a felt liner is continuously impregnated with liquid, thermosetting
resin through a proprietary process. The liner is then pulled into the host
pipe, inflated with air and cured with steam.
The iPlus™ Composite Process is a
trenchless method used for the rehabilitation of large-diameter sewer pipelines,
where the felt liner is reinforced with carbon or glass fiber, impregnated with
liquid, thermosetting resin, inverted into place and cured with hot water or
steam.
The PolyFlex™ and PolyFold™
Processes are methods of rehabilitating transmission and distribution
water mains using high-density polyethylene liners. Inserted into a new or
existing pipeline by our proprietary installation processes, the liners are
continuous and installed tightly against the inner wall of the host pipe,
thereby isolating the flow stream from the host pipe wall and eliminating
internal corrosion.
The Thermopipe™ Lining
System is a polyester-reinforced polyethylene lining system
for the rehabilitation of distribution water mains. The factory-folded “C” shape
liner is winched into the host pipe from a reel and reverted with air and steam.
Once inflated and heated, the liner forms a close-fit within the host pipe,
creating a jointless, leak-free lining system.
The iTAP™ Process is a
robotic method for reinstating potable water service connections from inside a
water main. Traditionally, service connections are restored by excavating each
service connection when a water distribution main is renewed with a trenchless
process. iTAP™ provides a non-disruptive, mechanical seal solution for pipes
relined with the Thermopipe™ lining system.
The Insituform® RPP™ Process is a
trenchless technology used for the rehabilitation of forced sewer mains and
industrial pressure pipelines. The felt tube is reinforced with glass and
impregnated with liquid, thermosetting resin, after which it is inverted with
water and cured with hot water to form a structural, jointless pipe within the
host pipe.
The Insituform® PPL® Process is
an ANSI/NSF 61 certified trenchless technology used for the rehabilitation of
drinking water and industrial pressure pipelines. A glass-reinforced liner is
impregnated with an epoxy resin, inverted with water and cured with hot water to
form a jointless pipe lining within the host pipe.
Sliplining is a
method used to push or pull a new pipeline into an old one. With segmented
sliplining, short segments of pipe are joined to form the new pipe. For gravity
sewer rehabilitation, these short segments can often be joined in a manhole or
access structure, eliminating the need for a large pulling pit.
Pipebursting is a
trenchless method for replacing deteriorated or undersized pipelines. A bursting
head is propelled through the existing pipeline, fracturing the host pipe and
displacing the fragments outward, allowing a new pipe to be pulled in to replace
the old line. Pipes can be replaced size-for-size or upsized.
See
“Patents” below for information concerning these technologies.
Tite Liner®
Process
Our Tite Liner® process
is a method of lining new and existing pipe with a corrosion and abrasion
resistant high-density polyethylene pipe.
Safetyliner™ Liner is
a grooved HDPE liner that is installed in an industrial pipeline using the Tite
Liner®
process. The Safetyliner™ liner is normally used in natural gas or
CO2
pipelines to allow release of gas that permeates the HDPE liner. If gas is
allowed to build in the annular space under normal operating conditions, the
line can be susceptible to collapse with sudden changes in operating pressures.
The Safetyliner™ liner also has been used in pipelines as a leak detection
system and for dual containment in mine water pipelines.
4
Operations
Most of
our installation operations are project-oriented contracts for municipal
entities. These contracts are usually obtained through competitive bidding or
negotiations and require performance at a fixed price. The profitability of
these contracts depends heavily upon the competitive bidding environment, our
ability to estimate costs accurately and our ability to effectively manage and
execute project performance. Project estimates may prove to be inaccurate due to
unforeseen conditions or events. A substantial portion of the work on any given
project may be subcontracted to third parties at a significantly lower
profitability level to us than work directly performed by us. Also, proper
trenchless installation requires expertise that is acquired on the job and
through training. Therefore, we provide ongoing training and appropriate
equipment to our field installation crews.
The
overall profitability of our installation operations is influenced not only by
the profitability of specific project contracts, but also by the volume and
timing of projects so that the installation operations are able to operate at,
or near, capacity.
We are
required to carry insurance and provide bonding in connection with certain
installation projects and, accordingly, maintain comprehensive insurance
policies, including workers’ compensation, general and automobile liability and
property coverage. We believe that we presently maintain adequate insurance
coverage for all installation activities. We have also arranged bonding capacity
for bid, performance and payment bonds. Typically, the cost of a performance
bond is less than 1% of the contract value. We are required to indemnify the
surety companies against losses from third-party claims of customers and
subcontractors. The indemnification obligations are collateralized by
unperfected liens on our assets and the assets of those subsidiaries that are
parties to the applicable indemnification agreement.
We
generally invoice our customers as work is completed. Under ordinary
circumstances, collection from municipalities is made within 60 to 90 days of
billing. In most cases, 5% to 15% of the contract value is withheld by the owner
pending satisfactory completion of the project.
We have
two principal operating segments: rehabilitation and Tite Liner. These segments
have been determined primarily based on the types of products sold and services
performed by each segment, and each is regularly reviewed and evaluated
separately.
Rehabilitation
Operations
Our
rehabilitation activities are conducted principally through installation and
other construction operations performed directly by us or our subsidiaries. In
certain geographic regions, we have granted licenses to unaffiliated companies.
As described under “Ownership Interests in Operating Licensees and Project Joint
Ventures” below, we also have entered into contractual joint ventures from time
to time to capitalize on our trenchless rehabilitation processes. Under these
contractual joint venture relationships, work is bid by the joint venture entity
and subcontracted to the joint venture partners or to third parties. The joint
venture partners are primarily responsible for their subcontracted work, but
both joint venture partners are liable to the customer for all of the work.
Revenue and associated costs are recorded using percentage-of-completion
accounting for our subcontracted portion of the total contract
only.
Our
principal rehabilitation activities are conducted in North America directly by
us or through our wholly-owned subsidiaries.
North
American rehabilitation operations, including research and development,
engineering, training and financial support systems, are headquartered in
Chesterfield, Missouri. During 2007, tube manufacturing and processing
facilities for North America were maintained in eight locations, geographically
dispersed throughout the United States and Canada.
Outside
North America, we conduct Insituform® CIPP process rehabilitation operations in
the United Kingdom, France, The Netherlands, Spain, Portugal, Switzerland,
Belgium, Poland and Romania through our wholly-owned subsidiaries and in Hong
Kong, Australia, India, Germany, Austria, Czech Republic, Slovakia, Hungary and
Ireland through joint venture relationships.
We
utilize multifunctional robotic devices, developed by a French subsidiary of our
Company, in connection with the inspection and repair of pipelines. We also
maintain a manufacturing facility in Wellingborough, England to support our
European operations, which are are headquartered in Paris, France.
In
addition to sewer rehabilitation, we restore potable water pipes through our
Insituform Blue™ operations started in 2006. Under the Insituform Blue™
brand, we restore water pipes using our Thermopipe™, PolyFlex™ and PolyFold™
lining systems throughout North America, the United Kingdom and Hong Kong
through our existing operations. In addition, after restoring water pipes, we
reinstate water service connections from inside the main using the iTAP™
process, our robotic method that avoids digging and disruption.
5
Tite Liner®
Operations
Tite
Liner® process operations are conducted in the United States through our United
Pipeline Systems division. Worldwide Tite Liner® process operations are
headquartered in Durango, Colorado. Outside the United States, Tite Liner®
process installation activities are conducted through our wholly-owned
subsidiaries in Chile and Canada, and through our Mexican joint venture
subsidiary in which we own a 55% equity interest through our subsidiary INA
Acquisition Corp.
Licensees
We have
granted licenses for the Insituform® CIPP process, covering exclusive and
non-exclusive territories, to licensees that provide pipe repair and
rehabilitation services throughout their respective licensed territories. At
December 31, 2007, the Insituform® CIPP process was licensed to seven
unaffiliated licensees that operate in the following countries: Bosnia, Croatia,
Herzegovina, Israel, Japan, Province of Kosovo (Serbia), Malaysia, New Zealand,
Norway, Singapore and Venezuela. There were no unaffiliated domestic licensees.
The licenses generally grant to the licensee the right to utilize our know-how
and the patent rights (where such rights exist) relating to the subject process,
and to use our copyrights and trademarks.
In
addition, we license our laterals patent portfolio (consisting of 16 United
States patents) to certain licensees in the United States for use in the United
States and Canada. We also act as licensor under arrangements with approved
installers relating to the use of our Thermopipe™ lining process in the
United Kingdom and elsewhere on a non-exclusive basis.
Our
licensees generally are obligated to pay a royalty at a specified rate, which in
many cases is subject to a minimum royalty payment. Any improvements or
modifications a licensee may make in the subject process during the term of the
license agreement generally becomes our property or is licensed to us. Should a
licensee fail to meet its royalty obligations or other material obligations, we
may terminate the license at our discretion. Licensees, upon prior notice to us,
may generally terminate the license for certain specified reasons. We may vary
the terms of agreements entered into with new licensees according to prevailing
conditions.
Ownership
Interests in Operating Licensees and Project Joint Ventures
Through
our indirect subsidiary, Insituform Holdings (UK) Limited, we hold one-half of
the equity interest in Insituform Rohrsanierungstechniken GmbH, our licensee of
the Insituform® CIPP process in Germany. Insituform Rohrsanierungstechniken also
conducts Insituform® CIPP process operations in Austria, the Czech Republic,
Slovakia and Hungary. The remaining interest in Insituform
Rohrsanierungstechniken is held by Per Aarsleff A/S, a Danish
contractor.
Through
our subsidiary, Insituform Technologies Limited, we hold one-half of the equity
interest in Insituform Environmental Techniques Limited. The remaining interest
is held by Environmental Techniques Limited, an Irish contractor. The joint
venture partners have rights-of-first-refusal in the event the other party
determines to divest its interest.
Through
our subsidiary, Insituform Technologies Netherlands BV, we hold one-half of the
equity interest in each of Insituform Asia Limited, our licensee of the
Insituform® CIPP process in the Special Administrative Regions of Hong Kong and
Macau, as well as Insituform Pacific Pty Limited, our licensee of the
Insituform® CIPP process in Australia. The remaining interests are held by VSL
International Ltd. The joint venture partners have rights-of-first-refusal in
the event the other party determines to divest its interest.
We have
entered into a number of contractual joint ventures to develop joint bids on
contracts for pipeline rehabilitation projects in India. The joint venture
partner for each of these joint ventures is Subhash Projects and Marketing Ltd.
(“SPML”), an Indian contractor. The joint ventures will hold the contract with
the owner and subcontract that portion of the work requiring the Insituform® CIPP
process to an entity to be majority owned by Insituform and minority owned by
SPML. This entity will be established in the first half of 2008.
We have
also entered into contractual joint ventures in other geographic regions in
order to develop joint bids on contracts for our pipeline rehabilitation
business. Typically, the joint venture entity holds the contract with the owner
and subcontracts portions of the work to the joint venture partners. As part of
the subcontracts, the partners usually provide bonds to the joint venture. We
could be required to complete our joint venture partner’s portion of the
contract if the partner were unable to complete its portion and a bond is not
available. We continue to investigate opportunities for expanding our business
through such arrangements.
6
Customers
and Marketing
The
marketing of rehabilitation technologies is focused primarily on the municipal
wastewater markets worldwide, which we expect to remain the largest part of our
business for the foreseeable future. We offer our Tite Liner® process worldwide
to industrial customers to line new and existing pipelines. No customer
accounted for more than 10% of our consolidated revenues during the years ended
December 31, 2007, 2006 or 2005.
To help
shape decision-making at every step, we use a multi-level sales force structured
around target markets and key accounts, focusing on engineers, consultants,
administrators, technical staff and public officials. We also produce sales
literature and presentations, participate in trade shows, conduct national
advertising and execute other marketing programs for our own sales force and
those of unaffiliated licensees. Our unaffiliated licensees are responsible for
marketing and sales activities in their respective territories. See “Licensees”
and “Ownership Interests in Operating Licensees and Project Joint Ventures”
above for a description of our licensing operations and for a description of
investments in licensees.
Contract
Backlog
Contract
backlog is our expectation of revenues to be generated from received, signed and
uncompleted contracts, the cancellation of which is not currently anticipated.
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, as of December
31, 2007, 2006 and 2005, respectively.
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December
31,
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||||||||||||
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Backlog
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2007
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2006
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2005
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(In
millions)
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Rehabilitation
Segment
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$ | 234.1 | $ | 201.7 | $ | 213.3 | ||||||
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Tite
Liner Segment
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26.2 | 12.8 | 20.2 | |||||||||
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Total
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$ | 260.3 | $ | 214.5 | $ | 233.5 | ||||||
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. We expect to perform a majority of the backlog
reported above at December 31, 2007 during 2008. See “Risk Factors” in Item 1A
of this report for further discussion regarding backlog.
Product
Development
By using
our own laboratories and test facilities, as well as outside consulting
organizations and academic institutions, we continue to develop improvements to
our proprietary processes, including the materials used and the methods of
manufacturing and installing pipe. During the years ended December 31, 2007,
2006 and 2005, we spent $4.2 million, $3.6 million and $2.9 million,
respectively, on research and development related activities, including
engineering.
Manufacturing
and Suppliers
We
maintain our North American Insituform® CIPP process liner manufacturing
facility in Batesville, Mississippi. In Europe, Insituform Linings Public
Limited Company. (“Insituform Linings”), a majority-owned subsidiary,
manufactures and sells Insituform® CIPP process liners from its plant located in
Wellingborough, United Kingdom. We hold a 75% interest in Insituform Linings,
and Per Aarsleff A/S holds the remainder. These interests are subject to
rights-of-first-refusal that we and Per Aarsleff A/S hold in the event of
proposed divestiture.
Although
raw materials used in Insituform® CIPP Process products are typically available
from multiple sources, our historical practice has been to purchase materials
from a limited number of suppliers. We maintain our own felt manufacturing
facility in Batesville. Substantially all of our fiber requirements are
purchased from one source, but there are alternate vendors readily available. We
source our resin supply from multiple vendors.
We
believe that the sources of supply for our Insituform® CIPP operations in
both North America and Europe are adequate for our needs. Our pricing of raw
materials is subject to fluctuations in the underlying commodity
prices.
We
currently source the manufacture and supply of our Thermopipe™
lining products through a single vendor. We are in the process of
negotiating the terms of a supply contract with this vendor, as well as
reviewing other available sources of manufacture and supply. Thermopipe™ liner
is used for potable water pipe rehabilitation and other rehabilitation
applications.
7
We sell
Insituform® CIPP process liners and related products to certain licensees
pursuant to fixed-term supply contracts. Under the arrangements assumed in
connection with the acquisition of the Thermopipe™ lining process and under
subsequent arrangements, we also sell Thermopipe™ lining products to
approved installers.
We
also manufacture certain equipment used in our Insituform® CIPP and Tite Liner®
businesses.
Patents
As of
December 31, 2007, we held 62 United States patents relating to the Insituform®
CIPP process, the last of which will expire in 2023. As of December 31, 2007, we
had 16 pending United States non-provisional patent applications and three
pending provisional patent applications relating to the Insituform® CIPP
process.
We have
obtained and are pursuing patent protection in our principal foreign markets
covering various aspects of the Insituform® CIPP process. As of December 31,
2007, there were 144 applications pending in foreign jurisdictions. Of these
applications, nine are pending before the European Patent Office and four are
Patent Cooperation Treaty applications that cover multiple jurisdictions in
Europe and throughout the world. The specifications and/or rights granted in
relation to each patent will vary from jurisdiction to jurisdiction. In
addition, as a result of differences in the nature of the work performed and in
the climate of the countries in which the work is carried out, not every
licensee uses each patent, and we do not necessarily seek patent protection for
all of our inventions in every jurisdiction in which we do
business.
There can
be no assurance that the validity of our patents will not be successfully
challenged. Our business could be adversely affected by increased competition
upon expiration of the patents or if one or more of our Insituform® CIPP process
patents were adjudicated to be invalid or inadequate in scope to protect our
operations. We believe in either case that our long experience with the
Insituform® CIPP process, our continued commitment to support and develop the
Insituform® CIPP process, the strength of our trademark and our degree of market
penetration should enable us to continue to compete effectively in the pipeline
rehabilitation market.
We hold
one basic issued patent and one omnibus pending patent application in the United
States relating to the Thermopipe™ lining system and Insituform Blue™ iTAP™
process for rehabilitating pressurized potable water and other aqueous fluid
pipes.
We hold a
small number of patents relating to our corrosion and abrasion protection
business. We believe that the success of our Tite Liner® process business,
operated through our United Pipeline Systems division, depends primarily upon
our proprietary know-how and our marketing and sales skills.
See “Risk
Factors” in Item 1A of this report for further discussion.
Competition
The
markets in which we operate are highly competitive, primarily on the basis of
price, quality of service and capacity to perform. Most of our products,
including the Insituform® CIPP process, face direct competition from competitors
offering similar or essentially equivalent products or services. In addition,
customers can select a variety of methods to meet their pipe installation and
rehabilitation needs, including a number of methods that we do not
offer.
Most of
our competitors are local or regional companies, and may be either specialty
trenchless contractors or general contractors. There can be no assurance as to
the success of our trenchless processes in competition with these companies and
alternative technologies for pipeline rehabilitation.
Seasonality
Our
operations can be affected by seasonal variations. Seasonal variations over the
past five years have been minimal; however, our results tend to be stronger in
the second and third quarters of each year due to milder weather. We are more
likely to be impacted by weather extremes, such as excessive rain or hurricanes,
which may cause temporary, short-term anomalies in our operational performance
in certain localized geographic regions. However, these impacts are usually not
material to our operations as a whole. See “Risk Factors” in Item 1A of this
report for further discussion.
Employees
As of
December 31, 2007, we had approximately 1,600 employees. Certain of our
subsidiaries and divisions are parties to collective bargaining agreements
covering an aggregate of approximately 200 employees. We generally consider our
relations with our employees and unions to be good.
8
Government
Regulation
We are
required to comply with all applicable United States federal, state and local,
and all applicable foreign statutes, regulations and ordinances. In addition,
our installation and other operations have to comply with various relevant
occupational safety and health regulations, transportation regulations, code
specifications, permit requirements, and bonding and insurance requirements, as
well as with fire regulations relating to the storage, handling and transporting
of flammable materials. Our manufacturing facilities, as well as our
installation operations, are subject to federal and state environmental
protection regulations, none of which presently have any material effect on our
capital expenditures, earnings or competitive position in connection with our
present business. However, although our installation operations have established
monitoring programs and safety procedures, further restrictions could be imposed
on the manner in which installation activities are conducted, on equipment used
in installation activities and on the use of solvents or the thermosetting
resins used in the Insituform® CIPP process.
The use
of both thermoplastics and thermosetting resin materials in contact with
drinking water is strictly regulated in most countries. In the United States, a
consortium led by NSF International, under arrangements with the United States
Environmental Protection Agency, establishes minimum requirements for the
control of potential human health effects from substances added indirectly to
water via contact with treatment, storage, transmission and distribution system
components, by defining the maximum permissible concentration of materials that
may be leached from such components into drinking water, and methods for testing
them. In April 1997, the Insituform PPL® liner was certified by NSF for use in
drinking water systems, followed in April 1999 by NSF certification of the
Insituform RPP® liner for such use. Our drinking water lining products also are
NSF certified. NSF assumes no liability for use of any products, and NSF’s
arrangements with the EPA do not constitute the EPA’s endorsement of NSF, NSF’s
policies or its standards. Dedicated equipment is needed in connection with use
of these products in drinking water applications. We expect that our proprietary products
for drinking water pipe rehabilitation will contribute modest operating
profits in
2008.
You
should carefully consider the following risks and other information contained or
incorporated by reference into this Annual Report on Form 10-K when evaluating
our business and financial condition. Although the risks described below are
risks that we face in our business that we believe are material, there may also
be risks of which we are currently unaware or that we may view as immaterial
based on the information currently available to us that may prove to be material
in the future. There can be no assurance that we have correctly identified and
appropriately assessed all factors affecting our business or that publicly
available and other information with respect to these matters is complete and
correct. Should any risks or uncertainties develop into actual events, such
developments could have material adverse effects on our business, financial
condition, cash flows and results of operations.
Our
business is dependent on obtaining work through a competitive bidding
process.
The
markets in which we operate are highly competitive. Most of our products and
services, including the Insituform® CIPP process, face direct competition from
companies offering similar or essentially equivalent products or services. In
addition, customers can select a variety of methods to meet their pipe
installation and rehabilitation needs, including a number of methods that we do
not offer. Competition also places downward pressure on our contract prices and
profit margins. Intense competition is expected to continue in these markets,
and we face challenges in our ability to maintain strong growth rates. If we are
unable to meet these competitive challenges, we could lose market share to our
competitors and experience an overall reduction in our profits.
We
may experience cost overruns on our projects.
We
typically conduct our business under guaranteed maximum price or fixed price
contracts, where we bear a significant portion of the risk for cost overruns.
Under such contracts, prices are established in part on cost and scheduling
estimates, which are based on a number of assumptions, including assumptions
about future economic conditions, prices and availability of materials and other
exigencies. Our profitability depends heavily on our ability to make accurate
estimates. Inaccurate estimates, or changes in other circumstances, such as
unanticipated technical problems, difficulties obtaining permits or approvals,
changes in local laws or labor conditions, weather delays, cost of raw materials
or our suppliers or subcontractors’ inability to perform could result in
substantial losses, as such changes adversely affect the revenue and gross
profit recognized on each project.
Our
use of the percentage-of-completion method of accounting could result in a
reduction or reversal of previously recorded results.
We employ
the percentage-of-completion method of accounting for our construction projects.
This methodology recognizes revenues and profits over the life of a project
based on costs incurred to date compared to total estimated project costs.
Revisions to revenues and profits are made once amounts are known and/or can be
reasonably estimated. On a historical basis, we believe that
9
Our
success and growth strategy depends on our senior management and our ability to
attract and retain qualified personnel.
We depend
on our senior management for the success and future growth of the operations and
revenues of our Company, and the loss of any member of our senior management
could have an adverse impact on our operations. Such a transition may be a
distraction to senior management as we search for a qualified replacement, could
result in significant recruiting, relocation, training and other costs and could
cause operational inefficiencies as a replacement becomes familiar with our
business and operations. On August 13, 2007, our former Chief Executive Officer
resigned, and the Chairman of our Board of Directors, Alfred L. Woods, assumed
the role of Interim Chief Executive Officer. There can be no assurance that a
new Chief Executive Officer will be successful in integrating with our other
members of senior management or executing our existing growth
strategy.
In
addition, we use a multi-level sales force structured around target markets and
key accounts, focusing on engineers, consultants, administrators, technical
staff and elected officials to market our products and services; we are
dependent on our personnel to continue to develop improvements to our
proprietary processes, including materials used and the methods of manufacturing
and installation; and we require quality field personnel to effectively and
profitably perform our work. Our success in attracting and retaining qualified
personnel is dependent on the resources available in individual geographic areas
and the impact on the labor supply of general economic conditions, as well as
our ability to provide a competitive compensation package and work environment.
Our failure to attract, train, integrate and retain qualified personnel could
have a significant effect on our financial condition and results of
operations.
Our
recognition of revenues from insurance claims and from change orders, extra work
or variations in the scope of work could be subject to reversal in future
periods.
We
recognize revenues from insurance claims and from change orders, extra work or
variations in the scope of work as set forth in our written contracts with our
client when management believes that realization of these revenues are probable
and the recoverable amounts can be reasonably estimated. Prior to our decision
to recognize these revenues, we consult with legal counsel to determine the
likelihood of recovery and the amount of the recovery that can be estimated. We
also factor in all other information that we possess with respect to the claim
to determine whether the claim should be recognized at all and, if recognition
is appropriate, what dollar amount of the claim should be recognized. On this
basis, we believe that we have historically made reasonably reliable estimates
of amounts of revenue to be recognized. Due to factors that we did not
anticipate at the time of recognition, however, revenues ultimately received on
these claims could be less than revenues recognized by us in a prior reporting
period or periods, resulting in the need in subsequent reporting periods to
reduce or reverse revenues and gross profit previously recognized.
Extreme
weather conditions may adversely affect our operations.
We are
likely to be impacted by weather extremes, such as excessive rain or hurricanes,
which may cause temporary, short-term anomalies in our operational performance
in certain localized geographic regions. Historically, these impacts have not
been material to our operations as a whole. However, delays and other weather
impacts can adversely affect our ability to meet project deadlines and may
increase a project’s cost and decrease its profitability.
We
may be liable to complete work under our joint venture
arrangements.
We enter
into contractual joint ventures in order to develop joint bids on certain
contracts. The success of these joint ventures depends largely on the
satisfactory performance of our joint venture partners of their obligations
under the joint venture. Under these joint venture arrangements, we may be
required to complete our joint venture partner’s portion of the contract if the
partner is unable to complete its portion and a bond is not available. In such
case, the additional obligations could result in reduced profits or, in some
cases, significant losses for us with respect to the joint venture.
A
substantial portion of our raw materials is from a limited number of vendors,
and we are subject to market fluctuations of certain commodities.
We
purchase the majority of our fiber requirements for tube manufacturing from one
source. However, we believe that alternate sources are readily available, and we
continue to negotiate with other supply sources. The manufacture of the tubes
used in our rehabilitation business is dependent upon the availability of resin,
a petroleum-based product. We currently have qualified four resin suppliers from
which we intend to purchase the majority of our resin requirements for our North
American operations. We also are in the process of qualifying multiple resin
vendors for our European operations. We believe that these and other sources of
10
Our
intellectual property may be successfully challenged.
Our
business could be adversely affected by increased competition upon expiration of
our patents or if one or more of our Insituform® CIPP process patents were
adjudicated to be invalid or inadequate in scope to protect our operations. We
believe in either case that our long experience with the Insituform® CIPP
process, our continued commitment to support and develop the Insituform® CIPP
process, the strength of our trademark and our degree of market penetration
should enable us to continue to compete effectively in the pipeline
rehabilitation market.
We
are subject to a number of restrictive debt covenants under our senior notes and
line of credit facility.
At
December 31, 2007, we had $65.0 million in senior notes outstanding due April
2013. We also have a $35.0 million credit facility of which we had no
outstanding borrowings at December 31, 2007. Our senior notes and our line of
credit facility contain certain restrictive debt covenants and other customary
events of default. These covenants limit the amount and type of debt and fixed
charges as a measure of operating cash flow. Our ability to meet these
restrictive covenants may be affected by the factors described in this “Risk
Factors” section of this Annual Report on Form 10-K and other factors outside
our control. Failure to meet one or more of these restrictive covenants may
result in an event of default. Upon an event of default, if not waived by our
lenders, our lenders may declare all amounts outstanding as due and payable. In
the past, we have not been in compliance with certain of these restrictive
covenants and have had to seek amendments or waivers from our lenders. If we are
unable to comply with the restrictive covenants in the future, we would be
required to obtain further modifications from our lenders or secure another
source of financing. If an acceleration by our current lenders occurs, we may
not have sufficient capital available at that time to pay the amounts due to our
lenders on a timely basis. In addition, these restrictive covenants may prevent
us from engaging in transactions that benefit us, including responding to
changing business and economic conditions and taking advantage of attractive
business opportunities. Our senior notes can be repaid at any time at par value
plus a make-whole payment. The make-whole payment is calculated as the present
value of the principal and remaining interest payments discounted at a
reinvestment rate equal to the United States Treasury equal to the average life
to maturity plus 50 basis points. At February 29, 2008, this make-whole payment
would have approximated $11.5 million.
Our
revenues are substantially dependent on municipal government
spending.
Many of
our customers are municipal governmental agencies, and as such, we are dependent
on municipal spending. Spending by our municipal customers can be affected by
local political circumstances, budgetary constraints and other factors.
Consequently, future municipal spending may not be allocated to projects that
would benefit our business or may not be allocated in the amounts or for the
size of the projects that we anticipated. A decrease in municipal spending on
such projects would adversely impact our revenues, results of operations and
cash flows.
A
general downturn in U.S. economic conditions, and specifically a downturn in the
municipal bond market, may reduce our business prospects and decrease our
revenues and cash flows.
Our
business is affected by general economic conditions. Any extended weakness in
the U.S. economy could reduce our business prospects and could cause decreases
in our revenues and operating cash flows. Specifically, a downturn in the
municipal bond market caused by an actual downgrade of monoline insurers could
result in our municipal customers being required to spend municipal funds
previously allocated to projects that would benefit our business to pay off
outstanding bonds.
We
have international operations that are subject to foreign economic and political
uncertainties and foreign currency fluctuation.
Through
our subsidiaries and joint ventures, our business is subject to fluctuations in
demand and changing international economic and political conditions that are
beyond our control. For the year ended December 31, 2007, 33.6% of our revenues
were derived from international operations. We expect a significant portion of
our revenues and profits to come from international operations and joint
ventures for the foreseeable future and to continue to grow over time. Operating
in the international marketplace exposes us to a number of risks, including
abrupt changes in foreign government policies and regulations and, in some
cases, international hostilities. To the extent that our international
operations are affected by unexpected and adverse foreign economic and political
conditions, we may experience project disruptions and losses that could
significantly reduce our revenues and profits.
11
From time
to time, our contracts may be denominated in foreign currencies, which will
result in additional risk of fluctuating currency values and exchange rates,
hard currency shortages and controls on currency exchange. Changes in the value
of foreign currencies could increase our U.S. dollar costs for, or reduce our
U.S. dollar revenues from, our foreign operations. Any increased costs or
reduced revenues as a result of foreign currency fluctuations could affect our
profits.
Our
backlog is an uncertain indicator of our future earnings.
Our
backlog, which at December 31, 2007 was approximately $260.3 million, is subject
to unexpected adjustments and cancellation. The revenues projected in this
backlog may not be realized or, if realized, may not result in profits. We may
be unable to complete some projects included in our backlog in the estimated
time and, as a result, such projects could remain in the backlog for extended
periods of time. To the extent that we experience project cancellation or scope
adjustments, we could face a reduction in the dollar amount of our backlog and
the revenues that we actually receive from such backlog.
Our
bonding capacity may be limited in certain circumstances.
A
significant portion of our projects require us to procure a bond to secure
performance. From time to time, it may be difficult to find sureties who will
provide the contract-required bonding at acceptable rates for reasons beyond our
control (for example, as a result of changing political or economic conditions
in a foreign country). With respect to our joint ventures, our ability to obtain
a bond also may depend on the credit and performance risks of our joint venture
partners, some of whom may not be as financially strong as we are. Our inability
to obtain bonding on favorable terms would have a material adverse effect on our
business.
Our
strategy to pursue inorganic growth through acquisition could involve a number
of risks.
In
addition to the organic growth of our business, the pursuit of inorganic growth
is included among our strategic imperatives to achieve our strategic goals of
growth, operational excellence and technological leadership. This strategy may
involve the acquisition of companies or assets that enable us to build on our
existing strength in a market or that gives us access to proprietary
technologies that are strategically valuable or allow us to leverage our
distribution channels. In connection with this strategy, we could face certain
risks and uncertainties in addition to those we face in the day-to-day
operations of our business.
Our
strategic imperative to diversify our products involves substantial research,
development and marketing expenses, and the resulting new or enhanced products
or services may not generate sufficient revenues to justify such
expenses.
Product
diversification is among our strategic imperatives to achieve our strategic
goals of growth, operational excellence and technological leadership. We,
therefore, place a high priority on developing new products and services, as
well as enhancing our existing products and services. In diversifying our
product portfolio, we may be required to expend substantial research,
development and marketing resources, and the time and expense required to
develop a new product or service or enhance an existing product or service is
difficult to predict. We cannot assure that we will succeed in developing,
introducing and marketing new products or services or product or service
enhancements. In addition, we cannot be certain that any new or enhanced product
or service will generate sufficient revenues to justify the expenses and
resources devoted to this product diversification effort.
The
market price of our common stock is highly volatile and may result in investors
selling shares of our common stock at a loss.
The
trading price of our common stock is highly volatile and subject to wide
fluctuations in price in response to various factors, many of which are beyond
our control, including:
|
·
|
actual
or anticipated variations in quarterly operating
results;
|
|
·
|
changes
in financial estimates by securities analysts that cover our stock or our
failure to meet these estimates;
|
|
·
|
conditions
or trends in the U.S. sewer rehabilitation
market;
|
|
·
|
changes
in municipal spending practices;
|
|
·
|
a
downturn of the municipal bond
market;
|
|
·
|
changes
in market valuations of other companies operating in our
industry;
|
|
·
|
announcements
by us or our competitors of a significant acquisition or divestiture;
and
|
|
·
|
additions
or departures of key personnel.
|
In
addition, the stock market in general and Nasdaq in particular have experienced
extreme price and volume fluctuations that may be unrelated or disproportionate
to the operating performance of listed companies. Industry factors may seriously
harm the market price of our common stock, regardless of our operating
performance. Such stock price volatility could result in investors selling
shares of our common stock at a loss.
12
A
change in control event will trigger early vesting of our equity-based incentive
awards.
The award
agreements in connection with the stock option, restricted stock and restricted
stock unit awards granted to our employees provide that upon a change in control
of our Company, all outstanding equity awards will immediately vest. One of the
change in control events designated under the award agreements is the
replacement of 50% or more of our current directors over a one-year period, if
the replacement were not approved by a majority of the current
directors.
We
recently were given notice by a stockholder that it intends to nominate
five individuals for election to our Board of Directors at our 2008 Annual
Meeting of Stockholders. The stockholder also gave notice that it intends to
submit a proposal at the Annual Meeting to amend our Amended and Restated
By-Laws to reduce the number of directors to six. If four or more of the
stockholder’s nominees are elected to the Board without being endorsed by a
majority of the current Board, the accelerated vesting provisions of the
outstanding stock option, restricted stock and restricted stock unit awards may
be triggered, which may cause immediate dilution to current
stockholders.
None.
During
2007, we relocated our executive offices to an owned facility in Chesterfield,
Missouri, a suburb of St. Louis, at 17988 Edison Avenue. Our prior executive
offices in Chesterfield were leased from an unaffiliated party through May 31,
2007. We also own our research and development and training facilities in
Chesterfield.
We own a
liner manufacturing facility and a contiguous felt manufacturing facility in
Batesville, Mississippi. Our manufacturing facility in Memphis, Tennessee, is
located on land sub-leased from an unaffiliated entity for an initial term of 40
years expiring on December 31, 2020. Insituform Linings Public Limited Company,
a majority-owned subsidiary, owns certain premises in Wellingborough, United
Kingdom, where its liner manufacturing facility is located.
We own or
lease various operational facilities in the United States, Canada, Europe, Latin
America and Asia.
The
foregoing facilities are regarded by management as adequate for the current
requirements of our business.
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
were no matters submitted during the quarter ended December 31, 2007 to a vote
of our stockholders, through the solicitation of proxies or
otherwise.
13
Our
executive officers, and their respective ages and positions with us, are as
follows:
|
Name
|
Age
at
March 1,
2008
|
Position with the
Company
|
|
Alfred
L. Woods
|
64
|
Interim
Chief Executive Officer and Chairman of the Board
|
|
Thomas
E. Vossman
|
45
|
Senior
Vice President and Chief Operating Officer
|
|
David
F. Morris
|
46
|
Senior
Vice President, Chief Administrative Officer, General Counsel and
Secretary
|
|
David
A. Martin
|
40
|
Vice
President and Chief Financial Officer
|
|
Alexander
J. Buehler
|
32
|
Vice
President – Marketing and Technology
|
|
Daniel
E. Cowan
|
31
|
Vice
President – Strategic Business
Initiatives
|
Alfred L.
Woods has been our Interim Chief Executive Officer since August 13, 2007; he has
served as Chairman of the Board of Directors since 2003 and has been a member of
the Board of Directors since 1997. Mr. Woods has been president of Woods
Group, a
management consulting company, since before 2000; Chairman and Chief Executive
Officer of R&S/Strauss, Inc., a specialty retail chain, from before 2000
until 2001 and is currently a director of Clutchmobile,
Inc.
Thomas E.
Vossman joined our company in January 2005 as Vice President for the Southwest
region of our sewer pipeline rehabilitation business and assumed the role of
Senior Vice President and Chief Operating Officer in May 2005. From March 2004
to December 2004, Mr. Vossman served as a consultant to the contracting
industry. Prior thereto, Mr. Vossman served as Senior Vice President of American
Residential Services, managing 19 contracting operations, and in various
positions of increasing authority at Encompass Services Corporation, a
consolidator of commercial/industrial/ residential mechanical contracting
companies, most recently as Regional President, residential division, managing
12 operating locations across the Eastern United States.
David F.
Morris serves as our Senior Vice President, Chief Administrative Officer,
General Counsel and Secretary. Mr. Morris served as our Vice
President, General Counsel and Secretary beginning in January 2005 through April
2007, at which time Mr. Morris was promoted to a Senior Vice
President. Mr. Morris became our Chief Administrative Officer in
August 2007. From March 1993 until January 2005, Mr. Morris was with the law
firm of Thompson Coburn LLP, St. Louis, Missouri, most recently as a partner in
its corporate and securities practice areas. Mr. Morris also served as Senior
Vice President, Associate General Counsel and Secretary of Unified Financial
Services, Inc., a diversified financial services company, from December 1999 to
March 2004.
David A.
Martin has served as our Vice President and Chief Financial Officer since August
2007. Prior thereto, he was Vice President and Controller since January 2006.
Mr. Martin also served as our Corporate Controller for two years, following two
and one-half years as finance director of our European operations. Mr. Martin
joined our company in 1993 from BDO Seidman, LLP, where he was a senior
accountant.
Alexander
J. Buehler has served as our Vice President – Marketing and Technology since
November 2005. Prior thereto, Mr. Buehler served as Strategic Assistant to our
Chief Executive Officer and later as Vice President of Sales and Marketing. Mr.
Buehler joined our company in 2004 after five years in the U.S. Army Corps of
Engineers.
Daniel E.
Cowan has served as our Vice President – Strategic Business Initiatives since
October 2007. Prior thereto, Mr. Cowan served as our Vice President,
International and also as the Special Assistant to the CEO since joining our
Company in September 2006. Mr. Cowan joined our company from E-Commerce &
Trade Services, Ltd., a third-party international finance processing company,
where he served as the founder, Chairman & CEO from 2000 to
2006.
14
PART
II
The
company’s common shares, $.01 par value, are traded on The Nasdaq Global Select
Market under the symbol “INSU.” The following table sets forth the range of
quarterly high and low sales prices for the years ended December 31, 2007 and
2006, as reported on The Nasdaq Global Select Market. Quotations represent
prices between dealers and do not include retail mark-ups, mark-downs or
commissions.
|
Period
|
High
|
Low
|
||||||
|
2007
|
||||||||
|
First
Quarter
|
$
|
29.81 |
$
|
18.88 | ||||
|
Second
Quarter
|
23.00 | 18.64 | ||||||
|
Third
Quarter
|
22.95 | 14.73 | ||||||
|
Fourth
Quarter
|
16.94 | 12.03 | ||||||
|
2006
|
||||||||
|
First
Quarter
|
$
|
27.87 |
$
|
18.51 | ||||
|
Second
Quarter
|
29.67 | 20.89 | ||||||
|
Third
Quarter
|
25.53 | 18.56 | ||||||
|
Fourth
Quarter
|
27.70 | 22.04 | ||||||
During
the quarter ended December 31, 2007, we did not make any repurchases of our
common stock, nor offer any equity securities that were not registered under the
Securities Act of 1933, as amended. As of February 21, 2008, the number of
holders of record of our common stock was 668.
Holders
of common stock are entitled to receive dividends as and when they may be
declared by our board of directors. We have never paid a cash dividend on the
common stock. Our present policy is to retain earnings to provide for the
operation and expansion of our business. However, our board of directors will
review our dividend policy from time to time and will consider our earnings,
financial condition, cash flows, financing agreements and other relevant factors
in making determinations regarding future dividends, if any. Under the terms of
certain debt arrangements to which we are a party, we are subject to certain
limitations on paying dividends. See “Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Liquidity and Capital Resources
– Long-Term Debt” for further discussion of such limitations.
The
following table provides information as of December 31, 2007 with respect to the
shares of common stock that may be issued under our existing equity compensation
plans:
Equity
Compensation Plan Information
|
Plan
Category
|
Number of securities to be
issued upon exercise of outstanding options, warrants and
rights(1)
(a)
|
Weighted-average
exercise price of outstanding options, warrants and rights
(b)
|
Number
of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
(c)
|
|||||||||
|
Equity
compensation plans approved by security holders
|
1,167,174 | $ | 20.70 | 1,946,503 | ||||||||
|
Equity
compensation plans not approved by security holders
|
– | – | – | |||||||||
|
Total
|
1,167,174 | $ | 20.70 | 1,946,503 | ||||||||
|
(1)
|
The
number of securities to be issued upon exercise of outstanding options,
warrants and rights includes 909,987 stock options, 47,789
restricted stock units, 54,300 shares of restricted stock and
155,098 deferred stock units outstanding at December 31,
2007.
|
15
Performance
Graph
The
following performance graph compares the total stockholder return on our common
stock to the S&P 500 Index and a composite group index for the past five
years. In 2007, we changed our peer group index, which is now comprised of the
following companies (collectively, the “New Peer Group”):
|
·
|
Michael
Baker Corporation
|
|
·
|
Layne
Christensen Company
|
|
·
|
Chicago
Bridge & Iron Company N.V.
|
|
·
|
Granite
Construction, Inc.
|
|
·
|
Perini
Corporation
|
|
·
|
Vectren
Corporation
|
|
·
|
MasTec,
Inc.
|
|
·
|
ENGlobal
Corporation
|
|
·
|
Sterling
Construction Company, Inc.
|
|
·
|
Quanta
Services, Inc.
|
|
·
|
Foster
Wheeler, Ltd.
|
|
·
|
Dycom
Industries, Inc.
|
|
·
|
American
States Water Company
|
|
·
|
Preformed
Line Products Company
|
|
·
|
Kennametal,
Inc.
|
This
change in composite group was made in order to establish a peer group that we
believe more closely identifies with our business and industry and will provide
a better comparison of returns. The Compensation Committee of our Board of
Directors also reviews data for this peer group in establishing the compensation
of our executive officers.
For the
year ended December 31, 2006, the composite group index used for the comparison
was comprised of the following companies (collectively, the “Old Peer
Group”):
|
·
|
INEI
Corporation, f/k/a Insituform East,
Incorporated
|
|
·
|
Michael
Baker Corporation
|
|
·
|
Granite
Construction, Inc.
|
|
·
|
Fluor
Corporation
|
|
·
|
Jacobs
Engineering Group, Inc.
|
|
·
|
Foster
Wheeler Corporation
|
As of
September 5, 2003, we acquired the business of Insituform East, Incorporated,
including selected assets, therefore, it was removed from the Old Peer
Group as of such date.
16
The graph
assumes that $100 was invested in our common stock and each index on December
31, 2002 and that all dividends were reinvested.
Comparison
of Five-Year Cumulative Return
|
2003
|
2004
|
2005
|
2006
|
2007
|
||||||||||||||||
|
Insituform
Technologies, Inc.
|
$ | 96.77 | $ | 132.96 | $ | 113.61 | $ | 151.68 | $ | 86.80 | ||||||||||
|
S&P
500 Index
|
128.68 | 142.67 | 149.65 | 173.28 | 182.81 | |||||||||||||||
|
Old
Peer Group Index
|
141.42 | 171.00 | 243.22 | 293.15 | 591.74 | |||||||||||||||
|
New
Peer Group Index
|
153.36 | 180.90 | 213.40 | 261.63 | 423.99 | |||||||||||||||
Notwithstanding
anything set forth in any of our previous filings under the Securities Act of
1933 or the Securities Exchange Act of 1934 which might incorporate future
filings, including this Annual Report on Form 10-K, in whole or in part, the
preceding performance graph shall not be deemed incorporated by reference into
any such filings.
17
The
selected financial data set forth below has been derived from our consolidated
financial statements contained in “Item 8. Financial Statements and
Supplementary Data” of this Annual Report on Form 10-K, and previously published
historical financial statements not included in this Annual Report on Form 10-K.
The selected financial data set forth below should be read in conjunction with
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our consolidated financial statements, including the footnotes,
contained in this report.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2007(1)
|
2006(1)
|
2005
|
2004
|
2003(2)
|
||||||||||||||||
|
(In
thousands, except per share amounts)
|
||||||||||||||||||||
|
INCOME STATEMENT
DATA(3):
|
||||||||||||||||||||
|
Revenues
|
$
|
495,570 |
$
|
527,419 |
$
|
483,595 |
$
|
433,869 |
$
|
387,252 | ||||||||||
|
Operating
income
|
13,530 | 36,311 | 35,545 | 17,155 | 14,367 | |||||||||||||||
|
Income
from continuing operations
|
12,866 | 26,303 | 20,160 | 6,209 | 1,128 | |||||||||||||||
|
Income
(loss) from discontinued operations(4)
|
(10,323 | ) | (1,625 | ) | (7,000 | ) | (5,612 | ) | 2,397 | |||||||||||
|
Net
income
|
2,543 | 24,678 | 13,160 | 597 | 3,525 | |||||||||||||||
|
Basic
earnings (loss) per share:
|
||||||||||||||||||||
|
Income
from continuing operations
|
0.47 | 0.97 | 0.75 | 0.23 | 0.04 | |||||||||||||||
|
Income
(loss) from discontinued operations(4)
|
(0.38 | ) | (0.06 | ) | (0.26 | ) | (0.21 | ) | 0.09 | |||||||||||
|
Net
income
|
0.09 | 0.91 | 0.49 | 0.02 | 0.13 | |||||||||||||||
|
Dilutive
earnings (loss) per share:
|
||||||||||||||||||||
|
Income
from continuing operations
|
0.47 | 0.96 | 0.75 | 0.23 | 0.04 | |||||||||||||||
|
Income
(loss) from discontinued operations(4)
|
(0.38 | ) | (0.06 | ) | (0.26 | ) | (0.21 | ) | 0.09 | |||||||||||
|
Net
income
|
0.09 | 0.90 | 0.49 | 0.02 | 0.13 | |||||||||||||||
|
BALANCE SHEET DATA(3):
|
||||||||||||||||||||
|
Unrestricted
cash and cash equivalents
|
78,961 | 96,389 | 77,063 | 93,242 | 93,209 | |||||||||||||||
|
Working
capital, net of unrestricted cash
|
117,862 | 77,466 | 70,114 | 61,637 | 73,535 | |||||||||||||||
|
Current
assets
|
309,289 | 310,364 | 274,024 | 268,868 | 277,273 | |||||||||||||||
|
Property,
plant and equipment
|
73,368 | 76,432 | 75,814 | 69,281 | 58,381 | |||||||||||||||
|
Total
assets
|
541,140 | 550,069 | 518,328 | 508,821 | 508,360 | |||||||||||||||
|
Current
maturities of long-term debt and
line
of credit
|
1,097 | 16,814 | 18,264 | 15,778 | 16,917 | |||||||||||||||
|
Long-term
debt, less current maturities
|
65,000 | 65,046 | 80,768 | 96,505 | 114,323 | |||||||||||||||
|
Total
liabilities
|
185,882 | 209,277 | 213,106 | 217,338 | 227,726 | |||||||||||||||
|
Total
stockholders’ equity
|
352,541 | 338,611 | 303,496 | 289,836 | 279,169 | |||||||||||||||
__________________________
|
(1)
|
Effective
January 1, 2006, we adopted Statement of Financial Accounting Standards
123(R), “Share Based
Payment”, which requires the recording of expense for stock option
and other equity compensation awards. We recorded $2.0 million and $2.9
million in incremental expense for stock options in 2007 and 2006,
respectively.
|
|
(2)
|
We
have completed various acquisitions that have been accounted for under the
purchase method of accounting, including Sewer Services, Ltd. in 2003,
Video Injection S.A. (remaining interest) in 2003, Insituform East in
2003, and Ka-Te Insituform AG (remaining interest) in
2003.
|
|
(3)
|
All
amounts have been restated for the impact of discontinued
operations.
|
|
(4)
|
Includes
$17.9 million of non-recurring exit charges recorded in connection with
the closure of the tunneling
business.
|
18
Overview
We are a
worldwide company specializing in trenchless technologies to rehabilitate,
replace and maintain underground pipes through two reportable segments:
rehabilitation and Tite Liner. While we use a variety of trenchless technologies
in a variety of locations, the majority of our revenue is derived from the
Insituform® cured-in-place-pipe (“CIPP”) process in the United
States.
Business
volume in the U.S. sewer rehabilitation market suffered from weak market
conditions throughout 2007. We have been and are currently working diligently to
realign our business structure to deliver improved and more consistent
profitability in the future. We have rationalized our crew structure,
administrative and project support teams and our corporate support groups. Over
the last several years there has been a shift in the U.S. toward
smaller-diameter pipe work. We have responded by reconfiguring our crew
resources for this trend, which will allow us to reduce crew operating costs and
take advantage of our proprietary IPlus™ Infusion™ technology. We have also
recently implemented logistical improvements to reduce the costs of delivering
tube to our crews.
In
addition, we have increased focus on geographic diversification of our business.
Greater geographic diversity should provide profitable growth and reduce the
negative impact of market cyclicality such as that experienced recently in the
U.S. In recent months, we have achieved major acquisitions of project
work in India, Hong Kong and Australia. We also continue to pursue growth
opportunities for our diverse product lines, including our Tite Liner® and
Insituform Blue™ products. At the end of the year, our Tite Liner business had a
record level of contract backlog, with projects on five continents. During the
last year, we performed a number of Insituform Blue™ projects on a global basis
in validation of our recently developed products, and we expect continued growth
in 2008. Finally, we are evaluating opportunities to grow through acquisitions
of products and services that will further bolster our technological leadership
and complement our global distribution network.
Results
of Operations
On March
29, 2007, we announced plans to exit our tunneling business in an effort to
better align our operations with our long-term business strategy. We have
classified the results of operations of our tunneling business as discontinued
operations for all periods presented. At December 31, 2007, substantially all
existing tunneling business activity had been completed.
Corporate
expenses previously allocated to our tunneling business have been re-allocated
to our remaining two segments, rehabilitation and Tite Liner, for all periods
presented.
2007
Compared to 2006
|
Years
Ended December 31,
|
Increase
(Decrease)
|
|||||||||||||||
|
2007
|
2006
|
$
|
%
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Revenues
|
$
|
495,570 |
$
|
527,419 |
$
|
(31,849 | ) | (6.0 | )% | |||||||
|
Gross
profit
|
99,108 | 129,003 | (29,895 | ) | (23.2 | ) | ||||||||||
|
Gross
profit margin
|
20.0 | % | 24.5 | % | ||||||||||||
|
Operating
expenses
|
90,078 | 92,692 | (2,614 | ) | (2.8 | ) | ||||||||||
|
Gain
on settlement of litigation
|
(4,500 | ) | - | (4,500 | ) | n/a | ||||||||||
|
Operating
income
|
13,530 | 36,311 | (22,781 | ) | (62.7 | ) | ||||||||||
|
Operating
margin
|
2.7 | % | 6.9 | % | ||||||||||||
|
Net
income from continuing operations
|
12,866 | 26,303 | (13,437 | ) | (51.1 | ) | ||||||||||
Net
income from continuing operations was $13.4 million lower in 2007 than in 2006
principally due to lower revenues and weaker gross profit margins in our
rehabilitation business due to weakness in the U.S. sewer rehabilitation market.
There were also several regions of our U.S. sewer rehabilitation operations that
experienced project performance issues stemming from delays and other unforeseen
issues. The impact of this decline in revenues was partially offset by a
decrease in operating expenses in 2007. The primary drivers of the decrease in
operating expenses were improved control of corporate and operational spending,
lower incentive compensation expense due to poorer performance and a reduction
of $1.7 million of previously recorded expense related to unvested restricted
stock and stock options in connection with the resignation of our former chief
executive officer and voluntary cancellations of stock options by our executive
team, partially offset with $1.0 million in severance payments to our former
chief executive officer. Finally, in 2007, the Company recorded a $4.5 million
gain on the settlement of litigation relating to patent infringements (see Note
9 to the consolidated financial statements contained in this
report).
19
2006
Compared to 2005
|
Years
Ended December 31,
|
Increase
(Decrease)
|
|||||||||||||||
|
2006
|
2005
|
$
|
%
|
|||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||
|
Revenues
|
$
|
527,419 |
$
|
483,595 |
$
|
43,815 | 9.1 | % | ||||||||
|
Gross
profit
|
129,003 | 121,026 | 7,968 | 6.6 | ||||||||||||
|
Gross
profit margin
|
24.5 | % | 25.0 | % | ||||||||||||
|
Operating
expenses
|
92,692 | 85,481 | 7,211 | 8.4 | ||||||||||||
|
Operating
income
|
36,311 | 35,545 | 757 | 2.1 | ||||||||||||
|
Operating
margin
|
6.9 | % | 7.4 | % | ||||||||||||
|
Net
income from continuing operations
|
26,303 | 20,160 | 6,134 | 30.4 | ||||||||||||
Net
income from continuing operations increased $6.1 million to $26.3 million in
2006. Operationally, the rehabilitation business generated higher revenue due
primarily to stronger performance in the second half of 2006 compared to the
same period in 2005. The first half of 2006 was especially slow for our domestic
rehabilitation business due to a market softening that began in late 2005 and
continued into the first quarter of 2006. Our Tite Liner® operations were very
strong in 2006 compared to 2005, with higher revenues, gross profit and
operating income. In addition, gross and operating margins were also higher in
the Tite Liner® business in 2006 compared to the prior year. Consolidated
operating expenses were $7.2 million higher in 2006 compared to 2005, primarily
due to increases in legal and accounting professional fees and a $2.9 million
increase to stock compensation expense. Our legal and accounting fees increased
significantly, as we focused on protecting our intellectual property and as we
engaged professional resources to assist us in strategies to minimize our income
tax exposure, particularly in foreign tax jurisdictions. Stock compensation
expense related to stock option grants was recorded, for the first time, in 2006
as required by Statement of Financial Accounting Standards (“SFAS”) No. 123(R),
Share Based Payment
(“SFAS No. 123(R)”),
which was effective for our company on January 1, 2006.
Segment
Results
Rehabilitation
Segment
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Revenues
|
$ | 453,964 | $ | 481,220 | $ | 445,072 | ||||||
|
Gross
profit
|
83,179 | 113,625 | 109,586 | |||||||||
|
Gross
profit margin
|
18.3 | % | 23.6 | % | 24.6 | % | ||||||
|
Operating
expenses
|
83,269 | 86,167 | 80,146 | |||||||||
|
Gain
on settlement of litigation
|
(4,500 | ) | - | - | ||||||||
|
Operating
income
|
4,410 | 27,458 | 29,440 | |||||||||
|
Operating
margin
|
1.0 | % | 5.7 | % | 6.6 | % | ||||||
Revenues
Revenues
decreased by 5.7% in the rehabilitation segment in 2007 to $454.0 million from
$481.2 million in the prior year primarily due to weak market conditions in the
United States. Our revenues in the U.S. in the rehabilitation segment were $50.8
million lower, or 13.9%, in 2007 than in 2006. Compounding the weak U.S. market
conditions was a larger percentage of smaller-diameter installation projects in
the U.S. marketplace in 2007, which are typically less profitable and generate
less revenue per foot than medium- and larger-diameter installation
projects.
According to
internal market analysis and various third party market surveys, spending in the
U.S. sewer rehabilitation market was down in 2007, and projections for 2008
indicate that the market will be flat to slightly down as compared to 2007. We
responded to these conditions by realigning our cost structure to improve
profitability going forward. Our 2007 full-year results were dramatically
impacted by our poor operating results in the first quarter. Since that time we
have reduced our crew capacity to fit the market demand and eliminated field
support costs, as well as reduced corporate costs. We improved our overall
operating margins in North America throughout the year as result of these
actions. We improved the geographic diversity of our business in 2007 with
significant new business wins in India, Hong Kong, Australia, Poland and
Romania, and pursued growth opportunities for Insituform Blue™ products. We
performed Insituform Blue™ projects in the U.S., Europe and Asia in 2007 as we
continued to validate and test our newly developed water rehabilitation
products. While this business is in its early stages, we expect that Insituform
Blue™ will contribute modest operating profits in 2008. Our strategy of
geographical and product diversification is aimed at
reducing our dependency on the U.S. sewer rehabilitation market, and minimize
the impact of market cyclicality, such as what we experienced in
2007.
20
Partially
offsetting the weakness in the U.S. markets was continued improvement in
European and Canadian contracting operations, where revenues increased $18.1
million, or 24.0%, and $6.7 million, or 26.2%, respectively, in 2007 compared
with the prior year. With increased revenues outside of the United States, we
realized the benefits of our international diversification strategy in
2007.
Rehabilitation
contract backlog increased 16.1% from December 31, 2006 to December 31, 2007.
The increase in backlog was primarily due to the acquisition of $35.1 million of
contracted projects by our newly formed venture in India. While backlog in the
North American CIPP business was down at December 31, 2007 from that of one year
ago, backlog improved from the first half of the year, and orders in the second
half improved by approximately 12%. Backlog in the European business was at a
near historical high as of December 31, 2007, and improved over 13% from
December 31, 2006 backlog levels.
Rehabilitation
revenues were 8.1% higher in 2006 compared to 2005. However, backlog in the
rehabilitation segment decreased by 5.4% at December 31, 2006 compared to
December 31, 2005. The first half of 2006 was affected by a significant market
softening in the United States, which occurred late in 2005 and lasted into the
first half of 2006. During this slow period, there was heightened competition
for fewer projects, resulting in low-margin pricing, and a decrease in our
workable backlog during the first half of 2006. Rather than obtain work at low
margins, we were able to take advantage of better margins when the slow period
was followed by modest growth in the second quarter of 2006, and even stronger
growth in the second half of 2006. As a result, backlog grew in the second half
of 2006 after declining during the first half of the year.
Gross
Profit and Margin
Rehabilitation
gross profit decreased by 26.8% in 2007 compared to 2006 primarily due to the
lower revenues described above. The weak market conditions in U.S. sewer
rehabilitation resulted in heightened competitive pricing pressure particularly
in the first half of 2007. This pricing compression, coupled with poor project
performance in several regions in the U.S. and a higher percentage of lower
margin small diameter projects, has contributed to lower gross margins. Gross
margins decreased 5.3 percentage points from 23.6% in 2006 to 18.3% in 2007. In
recent quarters, pricing has stabilized. While there are no assurances, we
anticipate pricing to remain stable in 2008.
Rehabilitation
gross profit increased by $4.0 million, or 3.7%, to $113.6 million in 2006
compared to $109.6 million in 2005, due primarily to higher revenues and
increased crew efficiencies, partially offset by higher material costs. However,
gross profit margins declined by one percentage point, to 23.6% in 2006 compared
to 24.6% in 2005. One factor impacting the gross profit margin in 2006 related
to the price reductions that were driven by the marketplace. Another factor in
the percentage-point decline in gross profit margin was the effect of an
insurance claim recognized in 2005, which provided a $3.4 million benefit to
gross profit. In 2006, an additional $0.5 million related to the same claim was
recorded. Excluding the effect of insurance claim recognition, gross profit
margin would have been 23.5% in 2006 compared to 23.8% in 2005.
Our
material costs were driven slightly higher in 2007 and 2006 primarily by resin
costs. Resin, a petroleum-based product, is subject to pricing volatility and is
a significant raw material in our CIPP process. Fuel is also subject to pricing
volatility and is a significant cost to our operations. In many cases, we have
the ability to pass through such price increases to our customers. To the extent
we may have longer-term contracts with fixed pricing, however, our ability to
pass through such price increases may be limited. During 2007 and 2006, our
ability to pass through a substantial portion of our raw material price
increases, including fuel costs, to our customers enabled us to manage the
declines in gross profits in 2007 and 2006.
Operating
Expenses
Operating
expenses decreased 3.4% in 2007 compared to 2006, primarily driven by the 5.7%
reduction in revenues as discussed above. We also experienced lower costs due to
the realignment of resources, particularly in our U.S. operations and
headquarters, partially offset by increased costs in Europe and Asia due to
geographic expansion. In addition, due to operating performance in 2007, our
executives and certain other key employees determined that it was in the best
interests of our Company and our stockholders to forfeit their 2007 stock option
annual grants. This voluntary cancellation of these stock options resulted in
lower variable components of equity compensation expense of $0.7 million in 2007
versus 2006. Operating expenses, as a percentage of revenues, were 18.3% in 2007
compared to 17.9% in 2006.
Operating
expenses were $6.0 million, or 7.5%, higher in 2006 compared to 2005 due to
higher corporate expenses, including equity compensation and legal expenses.
These increases were offset slightly by lower field expenses, primarily due to
reorganization efforts. Operating expenses, as a percentage of revenue, were
17.9% in 2006 compared to 18.0% in 2005.
21
Operating
Income and Margin
Lower
revenues and gross profit, partially offset by lower operating expenses,
combined to cause operating income to decrease by $23.0 million, or 83.9%, to
$4.4 million in 2007 compared to 2006. Rehabilitation operating margin, which is
operating income as a percentage of revenue, declined to 1.0% in 2007 compared
to 5.7% in 2006. The factors described above caused the weak results in 2007.
Finally, in 2007, the Company recorded a $4.5 million gain on the settlement of
litigation relating to patent infringement claims (see Note 9 to the
consolidated financial statements contained in this report).
Higher
revenues in 2006 were offset by higher subcontract and material costs, higher
operating expenses and the effect of the aforementioned claim recognized in
2005. Consequently, operating income fell $2.0 million, or 6.8%, to $27.5
million in 2006 compared to $29.4 million in 2005. Operating margin similarly
fell to 5.7% in 2006 compared to 6.6% in 2005.
Insituform
Blue™ Products
During
2006, we launched new potable water infrastructure products with the name
Insituform Blue™. Under the “Insituform Blue™” trademark, we operate with a
variety of technologies geared to the global drinking water market. In 2007, our
Insituform Blue™ work did not have a material effect on our consolidated
results of operations. We expect that Insituform Blue™ products will contribute
modest operating profits in 2008.
Tite Liner
Segment
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
(Dollars
in thousands)
|
||||||||||||
|
Revenues
|
$ | 41,606 | $ | 46,199 | $ | 38,523 | ||||||
|
Gross
profit
|
15,929 | 15,378 | 11,440 | |||||||||
|
Gross
profit margin
|
38.3 | % | 33.3 | % | 29.7 | % | ||||||
|
Operating
expenses
|
6,809 | 6,525 | 5,335 | |||||||||
|
Operating
income
|
9,120 | 8,853 | 6,105 | |||||||||
|
Operating
margin
|
21.9 | % | 19.2 | % | 15.8 | % | ||||||
Revenues
Revenues
in our Tite Liner segment decreased by $4.6 million, or 9.9%, in 2007 compared
to 2006 due primarily to weaker market conditions in Canada and South America,
where revenues decreased 24.0% and 24.9%, respectively. Offsetting these
declines were increased revenues in the U.S. and in Central
America.
The
December 31, 2007 Tite Liner segment backlog balance is the highest the Company
has reported at any other quarter-end date in history. Backlog was $12.8 million
at the beginning of 2007, which was less than half of the December 31, 2007
balance of $26.2 million. The primary driver of this change in backlog was the
timing of projects awarded. Demand for Tite Liner™ products is normally strong
during periods when pricing for oil and other mined commodities is
high.
Tite
Liner segment revenues were $7.7 million, or 19.9%, higher in 2006 compared to
2005 due to strong performance across all business units of our Tite Liner
business. Revenues from our North American operations increased by $6.0 million
in 2006 compared to 2005, and revenues from our South American and Latin
American operations increased by $1.7 million in 2006 compared to
2005.
Gross
Profit and Margin
Despite
lower revenues in 2007, gross profit was 3.6% higher in 2007 at $15.9 million,
compared to $15.4 million in 2006, due to strong project execution. The Tite
Liner segment gross profit margin percentages were 38.3% and 33.3% in 2007 and
2006, respectively. The higher gross profit margin in 2007 was principally due
to improved margins worldwide resulting from improved operational efficiencies
and improved project execution.
Gross
profit in the Tite Liner business was $3.9 million, or 34.4%, higher in 2006
compared to 2005. In addition to higher revenues in 2006, Tite Liner’s gross
profit margin was also 3.6 percentage points higher, at 33.3% in 2006 compared
to 29.7% in 2005, due to improved operational efficiency and favorable pricing
trends. North American operations achieved a 36.3% gross profit margin in 2006
compared to 35.1% in 2005, and South American operations achieved a 25.8% gross
profit margin in 2006, compared to 17.1% in 2005.
22
Operating
Expenses
Operating
expenses in the Tite Liner segment increased slightly, by only 4.4%, in 2007
versus 2006. As a percentage of revenues, operating expenses were 16.4% in 2007
compared to 14.1% in 2006, primarily due to the addition of resources devoted to
growth and project support.
Tite
Liner operating expenses were $1.2 million, or 22.3%, higher in 2006 compared to
2005 due primarily to additional staffing and additional corporate expenses
necessary to support anticipated growth in the Tite Liner business. As a
percentage of revenues, operating expenses were 14.1% in 2006 compared to 13.8%
in 2005.
Operating
Income and Margin
Despite
lower revenues in 2007, operating income increased by $0.3 million, or 3.0%,
compared to 2006. Due to our strengthening gross profit margin during the
period, the operating margin likewise, which is operating income as a percentage
of revenues, increased to 21.9% in 2007 compared to 19.2% in 2006.
In 2006,
the Tite Liner segment’s higher revenues and stronger gross profit margins were
partially offset by higher operating expenses as compared to 2005. These
combined factors resulted in operating income that was $2.7 million higher in
2006 compared to 2005. Operating margin was 19.2% in 2006, compared to 15.8% in
2005.
Other
Income (Expense)
Interest
expense decreased $1.4 million from $6.8 million in 2006 to $5.4 million in 2007
primarily related to the payoff of our Senior Notes, Series A, in February 2007.
Interest expense decreased $1.7 million from $8.5 million in 2005 to $6.8
million in 2006 primarily related to a decrease in debt principal amortization
in 2006. See “Liquidity and Capital Resources – Long-Term Debt” under this Item
7 for further discussion of debt instruments and related
amendments.
Interest
income decreased $0.4 million from $3.9 million in 2006 to $3.5 million in 2007
primarily due to fluctuations in interest rates on deposits. Interest income
increased $1.8 million from $2.1 million in 2005 to $3.9 million in 2006
primarily due to higher interest rates and higher cash balances.
Other
income decreased $2.3 million from $3.8 million in 2006 to $1.5 million in 2007
primarily due to large gains on non-operating property and asset disposals in
2006. Similarly, other income in 2006 was $4.6 million higher than the other
expense of $0.8 million in 2005.
Taxes
on Income (Tax Benefits)
Our
effective tax rate in 2007 was (1.1)% and was lower than the federal statutory
rate due to the benefit of amortization of intangibles, higher income in
jurisdictions with rates lower than the U.S. rate, the release of a valuation
allowance on certain foreign net operating losses, and the benefit of a federal
motor fuels excise tax credit.
Our
deferred tax assets in excess of deferred tax liabilities were $6.2 million,
including a $3.4 million valuation allowance primarily related to foreign net
operating losses. Deferred tax assets include $1.0 million of foreign tax credit
carryforwards, which begin expiring in 2015, and $3.7 million in federal, state
and foreign net operating loss carryforwards, net of applicable valuation
allowances.
The 2006
effective tax rate of 31.8% was lower than the federal statutory rate due to the
benefit of amortization of intangibles, higher income in jurisdictions with
rates lower than the U.S. rate, the favorable tax treatment on the disposal of
foreign property and the benefit of a federal motor fuels excise tax
credit.
We
provide for U.S. income taxes, net of available foreign tax credits, on earnings
of consolidated international subsidiaries that we plan to remit to the U.S. We
do not provide for U.S. income taxes on the remaining earnings of these
subsidiaries, as we expect to reinvest these earnings overseas or we expect the
taxes to be minimal based upon available foreign tax credits.
Our
effective tax rate in any given year is dependent in part on the level of
taxable income we generate in each of the foreign jurisdictions in which we
operate. We do expect that our effective tax rate in 2008 will be lower that the
U.S. statutory tax rate of 35%.
23
Minority
Interests
Minority
interests were $(0.5) million, $(0.3) million and $(0.2) million in 2007, 2006
and 2005, respectively, and principally relate to the 25% interest in the net
income of Insituform Linings Public Limited Company held by Per Aarsleff A/S, a
Danish contractor. Net income of Insituform Linings Public Limited Company
increased in 2007 primarily due to revenue growth in our European
operations.
Equity
in Earnings of Affiliated Companies
Equity in
earnings of affiliated companies decreased to $0.2 million during 2007 compared
to $1.3 million during 2006. In 2007, we invested in start-up joint ventures in
Hong Kong and Australia, and incurred losses in the early development stages. In
addition, earnings in our German joint venture in 2007 were lower than in 2006,
due to weaker market conditions in the German sewer rehabilitation market in
2007. Equity in earnings of affiliated companies of $0.9 million in 2005 was
comprised entirely of earnings in our German joint venture.
Loss
from Discontinued Operations
On March
29, 2007, we announced plans to exit our tunneling business in an effort to
better align our operations with our long-term business strategy. We have
classified the results of operations of our tunneling business as discontinued
operations for all periods presented. At December 31, 2007, substantially all
existing tunneling business activity had been completed.
Revenues
from discontinued operations were $62.1 million, $69.3 million and $111.7
million in 2007, 2006 and 2005, respectively. Losses from discontinued
operations, net of income taxes, were $10.3 million, $1.6 million and $7.0
million in 2007, 2006 and 2005, respectively. The lower activity in discontinued
operations was due to the winding down of the business. During the year ended
December 31, 2007, we recorded $17.9 million of non-recurring exit
charges.
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
|
December
31,
2007
|
September
30,
2007
|
June
30,
2007
|
March
31,
2007
|
December
31,
2006
|
|||||||||||||||
|
(in
millions)
|
||||||||||||||||||||
|
Rehabilitation
|
$ | 234.1 | $ | 208.3 | $ | 193.1 | $ | 187.2 | $ | 201.7 | ||||||||||
|
Tite
Liner
|
26.2 | 16.3 | 12.5 | 14.5 | 12.8 | |||||||||||||||
|
Total
|
$ | 260.3 | $ | 224.6 | $ | 205.6 | $ | 201.7 | $ | 214.5 | ||||||||||
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 Cash Equivalents
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
(In
thousands)
|
||||||||
|
Cash
and equivalents
|
$ | 78,961 | $ | 96,389 | ||||
|
Restricted
cash – in escrow
|
2,487 | 934 | ||||||
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 strategic investments. Our
primary source of cash is operating activities. Besides operating activities, we
occasionally borrow under our credit facility to fund operating activities,
including working capital investments. Information regarding our cash flows for
the years ended December 31, 2007, 2006 and 2005 is discussed below and is
presented in our consolidated statements of cash flows contained in this
report.
24
Cash
Flows from Operations
Cash
flows from continuing operating activities provided $9.6 million in 2007
compared to $43.6 million in 2006. The most significant component of the
unfavorable variance from 2006 to 2007 was net income from continuing
operations, which was $13.4 million lower in 2007 than in 2006. We used $18.2
million and $5.6 million of cash in 2007 and 2006, respectively, in relation to
changes in operating assets and liabilities (working capital). In 2007, $13.8
million was used to pay down accounts payable and accrued expenses, as opposed
to 2006, when $10.8 million was provided due to revenue growth and timing of
vendor payments. Accounts receivables, including contract retainage and costs
and earnings in excess of billings (unbilled receivables), increased by $2.0 and
$17.4 million in 2007 and 2006, respectively. The increase in receivables,
including contract retainage and unbilled receivables, was primarily due to an
increase in days’ sales outstanding (“DSO”) which was 99 at December 31, 2007
compared to 89 at December 31, 2006. In 2007, cash flows from operations were
negatively impacted by an increase of $4.2 million in net deferred income tax
assets. The operating activities of our discontinued operations used $1.5
million and $3.9 million of cash in 2007 and 2006, respectively.
Cash
flows from continuing operating activities provided $43.6 million in 2006
compared to $21.2 million in 2005. The most significant component of the
favorable variance from 2005 to 2006 was net income from continuing operations,
which was $6.1 million higher in 2006 than in 2005. Other factors affecting
operating cash flows in 2006 were higher non-cash expenses, most notably, equity
compensation expense of $4.3 million related to the effects of adoption of SFAS
No. 123(R). Changes in operating assets and liabilities (working capital) used
$5.6 million in 2006 compared to $21.7 million in 2005. Accounts receivables,
including contract retainage and costs and earnings in excess of billings
(unbilled receivables), was the largest component in the changes in working
capital, as it increased by $17.4 million in 2006. The increase in receivables,
including contract retainage and unbilled receivables, was primarily due to an
increase in DSO which was 89 at December 31, 2006 compared to 86 at December 31,
2005. Other changes in working capital include inventories, which increased by
$1.8 million from 2005 to 2006, due to dry tube production exceeding wet-out
tube production late in the year. Prepaid expenses and other current assets
increased by $1.9 million due primarily to $1.3 million in additional amounts
and prejudgment interest related to a claim against our excess liability
insurance carrier (see Note 12 to the consolidated financial statements
contained in this report). Partially offsetting increases in current operating
assets was an $10.8 million increase in accounts payable and accrued expenses,
due to revenue growth and timing of vendor payments. The operating activities of
our discontinued operations used $3.9 million and provided $2.4 million of cash
in 2007 and 2006, respectively.
Cash
Flows from Investing Activities
Investing
activities from continuing operations used $12.4 million in 2007 compared to
$11.0 million in 2006. The largest component of cash used by investing
activities was capital expenditures of $15.0 million in 2007, compared to $19.7
million in 2006. Capital expenditures in 2007 were primarily for equipment used
in our steam-inversion process and replacement of older equipment, primarily in
the United States, and for the remodeling of an existing facility as our
corporate headquarters in Chesterfield, Missouri. Capital expenditures in 2007
and 2006 were partially offset by $2.6 million and $7.3 million, respectively,
in proceeds received from asset disposals. In 2006, an additional $1.4 million
was received from the conversion of permanent life insurance policies on current
and former employees. Capital expenditures of discontinued operations were $8.8
million and $0.9 million in 2007 and 2006, respectively. Substantially all of
the capital expenditures of discontinued operations in 2007 related to the lease
buy-outs of tunneling boring machines that were subsequently sold. Proceeds from
fixed assets sales were $10.3 million and $4.8 million in 2007 and 2006,
respectively.
Investing
activities from continuing operations used $11.0 million in 2006 compared to
$24.0 million in 2005. The largest component of cash used by investing
activities was capital expenditures of $19.7 million in 2006, compared to $24.6
million in 2005. Capital expenditures in 2006 were primarily for equipment used
in our steam-inversion process and replacement of older equipment, primarily in
the United States. Capital expenditures were partially offset by $7.3 million in
proceeds received primarily from asset disposals from sales of real estate in
the United States and Europe. In 2006, an additional $1.4 million was received
from the conversion of permanent life insurance policies on current and former
employees. Capital expenditures of discontinued operations were $0.9 million and
$2.4 million in 2006 and 2005, respectively. Proceeds from fixed assets sales
were $4.8 million and $0.1 million in 2006 and 2005, respectively.
Cash
Flows from Financing Activities
Financing
activities from continuing operations used $11.4 million in 2007 compared to
$12.4 million in 2006. In 2007, the largest component of financing activities
was the scheduled debt amortization payment on our Senior Notes for $15.8
million. In addition, payments on notes payable used $2.0 million, while $2.0
million was received from notes payable, related to the financing of certain of
our annual insurance premiums. Partially offsetting payments on our Senior Notes
and notes payable were $4.2 million received from stock option exercises, and a
tax benefit from stock option exercises of $0.1 million, which was recorded to
additional paid-in capital.
25
Financing
activities from continuing operations used $12.4 million in 2006 compared to
$12.3 million in 2005. In 2006, the largest component of financing activities
was the scheduled debt amortization payment on our Senior Notes for $15.7
million. In addition, payments on notes payable used $4.1 million, while $2.7
million were received from notes payable, related to the financing of certain of
our annual insurance premiums. Partially offsetting payments on our Senior Notes
and notes payable were $4.1 million received from stock option exercises, and a
tax benefit from stock option exercises of $0.8 million, which was recorded to
additional paid-in capital.
Long-Term
Debt
Our total
indebtedness as of December 31, 2007 consisted of our $65.0 million Senior
Notes, Series 2003-A, due April 24, 2013, and $1.1 million of other notes
related to the financing of certain insurance premiums. At December 31, 2006,
our total indebtedness consisted of our $65.0 million Senior Notes, Series
2003-A, due April 24, 2013, $15.7 million remaining on our Senior Notes, Series
A, due February 14, 2007, and $1.2 million of other notes related to the
financing of certain insurance premiums. The Senior Notes, Series A and the
other notes were paid off in February 2007.
On March
28, 2007, we amended our $65.0 million Senior Notes, Series 2003-A, due April
24, 2013, to exclude all non-recurring charges taken during the year ending
December 31, 2007 relating to our exit from the tunneling operation, to the
extent deducted in determining consolidated net income for such period, subject
to a maximum amount of $34.2 million. In connection with the amendment, we paid
the noteholders an amendment fee of 0.05% of the outstanding principal balance
of Senior Notes, or $32,500. During the year ended December 31, 2007, we
recorded $17.9 million of non-recurring exit charges.
As of
December 31, 2007, we were in compliance with all of our debt covenants. We had
no debt covenant violations in 2007, 2006 or 2005. We anticipate being in
compliance with all of our debt covenants over the next 12 months.
We
believe 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.
Disclosure
of Contractual Obligations and 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 12 to the consolidated financial statements
contained in this report for further discussion regarding our commitments and
contingencies.
We have
entered into several contractual joint ventures in order to develop joint bids
on contracts for our installation business. In these cases, we could be required
to complete the joint venture partner’s portion of the contract if the partner
were unable to complete its portion. We would be liable for any amounts for
which we 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 we would be liable for additional costs, these costs would be
offset by any related revenues due under that portion of the contract. We have
not experienced material adverse results from such arrangements. Based on these
facts, we currently do not anticipate any future material adverse impact on our
consolidated financial position, results of operations or cash flows from our
contractual joint ventures.
26
The
following table provides a summary of our contractual obligations and commercial
commitments as of December 31, 2007 (in thousands). This table includes cash
obligations related to principal outstanding under existing debt arrangements
and operating leases.
|
Payments
Due by Period
|
||||||||||||||||||||||||||||
|
Cash Obligations(1)(2)(3)(4)
|
Total
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
|||||||||||||||||||||
|
Long-term
debt(2)
|
$ | 65,000 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 65,000 | ||||||||||||||
|
Interest
on long-term debt(1)
|
23,380 | 4,251 | 4,251 | 4,251 | 4,251 | 4,251 | 2,125 | |||||||||||||||||||||
|
Operating
leases
|
22,343 | 9,401 | 6,037 | 3,348 | 1,853 | 404 | 1,300 | |||||||||||||||||||||
|
Total
contractual cash
Obligations
|
$ | 110,723 | $ | 13,652 | $ | 10,288 | $ | 7,599 | $ | 6,104 | $ | 4,655 | $ | 68,425 | ||||||||||||||
|
(1)
|
Cash
obligations herein are not discounted. See Notes 6 and 12 to the
consolidated financial statements contained in this report regarding
long-term debt and commitments and contingencies,
respectively.
|
|
(2)
|
As
of December 31, 2007, no amounts were borrowed on the $35.0 million credit
facility. The available balance was $20.4 million, and the commitment fee
was 0.2%. The remaining $14.6 million was used for non-interest bearing
letters of credit, $14.5 million of which were collateral for insurance
and $0.1 million for work
performance.
|
|
(3)
|
Liabilities
related to Interpretation No. 48, Accounting for Uncertainty in
Income Taxes – an interpretation of FASB Statement No. 109 (“FIN
No. 48”) have not been included in the table above because we are
uncertain as to if or when such amounts may be settled. See Note 11 to the
consolidated financial statements contained in this report for further
information.
|
|
(4)
|
There
were no purchase commitments at December 31,
2007.
|
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 future commitments were $110.7
million at December 31, 2007. 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 12 to our consolidated financial statements contained in
this report regarding commitments and contingencies.
Critical
Accounting Policies
Discussion
and analysis of our financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amount of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
financial statement dates. Actual results may differ from these estimates under
different assumptions or conditions.
Some
accounting policies require the application of significant judgment by
management in selecting the appropriate assumptions for calculating financial
estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty. We believe that our critical accounting policies are those
described below. For a detailed discussion on the application of these and other
accounting policies, see Note 2 to the consolidated financial statements
contained in this report.
Revenue
Recognition – Percentage-of-Completion Method
We
recognize revenue and costs as construction 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
27
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.
Equity-Based
Compensation
We record
expense for equity-based compensation awards, including stock appreciation
rights, restricted shares of common stock, performance awards, stock options and
stock units based on the fair value recognition provisions contained in
Statement of Financial Accounting Standards 123(R), Share Based Payment. Fair
value of stock option awards is determined using an option pricing model that is
based on established principles of financial economic theory. Fair value of
restricted stock and deferred stock unit awards is determined using our
company’s closing stock price on the grant date. Assumptions regarding
volatility, expected term, dividend yield and risk-free rate are required for
valuation of stock option awards. Volatility and expected term assumptions are
based on our company’s historical experience. The risk-free rate is based on a
U.S. Treasury note with a maturity similar to the option award’s expected term.
Discussion of our implementation of SFAS No. 123(R) is described in Note 8 to
the consolidated financial statements contained in this report.
Goodwill
Impairment
Under
SFAS No. 142, Goodwill and
Other Intangible Assets (“SFAS No. 142”), 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. 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;
and
|
|
·
|
significant
changes in the strategy for a segment including extended slowdowns in the
sewer rehabilitation market.
|
In
accordance with the provisions of SFAS No. 142, we calculate the fair value of
our reporting units and compare such fair value to the carrying value of those
reporting units to determine if there is any indication of goodwill impairment.
Our reporting units consist of North American rehabilitation, European
rehabilitation and Tite Liner. At December 31, 2007, goodwill was $102.3
million, $19.4 million and $0.9 million for our North American rehabilitation,
European rehabilitation and Tite Liner reporting units, respectively. To
calculate reporting unit fair value, we utilize 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.
Taxation
We
provide for estimated income taxes payable or refundable on current year income
tax returns, as well as the estimated future tax effects attributable to
temporary differences and carryforwards, in accordance with the Statement of
Financial Accounting Standards 109, Accounting for Income Taxes
(“SFAS No. 109”). SFAS No. 109 also requires that a valuation allowance be
recorded against any deferred tax assets that are not likely to be realized in
the future. The determination is based on our ability to generate future taxable
income and, at times, is dependent on our ability to implement strategic tax
initiatives to ensure full utilization of recorded deferred tax assets. Should
we not be able to implement the necessary tax strategies, we may need to record
valuation allowances for certain deferred tax assets, including those related to
foreign income tax benefits. Significant management judgment is required in
determining the provision for income taxes, deferred tax assets and liabilities
and any valuation allowances recorded against net deferred tax
assets.
28
In
accordance with FIN No. 48, tax benefits from an uncertain tax position may be
recognized when it is more likely than not that the position will be sustained
upon examination, including resolutions of any related appeals or litigation
processes, based on the technical merits. Income tax positions must meet a more
likely than not recognition threshold at the effective date to be recognized
upon the adoption of FIN No. 48 and in subsequent periods. In addition, this
recognition model includes a measurement attribute that measures the position as
the largest amount of tax that is greater than 50% likely of being ultimately
realized upon ultimate settlement in accordance with FIN No. 48. This
interpretation also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and transition. We
adopted FIN No. 48 effective January 1, 2007 as discussed below.
We
recognize tax liabilities in accordance with FIN No. 48 and we adjust these
liabilities when our judgment changes as a result of the evaluation of new
information not previously available. Due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is
materially different from our current estimate of the tax liabilities. These
differences will be reflected as increases or decreases to income tax expense in
the period in which they are determined. While we believe the resulting tax
balances as of December 31, 2007 and 2006 are appropriately accounted for in
accordance with FIN No. 48 and SFAS No. 109, the ultimate outcome of such
matters could result in favorable or unfavorable adjustments to the consolidated
financial statements and such adjustments could be material.
Long-Lived
Assets
Property,
plant and equipment, goodwill and other identified intangibles (primarily
patents, trademarks, licenses and non-compete agreements) are recorded at cost
and, except for goodwill, are amortized on a straight-line basis over their
estimated useful lives. Changes in circumstances such as technological advances,
changes to our business model or changes in our capital strategy can result in
the actual useful lives differing from our estimates. If we determine that the
useful life of our property, plant and equipment or our identified intangible
assets should be changed, we would depreciate or amortize the net book value in
excess of the salvage value over its revised remaining useful life, thereby
increasing or decreasing depreciation or amortization expense.
Long-lived
assets, including property, plant and equipment, and other intangibles, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Factors we consider
important which could trigger an impairment review include:
|
·
|
significant
underperformance in a region relative to expected historical or projected
future operating results;
|
|
·
|
significant
changes in the use of the assets of a region or the strategy for the
region;
|
|
·
|
significant
negative industry or economic
trends;
|
|
·
|
significant
decline in our stock price for a sustained period;
and
|
|
·
|
market
capitalization significantly less than net book
value.
|
Such
impairment tests are based on a comparison of undiscounted cash flows to the
recorded value of the asset. The estimate of cash flow is based upon, among
other things, assumptions about expected future operating performance. Our
estimates of undiscounted cash flow may differ from actual cash flow due to,
among other things, technological changes, economic conditions, changes to our
business model or changes in our operating performance. If the sum of the
undiscounted cash flows (excluding interest) is less than the carrying value, we
recognize an impairment loss, measured as the amount by which the carrying value
exceeds the fair value of the asset.
Recently
Adopted Accounting Pronouncements
In June
2006, the Financial Accounting Standards Board (“FASB”) issued FIN No. 48. This
interpretation prescribes a more-likely-than-not threshold for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure of uncertain tax positions in financial statements.
We
adopted the provisions of FIN No. 48 on January 1, 2007 and, as a result,
increased our liability for unrecognized tax benefits by $2.8 million of which
$0.3 million was recorded as a reduction of the beginning balance of retained
earnings. The total amount of unrecognized tax benefits, if recognized, that
would affect the effective tax rate is $0.7 million.
We
recognize interest and penalties accrued related to unrecognized tax benefits in
the tax provision. Upon adoption of FIN No. 48, we accrued $0.6 million for
interest. In addition, during 2007, approximately $0.2 million was accrued for
interest.
We
believe that it is reasonably possible that the total amount of unrecognized tax
benefits will change in 2008. We have certain tax return years subject to
statutes of limitation that will expire within twelve months. Unless challenged
by tax authorities, the expiration of those statutes of limitation is expected
to result in the recognition of uncertain tax positions in the amount of
approximately $0.4 million in 2008.
29
Market
Risk
We are
exposed to the effect of interest rate changes and of foreign currency and
commodity price fluctuations. We currently do not use derivative contracts to
manage interest rate and commodity risks. From time to time, we may enter into
foreign currency forward contracts to fix exchange rates for net investments in
foreign operations to hedge our foreign exchange risk.
Interest
Rate Risk
The fair
value of our cash and short-term investment portfolio at December 31, 2007
approximated carrying value. Given the short-term nature of these instruments,
market risk, as measured by the change in fair value resulting from a
hypothetical 100 basis point change in interest rates, would not be
material.
Our
objectives in managing exposure to interest rate changes are to limit the impact
of interest rate changes on earnings and cash flows and to lower overall
borrowing costs. To achieve these objectives, we maintain fixed rate debt. The
fair value of our long-term debt, including current maturities and the amount of
outstanding borrowings on the line of credit facility, approximated its carrying
value at December 31, 2007. Market risk was estimated to be $0.2 million as the
potential increase in fair value resulting from a hypothetical 100 basis point
increase in our debt specific borrowing rates at December 31, 2007.
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 December 31, 2007, a
substantial portion of our cash and cash equivalents were denominated in foreign
currencies, and a hypothetical 10.0% change in currency exchange rates could
result in an approximate $3.7 million impact to our equity through accumulated
other comprehensive income.
In order
to help mitigate this risk, we may enter into foreign exchange forward contracts
to minimize the short-term impact of foreign currency fluctuations. We do not
engage in hedging transactions for speculative investment reasons. There can be
no assurance that our hedging operations will eliminate or substantially reduce
risks associated with fluctuating currencies. At December 31, 2007, there were
foreign currency hedge instruments outstanding with notional amounts of $20.0
million Canadian dollars, €5.0 million and £5.0 million related to our net
investment in our foreign operations. See Note 13 to the consolidated financial
statements contained in this report for additional information and disclosures
regarding our derivative financial instruments.
Commodity
Risk
We have
exposure to the effect of limitations on supply and changes in commodity pricing
relative to a variety of raw materials that we purchase and use in our operating
activities, most notably, resin, chemicals, staple fiber, fuel and pipe. We
manage this risk by entering into agreements with certain suppliers utilizing a
request for proposal, or RFP, format and purchasing in bulk, when possible. We
also manage this risk by continuously updating our estimation systems for
bidding contracts so that we are able to price our products and services
appropriately to our customers. However, we face exposure on contracts in
process that have already been priced and are not subject to any cost
adjustments in the contract. This exposure is potentially more significant on
our longer-term projects.
We were
previously subject to a resin supply contract for the purchase and sale of
certain proprietary resins we use in our North American operations. The contract
provided for the exclusive sale of our proprietary resins by the vendor to us or
to third parties that we designated. Pursuant to the terms of the contract, we
terminated the contract effective December 31, 2007. To diversify our supplier
base, we solicited proposals from resin suppliers and have qualified a number of
vendors in North America that can and are currently delivering proprietary
resins that meet our specifications. In 2008, we anticipate obtaining a majority
of our global resin requirements from multiple suppliers, thus reducing the
risks inherent in concentrated supply streams.
30
|
INDEX
TO CONSOLIDATED FINANCIAL
STATEMENTS
|
|
Management’s
Report on Internal Control Over Financial Reporting
|
32
|
|
Report
of Independent Registered Public Accounting Firm
|
33
|
|
Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006 and
2005
|
34
|
|
Consolidated
Balance Sheets, December 31, 2007 and 2006
|
35
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2007,
2006 and 2005
|
36
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
37
|
|
Notes
to Consolidated Financial Statements
|
28
|
31
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f).
Under the
supervision and with the participation of Company management, including the
Interim Chief Executive Officer (the principal executive officer) and the Chief
Financial Officer (the principal financial officer), an evaluation was performed
of the effectiveness of the Company’s internal control over financial reporting
as of December 31, 2007. In performing this evaluation, management employed the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal Control
– Integrated Framework.
Based on
the criteria set forth in Internal Control – Integrated
Framework, management, including the Company’s Interim Chief Executive
Officer and its Chief Financial Officer, has concluded that the Company’s
internal control over financial reporting was effective as of December 31,
2007.
Company
management does not expect that its system of internal control over financial
reporting and procedures will prevent all misstatements due to inherent
limitations. Therefore, management’s assessment provides reasonable, but not
absolute, assurance that misstatements will be prevented and/or detected by the
established internal control and procedures over financial
reporting.
The
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, as stated in its report which appears
herein.
|
/s/
Alfred L. Woods
|
|
Alfred
L. Woods
Interim
Chief Executive Officer
(Principal
Executive Officer)
|
|
/s/
David A. Martin
|
|
David
A. Martin
Vice
President and Chief Financial Officer
(Principal
Financial Officer)
|
32
To the
Board of Directors and the Stockholders of Insituform Technologies,
Inc.:
In our
opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, stockholders' equity and cash flows present
fairly, in all material respects, the financial position of Insituform
Technologies, Inc. and its subsidiaries (the “Company”) at December 31, 2007 and
2006, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007 in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2007, based on criteria
established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”). The Company’s management is
responsible for these financial statements, for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting. Our
responsibility is to express opinions on these financial statements and on the
Company’s internal control over financial reporting based on our integrated
audits. We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and
operating effectiveness of internal control based on the assessed risk. Our
audits also included performing such other procedures as we considered necessary
in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for uncertain tax positions as of January 1,
2007 and its method of accounting for stock-based compensation as of January 1,
2006.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the
financial statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/
PricewaterhouseCoopers
LLP
PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
March 7,
2008
33
Insituform
Technologies, Inc. and Subsidiaries
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands, except per share amounts)
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ | 495,570 | $ | 527,419 | $ | 483,595 | ||||||
|
Cost
of revenues
|
396,462 | 398,416 | 362,569 | |||||||||
|
Gross
profit
|
99,108 | 129,003 | 121,026 | |||||||||
|
Operating
expenses
|
90,078 | 92,692 | 85,481 | |||||||||
|
Gain
on settlement of litigation
|
(4,500 | ) | – | – | ||||||||
|
Operating
income
|
13,530 | 36,311 | 35,545 | |||||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
expense
|
(5,368 | ) | (6,834 | ) | (8,465 | ) | ||||||
|
Interest
income
|
3,458 | 3,888 | 2,081 | |||||||||
|
Other
|
1,451 | 3,799 | (775 | ) | ||||||||
|
Total
other income (expense)
|
(459 | ) | 853 | (7,159 | ) | |||||||
|
Income
before taxes on income (tax benefits)
|
13,071 | 37,164 | 28,386 | |||||||||
|
Taxes
on income (tax benefits)
|
(149 | ) | 11,826 | 8,913 | ||||||||
|
Income
before minority interests and equity in
earnings
of affiliated companies
|
13,220 | 25,338 | 19,473 | |||||||||
|
Minority
interests
|
(525 | ) | (316 | ) | (166 | ) | ||||||
|
Equity
in earnings of affiliated companies
|
171 | 1,281 | 853 | |||||||||
|
Income
from continuing operations
|
12,866 | 26,303 | 20,160 | |||||||||
|
Loss
from discontinued operations, net of tax
|
(10,323 | ) | (1,625 | ) | (7,000 | ) | ||||||
|
Net
income
|
$ | 2,543 | $ | 24,678 | $ | 13,160 | ||||||
|
Earnings
(loss) per share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Income
from continuing operations
|
$ | 0.47 | $ | 0.97 | $ | 0.75 | ||||||
|
Loss
from discontinued operations
|
(0.38 | ) | (0.06 | ) | (0.26 | ) | ||||||
|
Net
income
|
$ | 0.09 | $ | 0.91 | $ | 0.49 | ||||||
|
Diluted:
|
||||||||||||
|
Income
from continuing operations
|
$ | 0.47 | $ | 0.96 | $ | 0.75 | ||||||
|
Loss
from discontinued operations
|
(0.38 | ) | (0.06 | ) | (0.26 | ) | ||||||
|
Net
income
|
$ | 0.09 | $ | 0.90 | $ | 0.49 | ||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
34
Insituform
Technologies, Inc. and Subsidiaries
As
of December 31, 2007 and 2006
(In
thousands, except share information)
|
Assets
|
2007
|
2006
|
||||||
|
Current
assets
|
||||||||
|
Cash
and cash equivalents
|
$ | 78,961 | $ | 96,389 | ||||
|
Restricted
cash
|
2,487 | 934 | ||||||
|
Receivables,
net
|
85,774 | 83,009 | ||||||
|
Retainage
|
23,444 | 27,509 | ||||||
|
Costs
and estimated earnings in excess of billings
|
40,590 | 31,425 | ||||||
|
Inventories
|
17,789 | 17,665 | ||||||
|
Prepaid
expenses and other assets
|
28,975 | 25,084 | ||||||
|
Current
assets of discontinued operations
|
31,269 | 28,349 | ||||||
|
Total
current assets
|
309,289 | 310,364 | ||||||
|
Property, plant and
equipment, less accumulated depreciation
|
73,368 | 76,432 | ||||||
|
Other
assets
|
||||||||
|
Goodwill
|
122,560 | 122,620 | ||||||
|
Other
assets
|
26,532 | 15,342 | ||||||
|
Total
other assets
|
149,092 | 137,962 | ||||||
|
Non-current
assets of discontinued operations
|
9,391 | 25,311 | ||||||
|
Total
Assets
|
$ | 541,140 | $ | 550,069 | ||||
|
Liabilities and
Stockholders’ Equity
|
||||||||
|
Current
liabilities
|
||||||||
|
Current
maturities of long-term debt and line of credit
|
$ | 1,097 | $ | 16,814 | ||||
|
Accounts
payable and accrued expenses
|
87,935 | 96,321 | ||||||
|
Billings
in excess of costs and estimated earnings
|
8,602 | 9,511 | ||||||
|
Current
liabilities of discontinued operations
|
14,830 | 13,859 | ||||||
|
Total
current liabilities
|
112,464 | 136,505 | ||||||
|
Long-term debt,
less current maturities
|
65,000 | 65,046 | ||||||
|
Other
liabilities
|
7,465 | 3,686 | ||||||
|
Non-current
liabilities of discontinued operations
|
953 | 4,040 | ||||||
|
Total
liabilities
|
185,882 | 209,277 | ||||||
|
Minority
interests
|
2,717 | 2,181 | ||||||
|
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 27,470,623
and
29,597,044; shares outstanding 27,470,623 and 27,239,580
|
275 | 296 | ||||||
|
Additional
paid-in capital
|
104,332 | 149,802 | ||||||
|
Retained
earnings
|
238,976 | 236,763 | ||||||
|
Treasury
stock, at cost – 0 and 2,357,464 shares
|
– | (51,596 | ) | |||||
|
Accumulated
other comprehensive income
|
8,958 | 3,346 | ||||||
|
Total
stockholders’ equity
|
352,541 | 338,611 | ||||||
|
Total
Liabilities and Stockholders’ Equity
|
$ | 541,140 | $ | 550,069 | ||||
The
accompanying notes are an integral part of the consolidated financial
statements.
35
Insituform
Technologies, Inc. and Subsidiaries
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands, except number of shares)
|
Common Stock
Shares
Amount
|
Paid-In
Capital
|
Retained
Earnings
|
Treasury
Stock
|
Accumulated
Other Comprehensive
Income
(Loss)
|
Total
Stockholders’
Equity
|
Comprehensive
Income
|
||||||||||||||||||||||||||
|
BALANCE,
December 31, 2004
|
29,174,019 | $ | 292 | $ | 137,468 | $ | 198,925 | $ | (51,596 | ) |
$
|
4,747 |
$
|
289,836 | ||||||||||||||||||
|
Net
income
|
– | – | – | 13,160 | – | – | 13,160 |
$
|
13,160 | |||||||||||||||||||||||
|
Issuance
of common stock upon exercise of options, including income tax benefit of
$163
|
107,613 | 1 | 1,606 | – | – | – | 1,607 | – | ||||||||||||||||||||||||
|
Restricted
stock issued (See Note 8)
|
55,000 | 1 | (1 | ) | – | – | – | – | – | |||||||||||||||||||||||
|
Amortization
and forfeitures of restricted stock
|
(41,783 | ) | (0 | ) | 299 | – | – | – | 298 | – | ||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | – | (1,405 | ) | (1,405 | ) | (1,405 | ) | |||||||||||||||||||||
|
Total
comprehensive income
|
- | - | - | - | - | - | - |
$
|
11,755 | |||||||||||||||||||||||
|
BALANCE,
December 31, 2005
|
29,294,849 | $ | 293 | $ | 139,372 | $ | 212,085 | $ | (51,596 | ) |
$
|
3,342 |
$
|
303,496 | ||||||||||||||||||
|
Net
income
|
– | – | – | 24,678 | – | – | 24,678 |
$
|
24,678 | |||||||||||||||||||||||
|
Issuance
of common stock upon exercise of options, including income tax benefit of
$772
|
243,370 | 2 | 4,892 | – | – | – | 4,894 | – | ||||||||||||||||||||||||
|
Distribution
of shares pursuant to Deferred Stock Unit awards
|
9,525 | 0 | 50 | – | – | – | 50 | – | ||||||||||||||||||||||||
|
Reclassification
of deferred stock units in accordance with SFAS No. 123(R)
|
– | – | 1,235 | – | – | – | 1,235 | – | ||||||||||||||||||||||||
|
Restricted
stock issued (See Note 8)
|
50,800 | 1 | (1 | ) | – | – | – | – | – | |||||||||||||||||||||||
|
Amortization
and forfeitures of restricted stock
|
(1,500 | ) | (0 | ) | – | – | – | – | (0 | ) | – | |||||||||||||||||||||
|
Equity
based compensation expense
|
– | – | 4,254 | – | – | – | 4,254 | – | ||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | – | 4 | 4 | 4 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
– | – | – | – | – | – | – |
$
|
24,682 | |||||||||||||||||||||||
|
BALANCE,
December 31, 2006
|
29,597,044 | $ | 296 | $ | 149,802 | $ | 236,763 | $ | (51,596 | ) | $ | 3,346 | $ | 338,611 | ||||||||||||||||||
|
Net
income
|
– | – | – | 2,543 | – | – | 2,543 |
$
|
2,543 | |||||||||||||||||||||||
|
FIN
No. 48 adjustment
|
– | – | – | (330 | ) | – | – | (330 | ) | – | ||||||||||||||||||||||
|
Issuance
of common stock upon exercise or redemption of equity compensation
instruments, including tax benefit of $148
|
231,043 | 2 | 4,395 | – | – | – | 4,397 | – | ||||||||||||||||||||||||
|
Restricted
stock units issued
|
68,247 | 1 | (1 | ) | – | – | – | – | – | |||||||||||||||||||||||
|
Amortization
and forfeitures of restricted stock shares and units
|
(68,247 | ) | (0 | ) | (1,058 | ) | – | – | – | (1,058 | ) | – | ||||||||||||||||||||
|
Common
stock retired
|
(2,357,464 | ) | (24 | ) | (51,572 | ) | – | 51,596 | – | – | – | |||||||||||||||||||||
|
Equity
based compensation expense
|
– | – | 2,766 | – | – | – | 2,766 | – | ||||||||||||||||||||||||
|
Foreign
currency translation adjustment
|
– | – | – | – | – | 5,612 | 5,612 | 5,612 | ||||||||||||||||||||||||
|
Total
comprehensive income
|
– | – | – | – | – | – | – | $ | 8,155 | |||||||||||||||||||||||
|
BALANCE,
December 31, 2007
|
27,470,623 | $ | 275 | $ | 104,332 | $ | 238,976 | $ | – | $ | 8,958 | $ | 352,541 | |||||||||||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
36
Insituform
Technologies, Inc. and Subsidiaries
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands)
|
2007
|
2006
|
2005
|
||||||||||
|
Cash flows from
operating activities:
|
||||||||||||
|
Net
income
|
$ | 2,543 | $ | 24,678 | $ | 13,160 | ||||||
|
Loss
from discontinued operations
|
10,323 | 1,625 | 7,000 | |||||||||
|
Income
from continuing operations
|
12,866 | 26,303 | 20,160 | |||||||||
|
Adjustments
to reconcile to net cash provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization
|
16,252 | 16,620 | 16,372 | |||||||||
|
(Gain)
loss on sale of fixed assets
|
389 | (3,223 | ) | 2,588 | ||||||||
|
Equity-based
compensation expense
|
2,766 | 4,254 | 837 | |||||||||
|
Deferred
income taxes
|
(4,205 | ) | 908 | 3,523 | ||||||||
|
Other
|
(281 | ) | 4,298 | (557 | ) | |||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Restricted
cash
|
(1,569 | ) | 4,653 | (3,883 | ) | |||||||
|
Receivables
net, retainage and costs and estimated earnings in excess of
billings
|
(2,039 | ) | (17,357 | ) | (23,624 | ) | ||||||
|
Inventories
|
2,008 | (1,766 | ) | (2,859 | ) | |||||||
|
Prepaid
expenses and other assets
|
(2,857 | ) | (1,922 | ) | (7,659 | ) | ||||||
|
Accounts
payable and accrued expenses
|
(13,755 | ) | 10,837 | 16,288 | ||||||||
|
Net
cash provided by operating activities of continuing
operations
|
9,575 | 43,605 | 21,186 | |||||||||
|
Net
cash provided by (used in) operating activities of discontinued
operations
|
(1,532 | ) | (3,863 | ) | 2,372 | |||||||
|
Net
cash provided by operating activities
|
8,043 | 39,742 | 23,558 | |||||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Capital
expenditures
|
(14,978 | ) | (19,713 | ) | (24,647 | ) | ||||||
|
Proceeds
from sale of fixed assets
|
2,610 | 7,296 | 1,232 | |||||||||
|
Liquidation
of life insurance cash surrender value
|
– | 1,423 | – | |||||||||
|
Other
investing activities
|
– | – | (557 | ) | ||||||||
|
Net
cash used in investing activities of continuing operations
|
(12,368 | ) | (10,994 | ) | (23,972 | ) | ||||||
|
Net
cash provided by (used in) investing activities of discontinued
operations
|
1,530 | 3,861 | (2,370 | ) | ||||||||
|
Net
cash used in investing activities
|
(10,838 | ) | (7,133 | ) | (26,342 | ) | ||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Proceeds
from issuance of common stock
|
4,247 | 4,122 | 1,243 | |||||||||
|
Additional
tax benefit from stock option exercises recorded in
additional
paid-in capital
|
148 | 772 | – | |||||||||
|
Proceeds
from notes payable
|
1,966 | 2,662 | 6,179 | |||||||||
|
Principal
payments on notes payable
|
(1,959 | ) | (4,101 | ) | (3,650 | ) | ||||||
|
Principal
payments on long-term debt
|
(15,768 | ) | (15,735 | ) | (15,779 | ) | ||||||
|
Changes
in restricted cash related to financing activities
|
– | (106 | ) | (260 | ) | |||||||
|
Net
cash used in financing activities
|
(11,366 | ) | (12,386 | ) | (12,267 | ) | ||||||
|
Effect
of exchange rate changes on cash
|
(3,269 | ) | (899 | ) | (1,126 | ) | ||||||
|
Net
(decrease) increase in cash and cash equivalents for the
period
|
(17,430 | ) | 19,324 | (16,177 | ) | |||||||
|
Cash
and cash equivalents, beginning of year
|
96,393 | 77,069 | 93,246 | |||||||||
|
Cash
and cash equivalents, end of year
|
$ | 78,963 | $ | 96,393 | $ | 77,069 | ||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash paid
for:
|
||||||||||||
|
Interest
|
$ | 5,037 | $ | 6,402 | $ | 7,759 | ||||||
|
Income
taxes paid (refunded), net
|
6,389 | 7,637 | (5,218 | ) | ||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
37
Insituform
Technologies, Inc. and Subsidiaries
1. DESCRIPTION
OF BUSINESS
Insituform
Technologies, Inc. (a Delaware corporation) (the “Company”) is a leading
worldwide provider of proprietary technologies and services for rehabilitating
sewer, water and other underground piping systems. The Company’s primary
technology is the Insituform® process, a proprietary cured-in-place pipeline
rehabilitation process (the “Insituform® CIPP Process”), including certain
processes tailored for the rehabilitation of small-diameter and of large
diameter sewer pipelines. The Company also has methods of rehabilitating water
infrastructure, including using high-density polyethylene liners for
rehabilitating transmission and distribution water mains, using
polyester-reinforced polyethylene lining systems for the rehabilitation of
distribution water mains and employing a robotic method for reinstating potable
water service connections from inside a main. The Company’s Tite Liner® process
is a proprietary method of lining new and existing pipe with a corrosion and
abrasion resistant polyethylene pipe.
2. SUMMARY
OF ACCOUNTING POLICIES
Principles of
Consolidation
The
consolidated financial statements include the accounts of the Company, its
wholly-owned subsidiaries and its majority-owned subsidiaries, the most
significant of which is a 75%-owned United Kingdom subsidiary, Insituform
Linings Public Company Limited. For contractual joint ventures, the Company
recognizes revenue, costs and profits on its portion of the contract using
percentage-of-completion accounting. All significant intercompany transactions
and balances have been eliminated. Investments in entities in which the Company
does not have significant control nor meet the characteristics of a variable
interest entity, and for which the Company has 20% to 50% ownership are
accounted for by the equity method. We have classified the results of operations
of our tunneling business as discontinued operations for all periods
presented.
Accounting
Estimates
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Equity-Based
Compensation
The
Company records expense for equity-based compensation awards, including stock
appreciation rights, restricted shares of common stock, performance awards,
stock options and stock units based on the fair value recognition provisions
contained in Statement of Financial Standards (“SFAS”) No. FAS 123(R), Share Based Payment (“SFAS
No. 123(R)”). Fair value of stock option awards is determined using an option
pricing model that is based on established principles of financial economic
theory. Fair value of restricted share and deferred stock unit awards is
determined using the Company’s closing stock price on the award date.
Assumptions regarding volatility, expected term, dividend yield and risk-free
rate are required for valuation of stock option awards. Volatility and expected
term assumptions are based on the Company’s historical experience. The risk-free
rate is based on a U.S. Treasury note with a maturity similar to the option
award’s expected term. Discussion of the Company’s implementation of SFAS No.
123(R) is described in Note 8.
Revenues
Revenues
include construction and installation revenues that are recognized using the
percentage-of-completion method of accounting in the ratio of costs incurred to
estimated final costs. Contract costs include all direct material and labor
costs and those indirect costs related to contract performance, such as indirect
labor, supplies, tools and equipment costs. Since the financial reporting of
these contracts depends on estimates, which are assessed continually during the
term of these contracts, recognized revenues and profit are subject to revisions
as the contract progresses to completion. Revisions in profit estimates are
reflected in the period in which the facts that give rise to the revision become
known. When estimates indicate that a loss will be incurred on a contract on
completion, a provision for the expected loss is recorded in the period in which
the loss becomes evident. At December 31, 2007 and 2006, the Company had
provided $0.6 million and $0.2 million for expected losses on contracts.
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.
38
Research and
Development
The
Company expenses research and development costs as incurred. Research and
development costs of $4.2 million, $3.6 million and $2.9 million for the years
ended December 31, 2007, 2006 and 2005, respectively, are included in operating
expenses in the accompanying consolidated statements of income.
Taxation
The
Company provides for estimated income taxes payable or refundable on current
year income tax returns as well as the estimated future tax effects attributable
to temporary differences and carryforwards, based upon enacted tax laws and tax
rates, and in accordance with SFAS No. 109, Accounting for Income Taxes
(“SFAS No. 109”). SFAS No. 109 also requires that a valuation allowance be
recorded against any deferred tax assets that are not likely to be realized in
the future.
Earnings Per
Share
Earnings
per share have been calculated using the following share
information:
|
2007
|
2006
|
2005
|
||||||||||
|
Weighted
average number of common shares used for basic
EPS
|
27,330,835 | 27,043,651 | 26,782,818 | |||||||||
|
Effect
of dilutive stock options, stock appreciation rights,
restricted stock and deferred stock units (Note 8)
|
314,094 | 460,617 | 168,766 | |||||||||
|
Weighted
average number of common shares and dilutive
potential common stock used in diluted EPS
|
27,644,928 | 27,504,268 | 26,951,584 | |||||||||
The
Company excluded 443,085, 210,407 and 656,411 stock options in 2007, 2006 and
2005, 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.
Classification of Current
Assets and Current Liabilities
The
Company includes in current assets and current liabilities certain amounts
realizable and payable under construction contracts that may extend beyond one
year. The construction periods on projects undertaken by the Company generally
range from less than one month to 24 months.
Cash, Cash Equivalents and
Restricted Cash
The
Company classifies highly liquid investments with original maturities of 90 days
or less as cash equivalents. Recorded book values are reasonable estimates of
fair value for cash and cash equivalents. Restricted cash consists of payments
from certain customers placed in escrow in lieu of retention in case of
potential issues regarding future job performance by the Company or advance
customer payments in Europe. Restricted cash is similar to retainage and is
therefore classified as a current asset, consistent with the Company’s policy on
retainage.
Retainage
Many of
the contracts under which the Company performs work contain retainage
provisions. Retainage refers to that portion of revenue earned by the Company
but held for payment by the customer pending satisfactory completion of the
project. Unless reserved, the Company assumes that all amounts retained by
customers under such provisions are fully collectible. Retainage on active
contracts is classified as a current asset regardless of the term of the
contract. Retainage is generally collected within one year of the completion of
a contract, although collection can take up to two years in Europe. There was no
retainage due after one year at December 31, 2007 and 2006.
Allowance for Doubtful
Accounts
Management
makes estimates of the uncollectibility of accounts receivable and retainage.
The Company records an allowance based on specific accounts to reduce
receivables, including retainage, to the amount that is expected to be
collected. The specific allowances are reevaluated and adjusted as additional
information is received. After all reasonable attempts to collect the receivable
or retainage have been explored, the account is written off against the
allowance.
39
Inventories
Inventories
are stated at the lower of cost (first-in, first-out) or market. Actual cost is
used to value raw materials and supplies. Standard cost, which approximates
actual cost, is used to value work-in-process, finished goods and construction
materials. Standard cost includes direct labor, raw materials and manufacturing
overhead based on normal capacity.
Long-Lived
Assets
Property,
plant and equipment, goodwill and other identified intangibles (primarily
patents, trademarks, licenses and non-compete agreements) are recorded at cost
and, except for goodwill, are amortized on a straight-line basis over their
estimated useful lives. Changes in circumstances such as technological advances,
changes to the Company’s business model or changes in the Company’s capital
strategy can result in the actual useful lives differing from our estimates. If
the Company determines that the useful life of its property, plant and equipment
or our identified intangible assets should be changed, the Company would
depreciate or amortize the net book value in excess of the salvage value over
its revised remaining useful life, thereby increasing or decreasing depreciation
or amortization expense.
Long-lived
assets, including property, plant and equipment, and other intangibles, are
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Such impairment
tests are based on a comparison of undiscounted cash flows to the recorded value
of the asset. The estimate of cash flow is based upon, among other things,
assumptions about expected future operating performance. The Company’s estimates
of undiscounted cash flow may differ from actual cash flow due to, among other
things, technological changes, economic conditions, changes to its business
model or changes in its operating performance. If the sum of the undiscounted
cash flows (excluding interest) is less than the carrying value, the Company
recognizes an impairment loss, measured as the amount by which the carrying
value exceeds the fair value of the asset. The Company did not identify any
long-lived assets of its continuing operations as being impaired during 2007,
2006 and 2005.
Goodwill
Under
SFAS No. 142, Goodwill and
Other Intangible Assets (“SFAS No. 142”), the Company assesses
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. The Company performs its annual impairment tests for goodwill in
the fourth quarter. In accordance with the provisions of SFAS No. 142, the
Company calculates the fair value of its reporting units and compares such fair
value to the carrying value of the reporting unit to determine if there is any
indication of goodwill impairment. The Company’s reporting units consist of
North American rehabilitation, European rehabilitation and Tite Liner. To
calculate reporting unit fair value, the Company utilizes 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 the Company’s 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. The Company did
not identify any goodwill of its continuing operations as being impaired based
on management’s impairment analyses performed during 2007, 2006 and 2005. See
Note 5 regarding acquired intangible assets and goodwill. See Note 3 regarding
goodwill related to discontinued operations.
Foreign Currency
Translation
Results
of operations for foreign entities are translated using the average exchange
rates during the period. Current assets and liabilities are translated to U.S.
dollars using the exchange rates in effect at the balance sheet date, and the
related translation adjustments are reported as a separate component of
stockholders’ equity.
Newly Adopted Accounting
Pronouncements
In
December 2004, the Financial Accounting Standards Board issued Standard No.
123(R), Share-Based
Payment (“SFAS No. 123(R)”). This standard revises the measurement,
valuation and recognition of financial accounting and reporting standards for
equity-based employee compensation plans contained in SFAS No. 123, Accounting for Stock-Based
Compensation (“SFAS No. 123”), and supersedes Accounting Principles Board
Opinion No. 25, Accounting for
Stock Issued to Employees (“APB No. 25”). The new rules require companies
to expense the value of employee stock options and similar equity-based
compensation awards based on fair value recognition provisions determined on the
date of grant. The new standard became effective for the Company on January 1,
2006. The Company’s implementation of this standard is described in Note
8.
40
In July
2006, the Financial Accounting Standards Board issued Financial Accounting
Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN No. 48”), which describes a comprehensive model for the
measurement, recognition, presentation and disclosure of uncertain tax positions
in the financial statements. Under the interpretation, the financial statements
are to reflect expected future tax consequences of such positions presuming the
tax authorities’ full knowledge of the position and all relevant facts, but
without considering time values. The new standard became effective for the
Company on January 1, 2007. The Company’s implementation of this standard is
described in Note 11.
Accounting Pronouncements
Not Yet Adopted
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS No. 157”), which defines fair value, establishes a framework for
consistently measuring fair value under GAAP, and expands disclosures about fair
value measurements. SFAS No. 157 will be effective for the Company
beginning January 1, 2008, and the provisions of SFAS No. 157
will be applied prospectively as of that date. Management does not believe that
adoption of this statement will have a material impact on the Company’s
consolidated financial position or results of operations.
In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement
No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to
choose to measure eligible items at fair value at specified election dates and
report unrealized gains and losses on items for which the fair value option has
been elected in earnings at each subsequent reporting date.
SFAS No. 159 will be effective for the Company beginning
January 1, 2008. Management does not believe that adoption of this
statement will have a material impact on the Company’s consolidated financial
position or results of operations.
In
December 2007, the FASB issued SFAS No. 141R, Business Combinations (“SFAS
No. 141(R)”) which replaces SFAS No. 141, Business Combinations, and
requires the acquirer of a business to recognize and measure the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree at fair value. SFAS No. 141(R) also requires transaction costs
related to the business combination to be expensed as incurred. SFAS No. 141(R)
is effective for business combinations for which the acquisition date is on or
after fiscal years beginning after December 15, 2008.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements (“SFAS No. 160”). This Statement amends
ARB No. 51, Consolidated
Financial Statements, to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS No. 160 is effective for fiscal years beginning after December
15, 2008. We are currently evaluating the effect that the adoption of SFAS No.
160 will have on our consolidated financial position, results of operations and
cash flows; however the Company does have certain noncontrolling interests in
consolidated subsidiaries. If SFAS No. 160 had been applied as of December 31,
2007, the $2.7 million reported as minority interest in the liabilities section
on our consolidated balance sheet would have been reported as $2.7 million of
noncontrolling interest in subsidiaries in the equity section of our
consolidated balance sheet.
3. DISCONTINUED
OPERATIONS
On March
29, 2007, the Company announced plans to exit its tunneling business in an
effort to better align its operations with its long-term strategic initiatives.
The Company has classified the results of operations of its tunneling business
as discontinued operations for all periods presented. At December 31, 2007,
substantially all existing tunneling business activity had been
completed.
During
2007, the Company recorded a total of $5.9 million (pre-tax) related to these
activities, including expense for $3.8 million (pre-tax) associated with lease
terminations and buyouts, $1.9 million (pre-tax) for employee termination
benefits and retention incentives and $0.2 million related to debt financing
fees paid on March 28, 2007 in connection with certain amendments to the
Company’s Senior Notes and credit facility relating to the closure of the
tunneling business. The Company also incurred impairment charges for goodwill
and other intangible assets of $9.0 million in the first quarter of 2007. These
impairment charges occurred as a result of a thorough review of the fair value
of assets and future cash flows to be generated by the business. This review
concluded that insufficient fair value existed to support the value of the
goodwill and other intangible assets recorded
on the
balance sheet.
In
addition, in 2007, the Company recorded charges totaling $3.0 million (pre-tax)
for equipment and other assets. These charges related to assets that, at the
date of the announcement, were not being utilized in the business. The
impairment was calculated by subtracting current book values from estimated fair
values of each of the idle assets. Fair values were determined using data from
recent sales of similar assets and other market information. The Company
believes the fair value of the remaining fixed assets exceeded the carrying
value as of December 31, 2007.
41
Operating
results for discontinued operations are summarized as follows for the years
ended December 31 (in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ | 62,062 | $ | 69,296 | $ | 111,687 | ||||||
|
Gross
profit (loss)
|
3,386 | (1,049 | ) | (4,185 | ) | |||||||
|
Operating
expenses
|
2,479 | 3,803 | 7,617 | |||||||||
|
Closure
charges of tunneling business
|
17,917 | – | – | |||||||||
|
Operating
loss
|
(17,010 | ) | (4,852 | ) | (11,802 | ) | ||||||
|
Loss
before tax benefits
|
(15,298 | ) | (2,394 | ) | (11,725 | ) | ||||||
|
Tax
benefits
|
(4,975 | ) | (769 | ) | (4,725 | ) | ||||||
|
Net
loss
|
(10,323 | ) | 1,625 | (7,000 | ) | |||||||
Balance
sheet data for discontinued operations was as follows at December 31 (in
thousands):
|
2007
|
2006
|
|||||||
|
Receivables,
net
|
$ | 9,001 | $ | 7,669 | ||||
|
Retainage
|
9,122 | 9,684 | ||||||
|
Costs
and estimated earnings in excess of billings
|
9,063 | 10,087 | ||||||
|
Property,
plant and equipment, less accumulated depreciation
|
6,434 | 14,021 | ||||||
|
Goodwill
|
– | 8,920 | ||||||
|
Total
assets
|
40,660 | 53,660 | ||||||
|
Billings
in excess of costs and estimated earnings
|
2,768 | 2,860 | ||||||
|
Total
liabilities
|
15,783 | 17,899 | ||||||
4. SUPPLEMENTAL
BALANCE SHEET INFORMATION
Allowance for Doubtful
Accounts
Activity
in the allowance for doubtful accounts is summarized as follows for the years
ended December 31 (in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Balance,
at beginning of year
|
$ | 2,600 | $ | 2,718 | $ | 4,031 | ||||||
|
Charged
to (reversed from) expense
|
110 | 180 | (24 | ) | ||||||||
|
Write-offs
and adjustments
|
(292 | ) | (298 | ) | (1,289 | ) | ||||||
|
Balance,
at end of year
|
$ | 2,418 | $ | 2,600 | $ | 2,718 | ||||||
Costs and Estimated Earnings
on Uncompleted Contracts
Costs and
estimated earnings on uncompleted contracts consisted of the following at
December 31 (in thousands):
|
2007
|
2006
|
|||||||
|
Costs
incurred on uncompleted contracts
|
$ | 399,301 | $ | 270,493 | ||||
|
Estimated
earnings to date
|
38,914 | 57,318 | ||||||
|
Subtotal
|
438,215 | 327,811 | ||||||
|
Less
– Billings to date
|
(406,227 | ) | (305,897 | ) | ||||
|
Total
|
$ | 31,988 | $ | 21,914 | ||||
|
Included
in the accompanying balance sheets:
|
||||||||
|
Costs
and estimated earnings in excess of billings
|
$ | 40,590 | $ | 31,425 | ||||
|
Billings
in excess of costs and estimated earnings
|
(8,602 | ) | (9,511 | ) | ||||
|
Total
|
$ | 31,988 | $ | 21,914 | ||||
Costs and
estimated earnings in excess of billings represent work performed that could not
be billed either due to contract stipulations or lacking required contractual
documentation. Substantially all unbilled amounts are expected to be billed and
collected within one year.
42
Inventories
Inventories
are summarized as follows at December 31 (in thousands):
|
2007
|
2006
|
|||||||
|
Raw
materials and supplies
|
$ | 3,512 | $ | 3,072 | ||||
|
Work-in-process
|
5,020 | 3,897 | ||||||
|
Finished
products
|
1,150 | 2,210 | ||||||
|
Construction
materials
|
8,107 | 8,486 | ||||||
|
Total
|
$ | 17,789 | $ | 17,665 | ||||
Property, Plant and
Equipment
Property,
plant and equipment consisted of the following at December 31 (in
thousands):
|
Estimated
Useful Lives (Years)
|
2007
|
2006
|
||||||||||
|
Land
and land improvements
|
$ | 8,425 | $ | 8,171 | ||||||||
|
Buildings
and improvements
|
5 –
40
|
30,439 | 27,285 | |||||||||
|
Machinery
and equipment
|
4 –
10
|
84,754 | 84,823 | |||||||||
|
Furniture
and fixtures
|
3 –
10
|
10,750 | 8,301 | |||||||||
|
Autos
and trucks
|
3 –
10
|
35,915 | 39,146 | |||||||||
|
Construction
in progress
|
5,793 | 9,539 | ||||||||||
|
Subtotal
|
176,076 | 177,265 | ||||||||||
|
Less
– Accumulated depreciation
|
(102,708 | ) | (100,833 | ) | ||||||||
|
Total
|
$ | 73,368 | $ | 76,432 | ||||||||
Depreciation
expense was $16.0 million, $15.3 million and $14.9 million for the years ended
December 31, 2007, 2006 and 2005, respectively.
Other
Assets
Other
assets are summarized as follows at December 31 (in thousands):
|
2007
|
2006
|
|||||||
|
Investment
in affiliates
|
$ | 8,919 | $ | 8,258 | ||||
|
License
agreements
|
1,918 | 2,081 | ||||||
|
Customer
relationships
|
1,285 | 1,406 | ||||||
|
Patents
and trademarks
|
4,329 | 2,765 | ||||||
|
Deferred
income tax assets, net
|
4,542 | – | ||||||
|
Notes
receivable from affiliated companies
|
1,551 | – | ||||||
|
Non-current
tax recoverable
|
2,352 | – | ||||||
|
Other
|
1,636 | 832 | ||||||
|
Total
|
$ | 26,532 | $ | 15,342 | ||||
43
Accounts Payable and Accrued
Expenses
Accounts
payable and accrued expenses consisted of the following at December 31 (in
thousands):
|
2007
|
2006
|
|||||||
|
Accounts
payable – trade
|
$ | 50,524 | $ | 56,683 | ||||
|
Estimated
casualty and healthcare liabilities
|
18,994 | 20,175 | ||||||
|
Job
costs
|
13,277 | 12,777 | ||||||
|
Compensation
and bonus accruals
|
3,711 | 5,125 | ||||||
|
Interest
|
791 | 1,314 | ||||||
|
Job
loss reserves
|
595 | 197 | ||||||
|
Other
|
43 | 50 | ||||||
|
Total
|
$ | 87,935 | $ | 96,321 | ||||
Casualty Insurance and
Healthcare Liabilities
The
Company obtains actuarial estimates of its liabilities on a quarterly basis and
adjusts its reserves accordingly. Estimated casualty insurance and healthcare
benefits liabilities are summarized as follows at December 31 (in
thousands):
|
2007
|
2006
|
|||||||
|
Casualty
insurance
|
$ | 17,461 | $ | 18,370 | ||||
|
Healthcare
benefits
|
1,533 | 1,805 | ||||||
|
Total
|
$ | 18,994 | $ | 20,175 | ||||
5. ACQUIRED
INTANGIBLE ASSETS AND GOODWILL
In
accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible
Assets, the Company performed annual impairment tests for goodwill in the
fourth quarter of 2007 and 2006. Management retained an independent party to
perform a valuation of the Company’s reporting units, which consist of North
American rehabilitation, European rehabilitation and Tite Liner, and determined
that no impairment of goodwill existed.
Changes
in the carrying amount of goodwill for the year ended December 31, 2007 were as
follows (in thousands):
|
Rehabilitation
|
||||
|
Balance
as of December 31, 2006
|
$ | 122,620 | ||
|
Foreign
currency adjustment
|
(60 | ) | ||
|
Balance
as of December 31, 2007
|
$ | 122,560 | ||
|
|
Amortized
intangible assets were as follows (in
thousands):
|
|
As
of December 31, 2007
|
As
of December 31, 2006
|
|||||||||||||||||||||||||||
|
Weighted
Average Useful Lives (Years)
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||||||||||||||||
|
License
agreements
|
23
|
$ | 3,894 | $ | (1,976 | ) | $ | 1,918 | $ | 3,894 | $ | (1,813 | ) | $ | 2,081 | |||||||||||||
|
Customer
relationships
|
12
|
1,797 | (512 | ) | 1,285 | 1,797 | (391 | ) | 1,406 | |||||||||||||||||||
|
Patents
and trademarks
|
15
|
17,942 | (13,613 | ) | 4,329 | 16,048 | (13,283 | ) | 2,765 | |||||||||||||||||||
|
Total
|
$ | 23,633 | $ | (16,101 | ) | $ | 7,532 | $ | 21,739 | $ | (15,487 | ) | $ | 6,252 | ||||||||||||||
44
|
2007
|
2006
|
|||||||
|
For
the year ended December 31:
|
||||||||
|
Aggregate
amortization expense:
|
$ | 265 | $ | 707 | ||||
|
Estimated
amortization expense:
|
||||||||
|
For
year ending December 31, 2008
|
$ | 852 | ||||||
|
For
year ending December 31, 2009
|
852 | |||||||
|
For
year ending December 31, 2010
|
787 | |||||||
|
For
year ending December 31, 2011
|
740 | |||||||
|
For
year ending December 31, 2012
|
483 | |||||||
6. LONG-TERM
DEBT AND CREDIT FACILITY
Long-term
debt, line of credit and notes payable consisted of the following at December 31
(in thousands):
|
2007
|
2006
|
|||||||
|
8.88%
Senior Notes, Series A, payable in $15,715 annual
installments
beginning
February 2001 through 2007, with interest payable
semiannually
|
$ | – | $ | 15,710 | ||||
|
6.54%
Senior Notes, Series 2003-A, due April 24, 2013
|
65,000 | 65,000 | ||||||
|
Other
notes with interest rates from 5.0% to 10.5%
|
1,097 | 1,150 | ||||||
|
Subtotal
|
66,097 | 81,860 | ||||||
|
Less
– Current maturities and notes payable
|
(1,097 | ) | (16,814 | ) | ||||
|
Total
|
$ | 65,000 | $ | 65,046 | ||||
Principal
payments required to be made for each of the next five years and thereafter are
summarized as follows (in thousands):
|
Year
|
Amount
|
|||
|
2008
|
$ | 1,097 | ||
|
2009
|
– | |||
|
2010
|
– | |||
|
2011
|
– | |||
|
2012
|
– | |||
|
Thereafter
|
65,000 | |||
|
Total
|
$ | 66,097 | ||
At
December 31, 2007 and 2006, the estimated fair value of the Company’s long-term
debt was approximately $63.5 million and $74.4 million, respectively. Fair value
was estimated using market rates for debt of similar risk and
maturity.
Senior
Notes
On March
28, 2007, the Company amended its $65.0 million Senior Notes, Series 2003-A, due
April 24, 2013, to include in the definition of EBITDA all non-recurring charges
taken during the year ended December 31, 2007 relating to the Company’s exit
from the tunneling operation to the extent deducted in determining consolidated
net income for such period, subject to a maximum amount of $34.2 million. In
connection with the amendment, the Company paid the noteholders an amendment fee
of 0.05% of the outstanding principal balance of Senior Notes, or $32,500.
Through December 31, 2007, $17.9 million of non-recurring exit charges were
recorded.
In
February 2007, the Company made the final scheduled payment of $15.7 million on
its Senior Notes, Series A, due February 14, 2007.
Credit
Facility
At
December 31, 2007, the Company had $14.6 million in letters of credit issued and
outstanding under a credit facility with Bank of America, $14.5 million of which
was collateral for the benefit of certain of the Company’s insurance carriers
and $0.1 million was collateral for work performance. The $35.0 million credit
facility allows the Company to borrow under a line of credit and/or through
standby letters of credit. There were no other outstanding borrowings under the
line of credit facility at December 31, 2007, resulting in $20.4 million in
available borrowing capacity under the line of credit facility as of that
date.
45
The
credit facility matures April 30, 2008. We anticipate extending the credit
facility for another 12 months upon maturity at similar terms. The interest rate
on any borrowings under the credit facility equals LIBOR plus a spread determined by the consolidated
leverage ratio on our Senior Notes, Series 2003-A.
During
2007, there was financing of certain annual insurance premiums in the amount of
$2.6 million, of which $1.1 million remained outstanding at December 31, 2007.
These notes will be repaid in full during 2008.
On March
28, 2007, the Company amended its $35.0 million credit facility with Bank of
America, N.A., to incorporate by reference certain amendments to its Senior
Notes, Series 2003-A, due April 24, 2013, described above. In connection with
the amendment, the Company paid Bank of America, N.A., an amendment fee of 0.05%
of the borrowing capacity of the credit facility, or $17,500.
At
December 31, 2007 and 2006, the Company had no borrowings on the credit
facility.
Debt
Covenants
At
December 31, 2007, the Company was in compliance with all of its debt covenants
as required under the Senior Notes and credit facility. The Company believes it
has adequate resources to fund future cash requirements and debt repayments for
at least the next twelve months with cash generated from operations, existing
cash balances, additional short- and long-term borrowing and the sale of
assets.
Under the
terms of the Senior Notes, Series 2003-A, prepayment could cause the Company to
incur a “make-whole” payment to the holder of the notes.
7. STOCKHOLDERS’
EQUITY
|
|
Equity Compensation
Plans
|
The 2006
Employee Equity Incentive Plan (“Employee Plan”) provides for equity-based
compensation awards, including stock appreciation rights, restricted shares of
common stock, performance awards, stock options and stock units. There are
2,000,000 shares of the Company’s common stock registered for issuance under the
Employee Plan. The Employee Plan is administered by the compensation committee
of the board of directors, which determines eligibility, timing, pricing, amount
and other terms or conditions of awards. At December 31, 2007, there were
144,417 options outstanding and 47,789 unvested shares of restricted stock units
outstanding under the Employee Plan.
The
Employee Plan replaces the 2001 Employee Equity Incentive Plan, and contains
substantially the same provisions as the former plan. At December 31, 2007,
there were 491,465 options outstanding, 54,300 unvested shares of restricted
stock and 4,182 deferred stock units outstanding under the 2001 Employee Equity
Incentive Plan.
The 2006
Non-Employee Director Equity Incentive Plan (“Director Plan”) provides for
equity-based compensation awards, including non-qualified stock options and
stock units. There are 200,000 shares of the Company’s common stock registered
for issuance under the Director Plan. The board of directors administers the
Director Plan and has the authority to establish, amend and rescind any rules
and regulations related to the Director Plan. At December 31, 2007, there were
61,291 deferred stock units outstanding under the Director Plan.
The
Director Plan replaces the 2001 Non-Employee Director Equity Incentive Plan, and
contains substantially the same provisions as the former plan. At December 31,
2007, there were 45,000 options and 89,625 deferred stock units outstanding
under the 2001 Non-Employee Director Equity Incentive Plan.
At
December 31, 2007, there were 160,105 options outstanding under the 1992
Employee Stock Option Plan and the 1992 Director Stock Option Plan.
Activity
and related expense associated with these plans are described in Note
8.
Shareholders’ Rights
Plan
In
February 2002, the Company’s board of directors adopted a Shareholders’ Rights
Plan. Pursuant to the Shareholders’ Rights Plan, the board of directors declared
a dividend distribution of one preferred stock purchase right for each
outstanding share of the Company’s common stock, payable to the Company’s
stockholders of record as of March 13, 2002. Each right, when exercisable,
entitles the holder to purchase from the Company one one-hundredth of a share of
a new series of voting preferred stock, designated as Series A Junior
Participating Preferred Stock, $0.10 par value, at an exercise price of $116.00
per one one-hundredth of a share.
46
The
rights will trade in tandem with the common stock until 10 days after a
“distribution event” (i.e., the announcement of an intention to acquire or the
actual acquisition of 20% or more of the outstanding shares of common stock), at
which time the rights would become exercisable. Upon exercise, the holders of
the rights (other than the person who triggered the distribution event) will be
able to purchase for the exercise price, shares of common stock (or the common
stock of the entity which acquires the company) having the then market value of
two times the aggregate exercise price of the rights. The rights expire on March
12, 2012, unless redeemed, exchanged or otherwise terminated at an earlier
date.
Treasury
Stock
On
January 24, 2007, the Company’s Board of Directors approved the retirement of
the Company’s treasury stock. Consequently, the Company’s 2,357,464 shares of
treasury stock were retired on March 20, 2007, and the number of issued shares
was reduced accordingly. The effects on stockholders’ equity included a
reduction in common stock by the par value of the shares, and a reduction in
additional paid-in capital.
8. EQUITY-BASED
COMPENSATION
On
January 1, 2006, the Company adopted SFAS No. 123(R). This standard revised the
measurement, valuation and recognition of financial accounting and reporting
standards for equity-based compensation plans contained in SFAS No. 123, and
supersedes APB No. 25.
The new standard requires companies to expense the value of employee
stock options and similar equity-based compensation awards based on fair value
recognition provisions determined on the grant date.
The
Company adopted SFAS No. 123(R) using the modified prospective transition
method, which requires the application of the accounting standard on January 1,
2006, the effective date of the standard for the Company. In accordance with the
modified prospective transition method, the Company’s consolidated financial
statements for prior periods have not been restated to reflect, and do not
include, the impact of SFAS No. 123(R). The Company will continue to include
tabular, pro forma disclosures in accordance with SFAS No. 148, Accounting for Stock Based
Compensation – Transition and Disclosure, for all periods prior to
January 1, 2006. Beginning in 2007, the Company changed from using the
Black-Scholes option-pricing model to the binomial option-pricing model for
valuation purposes to more accurately reflect the features of the stock options
granted.
Restricted Stock
Shares
Restricted
shares of the Company’s common stock are awarded from time to time to executive
officers and certain key employees of the Company subject to a three-year
service restriction, and may not be sold or transferred during the restricted
period. Restricted stock compensation is recorded based on the fair value of the
restricted stock shares on the award date, which is equal to the Company’s stock
price, and charged to expense ratably through the restriction period.
Forfeitures of unvested restricted stock cause the reversal of all previous
expense recorded as a reduction of current period expense. No restricted stock
shares were granted in 2007.
The
following table summarizes information about restricted stock activity during
the years ended December 31, 2007, 2006 and 2005:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Restricted
Stock
Shares
|
Weighted
Average
Award
Date
Fair
Value
|
Restricted
Stock
Shares
|
Weighted
Average
Award
Date
Fair
Value
|
Restricted
Stock
Shares
|
Weighted
Average
Award
Date
Fair
Value
|
|||||||||||||||||||
|
Outstanding,
beginning of period
|
131,500 | $ | 17.73 | 83,900 | $ | 16.64 | 73,600 | $ | 15.53 | |||||||||||||||
|
Awarded
|
– | – | 50,800 | 19.41 | 55,000 | 14.65 | ||||||||||||||||||
|
Vested
|
(61,022 | ) | 18.15 | (1,700 | ) | 15.72 | (2,917 | ) | 15.61 | |||||||||||||||
|
Forfeited
|
(16,178 | ) | 18.34 | (1,500 | ) | 15.50 | (41,783 | ) | 15.97 | |||||||||||||||
|
Outstanding,
end of period
|
54,300 | $ | 17.09 | 131,500 | $ | 17.73 | 83,900 | $ | 16.64 | |||||||||||||||
47
Expense
associated with awards of restricted stock shares is presented below (in
thousands):
|
For
the Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Restricted
stock share expense
|
$ | 617 | $ | 796 | $ | 485 | ||||||
|
Forfeitures
|
(14 | ) | (15 | ) | (187 | ) | ||||||
|
Restricted
stock share expense, net
|
$ | 603 | $ | 781 | $ | 298 | ||||||
Unrecognized
pre-tax expense of $0.2 million related to restricted stock share awards is
expected to be recognized over the weighted average remaining service period of
0.7 years for awards outstanding at December 31, 2007.
|
|
Restricted Stock
Units
|
In 2007,
restricted stock units were awarded to executive officers and certain key
employees of the Company. The restricted stock units generally will vest fully
on the third anniversary date of the award if the recipient’s employment with
the Company has not terminated on or prior to that date. Restricted stock unit
compensation is recorded based on the fair value of the restricted stock units
on the grant date, which is equal to the Company’s stock price, and charged to
expense ratably through the restriction period. Forfeitures of unvested
restricted stock units cause the reversal of all previous expense recorded as a
reduction of current period expense.
The
following table summarizes information about restricted stock unit activity
during the year ended December 31, 2007:
|
Restricted
Stock
Units
|
Weighted
Average Award Date
Fair
Value
|
|||||||
|
Outstanding
at December 31, 2006
|
– | – | ||||||
|
Awarded
|
68,247 | $ | 22.96 | |||||
|
Shares
distributed
|
– | – | ||||||
|
Forfeited
|
(20,458 | ) | 25.60 | |||||
|
Outstanding
at December 31, 2007
|
47,789 | $ | 21.10 | |||||
Expense
associated with awards of restricted stock units for the year ended December 31,
2007 (no restricted stock units were awarded prior to 2007) is presented below
(in thousands):
|
Restricted
stock unit expense
|
$ | 285 | ||
|
Forfeitures
|
(7 | ) | ||
|
Restricted
stock unit expense, net
|
$ | 278 |
Unrecognized
pre-tax expense of $0.8 million related to restricted stock unit awards is
expected to be recognized over the weighted average remaining service period of
2.2 years for awards outstanding at December 31, 2007.
Deferred Stock
Units
Deferred
stock units generally are awarded to directors of the Company and represent the
Company’s obligation to transfer one share of the Company’s common stock to the
grantee at a future date and generally are fully vested on the date of grant.
The expense related to the issuance of deferred stock units is recorded
according to this vesting schedule.
48
The
following table summarizes information about deferred stock unit activity during
the years ended December 31, 2007, 2006 and 2005:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Deferred
Stock
Units
|
Weighted
Average
Award
Date
Fair
Value
|
Deferred
Stock
Units
|
Weighted
Average
Award
Date
Fair
Value
|
Deferred
Stock
Units
|
Weighted
Average
Award
Date
Fair
Value
|
|||||||||||||||||||
|
Outstanding,
beginning of period
|
93,807 | $ | 18.53 | 78,432 | $ | 16.39 | 58,800 | $ | 16.11 | |||||||||||||||
|
Awarded
|
61,291 | 18.48 | 24,900 | 24.20 | 32,282 | 16.69 | ||||||||||||||||||
|
Shares
distributed
|
– | – | (9,525 | ) | 15.75 | (12,650 | ) | 15.85 | ||||||||||||||||
|
Outstanding,
end of period
|
155,098 | $ | 18.51 | 93,807 | $ | 18.53 | 78,432 | $ | 16.39 | |||||||||||||||
|
|
Expense
associated with awards of deferred stock units is presented below (in
thousands):
|
|
For
the Years Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Deferred
stock unit expense
|
$ | 608 | $ | 603 | $ | 539 | ||||||
Stock
Options
Stock
options on the Company’s common stock are awarded from time to time to executive
officers and certain key employees of the Company. Stock options granted
generally have a term of seven to ten years and an exercise price equal to the
market value of the underlying common stock on the date of grant. Beginning in
2007, the Company changed from using the Black-Scholes option-pricing model to
the binomial option-pricing model for valuation purposes to more accurately
reflect the features of stock options granted. The fair value of stock options
awarded during 2007 and 2006 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 award’s expected term.
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Range
|
Weighted
Average
|
Range
|
Weighted
Average
|
Range
|
Weighted
Average
|
|||||||||||||||||||
|
Volatility
|
44.6% – 46.4 | % | 45.1 | % | 41.7% – 45.6 | % | 41.9 | % | 44.0 | % | 44.0 | % | ||||||||||||
|
Expected
term (years)
|
4.5 – 4.8 | 4.7 | 4.5 – 4.8 | 4.8 | 5.6 | 5.6 | ||||||||||||||||||
|
Dividend
yield
|
0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % | ||||||||||||
|
Risk-free
rate
|
4.0% – 4.6 | % | 4.5 | % | 4.3% – 5.0 | % | 4.3 | % | 4.0 | % | 4.0 | % | ||||||||||||
|
Turnover
|
2.1% – 2.9 | % | 2.8 | % | 2.3% – 2.9 | % | 2.3 | % | 3.3 | % | 3.3 | % | ||||||||||||
A summary
of stock option activity during the years ended December 31, 2007 and
2006:
|
2007
|
2006
|
|||||||||||||||
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average
Exercise
Price
|
|||||||||||||
|
Outstanding
at January 1
|
1,298,392 | $ | 19.85 | 1,381,476 | $ | 19.53 | ||||||||||
|
Granted
|
417,604 | 23.77 | 330,500 | 19.74 | ||||||||||||
|
Exercised
|
(231,043 | ) | 14.34 | (243,370 | ) | 16.88 | ||||||||||
|
Forfeited/Expired
|
(574,966 | ) | 22.59 | (170,214 | ) | 21.46 | ||||||||||
|
Outstanding
at December 31
|
909,987 | $ | 21.27 | 1,298,392 | $ | 19.85 | ||||||||||
|
Exercisable
at December 31
|
685,428 | $ | 21.91 | 901,667 | $ | 20.60 | ||||||||||
49
The
following table summarizes the outstanding options at December 31,
2007:
|
|
|
|
|
|
||||||||||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Price
|
Aggregate
Intrinsic
Value
|
Weighted
Average Remaining Contractual Term (Yrs)
|
||||||||||||||
| $ | 10.00 - $15.00 | 187,752 | $ | 14.07 | $ | 136,309 | 3.4 | |||||||||||
| $ | 15.01 - $20.00 | 277,430 | 17.86 | – | 4.9 | |||||||||||||
| $ | 20.01 - $25.00 | 178,732 | 23.92 | – | 4.2 | |||||||||||||
| $ | 25.01 - $30.00 | 266,073 | 28.14 | – | 3.8 | |||||||||||||
|
Total
Outstanding
|
909,987 | $ | 21.27 | $ | 136,309 | 4.1 | ||||||||||||
The
following table summarizes the outstanding options that were exercisable at
December 31, 2007:
|
|
|
|
|
|
|||||||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|
|||||||||||
| $ | 10.00 - $15.00 | 150,783 | $ | 13.94 | $ | 129,226 | |||||||||
| $ | 15.01 - $20.00 | 143,762 | 17.70 | – | |||||||||||
| $ | 20.01 - $25.00 | 176,732 | 23.91 | – | |||||||||||
| $ | 25.01 - $30.00 | 214,151 | 28.70 | – | |||||||||||
|
Total
Exercisable
|
685,428 | $ | 21.91 | $ | 129,226 |
|
|||||||||
The
weighted average remaining contractual term of the outstanding options that were
exercisable at December 31, 2007 was 3.7 years.
The
intrinsic values above are based on the Company’s closing stock price of $14.80
on December 31, 2007. The weighted average grant-date fair value of options
granted was $10.22 and $8.30 during 2007 and 2006, respectively. The Company
collected $4.2 million and $4.1 million from stock option exercises that had a
total intrinsic value of $0.7 million and $2.3 million in 2007 and 2006,
respectively. In 2007 and 2006, the Company recorded a tax benefit from stock
option exercises of $0.1 million and $0.8 million, respectively, in additional
paid-in capital on the consolidated balance sheets and cash flows from financing
activities on the consolidated statements of cash flows. In 2007 and 2006, the
Company recorded expense of $2.0 million and $2.9 million, respectively, related
to stock option awards. Unrecognized pre-tax expense of $0.6 million and $1.1
million related to stock options is expected to be recognized over the weighted
average remaining service period of 1.6 years and 0.9 years for awards
outstanding at December 31, 2007 and 2006, respectively.
At
December 31, 2007, 2,000,000 and 200,000 shares of common stock were
reserved for equity-based compensation awards pursuant to the 2006 Employee
Equity Incentive Plan and the 2006 Non-Employee Director Equity Incentive Plan,
respectively.
Prior Year Equity
Compensation Expense
Prior to
January 1, 2006, the Company applied the recognition and measurement principles
of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for stock options.
The following table illustrates the effect on net income and earnings per share
in the year ended December 31, 2005 had the Company applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock Based
Compensation, to equity-based compensation (in thousands, except
per-share data):
|
Income
from continuing operations, as reported
|
$ | 20,160 | ||
|
Add:
Total equity-based compensation expense included in net income, net of
related tax benefits
|
544 | |||
|
Deduct:
Total equity-based compensation expense determined under fair value method
for all awards, net of related tax effects
|
(2,307 | ) | ||
|
Pro
forma income from continuing operations
|
$ | 18,397 | ||
|
Basis
earnings per share from continuing operations as reported
|
$ | 0.75 | ||
|
Basic
earnings per share from continuing operations pro forma
|
0.69 | |||
|
Diluted
earnings per share from continuing operations as reported
|
$ | 0.75 | ||
|
Diluted
earnings per share from continuing operations pro forma
|
0.68 |
50
In
accordance with SFAS No. 148, Accounting for Stock-Based
Compensation – Transition and Disclosure, the equity-based compensation
expense recorded in the determination of reported net income during the year
ended December 31, 2005 is disclosed in the table above. The pro forma
equity-based compensation expense includes the recorded expense and the expense
related to stock options that was determined using the fair value
method.
9. LITIGATION
SETTLEMENT
In 1990,
the Company initiated proceedings against Cat Contracting, Inc., Michigan Sewer
Construction Company, Inc. and Inliner U.S.A., Inc. (subsequently renamed
FirstLiner USA, Inc.), along with another party, alleging infringement of
certain in-liner Company patents. In August 1999, the United States District
Court in Houston, Texas found that one of the Company’s patents was willfully
infringed and awarded $9.5 million in damages. After subsequent appeals, the
finding of infringement was affirmed, but the award of damages and finding of
willfulness were subject to rehearing. The damages and willfullness hearing was
completed in the third quarter of 2006. In September 2007, the Court issued its
opinion wherein the Court found that the defendants did not willfully infringe
the Company’s patent. The Court asked for a recalculation of damages to include
prejudgment interest. The damages submitted were approximately $9.6
million.
In
October 2007, the Company participated in a mediation with the parties to the
proceedings. In December 2007, the Company reached a settlement in principle,
which would provide the Company $4.5 million in exchange for releases of the
various parties, subject to the finalization of a comprehensive settlement
agreement. The Company received $4.5 million in cash in February 2008 in final
settlement of this matter.
10. OTHER
INCOME (EXPENSE)
Other
income (expense) was comprised of the following for the years ended December 31
(in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Gain
(loss) on sale of fixed assets
|
$ | (389 | ) | $ | 3,223 | $ | (2,588 | ) | ||||
|
Other
|
1,840 | 576 | 1,813 | |||||||||
|
Total
|
$ | 1,451 | $ | 3,799 | $ | (775 | ) | |||||
11. TAXES
ON INCOME (TAX BENEFITS)
Income
(loss) from continuing operations before taxes on income (tax benefits) was as
follows for the years ended December 31 (in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Domestic
|
$ | (4,424 | ) | $ | 14,017 | $ | 12,800 | |||||
|
Foreign
|
17,495 | 23,147 | 15,595 | |||||||||
|
Total
|
$ | 13,071 | $ | 37,164 | $ | 28,395 | ||||||
Provisions
(benefits) for taxes on income (tax benefit) from continuing operations
consisted of the following components for the years ended December 31 (in
thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | (1,348 | ) | $ | 2,589 | $ | 30 | |||||
|
Foreign
|
5,538 | 7,323 | 4,531 | |||||||||
|
State
|
(134 | ) | 1,006 | 829 | ||||||||
|
Subtotal
|
4,056 | 10,918 | 5,390 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
(2,137 | ) | 414 | 3,205 | ||||||||
|
Foreign
|
(1,845 | ) | 364 | 217 | ||||||||
|
State
|
(223 | ) | 130 | 101 | ||||||||
|
Subtotal
|
(4,205 | ) | 908 | 3,523 | ||||||||
|
Total
tax provision (benefit)
|
$ | (149 | ) | $ | 11,826 | $ | 8,913 | |||||
51
Income
tax (benefit) expense differed from the amounts computed by applying the U.S.
federal income tax rate of 35% to income (loss) before income taxes, equity in
income (loss) of joint ventures and minority interests as a result of the
following (in thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Income
taxes at U.S. federal statutory tax rate
|
$ | 4,575 | $ | 13,006 | $ | 9,938 | ||||||
|
Increase
(decrease) in taxes resulting from:
|
||||||||||||
|
State
income taxes, net of federal income tax benefit
|
(235 | ) | 738 | 604 | ||||||||
|
Amortization
of intangibles
|
(635 | ) | (711 | ) | (715 | ) | ||||||
|
Fuels
tax credit
|
(314 | ) | (293 | ) | (322 | ) | ||||||
|
Stock
options
|
307 | 426 | – | |||||||||
|
Changes
in taxes previously accrued
|
(715 | ) | (42 | ) | (58 | ) | ||||||
|
Foreign
tax matters
|
(2,113 | ) | (1,947 | ) | (684 | ) | ||||||
|
Valuation
allowance on net operating loss carryforwards (NOL)
|
(1,150 | ) | 648 | (204 | ) | |||||||
|
Non-deductible
meals and entertainment
|
206 | 187 | 179 | |||||||||
|
Other
matters
|
(75 | ) | (186 | ) | 175 | |||||||
|
Total
tax provision
|
$ | (149 | ) | $ | 11,826 | $ | 8,913 | |||||
|
Effective
tax rate
|
(1.1 | )% | 31.8 | % | 31.9 | % | ||||||
Net
deferred taxes consisted of the following at December 31 (in
thousands):
|
2007
|
2006
|
|||||||
|
Deferred
income tax assets:
|
||||||||
|
Foreign
tax credit carryforwards
|
$ | 1,047 | $ | 491 | ||||
|
Net
operating loss carryforwards
|
7,044 | 6,124 | ||||||
|
Accrued
expenses
|
10,818 | 8,351 | ||||||
|
Other
|
1,849 | 1,468 | ||||||
|
Total
gross deferred income tax assets
|
20,758 | 16,434 | ||||||
|
Less
valuation allowance
|
(3,381 | ) | (4,226 | ) | ||||
|
Net
deferred income tax assets
|
17,377 | 12,208 | ||||||
|
Deferred
income tax liabilities:
|
||||||||
|
Property,
plant and equipment
|
(4,058 | ) | (5,361 | ) | ||||
|
Other
|
(7,113 | ) | (5,315 | ) | ||||
|
Total
deferred income tax liabilities
|
(11,171 | ) | (10,676 | ) | ||||
|
Net
deferred income tax assets
|
$ | 6,206 | $ | 1,532 | ||||
The
Company’s tax assets and liabilities, netted by taxing location, are in the
following captions in the balance sheets (in thousands):
|
2007
|
2006
|
|||||||
|
Current
deferred income tax assets, net
|
$ | 1,664 | $ | 2,690 | ||||
|
Noncurrent
deferred income tax assets (liabilities), net
|
4,542 | (1,158 | ) | |||||
|
Net
deferred income tax assets
|
$ | 6,206 | $ | 1,532 | ||||
The
Company’s deferred tax assets at December 31, 2007 included $7.0 million in
federal, state and foreign net operating loss (“NOL”) carryforwards. These NOLs
include $2.2 million, which if not used will expire between the years 2008 and
2027, and $4.8 million that have no expiration dates. The Company also has
foreign tax credit carryforwards of $1.0 million, which will begin to expire in
2015.
For
financial reporting purposes, a valuation allowance of $3.4 million has been
recognized, to reduce the deferred tax assets related to certain state and
foreign net operating loss carryforwards, for which it is more likely than not
that the related tax benefits will not be realized, due to uncertainties as to
the timing and amounts of future taxable income. The valuation allowance at
December 31, 2006, was $4.2 million relating to the same items described
above.
On
January 1, 2007, the Company adopted the provisions of FIN No. 48, issued by the
FASB. FIN No. 48 prescribes a more-likely-than-not threshold for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN No. 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure of uncertain tax positions in financial statements.
52
Upon the
adoption of FIN No. 48, the Company increased its liability for unrecognized tax
benefits by $2.8 million of which $0.3 million was recorded as a reduction of
the beginning balance of retained earnings A reconciliation of the
beginning and ending balance of unrecognized tax benefits is as follows (in
thousands):
|
Balance
at January 1, 2007
|
$ | 3,506 | ||
|
Additions
for tax positions of prior years
|
553 | |||
|
Lapse
in statute of limitations
|
(729 | ) | ||
|
Foreign
currency translation
|
128 | |||
|
Balance
at December 31, 2007
|
$ | 3,458 |
The total
amount of unrecognized tax benefits, if recognized, that would affect the
effective tax rate is $0.7 million.
The
Company recognizes interest and penalties, if any, accrued related to
unrecognized tax benefits in income tax expense. Upon adoption of FIN No. 48, we
accrued $0.6 million for interest. In addition, during 2007, approximately $0.2
million was accrued for interest.
The
Company believes that it is reasonably possible that the total amount of
unrecognized tax benefits will change in 2008. The Company has certain tax
return years subject to statutes of limitation that will expire within twelve
months. Unless challenged by tax authorities, the expiration of those statutes
of limitation is expected to result in the recognition of uncertain tax
positions in the amount of approximately $0.4 million.
The
Company is subject to taxation in the United States, various states and foreign
jurisdictions. The Company’s tax years for 1999 through 2007 are subject to
examination by the tax authorities. During third quarter 2007, the IRS initiated
an examination of the Company’s Federal income tax return for the calendar year
2005. In addition, a number of state examinations are currently ongoing. With
few exceptions, the Company is no longer subject to U.S. federal, state, local
or foreign examinations by tax authorities for years before 2004.
The
Company provides for U.S. income taxes, net of available foreign tax credits, on
earnings of consolidated international subsidiaries that it plans to remit to
the U.S. The Company does not provide for U.S. income taxes on the remaining
earnings of these subsidiaries, as it expects to reinvest these earnings
overseas or it expects the taxes to be minimal based upon available foreign tax
credits.
12. COMMITMENTS
AND CONTINGENCIES
Leases
The
Company leases a number of its administrative operations facilities under
non-cancellable operating leases expiring at various dates through 2030. In
addition, the Company leases certain construction, automotive and computer
equipment on a multi-year, monthly or daily basis. Rental expense in 2007, 2006
and 2005 was $16.8 million, $18.5 million and $19.4 million,
respectively.
At
December 31, 2007, the future minimum lease payments required under the
non-cancellable operating leases were as follows (in thousands):
|
Year
|
Minimum
Lease Payments
|
|||
|
2008
|
$ | 9,401 | ||
|
2009
|
6,037 | |||
|
2010
|
3,348 | |||
|
2011
|
1,853 | |||
|
2012
|
404 | |||
|
Thereafter
|
1,300 | |||
|
Total
|
$ | 22,343 | ||
53
Litigation
In
December 2003, Environmental Infrastructure Group, L.P. (“EIG”) filed suit in
the District Court of Harris County, Texas, against several defendants,
including Kinsel Industries, Inc. (“Kinsel”), a wholly-owned subsidiary of the
Company, seeking unspecified damages. The suit alleges, among other things, that
Kinsel failed to pay EIG monies due under a subcontractor agreement. In February
2004, Kinsel filed an answer, generally denying all claims, and also filed a
counter-claim against EIG based upon EIG’s failure to perform work required of
it under the subcontract. In June 2004, EIG amended its complaint to add the
Company as an additional defendant and included a claim for lost opportunity
damages. In December 2004, the Company and Kinsel filed third-party petitions
against the City of Pasadena, Texas, on the one hand, and Greystar-EIG, LP, Grey
General Partner, LLC and Environmental Infrastructure Management, LLC
(collectively, the “Greystar Entities”), on the other hand. EIG also amended its
petition to add a fraud claim against Kinsel and the Company and also requested
exemplary damages. The original petition filed by EIG against Kinsel seeks
damages for funds that EIG claims should have been paid to EIG on a wastewater
treatment plant built for the City of Pasadena. Kinsel’s third-party petition
against the City of Pasadena seeks approximately $1.4 million in damages to the
extent EIG’s claims against Kinsel have merit and were appropriately requested.
The third-party petition against the Greystar Entities seeks damages based upon
fraudulent conveyance, alter ego and single business enterprise (the Greystar
Entities are the successors-in-interest to all or substantially all of the
assets of EIG, now believed to be defunct). Following the filing of the
third-party petitions, the City of Pasadena filed a motion to dismiss based upon
lack of jurisdiction claiming the City is protected by sovereign immunity. The
trial court denied the City’s motion and the suit was stayed pending appeal of
the City’s motion to the Court of Appeals in Corpus Christi, Texas. On March 16,
2006, the Texas Court of Appeals affirmed the trial court’s denial of the City’s
motion. The City appealed the matter to the Texas Supreme Court, which reversed
and remanded the case back to the District Court to consider the City’s plea to
jurisdiction in light of a recently enacted Texas statute that waives
governmental immunity. The parties have agreed upon a docket control order
setting the matter for trial in February 2009. The Company believes that the
factual allegations and legal claims made against it and Kinsel are without
merit and intends to vigorously defend them.
On June
3, 2005, the Company filed a lawsuit in the United States District Court in
Memphis, Tennessee against Per Aarsleff A/S, a publicly traded Danish company,
and certain of its subsidiaries and affiliates. Since approximately 1980, Per
Aarsleff and its subsidiaries held licenses for the Insituform® CIPP process in
various countries in Northern and Eastern Europe, Taiwan, Russia and South
Africa. Per Aarsleff also is a 50% partner in the Company’s German joint venture
and a 25% partner in the Company’s manufacturing company in Great Britain. The
Company’s lawsuit seeks, among other things, monetary damages in an unspecified
amount for the breach by Per Aarsleff of its license and implied license
agreements with the Company and for royalties owed by Per Aarsleff under the
license and implied license agreements. On May 12, 2006, the Company amended its
lawsuit in Tennessee to (i) seek damages based upon Per Aarsleff’s continued use
of Company-patented technology in Denmark, Sweden and Finland following
termination of the license agreements, (ii) seek damages based upon Per
Aarsleff’s use of Company trade secrets in connection with the operation of its
Danish manufacturing facility and (iii) seek an injunction against Per
Aarsleff’s continued operation of its manufacturing facility. Per Aarsleff filed
its Answer and Affirmative Defenses to the Company’s Amended Complaint on May
25, 2006. On October 25, 2006, Per Aarsleff filed a two count counterclaim
against the Company seeking to recover royalties payments paid to the Company.
On December 29, 2006, the Company and Per Aarsleff’s 50%-owned Taiwanese
subsidiary (“PIEC”) settled their respective claims against each other in
exchange for PIEC paying the Company $375,000, which amount was paid on December
29, 2006 (settlement of Taiwanese claims only, remainder of lawsuit continues).
Based upon the results of audits performed by the Company at Per Aarsleff’s
facilities in Denmark, Finland, Sweden and Poland, on May 25, 2007 the Company,
with leave granted by the Court, amended it lawsuit in Tennessee to allege that
Per Aarsleff committed fraud in its underreporting as well as misreporting of
installation contract revenues for the years 1999 – 2004. On February 22, 2008,
the Court dismissed the fraud claims against Per Aarsleff and the Company’s
request for punitive damages. In its order, the Court concluded that Delaware
law does not recognize a claim for fraudulent misrepresentation in the context
of a breach of contract action. At December 31, 2007, excluding the effects of
the claims specified in the lawsuit, Per Aarsleff owed the Company approximately
$0.5 million related to royalties due under the various license and implied
license agreements (over and above the Taiwanese settlement amount and the
amounts allegedly underreported or misreported by Per Aarsleff) based upon
royalty reports prepared and submitted by Per Aarsleff. The Company believes
that these receivables are fully collectible at this time. At December 31, 2007,
the Company had not recorded any receivable related to this
lawsuit.
54
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 $2.4 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 has paid
the Company the primary coverage of $1 million, less a $250,000 deductible, in
satisfaction of its obligations under the policy.
The
Company’s excess comprehensive general liability insurance coverage is in an
amount far greater than the costs associated with the liner removal and
re-installation. The Company believes the “Contractor Rework” special
endorsement applies to the excess insurance coverage; it incurred costs in
excess of the primary coverage and it notified its excess carrier of the claim
in 2003. The excess insurance carrier denied coverage in writing without
referencing the “Contractor Rework” special endorsement, and subsequently
indicated that it did not believe that the “Contractor Rework” special
endorsement applied to the excess insurance coverage.
In March
2004, the Company filed a lawsuit in United States District Court in Boston,
Massachusetts against its excess insurance carrier for such carrier’s failure to
acknowledge coverage and to indemnify the Company for the entire loss in excess
of the primary coverage. In March 2005, the Court granted the Company’s partial
motion for summary judgment, concluding that the Company’s policy with its
excess insurance carrier followed form to the Company’s primary insurance
carrier’s policy. On May 25, 2006, the Court entered an order denying a motion
for reconsideration previously filed by the excess insurance carrier, thereby
reaffirming its earlier opinion. In September 2006, the Company filed a motion
for summary judgment as to the issue of whether the primary insurance carrier’s
policy provided coverage for the underlying claim and as to the issue of
damages. The excess insurance carrier also filed a motion for summary judgment
as to the issue of primary coverage. On September 28, 2007, the Court entered an
order that granted the Company’s motion for summary judgment as to liability and
denied the excess insurance carrier’s motion. The Court found that
the excess carrier’s policy followed form to the primary policy and that the
claim was covered under both policies. However, the Court found that
there were factual questions as to the amount of the Company’s
claim. The case was set for a jury trial as to damages on February 4,
2008. The day before trial was to begin, the excess insurance carrier
advised the Court that it would stipulate to a damages award equal to the award
the Company would ask the jury to award, $6,054,899. The Company and
the excess carrier are attempting to negotiate an agreed award of prejudgment
interest. If they cannot reach an agreement, the Court will determine
the amount of the prejudgment interest to be awarded and enter a final judgment
from which the excess insurance carrier is expected to appeal.
During
the second quarter of 2005, the Company, in consultation with outside legal
counsel, determined that the likelihood of recovery from the excess insurance
carrier was probable and that the amount of such recovery was reliably
estimable. An insurance claims expert retained by the Company’s outside legal
counsel reviewed the documentation produced with respect to the claim and, based
on this review, provided the Company with an estimate of the costs that had been
sufficiently documented and substantiated to date. The excess insurance
carrier’s financial viability also was investigated during this period and was
determined to have a strong rating of A+ with the leading insurance industry
rating service. Based on these factors, the favorable court decisions in March
2005 and September 2007, the Company believes that recovery from the excess
insurance carrier is both probable and reliably estimable and has recorded an
insurance claim receivable in connection with this matter.
55
The total
claim receivable was $7.6 million at December 31, 2007 and is composed of
documented remediation costs and pre-judgment interest as outlined in the table
below:
|
Documented
Remediation
Costs
|
Pre-Judgment
Interest
|
Total
|
||||||||||
|
(in
thousands)
|
||||||||||||
|
Claim
recorded June 30, 2005
|
$ | 5,872 | $ | 275 | $ | 6,147 | ||||||
|
Interest
recorded July through December 31, 2005
|
– | 165 | 165 | |||||||||
|
Additional
documented remediation costs recorded in the second
quarter of 2006
|
526 | – | 526 | |||||||||
|
Adjustment
based on current developments(1)
|
(343 | ) | – | (343 | ) | |||||||
|
Interest
recorded in 2006 and 2007
|
– | 1,102 | 1,102 | |||||||||
|
Claim
receivable balance, December 31, 2007
|
$ | 6,055 | $ | 1,542 | $ | 7,597 | ||||||
__________
|
(1)
|
During
the second quarter of 2007, the claim was adjusted down by $0.3 million as
a result of current developments in the matter. Interest was adjusted
accordingly.
|
Department
of Justice Investigation
The
Company has incurred costs in responding to two United States government
subpoenas relating to the investigation of alleged public corruption and bid
rigging in the Birmingham, Alabama metropolitan area during the period from 1997
to 2003. The Company has produced hundreds of thousands of documents in an
effort to fully comply with these subpoenas, which the Company believes were
issued to most, if not all, sewer repair contractors and engineering firms that
had public sewer projects in the Birmingham area. Indictments of public
officials, contractors, engineers and contracting and engineering companies were
announced in February, July and August of 2005, including the indictment of a
former joint venture partner of the Company. A number of those indicted,
including the Company’s former joint venture partner and its principals, have
been convicted or pleaded guilty and have now been sentenced and fined. The
Company has been advised by the government that it is not considered a target of
the investigations at this time. The investigations are ongoing and the Company
may have to continue to incur substantial costs in complying with its
obligations in connection with the investigations. The Company has been fully
cooperative throughout the investigations.
Other
Litigation
The
Company is involved in certain other litigation incidental to the conduct of its
business and affairs. Management, after consultation with legal counsel, does
not believe that the outcome of any such other litigation will have a material
adverse effect on its consolidated financial condition, results of operations or
cash flows.
Retirement
Plans
Substantially
all of the Company’s U.S. employees are eligible to participate in the Company’s
sponsored defined contribution savings plan, which is a qualified plan under the
requirements of Section 401(k) of the Internal Revenue Code. Total Company
contributions to the domestic plan were $1.9 million, $1.8 million and $2.1
million for the years ended December 31, 2007, 2006 and 2005,
respectively.
In
addition, certain foreign subsidiaries maintain various other defined
contribution retirement plans. Company contributions to such plans for the years
ended December 31, 2007, 2006 and 2005 were $1.3 million, $0.9 million and $1.1
million, respectively.
Guarantees
The
Company has entered into several contractual joint ventures in order to develop
joint bids on contracts for its installation business and for tunneling
operations. In these cases, the Company could be required to complete the joint
venture partner’s portion of the contract if the partner were unable to complete
its portion. The Company would be liable for any amounts for which the Company
itself could not complete the work and for which a third party contractor could
not be located to complete the work for the amount awarded in the contract.
While the Company would be liable for additional costs, these costs would be
offset by any related revenues due under that portion of the contract. The
Company has not experienced material adverse results from such arrangements.
Based on these facts, while there can be no assurances, the Company currently
does not anticipate any future material adverse impact on its consolidated
financial position, results of operations or cash flows.
56
The
Company also has many contracts that require the Company to indemnify the other
party against loss from claims of patent or trademark infringement. The Company
also indemnifies its surety against losses from third party claims of
subcontractors. The Company has not experienced material losses under these
provisions and, while there can be no assurances, currently does not anticipate
any future material adverse impact on its consolidated financial position,
results of operations or cash flows.
The
Company regularly reviews its exposure under all its engagements, including
performance guarantees by contractual joint ventures and indemnification of its
surety. As a result of the most recent review, the Company has determined that
the risk of material loss is remote under these arrangements and has not
recorded a liability for these risks at December 31, 2007 on its consolidated
balance sheet.
13. DERIVATIVE
FINANCIAL INSTRUMENTS
From time
to time, the Company may enter into foreign currency forward contracts to fix
exchange rates for net investments in foreign operations. The Company’s currency
forward contracts as of December 31, 2007, relate only to Canadian Dollar, Euro
and Pound Sterling exchange rates. At December 31, 2007, a net deferred loss of
$0.1 million related to these hedges was recorded in accounts payable and
accrued expenses and other comprehensive income on the consolidated balance
sheet. All hedges were effective, and therefore, no gain or loss was recorded in
earnings.
The
following table summarizes the Company’s derivative instrument activity at
December 31, 2007:
|
Weighted
|
||||||||||||
|
Average
|
||||||||||||
|
Remaining
|
Average
|
|||||||||||
|
Notional
|
Maturity
|
Exchange
|
||||||||||
|
Amount
|
in
Months
|
Rate
|
||||||||||
|
Canadian
Dollar
|
$ | 20,000,000 | 4.0 | 1.001 | ||||||||
|
Euro
|
€ | 5,000,000 | 4.0 | 1.426 | ||||||||
|
Pound
Sterling
|
£ | 5,000,000 | 4.0 | 2.033 | ||||||||
14.
SEGMENT AND GEOGRAPHIC INFORMATION
The
Company has two reportable segments: rehabilitation and Tite Liner. The segments
were determined based upon the types of products sold by each segment and each
is regularly reviewed and evaluated separately. The rehabilitation segment
provides trenchless methods of rehabilitating sewers, pipelines and other
conduits using a variety of technologies including the Insituform® CIPP Process
and pipebursting. The Tite Liner segment provides a method of lining new and
existing pipe with a corrosion and abrasion resistant polyethylene pipe. These
operating segments represent strategic business units that offer distinct
products and services and serve different markets.
The
following disaggregated financial results have been prepared using a management
approach, which is consistent with the basis and manner with which management
internally disaggregates financial information for the purpose of assisting in
making internal operating decisions. The Company evaluates performance based on
stand-alone operating income.
Corporate
expenses previously allocated to the Company’s discontinued tunneling business
have been re-allocated to the remaining two segments, rehabilitation and Tite
Liner, for all periods presented. Re-allocated expenses were $3.7 million, $4.5
million and $5.1 million in 2007, 2006 and 2005, respectively. Re-allocated
expenses were allocated proportionally based on previously allocated
expenses.
There
were no customers that accounted for more than 10% of the Company’s revenues
during any year in the three-year period ended December 31, 2007.
57
Financial
information by segment was as follows at December 31 (in
thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues:
|
||||||||||||
|
Rehabilitation
|
$ | 453,964 | $ | 481,220 | $ | 445,072 | ||||||
|
Tite
Liner
|
41,606 | 46,199 | 38,523 | |||||||||
|
Total
revenues
|
$ | 495,570 | $ | 527,419 | $ | 483,595 | ||||||
|
Operating
income:
|
||||||||||||
|
Rehabilitation
|
$ | 4,410 | $ | 27,458 | $ | 29,440 | ||||||
|
Tite
Liner
|
9,120 | 8,853 | 6,105 | |||||||||
|
Total
operating income
|
$ | 13,530 | $ | 36,311 | $ | 35,545 | ||||||
|
Total
assets:
|
||||||||||||
|
Rehabilitation
|
$ | 385,810 | $ | 370,582 | $ | 345,893 | ||||||
|
Tite
Liner
|
20,027 | 20,810 | 15,255 | |||||||||
|
Corporate
|
94,643 | 105,017 | 93,927 | |||||||||
|
Discontinued
operations
|
40,660 | 53,660 | 63,253 | |||||||||
|
Total
assets
|
$ | 541,140 | $ | 550,069 | $ | 518,328 | ||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Capital
expenditures:
|
||||||||||||
|
Rehabilitation
|
$ | 8,688 | $ | 12,564 | $ | 19,571 | ||||||
|
Tite
Liner
|
719 | 870 | 527 | |||||||||
|
Corporate
|
5,571 | 6,279 | 4,549 | |||||||||
|
Total
capital expenditures
|
$ | 14,978 | $ | 19,713 | $ | 24,647 | ||||||
|
Depreciation
and amortization:
|
||||||||||||
|
Rehabilitation
|
$ | 13,308 | $ | 13,838 | $ | 13,266 | ||||||
|
Tite
Liner
|
720 | 594 | 818 | |||||||||
|
Corporate
|
2,224 | 2,188 | 2,288 | |||||||||
|
Total
depreciation and amortization
|
$ | 16,252 | $ | 16,620 | $ | 16,372 | ||||||
Financial
information by geographic area was as follows at December 31 (in
thousands):
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues:
|
||||||||||||
|
United
States
|
$ | 329,136 | $ | 379,054 | $ | 350,854 | ||||||
|
Europe
|
106,881 | 90,259 | 89,716 | |||||||||
|
Canada
|
46,307 | 44,101 | 31,169 | |||||||||
|
Other
foreign
|
13,246 | 14,005 | 11,856 | |||||||||
|
Total
revenues
|
$ | 495,570 | $ | 527,419 | $ | 483,595 | ||||||
|
Operating
income:
|
||||||||||||
|
United
States
|
$ | (4,443 | ) | $ | 15,180 | $ | 20,091 | |||||
|
Europe
|
7,614 | 8,945 | 8,734 | |||||||||
|
Canada
|
8,428 | 9,484 | 5,296 | |||||||||
|
Other
foreign
|
1,931 | 2,702 | 1,424 | |||||||||
|
Total
operating income
|
$ | 13,530 | $ | 36,311 | $ | 35,545 | ||||||
|
Long-lived
assets:
|
||||||||||||
|
United
States
|
$ | 74,352 | $ | 68,304 | $ | 68,261 | ||||||
|
Europe
|
21,948 | 20,163 | 17,993 | |||||||||
|
Canada
|
2,419 | 2,222 | 2,292 | |||||||||
|
Other
foreign
|
1,181 | 1,085 | 783 | |||||||||
|
Total
long-lived assets
|
$ | 99,900 | $ | 91,774 | $ | 89,329 | ||||||
58
15. SELECTED
QUARTERLY FINANCIAL DATA (UNAUDITED)
Unaudited
quarterly financial data was as follows for the years ended December 31, 2007
and 2006 (in thousands, except per share data):
|
First
Quarter
|
Second
Quarter
|
Third
Quarter
|
Fourth
Quarter
|
|||||||||||||
|
Year
ended December 31, 2007:
|
||||||||||||||||
|
Revenues
|
$ | 114,982 | $ | 124,969 | $ | 125,640 | $ | 129,979 | ||||||||
|
Gross
profit
|
20,383 | 28,050 | 25,639 | 25,036 | ||||||||||||
|
Operating
income (loss)
|
(3,802 | ) | 4,028 | 4,001 | 9,303 | |||||||||||
|
Income
(loss) from continuing operations
|
(3,288 | ) | 2,433 | 4,679 | 9,042 | |||||||||||
|
Income
(loss) from discontinued operations
|
(11,988 | ) | 763 | (197 | ) | 1,099 | ||||||||||
|
Net
income (loss)
|
(15,276 | ) | 3,196 | 4,482 | 10,141 | |||||||||||
|
Basic
earnings (loss) per share:
|
||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.12 | ) | $ | 0.09 | $ | 0.17 | $ | 0.33 | |||||||
|
Income
(loss) from discontinued operations
|
(0.44 | ) | 0.03 | (0.01 | ) | 0.04 | ||||||||||
|
Net
income (loss)
|
$ | (0.56 | ) | $ | 0.12 | $ | 0.16 | $ | 0.37 | |||||||
|
Diluted
earnings (loss) per share
|
||||||||||||||||
|
Income
(loss) from continuing operations
|
$ | (0.12 | ) | $ | 0.09 | $ | 0.17 | $ | 0.33 | |||||||
|
Income
(loss) from discontinued operations
|
(0.44 | ) | 0.03 | (0.01 | ) | 0.04 | ||||||||||
|
Net
income (loss)
|
$ | (0.56 | ) | $ | 0.12 | $ | 0.16 | $ | 0.37 | |||||||
|
Year
ended December 31, 2006:
|
||||||||||||||||
|
Revenues
|
$ | 124,180 | $ | 139,743 | $ | 128,074 | $ | 135,422 | ||||||||
|
Gross
profit
|
29,281 | 33,895 | 32,508 | 33,319 | ||||||||||||
|
Operating
income
|
7,673 | 9,145 | 9,177 | 10,316 | ||||||||||||
|
Income
from continuing operations
|
4,176 | 5,942 | 5,906 | 10,279 | ||||||||||||
|
Income
(loss) from discontinued operations
|
(1,142 | ) | (427 | ) | (211 | ) | 155 | |||||||||
|
Net
income
|
3,034 | 5,515 | 5,695 | 10,434 | ||||||||||||
|
Basic
earnings (loss) per share:
|
||||||||||||||||
|
Income
from continuing operations
|
$ | 0.15 | $ | 0.22 | $ | 0.23 | $ | 0.37 | ||||||||
|
Income
(loss) from discontinued operations
|
(0.04 | ) | (0.02 | ) | (0.01 | ) | 0.01 | |||||||||
|
Net
income
|
$ | 0.11 | $ | 0.20 | $ | 0.22 | $ | 0.38 | ||||||||
|
Diluted
earnings (loss) per share
|
||||||||||||||||
|
Income
from continuing operations
|
$ | 0.15 | $ | 0.22 | $ | 0.22 | $ | 0.37 | ||||||||
|
Income
(loss) from discontinued operations
|
(0.04 | ) | (0.02 | ) | (0.01 | ) | 0.01 | |||||||||
|
Net
income
|
$ | 0.11 | $ | 0.20 | $ | 0.21 | $ | 0.38 | ||||||||
59
Not
applicable.
Our
management, under the supervision and with the participation of our Interim
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 December 31, 2007.
Based upon and as of the date of this evaluation, our Interim 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.
Pursuant
to Section 404 of the Sarbanes-Oxley Act, we have included a report that
provides management’s assessment of our internal control over financial
reporting as part of this Annual Report on Form 10-K for the year ended December
31, 2007. Management’s report is included in Item 8 of this report under the
caption entitled “Management’s Report on Internal Control Over Financial
Reporting,” and is incorporated herein by reference. Our independent registered
public accounting firm has issued an attestation report on the effectiveness of
our internal control over financial reporting. This attestation report is
included in Item 8 of this report under the caption entitled “Report of
Independent Registered Public Accounting Firm” and is incorporated herein by
reference.
There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2007 that materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
Not
applicable.
60
PART
III
Information
concerning this item is included in “Item 4A. Executive Officers of the
Registrant” of this report and under the captions “Certain Information
Concerning Director Nominees,” “Section 16(a) Beneficial Ownership Reporting
Compliance,” “Corporate Governance—Corporate Governance Documents,” “Corporate
Governance—Board Meetings and Committees—Audit Committee” and “Corporate
Governance—Board Meetings and Committees—Audit Committee Financial Expert” in
our Proxy Statement for our 2008 Annual Meeting of Shareholders (“2008 Proxy
Statement”) and is incorporated herein by reference.
Information
concerning this item is included under the captions “Executive Compensation,”
“Compensation in Last Fiscal Year,” “Director Compensation,” “Corporate
Governance—Board Meetings and Committees—Compensation Committee Interlocks and
Insider Participation” and “Compensation Committee Report” in the 2008 Proxy
Statement and is incorporated herein by reference.
Information
concerning this item is included in Item 5 of this report under the caption
“Equity Compensation Plan Information” and under the caption “Information
Concerning Certain Stockholders” in the 2008 Proxy Statement and is incorporated
herein by reference.
Information
concerning this item is included under the caption “Corporate
Governance—Independent Directors” in the 2008 Proxy Statement and is
incorporated herein by reference.
Information
concerning this item is included under the caption “Independent Auditors’ Fees”
in the 2008 Proxy Statement and is incorporated herein by
reference.
61
PART
IV
1.
Financial Statements:
The
consolidated financial statements filed in this Annual Report on Form 10-K are
listed in the Index to Consolidated Financial Statements included in “Item 8.
Financial Statements and Supplementary Data,” which information is incorporated
herein by reference.
2.
Financial Statement Schedules:
No
financial statement schedules are included herein because of the absence of
conditions under which they are required or because the required information is
contained in the consolidated financial statements or notes thereto contained in
this report.
3.
Exhibits:
The
exhibits required to be filed as part of this Annual Report on Form 10-K are
listed in the Index to Exhibits attached hereto.
62
Pursuant
to the requirements of Section 13 or 15(d) 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.
Dated:
March 7,
2008 INSITUFORM
TECHNOLOGIES, INC.
By: /s/ Alfred L.
Woods
Alfred L. Woods
Interim Chief Executive
Officer
POWER
OF ATTORNEY
The
registrant and each person whose signature appears below hereby appoint Alfred
L. Woods and David F. Morris as attorneys-in-fact with full power of
substitution, severally, to execute in the name and on behalf of the registrant
and each such person, individually and in each capacity stated below, one or
more amendments to the annual report which amendments may make such changes in
the report as the attorney-in-fact acting deems appropriate and to file any such
amendment to the report with the Securities and Exchange
Commission.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
|
/s/
Alfred L. Woods
|
Principal
Executive Officer and
|
March
7, 2008
|
|
Alfred
L. Woods
|
Director
|
|
|
/s/
David A. Martin
|
Principal
Financial Officer and
|
March
7, 2008
|
|
David
A. Martin
|
Principal
Accounting Officer
|
|
|
/s/
Stephen P. Cortinovis
|
Director
|
March
7, 2008
|
|
Stephen
P. Cortinovis
|
||
|
/s/
Stephanie A. Cuskley
|
Director
|
March
7, 2008
|
|
Stephanie
A. Cuskley
|
||
|
/s/
John P. Dubinsky
|
Director
|
March
7, 2008
|
|
John
P. Dubinksy
|
||
|
/s/
Juanita H. Hinshaw
|
Director
|
March
7, 2008
|
|
Juanita
H. Hinshaw
|
||
|
/s/
Alfred T. McNeill
|
Director
|
March
7, 2008
|
|
Alfred
T. McNeill
|
||
|
/s/
Sheldon Weinig
|
Director
|
March
7, 2008
|
|
Sheldon
Weinig
|
63
Index to Exhibits (1)(2)
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended through April 27,
2005 (incorporated by reference to Exhibit 3.1 to the quarterly report on
Form 10-Q for the quarter ended March 31, 2007), and Certificate of
Designation, Preferences and Rights of Series A Junior Participating
Preferred Stock (incorporated by reference to Exhibit 3.1 to the annual
report on Form 10-K for the year ended December 31, 2001).
|
|
3.2
|
Amended
and Restated By-Laws of the Company, as amended through July 25, 2007
(incorporated by reference to Exhibit 3.3 to the quarterly report on Form
10-Q for the quarter ended June 30, 2007).
|
|
4
|
Rights
Agreement dated as of February 26, 2002 between Insituform Technologies,
Inc. and American Stock Transfer & Trust Company (incorporated by
reference to Exhibit 1 to the Registration Statement on Form 8-A filed
March 8, 2002).
|
|
10.1
|
Second
Amended and Restated Credit Agreement dated as of February 17, 2006 among
the Company and Bank of America, N.A., as Administrative Agent and Letter
of Credit Issuing Lender, and certain other lenders (incorporated by
reference to Exhibit 10.1 to the current report on Form 8-K dated and
filed February 21, 2006), as amended by First Amendment dated as of March
28, 2007 (incorporated by reference to Exhibit 10.2 to the current report
on Form 8-K filed April 3, 2007).
|
|
10.2
|
Note
Purchase Agreement dated as of April 24, 2003 among the Company and each
of the lenders listed therein (incorporated by reference to Exhibit 10.1
to the quarterly report on Form 10-Q for the quarter ended March 31,
2003), as further amended by First Amendment dated as of March 12, 2004
(incorporated by reference to Exhibit 10.3 to the annual report on Form
10-K for the year ended December 31, 2003), as further amended by Second
Amendment and Waiver dated as of March 16, 2005 (incorporated by reference
to Exhibit 10.3 to the annual report on Form 10-K for the year ended
December 31, 2004), as further amended by Third Amendment dated as of
March 28, 2007 (incorporated by reference to Exhibit 10.1 to the current
report on Form 8-K filed April 3, 2007.
|
|
10.3
|
Master
Guaranty dated as of February 17, 2006 by those subsidiaries of the
Company named therein (incorporated by reference to Exhibit 10.2 to the
current report on Form 8-K filed February 21, 2006).
|
|
10.4
|
Amended
and Restated Intercreditor Agreement dated as of April 24, 2003 among Bank
of America, N.A. and certain other lenders and the Noteholders
(incorporated by reference to Exhibit 10.2 to the quarterly report on Form
10-Q for the quarter ended March 31, 2003).
|
|
10.5
|
1992
Employee Stock Option Plan of the Company, as amended February 17, 2000
(incorporated by reference to Exhibit 10.11 to the annual report on Form
10-K for the year ended December 31, 1999). (3)
|
|
10.6
|
1992
Director Stock Option Plan of the Company, as amended February 17, 2000
(incorporated by reference to Exhibit 10.12 to the annual report on Form
10-K for the year ended December 31, 1999). (3)
|
|
10.7
|
Amended
and Restated 2001 Employee Equity Incentive Plan of the Company
(incorporated by reference to Appendix C to the definitive proxy statement
on Schedule 14A filed on April 16, 2003 in connection with the 2003 annual
meeting of stockholders). (3)
|
|
10.8
|
Amended
and Restated 2001 Non-Employee Director Equity Incentive Plan of the
Company (incorporated by reference to Appendix B to the definitive proxy
statement on Schedule 14A filed on April 16, 2003 in connection with the
2003 annual meeting of stockholders). (3)
|
|
10.9
|
2006
Employee Equity Incentive Plan of the Company (incorporated by reference
to Appendix C to the definitive proxy statement on Schedule 14A filed on
March 10, 2006 in connection with the 2006 annual meeting of
stockholders), as amended on April 14, 2006 (incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, filed on April 14, 2006).
(3)
|
|
10.10
|
2006
Non-Employee Director Equity Incentive Plan of the Company (incorporated
by reference to Appendix B to the definitive proxy statement on Schedule
14A filed on March 10, 2006 in connection with the 2006 annual meeting of
stockholders). (3)
|
|
10.11
|
2006
Executive Performance Plan of the Company (incorporated by reference to
Appendix D to the definitive proxy statement on Schedule 14A filed on
March 10, 2006 in connection with the 2006 annual meeting of
stockholders). (3)
|
|
10.12
|
Employee
Stock Purchase Plan of the Company (incorporated by reference to Appendix
A to the definitive proxy statement on Schedule 14A filed on March 15,
2007 in connection with the 2007 annual meeting of stockholders). (3)
|
64
|
10.13
|
Senior
Management Voluntary Deferred Compensation Plan of the Company
(incorporated by reference to Exhibit 10.19 to the annual report on Form
10-K for the year ended December 31, 1998), as amended by First Amendment
thereto dated as of October 25, 2000 (incorporated by reference to Exhibit
10.15 to the annual report on Form 10-K for the year ended December 31,
2000), as further amended by Second Amendment to Senior Management
Voluntary Deferred Compensation Plan dated as of December 21, 2005
(incorporated by reference to Exhibit 10.19 to the annual report on Form
10-K for the year ended December 31, 2005), as further amended by Third
Amendment to Senior Management Voluntary Deferred Compensation Plan dated
as of January 5, 2006 (incorporated by reference to Exhibit 10.5 to the
current report on Form 8-K filed January 11, 2006). (3)
|
|
10.14
|
Form
of Directors’ Indemnification Agreement (incorporated by reference to
Exhibit 10.3 to the quarterly report on Form 10-Q for the quarter ended
June 30, 2002). (3)
|
|
10.15
|
Executive
Separation Agreement and Release dated as of August 13, 2007 between the
Company and Thomas S. Rooney, Jr. (incorporated by reference to the
current report on Form 8-K filed August 17, 2007). (3)
|
|
10.16
|
Management
Annual Incentive Plan effective January 1, 2008, filed herewith. (3)
|
|
21
|
Subsidiaries
of the Company, filed herewith.
|
|
23
|
Consent
of PricewaterhouseCoopers LLP, filed herewith.
|
|
24
|
Power
of Attorney (set forth on signature page).
|
|
31.1
|
Certification
of Alfred L. Woods 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 Alfred L. Woods 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.
|
________________________________
|
(1)
|
The
Company’s current, quarterly and annual reports are filed with the
Securities and Exchange Commission under file no.
0-10786.
|
|
(2)
|
Pursuant
to Reg. Section 229.601, does not include certain instruments with respect
to long-term debt of the Company and its consolidated subsidiaries not
exceeding 10% of the total assets of the Company and its subsidiaries on a
consolidated basis. The Company undertakes to furnish to the Securities
and Exchange Commission, upon request, a copy of all long-term debt
instruments not filed herewith.
|
|
(3)
|
Management
contract or compensatory plan or
arrangement.
|
*
* *
65