FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996
--------------
Commission file number #0-10786
--------
Insituform Technologies, Inc.
(Exact name of registrant as specified
in its charter)
Delaware 13-3032158
- --------------- ----------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1770 Kirby Parkway, Suite 300
Memphis, Tennessee 38138
- -----------------------------------
(Address of Principal Executive Offices)
(901) 759-7473
---------------------
(Registrant's telephone number
including area code)
(Former name, former address and
former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Class Outstanding at May 1, 1996
- -------------------- --------------------------
Class A, Common Stock, 27,137,215 Shares
$.01 par value
<PAGE>
INDEX
Page No.
Part I Financial Information:
Item 1. Financial Statements:
Consolidated Balance Sheets 3
Consolidated Statements of Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial
Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14
Part II Other Information and Signatures:
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
<PAGE>
<PAGE>
<TABLE>
PART I. - FINANCIAL INFORMATION
ITEM 1. - FINANCIAL STATEMENTS
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION> March December
31, 1996 31, 1995
----------- ---------
(Unaudited)
(in thousands)
<S> <C> <C>
Assets
- ------
Current
- -------
Cash and cash equivalents, restricted
$841 and $842 $15,014 $11,416
Receivables (Note 4) 54,875 64,717
Costs and estimated earnings in excess
of billings 21,321 14,008
Inventories (Note 5) 16,233 16,572
Deferred income taxes 4,357 4,287
Prepaid expenses and miscellaneous 8,273 9,711
------- -------
Total current assets 120,073 120,711
------- -------
Property and equipment, less
accumulated depreciation and
amortization (Note 6) 60,041 59,773
------- -------
Other assets
- ------------
Cost in excess of net assets of
businesses acquired less
accumulated amortization of $7,608
and $6,960 (Notes 2 and 3) 57,530 58,431
Patents and patent applications, less
accumulated amortization of
$3,606 and $3,270 9,014 8,963
Investments in licensees and
affiliated companies (Note 2) 1,468 1,555
Deferred income taxes 1,886 1,862
Non-compete agreements, less
accumulated amortization of
$2,562 3,315 3,554
Miscellaneous 5,864 5,451
------- -------
Total other assets 79,077 79,816
------- -------
$259,191 $260,300
======== ========
See accompanying summary of accounting policies and notes to consolidated financial
statements.
</TABLE>
<PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION> March December
31, 1996 31, 1995
---------- ---------
(Unaudited)
(in thousands, except share amounts)
<S> <C> <C>
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities
- -------------------
Notes payable to banks $ 1,131 $ 1,053
Accounts payable and accruals 36,471 35,644
Income taxes payable 2,398 1,768
Deferred income taxes 638 627
Current maturities of long-term
debt (Note 9) 6,873 12,081
-------- --------
Total current liabilities 47,511 51,173
Long-term debt, less current
maturities (Note 9)
- --------------------------- 83,024 82,813
Deferred income taxes 3,004 2,850
- ---------------------
Other liabilities 1,028 1,009
- ----------------- -------- --------
Total liabilities 134,567 137,845
-------- --------
Commitments and contingencies
(Notes 9 and 10)
- -----------------------------
Minority interests (Note 3)
- --------------------------- 5,610 5,645
-------- --------
Stockholders' equity
- --------------------
Preferred stock, $.10 par -
shares authorized 2,000,000;
none outstanding 0 0
Common stock, $.01 par - shares
authorized 40,000,000; shares
outstanding 27,137,215 and
27,104,940 (Note 3 271 271
Additional paid-in capital 67,766 67,427
Retained earnings (Note 9) 56,807 54,557
-------- --------
124,844 122,255
Cumulative foreign currency
translation adjustments (2,206) (1,821)
Notes receivable from affiliates
(Note 7) (3,624) (3,624)
-------- --------
Total stockholders' equity 119,014 116,810
-------- --------
$259,191 $260,300
======== =========
See accompanying summary of accounting policies and notes to consolidated financial
statements.
/TABLE
<PAGE>
<PAGE>
<TABLE>
INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the Three Months
Ended March 31,
1996 1995
---- ----
(Note 1)
(In thousands, except per
share amounts)
<S> <C> <C>
Revenues:
Construction contracts $60,696 $54,744
Product sales 5,760 5,720
Royalties and license fees 1,654 1,799
------- -------
Total revenues 68,110 62,263
Operating costs and expenses:
Cost of construction contracts 42,273 36,550
Cost of product sales 3,705 4,044
Royalty expense 132 84
Selling, administrative and general 14,755 13,170
Strategic marketing and product
development 2,065 1,981
------- -------
Total operating costs and expenses 62,930 55,829
------- -------
Operating income 5,180 6,434
Interest expense (1,569) (1,379)
Other income 407 479
------- -------
Income before taxes on income 4,018 5,534
Taxes on income (Note 8) 1,651 2,067
------- -------
Income before minority interests and
equity in earnings 2,367 3,467
Minority interests (174) (348)
Equity in earnings of affiliated
companies 57 301
------- -------
Net income $ 2,250 $ 3,420
======= =======
Earnings per share of common stock and
common stock equivalents (Note 2):
Net income $ 0.08 $ 0.13
======= =======
Weighted average common and common
shares equivalent outstanding 27,235 27,160
======= =======
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
<TABLE> INSITUFORM TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the Three
Months Ended
March 31,
1996 1995
---- ----
(Note 1)
(in thousands)
<S> <C> <C>
Cash flows from operating activities:
- ------------------------------------
Income from continuing operations $2,250 $3,420
Adjustments to reconcile net income to cash
used by operating activities:
Depreciation 3,416 2,615
Amortization 1,083 854
Miscellaneous 211 72
Equity in earnings of affiliated companies (57) (301)
Loss (gain) on disposals of property and
equipment 54 (12)
Minority interests 174 348
Deferred income taxes 59 568
Translation adjustments (385) 416
Restructuring costs (259) 0
Changes in operating assets and liabilities
(net of effect of businesses purchased):
Receivables 9,077 (3,026)
Costs and estimated earnings in excess
of billings (7,313) 1,170
Inventories 307 (225)
Prepaid expenses and miscellaneous 1,412 (17)
Miscellaneous other assets (266) (427)
Accounts payable and accruals 1,149 (4,814)
Income taxes payable 1,416 (1,946)
----- ------
Net cash provided (used) by continuing
operations 12,328 (1,305)
------ ------
Net cash used by discontinued operations 0 (43)
------ ------
Net cash provided (used) by operations 12,328 (1,348)
------ ------
Cash flows from investing activities:
- ------------------------------------
Capital expenditures (3,744) (3,699)
Proceeds on disposal of property and equipment 0 181
Investments in licensees/affiliated companies 109 344
Patents and patent applications (97) (169)
Purchase of business, net of cash acquired
(Note 3) 0 (1,431)
------ ------
</TABLE>
See accompanying notes to consolidated financial statements
(continued)
<PAGE>
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
1996 1995
---- ----
(Note 1)
(in thousands)
<CAPTION>
<S> <C> <C>
Net cash used by investing activities (3,732) (4,774)
Cash flows from financing activities:
- ------------------------------------
Proceeds from issuance of common stock 17 37
Increase in short-term borrowings 346 2,622
Net repayments of long-term debt (5,059) (587)
Minority interests (254) 0
Dividends paid 0 (737)
------ -------
Net cash provided (used) by financing
activities (4,950) 1,335
------ -------
Effect of exchange rates changes on cash (48) 205
------ -------
Net increase (decrease) in cash and cash
equivalents for the period 3,598 (4,576)
------ -------
Cash and cash equivalents, beginning of
period 11,416 18,670
------ -------
Cash and cash equivalents, end of period $15,014 $14,094
======= =======
Supplemental disclosures of cash flows For the Three Months
information: Ended March 31,
- -------------------------------------- 1996 1995
---- ----
(in thousands)
Cash paid during three months ended
March 31, for:
- -----------------------------------
Interest $ 1,903 $ 1,235
Income taxes $ 197 $ 3,494
Non-cash investing and financing activities:
- -------------------------------------------
Stock issued in connection with litigation
settlement (Note 10) $ 322 --
</TABLE>
See accompanying notes to consolidated financial statements<PAGE>
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
1. In the opinion of the Company, the accompanying consolidated
financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the
financial position as of March 31, 1996 (unaudited) and the
unaudited results of operations and cash flows for the three
months ended March 31, 1996 and 1995. The financial statements
have been prepared in accordance with the requirements of Form
10-Q and consequently do not include all the disclosures
normally made in an Annual Report on Form 10-K. Accordingly, the
consolidated financial statements included herein should be
reviewed in conjunction with the financial statements and the
footnotes thereto included in the Company's 1995 Annual Report
on Form 10-K.
As discussed in Note 3 below, the consolidated financial
statements give retroactive effect to the Company's acquisition
of Insituform Mid-America, Inc. ("IMA") in October 1995, which
has been accounted for as a pooling-of-interests.
Reclassifications of prior period amounts have been made to
conform with current period presentation.
The results of operations for the three months ended March 31,
1996 and 1995 are not necessarily indicative of the results to
be expected for the full year.
2. The consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries, including a 51%
owned United Kingdom subsidiary, Insituform Linings, Plc., a 60%
owned Chilean subsidiary, United Sistema de Tuberias, Ltda., a
66% owned French subsidiary, Insituform France, S.A. and a 57.5%
owned domestic partnership, Midsouth Partners (see Note 3). All
material intercompany balances, transactions and stockholdings
are eliminated.
The net assets of businesses purchased are recorded at their
fair value at the acquisition date and the financial statements
include their operations only from that date. Any excess of
acquisition costs over the fair value of net assets acquired is
included in the balance sheet as "Costs in excess of net assets
of businesses acquired."
Corporate investments are carried at cost if ownership is less
than 20% and on the equity method if the Company's ownership
interest is 20% and greater, but not exceeding 50%. Investments
in partnerships for which the Company's ownership interest is no
greater than 50% are accounted for on the equity method.
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
Intercompany profits and losses are eliminated for those
investments carried on the equity method.
Construction and installation revenues are recognized using the
percentage-of-completion method. 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. Changes in estimated total contract costs
are recognized in the period they are determined. Where a
contract loss is forecast, the full amount of the anticipated
loss is recognized in the period the loss is determined.
Earnings per share have been computed based upon the weighted
average number of common shares and common equivalent shares
outstanding during the respective periods. Common equivalent
shares include shares from the assumed exercise of common stock
options.
3. On October 25, 1995, the Company completed the acquisition (the
"IMA Merger") of IMA through the merger into IMA of the
Company's wholly-owned subsidiary, ITI Acquisition Corp., as a
result of which IMA became a wholly-owned subsidiary of the
Company. The Company issued an aggregate of 12,450,896 shares
of common stock to all prior holders of IMA's Class A common
stock, subsequent to the conversion, in accordance with its
terms, of all shares of IMA Class B common stock into IMA Class
A common stock.
The IMA Merger has been accounted for using the pooling-of-
interests method of accounting, and accordingly, the
accompanying consolidated financial statements give retroactive
effect to the acquisition, as if the companies had always
operated as a single entity.
On April 18, 1995, the Company acquired the pipeline
rehabilitation business of Enviroq Corporation ("Enviroq"),
including Enviroq's Insituform process business conducted by its
Insituform Southeast, Inc. subsidiary in Alabama, Florida,
Georgia, North Carolina and South Carolina, through the merger
into Enviroq of a wholly-owned subsidiary of the Company.
The base purchase price of $18,250,000 (including $3,000,000 in
payment of a five-year covenant not to compete) was paid
$15,250,000 in cash and $3,000,000 in a five-year subordinated
promissory note. As a result of demands for payment of such
note and ensuing litigation, in March 1996 the Company
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
discharged its obligation under such note and under arrangements
to pay $1 million in consulting fees, and settled such
litigation, for the aggregate amount of $3.4 million and the
release of other claims.
Prior to April 18, 1995, a 15% general partnership interest in
Midsouth Partners, an Insituform licensee in Tennessee, Kentucky
and northern Mississippi, was held by a subsidiary of the
Company, and a 42.5% interest therein was held by a subsidiary
of Enviroq. As a result of the Enviroq acquisition, the Company
holds a majority ownership (57.5%) in Midsouth Partners and
Partners and has accordingly consolidated the accounts of
Midsouth Partners since April 18, 1995. The remaining partner
has initiated arbitration proceedings alleging a default by the
Enviroq subsidiary and claiming the right to name a majority of
the members of the partnership's management committee, an action
to which the Company objects.
The following table presents summarized consolidated unaudited
pro forma results of operations for first quarter 1995, as if
the Enviroq acquisition had occurred at the beginning of 1995.
These pro forma results are provided for comparative purposes
only and do not purport to be indicative of the results which
would have been obtained if these acquisitions had been effected
on the dates indicated or which may be obtained in the future
(in thousands except per share amounts).
Total revenues $68,265
Income from continuing operations $3,196
Income from continuing operations
per common and common equivalent
share $0.12
On February 16, 1995, the Company acquired two-thirds of the
common stock of Insituform France S.A., a newly-formed
subsidiary of its former French licensee, for FF7,400,000
(U.S.$1,431,000). The purchase price was funded by the
Company's debt facility with SunTrust Bank (see Note 9).
4. Receivables consist of the following (in thousands):
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Trade, less allowance for
possible losses of
$970 and $974 $43,515 $51,049
Retainage under construction
contracts 9,848 11,395
Refundable income taxes 1,512 2,273
------- -------
$54,875 $64,717
======= =======
</TABLE>
5. Inventories are valued at the lower of cost or market.
Maintenance and office supplies are not inventoried.
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Finished goods $1,333 $ 822
Work-in-process 1,110 1,053
Construction materials 9,403 9,608
Raw materials 4,387 5,089
------ -----
$16,233 $16,572
======= =======
</TABLE>
6. Property and equipment consists of the following (in
thousands):
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Land and land improvements $ 3,470 $ 3,474
Buildings and improvements 15,565 15,264
Machinery and equipment 66,772 64,980
Furniture and fixtures 7,879 7,967
Autos and trucks 3,797 3,685
Construction in progress 6,466 5,168
------ -------
103,949 100,538
Less: accumulated depreciation (43,908) (40,765)
------- -------
$ 60,041 $59,773
======== =======
</TABLE>
7. On July 3, 1992, Ringwood Limited ("Ringwood"), Parkwood
Limited ("Parkwood"), and Douglas Chick and Brian Chandler,
both directors of the Company, entered into an agreement
whereby Messrs. Chick and Chandler and Ringwood executed a
secured non-recourse promissory note in the amount of
$3,624,000 which bears interest at Citibank's prime rate plus
2-1/22% and originally was due July 3, 1995. On May 21, 1995,
the Company extended the maturity date of the note to July 3,
1996, and in December 1995 the interest payment otherwise due
in January 1996 was postponed to be due on a date (the
"Extension Date") no later than 30 days after the date of first
publication of the Company's operating results covering at
least a 30-day period after the consummation of the IMA Merger.
As security for the note, Ringwood and Messrs. Chick and
Chandler have pledged to the Company 255,801 shares of the
Company's stock beneficially owned by them. At the Extension
Date, Ringwood had defaulted in the payment to the Company of
its interest payment postponed as aforesaid. Ringwood,
together with Messrs. Chandler and Chick, have proposed that
the Company extend the maturity of the loan (in which event
such interest payment would be brought current). The Board of
Directors of the Company has not reached a determination with
respect to such proposal or whether to assert the Company's
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
rights to foreclose on such collateral in order to satisfy such
defaulted payment, and has appointed an independent committee of
the Board in order to evaluate and recommend for action by a
disinterested majority of the Board action regarding any such
extension and the terms thereof.
8. Provision for federal and state income taxes in the consolidated
statements of income are made up of the following components (in
thousands) for the three months ended March 31, 1996 and 1995,
respectively:
<TABLE>
<CAPTION>
March 31,
1996 1995
---- ----
<S> <C> <C> <C>
Current:
Federal $ 562 $1,023
Foreign 953 1,011
State 77 126
----- -----
1,592 2,160
----- -----
Deferred:
Federal $ 98 $ 97
Foreign (39) (190)
State C C
----- ------
59 (93)
----- ------
Total taxes on income $1,651 $2,067
====== ======
</TABLE>
The effective tax rate on income before taxes for the three
months ended March 31, 1996 and 1995 was different than the
United States ("U.S.") federal statutory tax rate. The
following summary reconciles taxes at the U.S. federal
statutory tax rate with the actual taxes (in thousands) and the
effective rate:
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1996
<TABLE>
<CAPTION>
1996 1995
Amount Percent Amount Percent
------ ------- ------ -------
<S> <C> <C> <C> <C>
Taxes on income at U.S.
federal statutory rate $1,366 34.0% $1,881 34.0%
Increase (decrease) in
taxes resulting from:
State income taxes, net of
federal income tax benefit 51 1.3 83 1.5
Effect of foreign income
taxed at foreign rates 411 10.2 225 4.1
Tax amortization of
intangibles (196) (4.9) (187) (3.4)
Tax benefit not currently
recognizable on losses of
subsidiaries 47 1.2 40 0.7
Utilization of net operating
losses and other
carryforwards (12) (0.3) (29) (0.5)
Amortization of goodwill, not
allowed for tax purposes 166 4.1 138 2.5
Other items (182) (4.5) (84) (1.5)
----- ---- ----- -----
Total taxes on income $1,651 41.1% $2,067 37.4%
====== ==== ====== ====
</TABLE>
9. At March 31, 1996, the Company had outstanding borrowings of
$71.1 million under its credit agreement with SunTrust Bank,
Nashville, National Association (formerly, Third National Bank
in Nashville; "SunTrust") entered into in October 1995, which
provides for advances through 1997 on a revolving basis
aggregating up to $105 million (including a $5.0 million
standby letter of credit facility). Of such amount,
approximately $66.4 million was applied to refinance existing
debt under the Company's prior arrangements with SunTrust
(approximately $35.9 million), IMA's term loans with Boatmen's
National Bank and Mark Twain Bank ($14.5 million), and short-
term debt under IMA's line of credit facility ($16.0 million).
Additional advances are available for the expansion of the
Company's business and for general corporate purposes.
The current SunTrust facility matures in October 2000, with
installments based on a five-year amortization schedule,
commencing December 31, 1997. Interest on indebtedness under
the facility is payable at either (i) SunTrust's prime rate
(8.5% at March 31, 1996), plus a margin of up to .25% in the
event certain financial ratios are not maintained, or (ii) an
adjusted LIBOR rate (5.3% at March 31, 1996), plus a margin
ranging from 1.00% to 1.75%, depending on the maintenance of
certain financial ratios. Up to $5 million under the credit
facility may be borrowed from SunTrust pursuant to a "swing
line facility," which accrues interest at a rate per annum
equal to 0.5% below SunTrust's prime rate. The SunTrust
facility obligates the Company to comply with certain financial
ratios and restrictive covenants that, among other things,
limit the ability of the Company and its subsidiaries to incur
further indebtedness, pay dividends, make loans and encumber
any properties, and requires guarantees of certain domestic
subsidiaries. Essentially all of the Company's retained
earnings at March 31, 1996 are restricted under such covenants.
<PAGE>
INSITUFORM TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
March 31, 1996
In July 1993, in order to complete the financing for the
acquisition of Insituform Midwest, the Company also issued an
8.5% senior subordinated note, subordinated in right to the
Company's bank and other institutional financing and to
deferred consideration incurred in connection with business
acquisitions. Warrants to purchase 350,877 unregistered shares
of the Company's Common Stock were also issued to the lender.
The note is prepayable at the Company's option, at premiums
until July 1998 ranging from 3% to 1% of the amount prepaid.
The subordinated note also restricts the Company's ability to
pay dividends and repurchase outstanding common stock.
The Company's subsidiaries, Insituform Canada Limited,
Insituform Technologies Limited (formerly Insituform Permaline
Limited), Insituform France S.A., and Insituform Japan KK, also
maintain certain revolving line of credit facilities. The
aggregate amount outstanding under these facilities was
$1,131,000 at March 31, 1996.
10. On May 23, 1995, the Company, notwithstanding its belief that
it had defenses to plaintiff's claim that were well grounded in
fact and law, entered into a memorandum of understanding to
settle the previously disclosed stockholder class action
against the Company in the United States District Court for the
Western District of Tennessee alleging various misstatements
and omissions, relating to, among other things, acquisition and
restructuring costs arising from the acquisition of Insituform
Group Limited in December 1992, in public disclosures by the
Company during the period from October 28, 1992 to May 12, 1993
in violation, among other things, of Rule 10b-5 under the
Securities Exchange Act of 1934. Under the settlement, the
Company has made a cash payment to class members in the amount
of $3.2 million and (in January 1996) issued to class members
30,000 shares of the Company's class A common stock.
The Company is involved in certain additional litigation
incidental to the conduct of its business. In the Company's
opinion, none of these proceedings will have a material adverse
effect on the Company's financial position, results of
operations and liquidity. The financial statements include the
estimated amounts of liabilities that are likely to be incurred
from these and various other pending litigation and claims.
11. Subsequent to the end of the first quarter, the Company entered
into arrangements whereby, in exchange for payments in the
approximate amount of $1 million, the Company increased its
share of the equity of its German licensee from one-third to
one-half, effective January 1, 1996.
<PAGE>
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors which have affected the Company's financial
condition and results of operations during the periods included in
the accompanying consolidated financial statements.
General
- -------
The Company's revenues include construction revenues from direct
installation and other contracting activities, product sales of
materials and equipment to licensees and royalty income and initial
license fees received from licensees for the use of the Company's
trenchless rehabilitation processes. Product sales consist
primarily of sales of Insitutubes(R) and NuPipe(R) to licensees.
Construction contract revenue is generated by the Company's
subsidiaries operating in the United States, Canada, France, the
United Kingdom and Chile. Royalties and license fees are paid by
the Company's 33 unaffiliated Insituform(R) licensees and
sublicensees and its ten unaffiliated NuPipe(R) licensees.
Product sales and royalties are primarily a function of the
contracts performed by the Company's licensees. However, changes
in product sales may vary from changes in royalties because of
several factors, including differences between the timing of
Insitutube sales and contract performance by licensees and the
accrual by the Company of minimum royalties in excess of royalties
otherwise due for work performed. The Company's consolidated
subsidiaries obtain supplies of Insitutubes and related materials
from the Company.
The Company was incorporated in Delaware in 1980 in order to act as
the exclusive licensee of the Insituform Process in most of the
United States. In October 1995, the Company consummated the IMA
Merger, which has been accounted for as a pooling-of-interests.
Under the pooling-of-interests method of accounting, the historical
financial statements of the combining companies are retroactively
combined (after adjustments to eliminate intercompany balances and
transactions, and to conform accounting methods) as if the
companies had operated as a single entity.
Fluctuations in the exchange rates between the United States dollar
and the currencies of other countries in which the Company operates
or has licensees may have an impact on the Company's consolidated
results during the relevant reporting period. See "Results of
Operations" below. The Company intends to manage any such foreign
currency exposure, in the context of discrete commercial
transactions and, when appropriate, to offset such exposure in
whole or in part by entering into foreign currency forward
contracts, in order to reduce the impact of such fluctuations on
results of operations. The Company does not anticipate that the
circumstances in which such hedging activity would be appropriate
will have a material effect on the Company's liquidity.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
At March 31, 1996, the Company had $15.0 million in cash, U.S.
treasury bills, and short-term investments, as compared to $11.4
million at December 31, 1995. Cash and cash equivalents increased
$3.6 million as a result of cash provided by operations of $12.3
million offset by cash used for capital expenditures of $3.7
million and repayments of long-term debt of $5.1 million. The
Company's working capital ratio was 2.5-to-1.0 at March 31, 1996
representing an increase from 2.4-to-1.0 at December 31, 1995.
Operations provided cash in the amount of $12.3 million during the
quarter ended March 31, 1996, as compared to cash used in the
amount of $1.3 million during the same period in 1995. This
increase is due primarily to an increase in cash provided by
receivables (including costs in excess of billings of construction
contracts) of $3.6 million and a decrease in prepaid expenses and
miscellaneous of $1.4 million. Furthermore, unlike first quarter
1995 in which reductions of accounts payable, accrued expenses and
income taxes used approximately $6.8 million in cash, first quarter
1996 resulted in increases in accounts payable of $1.1 million and
in accrued income taxes of $1.4 million. In addition, depreciation
and amortization increased by approximately $1.0 million, primarily
as a result of the acquisition of the pipeline rehabilitation
business of Enviroq, and to a lesser extent from continuing capital
expenditures.
Receivables provided $1.8 million of cash during 1996, compared to
using $1.9 million in 1995, primarily due to stronger collections
resulting from increased contracting activity in the United Kingdom
following the acquisition in November 1995 of the FormaPipe
division of Water Flow Services, Ltd., and strong activity in the
United States. Receivables, including costs and estimated earnings
in excess of billings, decreased 2.3% to $74.7 million from $76.5
million at December 31, 1995, reflecting a $7.5 million decrease in
trade receivables, and a $1.5 million decrease in retainage
receivables, partially offset by an increase of $7.3 million in
costs and estimated earnings in excess of billings on construction
contracts. The collection cycle for construction receivables is
generally longer than for the Company's other operations due to
provisions for retainage, often 5% to 10% of the contract amount,
as well as the slow internal review processes often employed by the
construction subsidiaries' municipal customers. Retainage
receivables are generally received within 60 to 90 days after the
completion of a contract.
During 1996, increases in accounts payable and accruals provided
$1.1 million in cash as compared to $4.8 million used in 1995,
primarily attributable to lower payments for employee bonuses made
in 1996. Additional accruals of income taxes added $1.4 million to
cash in 1996, as compared to a reduction in accruals of $1.9
million in 1995.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Capital expenditures remained virtually constant at $3.7 million
for the first quarter of each of 1995 and 1996. Capital
expenditures generally reflect replacement equipment required by
the Company's contracting subsidiaries. In connection with the
expansion of its activities with respect to the commercialization
of products under license from Ashimori Industry Co. Ltd., the
Company will consider establishment of an additional manufacturing
facility adjacent to its Batesville, Mississippi plant, and whether
to dispose of approximately 5.4 acres in Chesterfield, Missouri, on
which IMA had commenced construction of a manufacturing facility.
Financing activities used $4.9 million in cash during first quarter
1996 as compared to cash provided of $1.3 million in the comparable
period in 1995. This decrease is due primarily to principal
payments totaling $5.1 million relating to the Company's credit
facility with SunTrust Bank, Nashville, N.A. ("SunTrust") and
repayment of the subordinated note issued in connection with the
Enviroq acquisition. In March 1996, as a result of demands for
payment of the Company's $3 million five-year subordinated note
issued in April 1995 as part of the $18.3 million purchase price in
the Enviroq acquisition, and ensuing litigation, the Company
discharged its obligation under such note and under arrangements to
pay $1 million in consulting fees over five years, and settled such
litigation, for the aggregate amount of $3.4 million and the
release of other claims.
In October 1995, the Company entered into a credit agreement dated
such date (the "Credit Agreement") with SunTrust, as agent, and a
group of participating lenders (the "Lenders"), which provides for
advances by the Lenders through October 1997 on a revolving basis
aggregating up to $105 million (including a $5 million standby
letter of credit facility). Of such amount, approximately $35.9
million was applied to refinance the prior existing debt of the
Company to SunTrust and approximately $14.5 million to IMA's prior
existing term loan and approximately $15.9 million to short-term
debt of IMA under credit lines replaced with the new facility.
Additional advances may be used for the expansion of the Company's
business and for general corporate purposes.
Indebtedness pursuant to the Credit Agreement matures five years
after closing, with installments based on a five-year amortization
schedule, commencing December 31, 1997. Interest on indebtedness
under the Credit Agreement is payable at a rate per annum selected
by the Company as either SunTrust's prime rate, plus a margin up to
0.25% in the event certain financial ratios are not maintained, or
an adjusted LIBOR rate, plus a margin ranging from 1.00% to 1.75%,
depending on the maintenance of certain financial ratios. Up to $5
million under the Credit Agreement may be borrowed from SunTrust
pursuant to a swing-line facility, and would accrue interest at a
rate per annum equal to 0.5% below SunTrust's prime rate. The
Credit Agreement obligates the Company to comply with certain
financial ratios and restrictive covenants that, among other
things, limit the ability of the Company and its subsidiaries to
incur further indebtedness, pay dividends, make loans and encumber
any properties, and requires guarantees of certain domestic
subsidiaries.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's senior subordinated note in the principal amount of
$5 million acquired by Hanseatic Corporation in July 1993 requires
quarterly payments of interest at 8.5% per annum and installments
of principal in the amount of $1 million on each of the fifth
through eighth anniversary dates of closing, with the entire
remaining principal due nine years after closing. The note is
subordinated to bank and other institutional financing (including
the Credit Agreement), and purchase money debt incurred in
connection with acquisitions of businesses. The note is
pre-payable at the option of the Company, at premiums until the
fifth anniversary of closing ranging from 3% to 1% of the amount
prepaid. Warrants with respect to 350,877 shares of the Company's
class A common stock, $.01 par value (the "Common Stock"), issued
in connection with such note are exercisable, at the election of
the holder, through July 25, 1998, at a price per share of Common
Stock of $14.25, and such shares are entitled to demand and
incidental registration rights.
The Company also remains obligated on certain notes issued in
connection with the acquisition, in October 1994, of all of the
outstanding stock of Gelco and affiliates, originally representing
the one-half of the purchase price of $18 million not paid in cash
at closing, such notes due on the first and second anniversaries of
closing. In addition, the Company issued promissory notes,
aggregating $2.85 million, to the former Gelco shareholders and
their affiliates, representing net current liabilities of the
acquired companies to related parties and a portion of working
capital at closing. The notes issued in the Gelco closing are
secured by the assets acquired, subject to the rights of SunTrust,
as agent, under its loan arrangements with the Company.
In May 1995, the Company agreed to extend by one year, through July
1996, the maturity of the note held by the Company issued by
Ringwood Limited, an affiliate of Brian Chandler and Douglas Chick,
directors of the Company, in the principal amount of $3.624
million, and in December 1995 the interest payment otherwise due in
January 1996 was postponed to be due on a date no later than 30
days after the date of first publication of the Company's operating
results covering at least a 30-day period after consummation of the
IMA Merger. At the interest extension date, Ringwood had defaulted
in the payment to the Company of its interest payment postponed as
aforesaid. See Note 7 of the Notes to Consolidated Financial
Statements for information concerning proposals by Ringwood,
together with Messrs. Chandler and Chick, to extend the maturity of
the loan and the appointment of an independent committee of the
Company's Board of Directors to recommend action by a disinterested
majority of the Board in this matter.
In October 1992, prior to its acquisition by the Company, Naylor
sold all of the common stock of its industrial services subsidiary,
and as part of the sale remains obligated to indemnify the
purchaser, with certain exceptions and subject to specified
limitations, against certain claims, including certain pending or
threatened litigation known to Naylor as of the date of the
purchase. There can be no assurance that any claims, if successful,
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
are or will be wholly or partially insured, or covered by financial
reserves, or that such claims will not result in retroactive
adjustments in Naylor's insurance premiums based on the terms of
its retrospective rated policies. The Company's financial
statements reflect management's estimate of the likely amounts of
such remaining premiums. The Company has also provided in its
financial statements for the estimated amount of liabilities that
are likely to be incurred from pending litigation and claims
involving Naylor.
Management believes its working capital and its existing credit
availability will be adequate to meet its capital requirements for
the foreseeable future. In connection with any plans for the
expansion of the Company's business and for general corporate
purposes, the Company may consider an offering of shares of Common
Stock or convertible or other debt. The Company has not reached
any determination with respect to the size or nature of any such
offering or whether any such offering will be undertaken, and there
can be no assurance that any such offering will be made.
Recently Issued Accounting Standards
- ------------------------------------
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), issued by the Financial
Accounting Standards Board is effective for transactions entered
into in fiscal years that begin after December 15, 1995. The
disclosure requirements of SFAS No. 123 are also effective for
financial statements for fiscal years beginning after December 15,
1995. The new standard encourages entities to adopt a fair value
method of accounting for employee stock-based compensation plans
and requires such accounting for transactions in which an entity
acquires goods or services from non-employees through issuance of
equity instruments. As allowed under the provisions of SFAS No.
123, the Company will continue to measure compensation cost for
employee stock-based compensation plans using the intrinsic value
based method of accounting prescribed by the Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. As
such, the Company will make pro forma disclosures in its annual
financial statements of net income and earnings per share as if the
fair value based method of accounting had been applied.
Results of Operations - Three Months Ended March 31, 1996 Compared
to Three Months Ended March 31, 1995
Revenues. Revenues increased 9.4% to $68.1 million in 1996 from
$62.3 million in the prior year, primarily as a result of an
increase in construction revenues. The increase in construction
revenues is due principally to the April 1995 acquisition of the
pipeline rehabilitation business of Enviroq, including Insituform
Southeast, Inc. (and the consequent consolidation of Midsouth
Partners) resulting in the elimination of the related product sales
and royalty revenues. Fluctuations in currency exchange rates of
the Japanese yen, British pound sterling, and Canadian dollar to
the United States dollar negatively impacted total revenues by
approximately $0.4 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Construction contract revenues increased 10.9% to $60.7 million
from $54.7 million in 1995, primarily as a result of the
acquisition of Insituform Southeast, which together with the
consolidation of Midsouth Partners, contributed $6.8 million to
1996 construction revenues. See Note 3 of the Notes to
Consolidated Financial Statements for information describing the
Company's majority interest in Midsouth Partners resulting from the
Enviroq acquisition, and claims made in arbitration relating to
control of the management committee of Midsouth Partners.
Construction revenues also reflect increases by operations in the
United States from the Company's central region of $3.0 million and
its western region of $3.1 million. In addition, United Kingdom
revenues increased by $3.5 million, which primarily reflects volume
increases resulting from the acquisition of the FormaPipe business
in November 1995. These increases were offset by decreases in
revenues by the Company's New England operations of $4.2 million,
midwestern operations of $3.5 million, and corrosion and abrasion
activities in the United States and Chile of $3.4 million, which
were heavily impacted by poor weather and by lower workable
abrasion contract backlog in 1996. Fluctuations in currency
exchange rates of the British pound sterling and Canadian dollar to
the United States dollar negatively impacted total revenues by
approximately $0.2 million.
Product sales increased 0.7% to $5.8 million in 1996 from $5.7
million in 1995. The increase is primarily due to increased
activity in Japan of $1.0 million, relating to the Narita airport
project. These increases were offset by eliminations of
intercompany sales to the Company's recently acquired subsidiaries.
Prior period sales included $1.2 million of pre-acquisition sales
to Insituform Southeast and Midsouth Partners. Fluctuations in
currency exchange rates of the Japanese yen and British pound
sterling to the United States dollar negatively impacted total
revenues by approximately $0.2 million.
Royalty and license fee revenue decreased 8.1% in 1996 to $1.7
million compared to $1.8 million in 1995. While gross royalties
(before eliminations of intercompany transactions) increased by 0.2
million due to overall increased construction volume by the
Company's subsidiaries and its licensees, additional eliminations
of intercompany royalties from wholly owned licensees resulted in
royalties being virtually the same year to year. In 1995, the
Company recognized $0.2 million in license fees, compared to no
such revenues in 1996.
Operating Costs and Expenses. Costs of construction contracts
increased 15.7% to $42.3 million from $36.6 million in 1995. The
increase was primarily attributable to newly-acquired licensees,
which added, collectively, $5.5 million in costs in 1996.
Increases in construction costs in the central and western regions
of the United States of $3.2 million and $2.9 million,
respectively, are reflective of increased volume in 1996. The
Company's New England and midwestern operations experienced
decreases in costs in 1996 of $4.6 million and $2.1 million,
respectively, due primarily to decreases in volume. In addition,
the Company's corrosion and abrasion activities in the United
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
States and Chile experienced a decline in costs of $3.1 million,
due primarily to a decrease in volume as a result of lower workable
backlog. Construction costs as a percentage of construction
revenues increased to 69.6% as compared to 66.8% in 1995,
principally due to lower margins achieved by newly acquired
subsidiaries, coupled with lower margins in certain regions of the
United States which resulted from poor weather conditions and
competitive bidding conditions.
Cost of product sales decreased 8.4% to $3.7 million in 1996 from
$4.0 million in 1995 as a result of improved margins achieved in
the manufacture of Insituform and NuPipe products in the United
States, as a result of continued improvements in efficiency. In
addition, margins achieved in Japan improved in 1996 by over 2.1%
compared to the prior year due to increased volume and resulting
economies of scale. Costs of product sales as a percentage of
product sales improved to 64.3% in 1996, as compared to 70.7% in
1995, due to the improvements in overall margin.
As a percentage of revenues, selling, administrative and general
expenses were 21.7% compared to 21.2% in 1995. The 1996 increase
as a percentage of revenues is attributable primarily to higher
costs of operations in the newly acquired subsidiaries, coupled
with management's investment in stronger operations and sales
management, improvement in quality (ISO 9000 certification
program), and focus on the industrial market in 1996. Selling,
administrative and general costs increased 12.0% to $14.8 million
compared to $13.2 million in 1995 due, in large part, to the
incremental costs of operations for recently acquired entities of
$1.0 million (of which $0.3 million related to incremental goodwill
and non-compete amortization). Other increases were attributable
to added personnel costs in the Company's contracting operations in
the United States principally in the areas of industrial sales, and
operations and project management.
Strategic marketing and product development costs increased 4.2% to
$2.1 million in 1996 compared to $2.0 million in 1995, primarily
due to the continued focus on industrial marketing.
Interest expense. Interest expense increased 13.8% to $1.6 million
in 1996 from $1.4 million in 1995, due primarily to interest on
debt used to finance the Enviroq acquisition. This increase was
offset slightly by reduced principal and lower interest rates on
other indebtedness.
Other income. Other income decreased to $0.4 million from $0.5
million in 1995, primarily attributable to slightly lower
investment income from smaller available cash portfolios in the
United States in 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Taxes on Income. Taxes on income decreased 20.1% to $1.7 million
from $2.1 million in 1995 as a result of $1.5 million less in
income before taxes on income, offset by an increase in the
effective tax rate to 41.1% from 37.4% during the first quarter of
1995. This increase in the effective tax rate was primarily due to
a shift in earnings mix in 1996 to jurisdictions with higher tax
rates, coupled with additional amortization of goodwill associated
with the Enviroq acquisition, which is not deductible for tax
purposes.
Net Income. Total revenues increased by $5.8 million, or 9.4%, in
the first quarter of 1996 over the comparable period in 1995, which
was coupled with an increase in gross profit of $0.4 million, or
1.9%, offset by increased operating costs of $1.7 million, or
11.0%. These factors contributed to a decrease in operating income
of $1.3 million, or 19.5%. An increase in interest expense of $0.2
million and a decrease in other income of $0.1 million, offset by
a decrease in taxes on income of $0.4 million, resulted in a
decrease in income from continuing operations of $1.1 million, or
31.7%. Minority interests decreased by $0.2 million, offset by a
decrease in equity in earnings of affiliated companies of $0.2
million. As a result of the foregoing, net income for the first
quarter of 1996 was $2.3 million, a decrease of $1.2 million, or
34.2%, from the first quarter of 1995.
<PAGE>
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) The exhibits filed or incorporated by reference
as part of this Quarterly Report on Form 10-Q are listed on the
attached Index to Exhibits.
(b) During the quarter ended March 31, 1996, the
Company did not file any Current Reports on Form 8-K.<PAGE>
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
INSITUFORM TECHNOLOGIES, INC.
May 14, 1996 By: s/William A. Martin
-----------------------------
William A. Martin
Senior Vice President and
Principal Financial and
Accounting Officer
<PAGE>
<PAGE>
INDEX TO EXHIBITS
-----------------
27 - Financial Data Schedule, which is submitted
electronically to the Securities and Exchange
Commission for information only and is not filed.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 15,014
<SECURITIES> 1
<RECEIVABLES> 54,875
<ALLOWANCES> 970
<INVENTORY> 16,233
<CURRENT-ASSETS> 120,073
<PP&E> 60,041
<DEPRECIATION> 43,908
<TOTAL-ASSETS> 259,191
<CURRENT-LIABILITIES> 47,511
<BONDS> 0
0
0
<COMMON> 271
<OTHER-SE> 118,743
<TOTAL-LIABILITY-AND-EQUITY> 259,191
<SALES> 5,760
<TOTAL-REVENUES> 68,110
<CGS> 3,705
<TOTAL-COSTS> 46,110
<OTHER-EXPENSES> 16,820
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,569
<INCOME-PRETAX> 4,018
<INCOME-TAX> 1,651
<INCOME-CONTINUING> 2,250
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,250
<EPS-PRIMARY> 0.080
<EPS-DILUTED> 0.080
</TABLE>
