UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d)
OF
THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2006
Commission
file number 0-10786
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Insituform
Technologies, Inc.
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(Exact
name of registrant as specified in its charter)
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Delaware
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13-3032158
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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702
Spirit 40 Park Drive
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Chesterfield,
Missouri
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63005
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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636-530-8000
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Securities
registered pursuant to Section 12(b) of the Act:
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None
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Securities
registered pursuant to Section 12(g) of the Act:
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Title
of each class
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Name
of each exchange on which reported
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Class
A Common Shares, $.01 par value
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The
Nasdaq Global Select Market
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Preferred
Stock Purchase Rights
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The
Nasdaq Global Select Market
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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, 2006: $621,041,614
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 February 20, 2007: 27,247,985 shares
DOCUMENTS
INCORPORATED BY REFERENCE
As
provided herein, portions of the documents below are incorporated by
reference:
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Document
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Part
- Form 10-K
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Registrant’s
Proxy Statement
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Part
III
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for
the 2007 Annual Meeting of
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Stockholders
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3
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3
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14
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39
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41
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74
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74
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75
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75
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77
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Item
1.
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Business
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Forward-Looking
Information
This
Annual Report on Form 10-K contains various forward-looking statements (as
such
term is defined in the Private Securities Litigation Reform Act of 1995) that
are based on information currently available to the management of Insituform
Technologies, Inc. and on management’s beliefs and assumptions. When used in
this document, the words “anticipate,” “estimate,” “believe,” “plan,” and
similar expressions are intended to identify forward-looking statements, but
are
not the exclusive means of identifying such statements. Such statements are
subject to risks and uncertainties and include among others, our belief with
respect to estimated and anticipated costs to complete ongoing projects, our
belief that our documentation will substantiate contract claim conditions,
our
expectation with respect to the completion dates of ongoing projects and the
amount of backlog we will perform, our belief of the amounts we may recover
for
pending tunneling claims, our intention to obtain work that is comparable with
our tunneling operation’s core competency, our belief with respect to
anticipated levels of operating expenses, our belief that we have adequate
resources and liquidity to fund future cash requirements and debt repayments,
our expectation with respect to the anticipated growth of our businesses and
our
belief with respect to the strength of our trademark and our degree of market
penetration. Our actual results may vary materially from those anticipated,
estimated or projected due to a number of factors, such as the competitive
environment for our products and services, the availability and pricing of
raw
materials used in our operations, increased competition upon expiration of
our
patents or the inadequacy of one or more of our patents to protect our
operations, the geographical distribution and mix of our work, our ability
to
attract business at acceptable margins, the strength of our marketing and sales
skills, foreseeable and unforeseeable issues in projects that make it difficult
or impossible to meet projected margins, the timely award or cancellation of
projects, our ability to maintain adequate insurance coverage for our business
activities, political circumstances impeding the progress of work, our ability
to remain in compliance with the financial covenants included in our financing
documents, the regulatory environment, weather conditions, the outcome of our
pending litigation, our ability to enter new markets and other factors set
forth
in reports and other documents filed by us with the Securities and Exchange
Commission from time to time. We do not assume a duty to update forward-looking
statements. Please use caution and do not place reliance on forward-looking
statements.
General
Insituform
Technologies, Inc. is a worldwide company specializing in trenchless
technologies to rehabilitate, replace, maintain and install underground pipes.
We have three principal operating segments: rehabilitation, tunneling and Tite
Liner®. These segments have been determined primarily based on the types of
products sold by each segment, and each is regularly reviewed and evaluated
separately. While we use a variety of trenchless technologies, the
Insituform®
cured-in-place
pipe (“CIPP”) process contributed 72.3%, 66.7% and 69.2% of our revenues in
2006, 2005 and 2004, respectively.
Revenues
are generated by our company and our subsidiaries operating principally in
the
United States, Canada, Mexico, the United Kingdom, the Netherlands, France,
Belgium, Spain, Switzerland, Poland and Chile, and include product sales and
royalties from our joint ventures in Europe and Asia, and unaffiliated licensees
and sub-licensees throughout the world. The United States remains our single
largest market, representing 75.1% of total revenues in 2006. See Note 12 to
our
Consolidated Financial Statements contained in this report for additional
segment information and disclosures.
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.
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. For
certain information concerning our industry segments and geographic areas,
see
Note 12 to our Consolidated Financial Statements contained in this report.
Available
Information
Our
company’s 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 and current reports on Form 8-K (and 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 Business Code of Conduct applicable to our officers,
directors and employees, our Corporate Governance Guidelines, and our Board
committee charters are available, free of charge, on this website under
“Investors - Corporate Governance.” These documents will be made available, free
of charge, to any stockholder requesting them.
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.
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.
Microtunneling
is a
trenchless method of drilling a new tunnel from surface operated equipment.
Microtunneling is typically used for gravity sewers at depths greater than
15
feet, in congested areas, where unstable ground conditions exist, where
construction is below the water table, or where contamination zones are present.
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.
Thermopipe®
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.
PolyFlex™
and PolyFold™
are
methods of rehabilitating transmission and distribution water mains using
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.
iTAP™
is
a
robotic method for reinstating potable water service connections from inside
a
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 rehabilitation solution for pipes relined with
Thermopipe™, Polyflex™ or Polyfold™ lining systems.
See
“Patents” below for information concerning these technologies.
Tunneling
Tunneling
typically encompasses the construction of man-entry sized pipelines with access
through vertical shafts. From the vertical shaft, a tunnel is constructed using
a steerable, locally controlled tunnel boring machine. Pipe is typically
installed after the tunnel is constructed.
Tite
Liner® Process
Our
Tite
Liner® process is a method of lining new and existing pipe with a corrosion and
abrasion resistant polyethylene pipe.
Operations
Most
of
our installation operations are project-oriented contracts for municipal
entities. The 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 in the United States 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.
Rehabilitation
Activities
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 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 subsidiaries.
North
American rehabilitation operations, including research and development,
engineering, training and financial support systems, are headquartered in
Chesterfield, Missouri. During 2006, 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
through our subsidiaries in the United Kingdom, France, the Netherlands, Spain,
Switzerland, Belgium and Poland. Through one of our French subsidiaries, Video
Injection S.A.S., acquired in 1998, we utilize multifunctional robotic devices,
developed by Video Injection, in connection with the inspection and repair
of
pipelines. We also maintain a manufacturing facility in Wellingborough, England
to support European operations.
In
addition to sewer rehabilitation, we restore potable water pipes through
Insituform Blue™, a division formed in 2006. Currently operating in the United
Kingdom and North America, our Insituform Blue™ division restores water pipes
using our Thermopipe™, PolyFlex™ and PolyFold™ lining systems. In addition,
after restoring water pipes, we reinstate water service connections using iTAP™,
a robotic method that avoids digging and disruption.
European
operations are headquartered in Paris, France with principal regional facilities
located in the United Kingdom, France, The Netherlands, Spain, Switzerland,
Belgium and Poland.
Tunneling
Activities
We
conduct tunneling, microtunneling and a range of pipe system rehabilitation
services throughout the United States through our wholly-owned subsidiary,
Affholder, Inc. Our principal administrative functions for tunneling are
headquartered in Chesterfield, Missouri.
Tite
Liner® Activities
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 operating subsidiaries
in Chile and Canada and our Mexican 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 who provide pipe repair and
rehabilitation services throughout their respective licensed territories. At
December 31, 2006, the Insituform® CIPP process was licensed to five
unaffiliated licensees, which operate in the following countries: Israel, Japan,
Malaysia, New Zealand, Norway and Singapore. 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 they exist) relating to the subject
process, and to use our copyrights and trademarks.
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. Licensees, upon prior notice to us, may generally
terminate the license for specific reasons. We may vary the terms of agreement
entered into with new licensees according to prevailing conditions.
We
act as
licensor under arrangements with approved installers relating to the use of
our
Thermopipe® process in the United Kingdom and elsewhere on a non-exclusive
basis.
Ownership
Interests in Operating Licensees and Project Joint Ventures
Through
our 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, Hungary and Slovenia. The remaining interest in Insituform
Rohrsanierungstechniken is held by Per Aarsleff A/S, a Danish contractor. The
joint venture partners have rights-of-first-refusal in the event either party
determines to divest its interest.
Through
our subsidiary, Insituform Technologies Limited, we hold one-half of the equity
interest in Insituform Environmental Techniques Limited, our licensee of the
Insituform® CIPP process in Ireland. 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.
During
2006, we acquired through our subsidiary, INA Acquisition Corp., a 50% equity
interest in Insituform Asia Limited, our licensee of the Insituform® CIPP
process in the Special Administrative Regions of Hong Kong and Macau. The
remaining interest is 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 several contractual joint ventures in order to develop joint bids
on contracts for our pipeline rehabilitation business and for our tunneling
operations. 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.
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. 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.
We
offer
our Tite Liner® process worldwide to industrial customers to line new and
existing pipelines.
We
bid on
tunneling projects in selected geographical markets in the United States. Our
current bidding strategy is designed to obtain profitable work that fits
tunneling’s core mining competency. Large, more complex tunneling projects are
not part of our current strategy for our tunneling operation.
No
customer accounted for more than 10% of our consolidated revenues during the
years ended December 31, 2006, 2005 or 2004.
Contract
Backlog
Contract
backlog is our expectation of revenues to be generated from received, signed
and
uncompleted contracts whose cancellation 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,
as of December 31, 2006, 2005 and 2004, respectively.
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December
31,
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Backlog
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2006
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2005
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2004
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(In
millions)
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Rehabilitation
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$
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201.7
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$
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213.3
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$
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190.4
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Tunneling
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75.7
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66.3
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129.3
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Tite
Liner®
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12.8
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20.2
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8.6
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Total
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$
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290.2
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$
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299.8
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$
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328.3
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The
dollar amount of the backlog is not necessarily indicative of our future
earnings relative to our performance of such work. 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 all of the backlog in the rehabilitation and
Tite Liner® segments, and nearly all of the backlog in the tunneling segment,
during 2007. 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, 2006,
2005 and 2004, we spent $3.6 million, $2.9 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 Plc.
(“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 at our Insitutube® manufacturing facility in Batesville. Substantially
all of our fiber requirements are purchased from one source, but there are
alternate vendors readily available.
We
believe that the sources of supply for our Insituform® CIPP process 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
have a
third party contractual commitment for the manufacture and supply of Thermopipe®
process products through 2007. Thermopipe® is used for potable water pipe
rehabilitation and other rehabilitation applications.
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® process and under subsequent
arrangements, we also sell Thermopipe® process products to approved installers.
We
also
manufacture certain equipment used in our Insituform® CIPP and Tite Liner®
businesses.
Patents
As
of
December 31, 2006, we held 61 United States patents relating to the Insituform®
CIPP process, the last of which will expire in 2023. As of December 31, 2006,
we
had 15 pending United States patent applications relating to the Insituform®
CIPP process.
We
have
obtained and are pursuing patent protection in our principal overseas markets
covering various aspects of the Insituform® CIPP process. 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 three pending patent applications in the United
States relating to the Thermopipe® 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, 2006, we had approximately 2,000 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.
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 do not expect material revenues from our
proprietary products for drinking water pipe rehabilitation at least through
2007.
|
Item
1A.
|
The
following are some of the risks that we face in our business. The list of risk
factors is not exhaustive. 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. Additional risks not presently known to us or that we
currently believe to be immaterial also may adversely impact us. Should any
risks or uncertainties develop into actual events, these developments could
have
material adverse effects on our business, financial condition, cash flows and
results of operations.
Continued
under-performance by our tunneling business segment may result in goodwill
and
fixed asset impairment.
Late
in
2004 and 2005, our tunneling business experienced a number of margin write-downs
on its larger projects. In addition, underutilized equipment was a significant
adverse factor in the results of our tunneling business in 2005 and 2006. There
were significant losses in our tunneling business in 2004, 2005 and 2006. During
2006, it was determined, based on forecasted results for the next five years,
that there was no impairment of our tunneling goodwill or fixed assets. However,
if our tunneling business fails to improve performance, we may have exposure
to
the impairment of our goodwill and certain of our fixed assets in the tunneling
segment.
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 we have made
reasonably reliable estimates of the progress towards completion in our
long-term contracts. However, given the uncertainties associated with some
of
our contracts, it is possible for actual costs to vary from estimated amounts
previously made. The effect of revisions to estimates could result in the
reversal of revenue and gross profit previously recognized.
Our
success depends on attracting and retaining qualified
personnel.
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 also dependent on our
personnel to continue to develop improvements to our proprietary processes,
including materials used and the methods of manufacturing and installation.
Our
ability to attract, develop and retain qualified personnel has a significant
effect on our ability to profitably execute our work. Our success in attracting
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
recognition of revenues from insurance claims and from change orders, extra
work
or variations in the scope of work could result in a reduction or reversal
of
previously recorded revenues.
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
reasonably assured and the recoverable amounts can be reasonably estimated.
Prior to our decision to recognize these revenues, we consult with outside
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 to reduce or
reverse revenues and gross profit previously recognized in subsequent reporting
periods.
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 contracts
for
our pipeline rehabilitation business and for our tunneling operations. 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.
The
majority of our fiber requirements for tube manufacturing are from one source.
However, 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. In certain markets, such
as North America and Europe, we currently obtain a majority of our resin
requirements from single suppliers, although we believe that other sources
of
supply are available. We have a supply agreement with a supplier of resin that
requires the supplier to provide a majority of our resin requirements but the
agreement does not set a fixed purchase price for the product. Resin prices
have
fluctuated on the basis of the prevailing prices of oil and we anticipate that
prices will continue to be heavily influenced by the events affecting the oil
market. In addition, we purchase a significant volume of fuel to operate our
trucks and equipment. At present, we do not engage in any type of hedging
activities to mitigate the risks of fluctuating market prices for oil or fuel
and increases in the price of oil may cause an adverse effect on our cost
structure which we may not be able to recover from our customers.
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.
Our
Senior Notes and our line of credit facility contain certain restrictive debt
covenants. Our ability to meet these restrictive covenants may be affected
by
factors described above and others outside our control. Failure to meet one
or
more of these restrictive covenants may result in an event of default and may
hinder our ability to take advantage of attractive business opportunities.
Upon
an event of default, our lender(s) may declare all amounts outstanding as due
and payable and we may not have sufficient capital available at that time to
pay
the amounts due to our lenders.
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.
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, 2006, 24.9% 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. 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 which could significantly reduce our revenues and profits.
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, 2006 was approximately $290 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 requires 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.
|
Item
1B.
|
None.
|
Item
2.
|
Properties
|
Our
executive offices are located in Chesterfield, Missouri, a suburb of St. Louis,
at 702 Spirit 40 Park Drive. The executive offices are leased from an
unaffiliated party through May 31, 2007. We will relocate our executive offices
to a facility at another location we own in Chesterfield during 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, which was closed in January 2004,
but reopened in 2006, is located on land sub-leased from an unaffiliated entity
for an initial term of 40 years expiring on December 31, 2020. Insituform
Linings, 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 and
Latin America.
The
foregoing facilities are regarded by management as adequate for the current
requirements of our business.
|
Item
3.
|
Legal
Proceedings
|
In
the
third quarter of 2002, an accident on an Insituform® CIPP process project in Des
Moines, Iowa resulted in the death of two workers and the injury of five
workers. We fully cooperated with Iowa’s state OSHA in the investigation of the
accident. Iowa OSHA issued a Citation and Notification of Penalty in connection
with the accident, including several willful citations. Iowa OSHA proposed
penalties of $808,250. We challenged Iowa OSHA’s findings, and in the fourth
quarter of 2003, an administrative law judge reduced the penalties to $158,000.
In the second quarter of 2004, the Iowa Employment Appeal Board reinstated
many
of the original penalties, ordering total penalties in the amount of $733,750.
We appealed the decision of the Employment Appeal Board to the Iowa District
Court for Polk County, which, in the first quarter of 2005, reduced the
penalties back to $158,000. We appealed the decision of the Iowa District
Court
and, on February 8, 2006, our appeal was heard by the Iowa Court of Appeals.
On
March 17, 2006, the Court of Appeals issued its opinion, vacating all citations
issued under the general industry standards (all citations except two serious
citations) and reducing total penalties to $4,500. Thereafter, the Employment
Appeal Board filed a petition for further review with the Iowa Supreme Court,
and we filed a resistance to the petition. On September 29, 2006, the Iowa
Supreme Court granted the Employment Appeal Board’s petition for further review,
and set the case for consideration during the week of December 4, 2006. On
February 16, 2007, the Iowa Supreme Court issued its opinion, reinstating
all
citations issued under the general industry standards, including several
willful
citations, and reinstating penalties in the amount of $733,750. The Iowa
Supreme
Court remanded the case back to the Iowa District Court to enter an order
consistent with its opinion. We currently are reviewing the Court’s opinion
and our
options regarding further judicial review of the Court’s
opinion.
We
are
involved in certain other 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 other litigation will have a material adverse
effect on our consolidated financial condition, results of operations or cash
flows.
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
There
were no matters submitted during the quarter ended December 31, 2006 to a vote
of our stockholders, through the solicitation of proxies or
otherwise.
|
Item
4A.
|
Executive
Officers of the
Registrant
|
Our
executive officers, and their respective ages and positions with us, are as
follows:
|
Name
|
Age
at
February
1, 2007
|
Position
with the Company
|
||
|
Thomas
S. Rooney, Jr.
|
47
|
President
and Chief Executive Officer
|
||
|
Thomas
E. Vossman
|
44
|
Senior
Vice President and Chief Operating Officer
|
||
|
David
F. Morris
|
45
|
Vice
President, General Counsel and Secretary
|
||
|
David
A. Martin
|
39
|
Vice
President and Controller
|
Thomas
S.
Rooney, Jr. has been our President since April 2003, and our Chief Executive
Officer since July 2003. From April 2003 to July 2003, Mr. Rooney was our Chief
Operating Officer. From 2000 until he joined our company, Mr. Rooney was Senior
Vice President and Regional Manager for Gilbane Building Company.
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 has been our Vice President, General Counsel and Secretary since January
2005. 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 Controller since January 2006.
Prior
thereto, Mr. Martin served as our Corporate Controller for two years, following
two and one-half years as controller of our European operations. Mr. Martin
joined our company in 1993 from BDO Seidman, LLP, where he was a senior
accountant.
Item
5.
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
(a) The
company’s common shares, $.01 par value, are traded on The Nasdaq Global Select
Market (previously known as The Nasdaq Stock 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, 2006 and 2005, 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
|
|||||
|
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
|
|||||
|
2005
|
|||||||
|
First
Quarter
|
$
|
22.98
|
$
|
13.24
|
|||
|
Second
Quarter
|
17.50
|
13.86
|
|||||
|
Third
Quarter
|
21.17
|
15.86
|
|||||
|
Fourth
Quarter
|
20.99
|
14.90
|
|||||
During
the quarter ended December 31, 2006, 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 1, 2007, the number of
holders of record of our common stock was 701.
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
- Financings.”
The
following table provides information as of December 31, 2006 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
|
1,392,199
|
$
|
19.85
|
2,193,500
|
||||||
|
Equity
compensation plans not approved by security holders
|
-
|
n/a
|
-
|
|||||||
|
Total
|
1,392,199
|
$
|
19.85
|
2,193,500
|
||||||
|
(1)
|
The
number of securities to be issued upon exercise of outstanding options,
warrants and rights includes 1,298,392 stock options and 93,807 deferred
stock units outstanding at December 31,
2006.
|
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. Our peer group index is comprised of the following six
companies:
|
·
|
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.
The
graph
assumes that $100 was invested in our common stock and each index on December
31, 2001 and that all dividends were reinvested.
Comparison
of Five-Year Cumulative Return
|
2001
|
2002
|
2003
|
2004
|
2005
|
2006
|
||||||||||||||
|
Insituform
Technologies, Inc.
|
$
|
100.00
|
$
|
66.65
|
$
|
64.50
|
$
|
88.62
|
$
|
75.72
|
$
|
101.09
|
|||||||
|
S&P
500 Index
|
$
|
100.00
|
$
|
77.90
|
$
|
100.25
|
$
|
111.15
|
$
|
116.61
|
$
|
135.03
|
|||||||
|
Composite
Peer Group Index
|
$
|
100.00
|
$
|
81.86
|
$
|
115.21
|
$
|
139.89
|
$
|
198.70
|
$
|
229.03
|
|||||||
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.
|
Item
6.
|
Selected
Financial Data
|
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,
|
||||||||||||||||
|
2006(1)
|
2005
|
2004
|
2003(2)
|
2002(2,3,4)
|
||||||||||||
|
(In
thousands, except per share amounts)(Unaudited)
|
||||||||||||||||
|
INCOME
STATEMENT DATA:
|
||||||||||||||||
|
Revenues
|
$
|
596,715
|
$
|
595,282
|
$
|
542,598
|
$
|
487,272
|
$
|
480,358
|
||||||
|
Operating
income
|
31,459
|
23,743
|
8,178
|
21,591
|
50,183
|
|||||||||||
|
Income
from continuing operations
|
24,678
|
13,160
|
597
|
4,628
|
28,560
|
|||||||||||
|
Loss
from discontinued operations
|
-
|
-
|
-
|
(1,103
|
)
|
(5,869
|
)
|
|||||||||
|
Net
income
|
24,678
|
13,160
|
597
|
3,525
|
22,691
|
|||||||||||
|
Basic
earnings per share:
|
||||||||||||||||
|
Income
from continuing operations
|
0.91
|
0.49
|
0.02
|
0.17
|
1.08
|
|||||||||||
|
Loss
from discontinued operations
|
-
|
-
|
-
|
(0.04
|
)
|
(0.22
|
)
|
|||||||||
|
Net
income
|
0.91
|
0.49
|
0.02
|
0.13
|
0.86
|
|||||||||||
|
Dilutive
earnings per share:
|
||||||||||||||||
|
Income
from continuing operations
|
0.90
|
0.49
|
0.02
|
0.17
|
1.07
|
|||||||||||
|
Loss
from discontinued operations
|
-
|
-
|
-
|
(0.04
|
)
|
(0.22
|
)
|
|||||||||
|
Net
income
|
0.90
|
0.49
|
0.02
|
0.13
|
0.85
|
|||||||||||
|
BALANCE
SHEET DATA:
|
||||||||||||||||
|
Unrestricted
cash and cash equivalents
|
$
|
96,393
|
$
|
77,069
|
$
|
93,246
|
$
|
93,865
|
$
|
71,401
|
||||||
|
Working
capital, net of unrestricted cash
|
77,466
|
70,114
|
61,637
|
73,535
|
52,829
|
|||||||||||
|
Current
assets
|
310,364
|
274,024
|
273,201
|
277,273
|
252,651
|
|||||||||||
|
Property,
plant and equipment
|
90,453
|
95,657
|
90,846
|
75,667
|
71,579
|
|||||||||||
|
Total
assets
|
550,069
|
518,328
|
513,154
|
508,360
|
473,013
|
|||||||||||
|
Current
maturities of long-term debt and line of credit
|
16,814
|
18,264
|
15,778
|
16,938
|
49,360
|
|||||||||||
|
Long-term
debt, less current maturities
|
65,046
|
80,768
|
96,505
|
114,323
|
67,014
|
|||||||||||
|
Total
liabilities
|
209,277
|
213,106
|
221,671
|
227,726
|
198,965
|
|||||||||||
|
Total
stockholders’ equity
|
338,611
|
303,496
|
289,836
|
279,169
|
272,618
|
|||||||||||
__________________________
|
(1)
|
Effective
January 1, 2006, we adopted SFAS 123(R), “Share Based Payment” which
requires recording expense for stock option and other equity compensation
awards. We recorded $2.9 million in incremental expense for stock
options
in 2006.
|
|
(2)
|
We
have completed various acquisitions that have been accounted for
under the
purchase method of accounting, including Elmore Pipe Jacking, Inc.
in
2002, Sewer Services, Ltd. in 2003, Video Injection (remaining interest)
in 2003, Insituform East in 2003, and Ka-Te Insituform (remaining
interest) in 2003.
|
|
(3)
|
Results
include a pre-tax intangible asset impairment and restructuring charges
of
$3.5 million and $2.5 million, respectively.
|
|
(4)
|
Effective
January 1, 2002, we adopted SFAS 142, “Goodwill and Other Intangible
Assets,” and ceased amortizing
goodwill.
|
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
Results
of Operations
Consolidated
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Revenues
|
$
|
596,715
|
$
|
595,282
|
$
|
542,598
|
||||
|
Gross
profit
|
127,954
|
116,841
|
99,499
|
|||||||
|
Gross
profit margin
|
21.4
|
%
|
19.6
|
%
|
18.3
|
%
|
||||
|
Operating
expenses
|
96,495
|
93,098
|
91,321
|
|||||||
|
Operating
income
|
31,459
|
23,743
|
8,178
|
|||||||
|
Operating
income percentage
|
5.3
|
%
|
4.0
|
%
|
1.5
|
%
|
||||
Fourth
Quarter 2006 Results
Consolidated
net income in the fourth quarter of 2006 was $10.4 million, contributing
significantly to our $24.7 million in net income for the year ended December
31,
2006. Operationally, the fourth quarter of 2006 was strong, with the highest
revenues of any quarter in 2006. Revenue in the fourth quarter of 2006 was
$154.9 million, with $33.6 million in gross profit, which is a gross profit
margin of 21.7%. Operating expenses were $23.4 million, resulting in operating
income of $10.1 million. Operating margin, which is operating income as a
percentage of revenue, was 6.2% in the fourth quarter of 2006, the strongest
of
any quarter this year.
In
addition to operations, a number of items below the operating income line also
benefited our consolidated net earnings in the fourth quarter of 2006,
including:
|
·
|
Interest
income of $1.3 million in the quarter due to improved treasury practices,
higher interest rates and higher cash
balances.
|
|
·
|
Other
income of $4.3 million, primarily from gains on sales of property
and
equipment, of which,
|
-
$0.8
million was from tunneling property and equipment,
- $1.8
million was from the sale-leaseback of one of our European properties,
and
- $1.7
million was from the disposal of other property and equipment in North America.
|
·
|
A
tax rate of 30.1% for the quarter to bring the 2006 effective tax
rate to
31.8%.
|
See
Note
14 to our consolidated financial statements, “Selected Quarterly Financial Data”
for summarized financial data by quarter for the year ended December 31,
2006.
2006
Compared to 2005
Consolidated
net earnings nearly doubled in 2006 to $24.7 million, or $0.90 per diluted
share, from $13.2 million, or $0.49 per diluted share, in 2005. 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.
Cost
reductions have been a major initiative over the last several years, with a
primary focus on productivity through the implementation of steam and continued
material enhancements. As a result of these cost reductions, we have been able
to be more competitive in the marketplace, while market pricing has declined.
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 last year. Our tunneling business posted an
operating loss this year, but the operating loss in 2006 decreased by $7.5
million to $9.4 million compared to an operating loss of $16.9 million in 2005.
All of the large jobs that generated losses in the tunneling business have
been
completed, and the primary cause of operating losses in that segment of our
business during 2006 was the effect of underutilized equipment, as a result
of
much lower revenue compared to 2005 and 2004.
Consolidated
operating expenses were $3.4 million higher in 2006 compared to 2005, primarily
due to the following (in thousands):
|
Year
Ended
December
31, 2006 vs. 2005
|
||||
|
Increase
(Decrease)
|
||||
|
Legal
& accounting professional fees
|
$
|
3,125
|
||
|
Stock
option expense
|
2,870
|
|||
|
Other
equity compensation expense
|
547
|
|||
|
Incentive
compensation expense
|
247
|
|
||
|
Other,
including business unit operating expenses
|
(3,392
|
)
|
||
|
Total
|
$
|
3,397
|
||
Legal
and
accounting fees increased significantly, as we have focused on protecting our
intellectual property (discussed in more detail, below) and as we have engaged
professional resources to assist us in strategies to minimize our income tax
exposure, particularly in foreign tax jurisdictions. Stock option expense was
recorded, for the first time, in 2006 as required by SFAS 123(R), Share
Based Payment, which
was
effective for our company on January 1, 2006. Other equity compensation expense
relates to awards of restricted stock and deferred stock units and is calculated
based on our closing stock price on the grant date. As our stock price was
generally higher in 2006 than in 2005, restricted stock and deferred stock
units
granted in 2006 resulted in higher expense than awards granted in
2005.
Operating
income was $7.7 million higher in 2006, at $31.5 million compared to $23.7
million in 2005 due to higher revenues in our rehabilitation and Tite Liner®
businesses along with stronger gross profit margins in the Tite Liner®
business.
There
were a number of factors not directly related to operations that also
contributed to the increase in net earnings in 2006, most notably
(pre-tax):
|
·
|
sales
of tunneling property and equipment resulted in gains of $2.5
million;
|
|
·
|
sales
of other property resulted in gains of $3.7
million;
|
|
·
|
interest
income increased by $1.8 million due to improved cash management
practices, higher interest rates and a $0.4 million increase
in pre-judgment interest on a claim receivable;
and
|
|
·
|
interest
expense was $1.6 million lower due to our annual debt amortization
payment.
|
2005
Compared to 2004
Consolidated
revenues from operations increased 9.7% in 2005 compared to 2004. We experienced
significant revenue growth in our rehabilitation and Tite Liner® segments, while
tunneling revenues increased only slightly. Greater revenues were achieved
through successful sales efforts, greater crew capacity and higher backlog
in
the rehabilitation and Tite Liner® segments, while a more selective bidding
strategy, and the continuation of a few larger low-margin/loss projects led
to
the small increase in our tunneling revenue.
Consolidated
gross profit margins increased from 18.3% to 19.6% due to margin gains in the
rehabilitation business. In our rehabilitation business, we achieved certain
manufacturing and logistical efficiencies and we experienced improved
productivity in the second half of 2005. However, these favorable developments
were tempered by the effect of increased fuel and commodity prices, particularly
resin. In the rehabilitation segment, a claim receivable (as discussed below
under “Rehabilitation Segment - Gross Profit and Margin”) was recorded in 2005
which provided a net $3.4 million benefit to gross profit. Excluding the effect
of the claim receivable, margins increased by three-quarters of a percent in
the
rehabilitation business despite significantly higher commodity and fuel prices.
Tite Liner® margins were somewhat lower in 2005 compared to 2004 due to higher
volume of work performed in South America, which includes installing steel
pipe
(a commodity) and our Tite Liner® product at a lower gross profit margin.
Tunneling gross margins continued to suffer in 2005 from the continuation of
large projects that experienced downward gross margin revisions.
Operating
expenses increased by only 1.9% in 2005 compared to 2004 due principally to
controlled expenses in rehabilitation. There were increases in compensation
and
benefits for additional staffing required to support our business growth, as
well as increased legal expenses relating to various matters described more
fully in Note 11 to the consolidated financial statements contained in this
report. These costs were offset by a decrease in incentive compensation, as
our
results were below expectations for the year. As a percentage of revenue,
operating expenses were 15.6% of revenue in 2005 compared to 16.8% in 2004.
As
a
result, operating income increased by $15.6 million, or over 190%, to $23.7
million in 2005 compared to $8.2 million in 2004.
Intellectual
Property and Other Legal Matters
In
the
past few years, we have increased our emphasis on protecting the intellectual
property that is at the core of our business. As part of this effort, we have
actively prosecuted a number of legal proceedings seeking to collect damages
and
to enforce other remedies against third parties based upon patent infringement,
breach of license and implied license agreements and unauthorized use of trade
secrets involving our proprietary intellectual property.
In
one
such case filed against Cat Contracting, Inc., Michigan Sewer Company and
FirstLiner USA, Inc. in the United States District Court in Houston, Texas,
we
had received a judgment of $9.5 million in 1999 based upon the infringement
of
certain in-liner patents we owned. Upon subsequent appeal, the finding of
infringement was upheld, but the award of damages, including the finding of
willfulness, was subject to rehearing. We believed that we had a strong position
in upholding the original damage award and, after investigation, we also
concluded that the defendants had a viable source to collect all or a portion
of
the award, if confirmed. On the basis of these determinations, we decided to
aggressively pursue the rehearing on damages. The damages rehearing was
completed in the third quarter of 2006, and we currently are awaiting the
court’s decision. No receivable related to this matter has been recorded in the
consolidated financial statements as of December 31, 2006.
In
June
2005, after investigation, we commenced a lawsuit in the United States District
Court in Memphis, Tennessee against our long-time international partner, Per
Aarsleff A/S, a Danish public company, and certain of its subsidiaries and
affiliates. The suit alleges breach by these entities of license agreements
and
implied license agreements with us involving our proprietary intellectual
property relating to the Insituform® CIPP process. We seek monetary damages for
breach of our license agreements and implied license agreements between the
Per
Aarsleff entities and our company and for royalties owed by the Per Aarsleff
entities to us under these agreements. In 2006, we amended our complaint against
the Per Aarsleff entities to include additional damage claims based upon Per
Aarsleff’s continued use of our patented technology in Denmark, Sweden and
Finland following the termination of the license agreements and Per Aarsleff’s
use of our trade secrets in its Danish tube manufacturing facility. Our amended
complaint also seeks an injunction against Per Aarsleff’s continued operation of
the tube manufacturing facility. In April 2006, we filed a separate patent
infringement action in Denmark against Per Aarsleff seeking to enjoin its
continued use of an inversion device covered by one of our European patents.
We
also have filed separate legal actions in Germany against Per Aarsleff relating
to its conduct involving our joint venture company in Germany and with respect
to transactions between Per Aarsleff and our German joint venture company,
which
we believe were at prices other than arms’-length. We estimate the aggregate
claims in these matters to be in excess of $10.0 million; however, no claims
receivable has been recorded in the consolidated financial statements. Due
to
the uncertainties of litigation, as well as issues regarding the collectibility
of damage awards, there can be no assurance regarding these litigations at
this
time or as to the amount of money, if any, that we may ultimately recover
against Per Aarsleff. This case currently is set for trial in the second quarter
of 2008.
In
June
2005, we filed a petition in State Court in St. Louis County, Missouri against
Reynolds, Inc., certain of its subsidiaries and affiliates and an officer of
Reynolds, Inc. This suit has been moved to the United States District Court
in
St. Louis. The suit alleges that Reynolds, among other things, (i) tortiously
interfered with a non-competition and confidentiality agreement we had with
a
former employee and (ii) misappropriated our trade secrets. In April 2005,
the
St. Louis County Court had entered a temporary injunction against our former
employee, finding that he had violated the terms of his non-competition and
confidentiality agreement with us and had retained, misappropriated and
disseminated to Reynolds, Inc. property of our company for the benefit of
Reynolds. In light of the court’s April 2005 findings, we amended our petition
to add Reynolds as a defendant in the action. This case currently is set for
trial in the second quarter of 2007.
As
discussed in previous reports, we also are vigorously pursuing a number of
tunneling claims, and continue to incur significant legal costs and expenses
in
prosecuting such actions. As of December 31, 2006, we had approximately $18.7
million in tunneling claims, of which approximately $7.2 million has been
recognized.
We
have
recorded significant expenses, including attorneys’ fees and other litigation
costs, in connection with the prosecution of these intellectual property
lawsuits, tunneling claims and other legal matters. For the years ended December
31, 2006, 2005 and 2004, we incurred attorneys’ fees and litigation costs of
approximately $6.6 million, $4.3 million and $3.5 million, respectively, with
respect to these lawsuits and other legal matters. Other than $7.2 million
and
$7.6 million in receivables at December 31, 2006 related to tunneling claims
and
our claim against our excess insurance carrier (see
Note 11 “Boston Installation”),
respectively, we have not recorded any receivable related to these lawsuits.
We
have vigorously pursued these lawsuits based upon our business judgment that
the
possibility of recovery of substantial damages, the granting of the requested
injunctive relief and other ancillary benefits arising from our proactive
protection of our intellectual property, justifies the expenses previously
incurred and currently projected. Because of the substantial uncertainty at
this
time with respect to the liability and/or damages outcomes, including the
collectibility of any damages awarded, we cannot estimate a dollar amount or
range of recovery from these lawsuits at this time.
Contract
Backlog
Contract
backlog is management’s expectation of revenues to be generated from received,
signed, uncompleted contracts whose cancellation is not anticipated at the
time
of reporting. 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.
|
Backlog
|
December
31,
2006
|
September
30,
2006
|
June
30,
2006
|
March
31,
2006
|
December
31,
2005
|
|||||||||||
|
(in
millions)
|
||||||||||||||||
|
Rehabilitation
|
$
|
201.7
|
$
|
201.2
|
$
|
186.8
|
$
|
216.2
|
$
|
213.3
|
||||||
|
Tunneling
|
75.7
|
80.7
|
70.1
|
50.2
|
66.3
|
|||||||||||
|
Tite
Liner®
|
12.8
|
13.2
|
15.6
|
20.1
|
20.2
|
|||||||||||
|
Total
|
$
|
290.2
|
$
|
295.1
|
$
|
272.5
|
$
|
286.5
|
$
|
299.8
|
||||||
The
dollar amount of backlog is not necessarily indicative of future earnings
relative to the performance of such work. 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.
Rehabilitation
Segment
|
Years
Ended December 31,
|
||||||||||
|
|
2006
|
2005
|
2004
|
|||||||
|
(Dollars
in thousands)
|
||||||||||
|
Revenues
|
$
|
481,220
|
$
|
445,072
|
$
|
409,408
|
||||
|
Gross
profit
|
113,623
|
109,585
|
94,305
|
|||||||
|
Gross
profit margin
|
23.6
|
%
|
24.6
|
%
|
23.0
|
%
|
||||
|
Operating
expenses
|
81,874
|
75,275
|
77,173
|
|||||||
|
Operating
income
|
31,749
|
34,310
|
17,132
|
|||||||
|
Operating
income percentage
|
6.6
|
%
|
7.7
|
%
|
4.2
|
%
|
||||
Revenues
Rehabilitation
revenues were 8.1% higher in 2006 compared to 2005. However, backlog in the
rehabilitation segment decreased by 5.4% in 2006 compared to 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 quarter 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. Due
to
the improvement in the market, during the second half of 2006, revenue was
substantially higher than the same periods in 2005, as demonstrated in the
table
below, which presents rehabilitation revenues, by quarter, compared to the
prior
year:
|
Rehabilitation
Revenues by Quarter
|
|||||||||||||
|
2006
|
2005
|
$
Increase
|
%
Increase
|
||||||||||
|
(dollars
in thousands)
|
|||||||||||||
|
1st
quarter
|
$
|
111,658
|
$
|
105,228
|
$
|
6,430
|
6.1
|
%
|
|||||
|
2nd
quarter
|
125,218
|
123,231
|
1,987
|
1.6
|
%
|
||||||||
|
3rd
quarter
|
118,269
|
107,821
|
10,448
|
9.7
|
%
|
||||||||
|
4th
quarter
|
126,075
|
108,792
|
17,283
|
15.9
|
%
|
||||||||
|
Total
|
$
|
481,220
|
$
|
445,072
|
$
|
36,148
|
8.1
|
%
|
|||||
As
stated
earlier, revenue was somewhat tempered by market price reductions during the
year as a result of competitiveness we have gained over the last few years
through cost efficiencies gained from the implementation of steam and other
technological improvements.
Revenue
from our European rehabilitation business was slightly higher in 2006 compared
to 2005 due primarily to higher royalty revenue, which was $0.9 million higher
in 2006 as compared to 2005. Revenue from European CIPP installations were
lower
primarily due to results in the United Kingdom and France, while operations
in
other European countries achieved higher revenue, particularly in the
Netherlands.
We
expect
growth in our rehabilitation business in 2007, both in North America and Europe.
Rehabilitation backlog decreased by 5.4% compared to December 31, 2005, but
grew
by approximately 8.0% in the second half of 2006, to $201.7 million at December
31, 2006. In addition, due to improved crew productivity and technological
advances, particularly in our steam inversion process, we expect to achieve
growth with minimal crew expansion.
Rehabilitation
revenues increased $35.7 million, or 8.7%, in 2005 as compared to 2004 due
to a
number of factors, including successful sales efforts through an expanded sales
force, higher backlog and expanded crew capacity. Backlog at the beginning
of
2005 was $78.6 million higher than at the beginning of 2004. During 2005, we
experienced a full year of larger CIPP process crew capacity to accommodate
our
growing backlog. Revenues were higher in 2005 compared to 2004 across nearly
all
geographic regions in both North America and Europe. Revenue from our European
contracting operations increased by 11.5% during 2005 as compared to 2004 and
revenue from our North American contracting operations increased by 7.7% during
2005 as compared to 2004. European revenues were principally impacted by growth
and improved markets in the United Kingdom, the Netherlands and
France.
Gross
Profit and Margin
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 slid 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 which were driven in the marketplace. Another factor in
the
percentage-point decline in gross profit margin is 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.
See
Note 11 to the consolidated financial statements for a more detailed description
of this insurance claim receivable. Excluding the effect of insurance claim
recognition, gross profit margin would have been 23.5% in 2006 compared to
23.8%
in 2005. A table reconciling gross profit, excluding the effect of insurance
claims, to gross profit, as reported, is provided in the table below for the
years ended December 31, 2006 and 2005 (dollars in thousands):
|
Years
Ended
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
Gross
profit, excluding insurance claims
|
$
|
113,097
|
$
|
106,138
|
|||
|
Gross
profit margin, excluding insurance claims
|
23.5
|
%
|
23.8
|
%
|
|||
|
Effect
of insurance claims recognition
|
526
|
3,447
|
|||||
|
Gross
profit, as reported
|
$
|
113,623
|
$
|
109,585
|
|||
|
Gross
profit margin, as reported
|
23.6
|
%
|
24.6
|
%
|
|||
Our
material costs were driven slightly higher in 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. In many cases, we have the ability
to pass through such price increases to our customers. However, to the extent
we
may have longer-term contracts with fixed pricing, our ability to pass through
such price increases may be limited. During 2006, our ability to pass through
a
substantial portion of our raw material price increases to our customers enabled
us to maintain a gross profit margin that was only slightly lower than the
gross
profit margin achieved in 2005, excluding the effect of insurance claims
recognition.
Rehabilitation
gross profit increased by $15.3 million, or 16.2%, in 2005 as compared to 2004.
Gross profit margins in the rehabilitation segment were 24.6% in 2005 compared
to 23.0% in 2004. During 2005, a claim receivable (as discussed in Note 11
to
the consolidated financial statements) was recorded which provided a net $3.4
million benefit to rehabilitation gross profit. Excluding the effect of this
claim receivable, rehabilitation gross margins would have increased by just
over
three-quarters of a percentage point due to a decrease in low-margin
pipebursting work, advances in crew productivity and efficiencies in
manufacturing and logistics. These results were achieved despite significant
increases in raw material costs, particularly resin, during late 2004 and into
2005. In addition, fuel costs increased significantly during the same period.
Operating
Expenses
Operating
expenses were $6.6 million, or 8.8%, 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
17.0% in 2006 compared to 16.9% in 2005.
Operating
expenses decreased $1.9 million, or 2.5%, in 2005 as compared to 2004, due
primarily to lower incentive compensation expense and lower amortization
expense. Incentive compensation expense was lower as our overall results were
below expectations. Amortization expense was lower due to the full amortization
during 2004 of certain intangibles acquired with Insituform East, Inc. These
reductions in operating expenses were partially offset by increased compensation
and legal costs necessary to support growth and our strategic initiatives.
As a
percentage of revenues, operating expenses were 16.9% in 2005 compared to 18.8%
in 2004.
Operating
Income and Margin
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 $2.6 million, or 7.5%, to $31.7
million in 2006 compared to $34.3 million in 2005. Operating margin, which
is
operating income as a percentage of revenue, similarly fell to 6.6% in 2006
compared to 7.7% in 2005.
In
2005,
higher revenues along with lower operating expenses resulted in significantly
higher operating income in the rehabilitation segment as compared to 2004.
Rehabilitation operating income increased by $17.2 million, or over 100%, in
2005 as compared to 2004, and operating margin, increased to 7.7% in 2005
compared to 4.2% in 2004.
Insituform
Blue™
During
2006, we launched a new potable water infrastructure division under the name
Insituform Blue™. Under Insituform Blue™, we operate with a variety of
technologies geared to the global drinking water market. Insituform Blue™ did
not have a material effect on our consolidated results of operations, and is
expected to generate modest operating losses, perhaps for the next few years,
as
we establish this business for the future.
Tunneling
Segment
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Revenues
|
$
|
69,296
|
$
|
111,687
|
$
|
108,729
|
||||
|
Gross
loss
|
(1,048
|
)
|
(4,184
|
)
|
(3,128
|
)
|
||||
|
Gross
profit margin
|
-1.5
|
%
|
-3.7
|
%
|
-2.9
|
%
|
||||
|
Operating
expenses
|
8,338
|
12,723
|
10,080
|
|||||||
|
Operating
loss
|
(9,386
|
)
|
(16,907
|
)
|
(13,208
|
)
|
||||
|
Operating
income percentage
|
-13.5
|
%
|
-15.1
|
%
|
-12.1
|
%
|
||||
Summary
In
early
2006, the tunneling business brought to a close the last of the major
problematic projects, which had been the primary reason for significant losses
in the segment in recent years. During 2006, tunneling’s management refocused
its efforts on disposal of excess property and equipment, and on obtaining
profitable new projects that are in alignment with tunneling’s core mining
expertise. Consequently, disposals of tunneling property and equipment resulted
in $2.5 million in gains on property and equipment disposals during 2006, and
backlog rose to $75.7 million at December 31, 2006 after reaching a low of
$50.2
million at March 31, 2006.
While
there are positive indications that tunneling may return to profitability,
tunneling will likely continue to be burdened by significant underutilized
equipment costs. Underutilized equipment costs were $9.2 million in 2006, as
revenues were significantly lower than what would be considered necessary to
support the operation. Accordingly, we continue to seek alternatives to further
reduce equipment to a level appropriate for the size of our tunneling business.
We will also continue to focus on obtaining additional projects, as more
projects are needed to return the tunneling business to more historical levels
of revenues and earnings.
Some
of
the problems experienced on a number of completed tunneling projects may have
related claims that could benefit gross profit in future periods. At December
31, 2006, our tunneling operation had approximately $18.7 million in outstanding
claims against third parties relating to, among other things, differing site
conditions and defective customer specifications. Of this amount, $7.2 million
had been recorded in our consolidated financial statements through December
31,
2006. Claims of $1.3 million were recognized during 2006, compared to $4.6
million recorded in 2005 and $1.7 million recorded in 2004. In accordance with
our accounting policies, we record a claim to income when realization of the
claim is reasonably assured, and we can estimate a recoverable
amount.
During
2005 and 2006, we increased our efforts regarding tunneling claims and have
aggressively pursued all outstanding claims, either through discussions and/or
negotiations with our clients, alternative dispute resolution proceedings or,
if
necessary, litigation.
Revenues
Tunneling
revenues declined by 38.0%, or $42.4 million, in 2006 compared to 2005, due
to
fewer active projects and low backlog. Management’s focus on completing existing
projects in late 2005 and early 2006, along with the implementation of a more
selective bidding strategy, caused backlog in the tunneling business to decline
sharply, beginning in 2005 and continuing into the second quarter of
2006.
Tunneling
revenues increased by only $3.0 million, or 2.7%, in 2005 as compared to 2004
due to the implementation of a more selective bidding strategy in response
to
difficulties encountered on certain large jobs in 2004 and 2005. Revenue was
also impacted by claims recorded in 2005 and 2004 and write-downs on the
aforementioned projects in 2005 partially offset by $4.6 million in claims
receivable during 2005. The combination of management’s focus on completing
existing jobs and the more selective bidding strategy caused backlog to decrease
sharply during 2005, by $63.0 million, or 48.7%, to $66.3 million at the end
of
2005 compared to $129.3 million in 2004.
Gross
Loss and Margin
Tunneling’s
gross loss narrowed to $1.0 million in 2006 compared to $4.2 million in 2005.
While tunneling project margins have improved, as a result of the completion
of
several problematic low-margin or loss jobs, and the slow addition of new work,
considerable idle tunneling equipment remains, resulting in significant
underutilized equipment costs in 2006. Underutilized equipment costs, primarily
depreciation and operating lease expenses, were $9.2 million in 2006 compared
to
$4.8 million in 2005. Partially offsetting underutilized equipment costs were
$1.3 million recorded on claims in 2006, relating to completed projects.
Tunneling’s gross loss in the prior year was affected by the continuation of
large projects that experienced margin deterioration.
Tunneling’s
loss at the gross profit line widened by $1.1 million, or 33.8%, in 2005 as
compared to 2004. The gross profit margin also declined to a negative 3.7%
in
2005 compared to a negative 2.9% in 2004. Performance in the tunneling segment
was adversely impacted by the continuation of projects with ongoing issues
and
further margin deterioration on certain of those projects. The project in
Chicago accounted for $5.7 million of 2005’s gross loss. As mentioned earlier,
during 2005, $4.6 million in claims were recognized, which partially offset
the
losses incurred during 2005. During 2004, only $1.7 million in claims were
recorded.
Due
to
the decreasing backlog during 2005, gross profit also was significantly impacted
by under utilized equipment. Underutilized equipment costs (primarily
depreciation and operating lease expenses) were $4.8 million in 2005 compared
to
$2.4 million in 2004.
Operating
Expense
Tunneling
operating expenses decreased significantly during 2006, as administrative
staffing and other overhead expenses were reduced to adjust to a lower operating
base. Partially offsetting lower administrative and overhead expenses were
higher corporate costs allocated to tunneling for increased management efforts
to run the business. Operating expenses as a percentage of revenue were 12.0%
in
2006 compared to 11.4% in 2005.
Tunneling’s
operating expenses increased $2.6 million, or 26.2%, in 2005 as compared to
2004
due to higher compensation expenses for additional staffing hired to improve
cost control and project management and $0.9 million in bad debt expense on
certain doubtful receivables and claims from counterparties. Corporate expenses
allocated to tunneling were also higher due to additional senior management
time
spent on tunneling matters, additional technology costs related to systems
initiatives and legal costs related to claims. These factors were partially
offset by lower incentive compensation expense as tunneling’s performance was
well below expectations in 2005.
Operating
expenses as a percentage of revenue rose to 11.4% in 2005 compared to 9.3%
in
2004.
Operating
Loss and Margin
Tunneling’s
operating loss narrowed by $7.5 million, to $9.4 million in 2006 compared to
$16.9 million in 2005. Tunneling’s operating margin was a negative 13.5% in 2006
compared to a negative 15.1% in 2005.
Tunneling’s
operating loss widened by $3.7 million, or 28.0%, in 2005 compared to 2004
due
to the factors described in the preceding paragraphs. Operating loss percentage
was a negative 15.1% in 2005 compared to a negative 12.1% in 2004.
During
2006, it was determined that there was no impairment of our tunneling goodwill
($8.9 million at December 31, 2006) or fixed assets. However, if our tunneling
business does not improve, we may have exposure to the impairment of our
goodwill and certain of our fixed assets in the tunneling segment.
Tite
Liner® Segment
|
Years
Ended December 31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
(Dollars
in thousands)
|
||||||||||
|
Revenues
|
$
|
46,199
|
$
|
38,523
|
$
|
24,461
|
||||
|
Gross
profit
|
15,379
|
11,440
|
8,322
|
|||||||
|
Gross
profit margin
|
33.3
|
%
|
29.7
|
%
|
34.0
|
%
|
||||
|
Operating
expenses
|
6,283
|
5,100
|
4,068
|
|||||||
|
Operating
income
|
9,096
|
6,340
|
4,254
|
|||||||
|
Operating
income percentage
|
19.7
|
%
|
16.5
|
%
|
17.4
|
%
|
||||
Revenues
Tite
Liner® 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 operations increased
by
$1.7 million in 2006 compared to 2005.
Backlog,
which is not necessarily an indicator of future revenues, was $20.2 million
at
the beginning of 2006, which was $11.6 million higher than backlog at the
beginning of 2005. In addition, backlog remained at a high level into the first
quarter of 2006, before coming down during the last three quarters of 2006
to
$12.8 million at December 31, 2006, due primarily to timing of projects
awarded.
Demand
for Tite Liner®’s product is normally strong during periods when pricing for oil
and other mined commodities is high. Tite Liner®’s strong performance is
expected to continue into 2007, but it may not exceed 2006 results, as this
year
was exceptionally strong for the Tite Liner® business, and backlog was lower at
December 31, 2006 as compared to last year. We are also pursuing new markets
for
business worldwide, including potable water.
Tite
Liner® revenues increased $14.1 million, or 57.5%, in 2005 compared to 2004 due
primarily to an increased volume of business in South America and other
international markets. Tite Liner’s revenues from South American operations were
$10.3 million higher during 2005 compared to 2004. Operations in the United
States and Canada increased by approximately $3.7 million during 2005 compared
to the prior year due to a market driven by high oil and other commodity
prices.
Gross
Profit
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.
Tite
Liner’s® gross profit increased by $3.1 million, or 37.5%, in 2005 as compared
to 2004, due to higher revenues. Gross profit margin was 29.7% in 2005 compared
to 34.0% in 2004 due to the volume of business in South America. The work in
South America includes installing steel pipes (a commodity), which contributes
a
lower gross margin, as well as our Tite Liner® product. Gross margins in South
America were 17.1% in 2005 compared to 19.0% in 2004. In contrast, North
American operations generated gross margins of 35.1% in 2005 compared to 34.8%
in 2004.
Operating
Expenses
Tite
Liner® operating expenses were $1.2 million, or 23.2%, higher in 2006 as
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 revenue, operating expenses were 13.6% in 2006 compared to
13.2%
in 2005.
Operating
expenses in our Tite Liner® business were $1.0 million, or 25.4%, higher in 2005
as compared to 2004, due primarily to additional staffing hired and additional
corporate expenses allocated to accommodate business growth. However, as a
percentage of revenue, operating expenses were 13.2% of revenues in 2005
compared to 16.6% of revenues in 2004.
Operating
Income and Margin
Tite
Liner's® higher revenues and stronger gross profit margins were partially offset
by higher operating expenses. These combined factors resulted in operating
income that was $2.8 million, or 43.5%, higher in 2006 compared to 2005.
Operating margin, which is operating income as a percentage of revenue, was
19.7% in 2006, compared to 16.5% in 2005.
Operating
income increased by $2.1 million, or 49.0%, during 2005 as compared to 2004.
However, due to the volume of business in South America and the related lower
margins, operating margin was lower in 2005, at 16.5%, compared to 17.4% in
2004.
Other
Income/Expense
Interest
expense and the year-over-year fluctuation of interest expense for the years
ended December 31, 2006, 2005 and 2004 were as follows (in
thousands):
|
Years
Ended
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Interest
expense
|
$
|
6,834
|
$
|
8,465
|
$
|
9,305
|
||||
|
Increase
(decrease) from prior year
|
(1,631
|
)
|
(840
|
)
|
1,070
|
|||||
Interest
expense decreased $1.6 million during 2006 compared to 2005 and $0.8 million
during 2005 compared to 2004 due to the following factors (in
thousands):
|
Years
Ended
December
31,
|
|||||||
|
2006
vs. 2005
|
2005
vs. 2004
|
||||||
|
Debt
principal amortization
|
$
|
(1,476
|
)
|
$
|
(1,238
|
)
|
|
|
Increased
rates due to debt amendments
|
93
|
487
|
|||||
|
Deferred
fee write-offs due to debt amendments
|
-
|
(226
|
)
|
||||
|
Euro
note interest (Note repaid in 2004)
|
-
|
(114
|
)
|
||||
|
Interest
on short-term borrowings and other
|
(248
|
)
|
251
|
||||
|
Total
|
$
|
(1,631
|
)
|
$
|
(840
|
)
|
|
See
“
-
Liquidity and Capital Resources - Financings” under this Item 7 for further
discussion of debt instruments and related amendments.
Interest
income was $3.9 million in 2006, which was $1.8 million higher than 2005. During
2006, interest earned on deposits increased by approximately $1.4 million,
due
to improved treasury practices, higher interest rates and higher cash balances.
In addition, pre-judgment interest income related to an insurance claim
receivable was $0.4 million greater in 2006 compared to 2005.
Interest
income was $2.1 million in 2005 compared to $1.4 million of interest income
recorded in 2004. The majority of the increase in interest income between 2004
and 2005 was $0.4 million of pre-judgment interest income related to an
insurance claim receivable recorded in 2005.
Other
income was $6.3 million in 2006 compared to other expense of $0.7 million in
2005. The majority of other income in 2006 includes gains on property and asset
disposals of $6.2 million.
Income
Taxes
Our
effective tax rate in 2006 was 31.8% 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 favorable tax treatment
on the disposal of foreign property, and the benefit of a federal motor fuels
excise tax credit.
Our
deferred tax liabilities in excess of deferred tax assets were $0.7 million,
including a $4.6 million valuation allowance primarily related to foreign net
operating losses. Deferred tax assets include $0.5 million of foreign tax credit
carryforwards, which begin expiring in 2011, and $2.5 million in federal, state
and foreign net operating loss carryforwards, net of applicable valuation
allowances.
The
2005
effective tax rate of 25.1% was lower than the federal statutory rate due to
the
benefit of amortization of intangibles, utilization of operating losses in
certain foreign countries that had prior valuation allowances, higher income
in
jurisdictions with rates lower than the U.S. rate, 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.
See
Note
9 to the consolidated financial statements contained in this report for
additional information regarding taxes on income.
Minority
Interest and Equity in Earnings (Losses) of Affiliated
Companies
Minority
interest in net income principally relates to the 25% interest in the net income
of Insituform Linings Plc held by Per Aarsleff A/S, a Danish
contractor.
Equity
in
earnings of affiliated companies increased to $1.3 million during 2006 compared
to $0.9 million during 2005. During 2006, equity earnings from our 50%-owned
German joint venture, Insituform Rohrsanierungstechniken GmbH, was $1.6 million,
but was partially offset by $0.3 million in losses from our Asian joint venture.
In the prior year, our German joint venture earned $0.9 million.
Equity
losses of $0.2 million in 2004 was comprised primarily of $0.3 million in
earnings by our German joint venture offset by $0.5 million losses in our
Italian joint venture, Insituform Italia, Srl, which ceased operations in early
2005.
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 completion and thus the timing of revenue recognition and gross
profit. Revisions in profit estimates are reflected in the period in which
the
facts that give rise to the revision become known. When current estimates of
total contract costs indicate that the contract will result in a loss, the
projected loss is recognized in full in the period in which the loss becomes
evident. Revenues from change orders, extra work, variations in the scope of
work and claims are recognized when realization is reasonably assured, and
at
estimated recoverable amounts.
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.
Retainage
Many
of
the contracts under which we perform work contain retainage provisions.
Retainage refers to that portion of revenue we have earned and billed but is
held for payment by the customer pending satisfactory completion of the project.
Unless reserved, we assume 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. See Note 2 to the
consolidated financial statements contained in this report regarding
classification of current assets and current liabilities.
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 SFAS
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 share 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 123(R) is described in Note 7 to the
consolidated financial statements.
Goodwill
Impairment
Under
Statement of Financial Accounting Standards 142, Goodwill
and Other Intangible Assets,
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 or division relative to expected, historical
or projected future operating
results;
|
|
·
|
significant
negative industry or economic trends;
and
|
|
·
|
significant
changes in the strategy for a segment or
division.
|
In
accordance with the provisions of SFAS 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, tunneling and Tite Liner®. 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. We typically engage a third party valuation expert to assist in
estimating reporting unit fair value. 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.
See
“Risk
Factors” in Item 1A of this report for further discussion of goodwill impairment
risk.
Deferred
Income Tax Assets
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
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.
Long-Lived
Assets
Property,
plant and equipment, goodwill and other identified intangibles (primarily
licenses, covenants not-to-compete and patents) 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 shortened, we would depreciate or amortize the net book value in excess
of
the salvage value over its revised remaining useful life, thereby increasing
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.
Allowance
for Doubtful Accounts
We
estimate the uncollectibility of our accounts receivable and we evaluate
specific accounts where we have information that the customer may be unwilling
or unable to pay the receivable in full. In these cases, we use judgment, based
on the best available facts and circumstances, and record specific allowances
for those customers against amounts due in order to reduce the receivable to
the
amount that is considered collectible. The specific allowances are re-evaluated
and adjusted as additional information is received that affects the allowance.
After all reasonable attempts to collect the receivable have been explored,
the
receivable is written off against the allowance. Based on the information
available, we believe that the allowance for doubtful accounts as of
December 31, 2006 was adequate. However, no assurances can be given that
actual write-offs will not exceed the recorded allowance.
Liquidity
and Capital Resources
Cash
and Cash Equivalents
|
December
31,
|
|||||||
|
2006
|
2005
|
||||||
|
(In
thousands)
|
|||||||
|
Cash
and equivalents
|
$
|
96,393
|
$
|
77,069
|
|||
|
Restricted
cash - in escrow
|
934
|
5,588
|
|||||
Restricted
cash held in escrow relates to deposits made as escrow for release of retention
on specific projects performed for municipalities and state agencies.
Sources
and Uses of Cash
We
expect
the principal use of funds for the foreseeable future will be for capital
expenditures, working capital, debt servicing and investments. Our primary
source of cash is operating activities. Besides operating activities, we
occasionally borrow under our line of credit to fund operating activities,
including working capital investments. In 2007, we anticipate working with
the
investment banking community to develop a plan to create a new capital structure
that is aligned with our long-term growth opportunities. Information regarding
our cash flows for the year ended December 31, 2006, 2005 and 2004 is further
discussed below and is presented in our consolidated statements of cash flows
contained in this report.
Cash
Flows from Operations
Cash
flows from operating activities provided $39.7 million in 2006 compared to
$23.6
million in 2005. The most significant component of the favorable variance from
2005 to 2006 was net income, which was $11.5 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 123(R). Changes in operating assets and
liabilities (working capital) used $9.0 million in 2006 compared to $11.4
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 $14.7 million.
The increase in receivables, including contract retainage and unbilled
receivables, was primarily due to an increase in days’ sales outstanding (DSO)
which was 92 at December 31, 2006 compared to 86 at December 31, 2005. Other
changes in working capital include inventories, which increased by $1.7 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 $2.1
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 11 to the consolidated financial statements for a more detailed
description). Partially offsetting increases in current operating assets was
a
$9.5 million increase in accounts payable and accrued expenses, due to revenue
growth and timing of vendor payments.
Cash
flows from operating activities provided $23.6 million in 2005 compared to
$42.6
million in 2004. Changes in working capital used $11.4 million in 2005, while
changes in working capital provided $15.5 million in 2004. Accounts receivable,
including retainage and costs and estimated earnings in excess of billings
(unbilled receivables), increased by $15.2 million, inventories increased by
$2.5 million, and accounts payable increased $13.0 million during 2005. The
increase in receivables, inventory and payables was principally due to the
growth in revenue experienced during 2005. While receivables grew during 2005,
DSOs decreased from 90 at December 31, 2004 to 86 at December 31, 2005 due
to
higher revenues and improved cash collection. The most significant component
of
working capital changes in 2004 was the receipt of $9.1 million in tax refunds
early in 2004. Depreciation expense was higher during 2005 due to a higher
level
of fixed assets, but amortization expense was $0.4 million lower in 2005
compared to 2004 due to the full amortization of certain intangible assets
during 2004 acquired with Insituform East, Inc.
Cash
Flows from Investing Activities
Investing
activities used $7.1 million in 2006 compared to $26.3 million in 2005. The
largest component of cash used by investing activities was capital expenditures
of $20.6 million in 2006, compared to $27.1 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 $12.1 million in proceeds received
from asset disposals, of which $4.6 million was received from disposals of
tunneling property and equipment, while the remaining $7.5 million was from
sales of real estate in the United States and Europe. An additional $1.4 million
was received from the conversion of permanent life insurance policies on current
and former employees.
The
largest component of cash used in investing activities during 2005 was capital
expenditures of $27.1 million. In addition, $0.6 million was used for investment
in patents. These investments were slightly offset by $1.3 million received
on
the sale of certain assets during 2005. Capital expenditures, which were
significantly lower in 2005 compared to 2004, were primarily for equipment
used
to develop our steam-inversion process, replacement of older equipment and
purchase of other new equipment to accommodate revenue growth and crew
expansion. Investing activities used $34.1 million during 2004, consisting
primarily of capital expenditures of $35.2 million. In addition to capital
expenditures, $0.8 million was invested into a 50%-owned joint venture in Italy,
which subsequently ceased operations in the first quarter of 2005. The amounts
were slightly offset by $1.9 million received on the sale of certain assets
during 2004.
Cash
Flows from Financing Activities
Financing
activities used $12.4 million in 2006 compared to $12.3 million in 2005. 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.
Cash
used
by financing activities was $12.3 million during 2005 compared to $11.4 million
during 2004. The largest component of financing activities cash flow was $15.8
million for normal, scheduled debt amortization payments during 2005. Of the
$15.8 million in debt amortization payments during 2005, $15.7 million was
for
the scheduled amortization payment on our Series A Senior Notes. Likewise,
in
2004, our normal, scheduled debt amortization payment on our Series A Senior
Notes of $15.7 million and the retirement of our $3.0 million Euro note were
the
primary components of cash used in financing activities during 2004. During
2005, certain of our annual insurance premiums were financed, providing $6.2
million of cash, while repayments on those notes payable used $3.6 million
for a
net of $2.6 million borrowed and outstanding at December 31, 2005. In addition,
exercises of stock options provided $1.2 million during
2005. Debt repayments during 2004 were partially offset by $3.6 million received
from the exercise of stock options by employees and $4.6 million representing
the release of restricted cash held as collateral for certain of our insurance
agreements.
Total
debt, including current maturities and current notes payable, was $81.9 million
at December 31, 2006 compared to $99.0 million at December 31, 2005. The balance
at the end of December 31, 2006 consisted primarily of Series 2003-A Senior
Notes of $65.0 million, due in 2013, and the final Series A Senior Notes debt
amortization payment of $15.7 million due in 2007. The remaining amount relates
to current notes payable for the financing of certain of our annual insurance
premiums that will be repaid during 2007.
Financings
See
Note
5 to the consolidated financial statements contained in this report for
additional information regarding our financings.
We
had
debt covenant violations in the fourth quarter of 2004, which resulted in
certain waivers and amendments to our debt agreements. There were no debt
covenant violations in 2005 or 2006.
We
believe we have adequate resources and liquidity 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.
Disclosure
of Financial Obligations and Commercial Commitments
We
have
entered into various financial obligations and commitments in the course of
our
ongoing operations and financing strategies. Financial 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 as well
as
from commercial arrangements that are directly supported by related
revenue-producing activities. Commercial commitments represent our contingent
obligations, which become payable only if certain pre-defined events were to
occur, such as funding financial guarantees. See Note 11 to the consolidated
financial statements contained in this report for further
discussion.
We
have
entered into several contractual joint ventures in order to develop joint bids
on contracts for our installation business and for tunneling operations. 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.
The
following table provides a summary of our financial obligations and commercial
commitments as of December 31, 2006 (in thousands). This table includes cash
obligations related to principal outstanding under existing debt arrangements
and operating leases.
|
Payments
Due by Period
|
||||||||||||||||||||||
|
Cash
Obligations(1,3)
|
Total
|
2007
|
2008
|
2009
|
2010
|
2011
|
Thereafter
|
|||||||||||||||
|
Long-term
debt
|
$
|
81,860
|
$
|
16,814
|
$
|
13
|
$
|
13
|
$
|
13
|
$
|
7
|
$
|
65,000
|
||||||||
|
Interest
on long-term debt
|
28,488
|
5,107
|
4,251
|
4,251
|
4,251
|
4,251
|
6,377
|
|||||||||||||||
|
Line
of credit facility(2)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|||||||||||||||
|
Operating
leases
|
37,490
|
13,636
|
11,346
|
7,062
|
2,639
|
1,215
|
1,592
|
|||||||||||||||
|
Total
contractual cash obligations
|
$
|
147,838
|
$
|
35,557
|
$
|
15,610
|
$
|
11,326
|
$
|
6,903
|
$
|
5,473
|
$
|
72,969
|
||||||||
|
(1)
|
Cash
obligations herein are not discounted. See Notes 5 and 11 to the
consolidated financial statements contained in this report regarding
long-term debt and commitments and contingencies,
respectively.
|
|
(2)
|
As
of December 31, 2006, there was no borrowing balance on the credit
facility and therefore there is no applicable interest rate as the
rates
are determined on the borrowing date. The available balance was $19.5
million, and the commitment fee was 0.20%. The remaining $15.5 million
was
used for non-interest bearing letters of credit, of which $14.5 million
was collateral for insurance and $1.0 million for work performance.
We
generally use the credit facility for short-term borrowings and disclose
amounts outstanding as a current liability.
|
|
(3)
|
A
resin supply contract with one of our vendors is excluded from this
table.
See “Market Risk - Commodity Risk” under this Item 7 for further
discussion.
|
Off-Balance
Sheet Arrangements
We
use
various structures for the financing of operating equipment, including
borrowing, operating and capital leases, and sale-leaseback arrangements. All
debt, including the discounted value of future minimum lease payments under
capital lease arrangements, is presented in our consolidated balance sheet.
Our
commitments under operating lease arrangements were $37.5 million at December
31, 2006. We also have exposure under performance guarantees by contractual
joint ventures and indemnification of our surety. Historically, we have not
experienced any material adverse effect to our consolidated financial position,
results of operations or cash flows relative to these arrangements. All
unconsolidated foreign joint ventures are accounted for using the equity method.
We have no other off-balance sheet financing arrangements or commitments. See
Note 11 to the consolidated financial statements contained in this report
regarding commitments and contingencies.
New
Accounting Pronouncements
For
a
discussion of new accounting pronouncements, see Note 2 to the consolidated
financial statements contained in this report.
| Item 7A. |
Quantitative
and Qualitative Disclosures about Market
Risk
|
Market
Risk
We
are
exposed to the effect of interest rate changes and of foreign currency and
commodity price fluctuations. We currently do not use derivative contracts
to
manage these risks.
Interest
Rate Risk
The
fair
value of our cash and short-term investment portfolio at December 31, 2006
approximated carrying value. Given the short-term nature of these instruments,
market risk, as measured by the change in fair value resulting from a
hypothetical 10% change in interest rates, is not material.
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
outstanding on the line of credit facility, was approximately $74.4 million
at
December 31, 2006. Market risk was estimated to be $0.3 million as the potential
increase in fair value resulting from a hypothetical 1% decrease in our debt
specific borrowing rates at December 31, 2006.
Foreign
Exchange Risk
We
operate subsidiaries and are associated with licensees and affiliates operating
solely outside of the United States, 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, 2006, a
substantial portion of our cash and cash equivalents were denominated in foreign
currencies, and a hypothetical 1% change in currency exchange rates could result
in an approximate $0.6 million impact to our equity through accumulated other
comprehensive income. We continue to evaluate the use of instruments, such
as
forward contracts, to hedge our foreign exchange exposure.
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, fuel, pipe, fiber and concrete. We manage
this
risk by entering into agreements with our suppliers, as well as 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, particularly in the tunneling segment. We do not
currently hold or issue derivative financial instruments for hedging
purposes.
We
entered into a resin supply contract effective March 29, 2005, for the purchase
and sale of certain proprietary resins we use in our North American operations.
The contract provides for the exclusive sale of our proprietary resins by the
vendor to us or to third parties that we designate. The contract has an initial
term from March 29, 2005 until December 31, 2007, which shall renew for
succeeding 12-month periods until the contract is terminated by either party
upon 180-days’ prior written notice to the other party with an effective date of
the end of the contract term.
|
Financial
Statements and Supplementary Data
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
42
|
|
|
43
|
|
|
45
|
|
|
46
|
|
|
47
|
|
|
48
|
|
|
49
|
Management’s
Report on Internal Control Over Financial
Reporting
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
Chief Executive Officer and the Controller, an evaluation was performed of
the
effectiveness of the Company’s internal control over financial reporting as of
December 31, 2006. 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 Chief Executive Officer and its Controller,
has concluded that the Company’s internal control over financial reporting was
effective as of December 31, 2006.
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.
Our
management’s assessment of the effectiveness of the Company’s internal control
over financial reporting as of December 31, 2006 has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm,
as
stated in its report which appears herein.
|
/s/
Thomas S. Rooney, Jr.
|
|
|
Thomas
S. Rooney, Jr.
President
and Chief Executive Officer
|
|
/s/
David A. Martin
|
|
|
David
A. Martin
Vice
President and Controller
|
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and the Stockholders of Insituform Technologies,
Inc.:
We
have
completed integrated audits of Insituform Technologies, Inc.’s consolidated
financial statements and of its internal control over financial reporting as
of
December 31, 2006, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated
financial statements
In
our
opinion, the consolidated financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Insituform
Technologies, Inc. and its subsidiaries at December 31, 2006 and 2005 and the
results of their operations and their cash flows for each of the three years
in
the period ended December 31, 2006 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of
the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
of
financial statements includes 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. We believe that our
audits provide a reasonable basis for our opinion.
As
discussed in Note 7 to the financial statements, the Company changed the manner
in which it accounts for equity-based compensation in fiscal 2006.
Internal
control over financial reporting
Also,
in
our opinion, management’s assessment, included in "Management's Report on
Internal Control Over Financial Reporting" appearing under Item 8, that the
Company maintained effective internal control over financial reporting as of
December 31, 2006 based on criteria established in Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2006,
based on criteria established in Internal
Control - Integrated Framework
issued
by the COSO. The Company’s management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management’s assessment and on the effectiveness
of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit
to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial
reporting includes obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
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
February
23, 2007
Insituform
Technologies, Inc. and
Subsidiaries
Consolidated
Statements of Income
For
the Years Ended December 31, 2006, 2005 and 2004
(In
thousands, except per share amounts)
|
2006
|
2005
|
2004
|
||||||||
|
Revenues
|
$
|
596,715
|
$
|
595,282
|
$
|
542,598
|
||||
|
Cost
of revenues
|
468,761
|
478,441
|
443,099
|
|||||||
|
Gross
profit
|
127,954
|
116,841
|
99,499
|
|||||||
|
Operating
expenses
|
95,200
|
91,603
|
89,385
|
|||||||
|
Amortization
expense
|
1,295
|
1,495
|
1,936
|
|||||||
|
Operating
income
|
31,459
|
23,743
|
8,178
|
|||||||
|
Other
income (expense)
|
||||||||||
|
Interest
expense
|
(6,834
|
)
|
(8,465
|
)
|
(9,305
|
)
|
||||
|
Interest
income
|
3,889
|
2,081
|
1,397
|
|||||||
|
Other
|
6,256
|
(698
|
)
|
(185
|
)
|
|||||
|
Total
other income (expense)
|
3,311
|
(7,082
|
)
|
(8,093
|
)
|
|||||
|
Income
before taxes on income
|
34,770
|
16,661
|
85
|
|||||||
|
Taxes
(benefits) on income
|
11,057
|
4,188
|
(835
|
)
|
||||||
|
Income
before minority interests, equity in earnings
|
23,713
|
12,473
|
920
|
|||||||
|
Minority
interests
|
(316
|
)
|
(166
|
)
|
(107
|
)
|
||||
|
Equity
in earnings (losses) of affiliated companies
|
1,281
|
853
|
(216
|
)
|
||||||
|
Net
income
|
$
|
24,678
|
$
|
13,160
|
$
|
597
|
||||
|
Earnings
per share of common stock and common stock
equivalents:
|
||||||||||
|
Basic
|
$
|
0.91
|
$
|
0.49
|
$
|
0.02
|
||||
|
Diluted
|
0.90
|
0.49
|
0.02
|
|||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
Insituform
Technologies, Inc. and
Subsidiaries
Consolidated
Balance Sheets - As of December 31, 2006 and 2005
(In
thousands, except share information)
|
Assets
|
2006
|
2005
|
|||||
|
Current
assets
|
|||||||
|
Cash
and cash equivalents
|
$
|
96,393
|
$
|
77,069
|
|||
|
Restricted
cash
|
934
|
5,588
|
|||||
|
Receivables,
net
|
90,678
|
85,896
|
|||||
|
Retainage
|
37,193
|
33,138
|
|||||
|
Costs
and estimated earnings in excess of billings
|
41,512
|
32,503
|
|||||
|
Inventories
|
17,665
|
15,536
|
|||||
|
Prepaid
expenses and other assets
|
25,989
|
24,294
|
|||||
|
Total
current assets
|
310,364
|
274,024
|
|||||
|
Property,
plant and equipment,
less accumulated depreciation
|
90,453
|
95,657
|
|||||
|
Other
assets
|
|||||||
|
Goodwill
|
131,540
|
131,544
|
|||||
|
Other
assets
|
17,712
|
17,103
|
|||||
|
Total
other assets
|
149,252
|
148,647
|
|||||
|
Total
Assets
|
$
|
550,069
|
$
|
518,328
|
|||
|
Liabilities
and Stockholders’ Equity
|
|||||||
|
Current
liabilities
|
|||||||
|
Current
maturities of long-term debt and line of credit
|
$
|
16,814
|
$
|
18,264
|
|||
|
Accounts
payable and accrued expenses
|
107,320
|
94,560
|
|||||
|
Billings
in excess of costs and estimated earnings
|
12,371
|
14,017
|
|||||
|
Total
current liabilities
|
136,505
|
126,841
|
|||||
|
Long-term
debt,
less current maturities
|
65,046
|
80,768
|
|||||
|
Other
liabilities
|
7,726
|
5,497
|
|||||
|
Total
liabilities
|
209,277
|
213,106
|
|||||
|
Minority
interests
|
2,181
|
1,726
|
|||||
|
Commitments
and contingencies (Note 11)
|
-
|
-
|
|||||
|
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 29,597,044
and 29,294,849; shares outstanding 27,239,580 and
26,937,385
|
296
|
293
|
|||||
|
Additional
paid-in capital
|
149,802
|
139,372
|
|||||
|
Retained
earnings
|
236,763
|
212,085
|
|||||
|
Treasury
stock, at cost - 2,357,464 shares
|
(51,596
|
)
|
(51,596
|
)
|
|||
|
Accumulated
other comprehensive income
|
3,346
|
3,342
|
|||||
|
Total
stockholders’ equity
|
338,611
|
303,496
|
|||||
|
Total
Liabilities and Stockholders’ Equity
|
$
|
550,069
|
$
|
518,328
|
|||
The
accompanying notes are an integral part of the consolidated financial
statements.
Insituform
Technologies, Inc. and
Subsidiaries
Consolidated
Statements of Stockholders’ Equity
For
the Years Ended December 31, 2006, 2005 and 2004
(In
thousands, except number of shares)
|
Accumulated
|
|||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
|||||||||||||||||||||||
|
Common
Stock
|
Paid-In
|
Retained
|
Treasury
|
Comprehensive
|
Stockholders’
|
Comprehensive
|
|||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Earnings
|
Stock
|
Income
(Loss)
|
Equity
|
Income
|
||||||||||||||||||
|
BALANCE,
December 31, 2003
|
28,844,069
|
$
|
288
|
$
|
133,382
|
$
|
198,328
|
$
|
(51,596
|
)
|
$
|
(1,233
|
)
|
$
|
279,169
|
||||||||||
|
Net
income
|
-
|
-
|
-
|
597
|
-
|
-
|
597
|
$
|
597
|
||||||||||||||||
|
Issuance
of common stock upon exercise of options, including income tax
benefit of $382
|
284,750
|
3
|
3,959
|
-
|
-
|
-
|
3,962
|
-
|
|||||||||||||||||
|
Restricted
stock issued (See Note 7)
|
65,000
|
1
|
(1
|
)
|
-
|
-
|
-
|
-
|
-
|
||||||||||||||||
|
Amortization
and forfeitures of restricted stock
|
(19,800
|
)
|
(0
|
)
|
128
|
-
|
-
|
-
|
128
|
-
|
|||||||||||||||
|
Common
stock repurchased
|
-
|
-
|
-
|
-
|
(1,851
|
)
|
-
|
(1,851
|
)
|
-
|
|||||||||||||||
|
Foreign
currency translation adjustment
|
-
|
-
|
-
|
-
|
-
|
5,980
|
5,980
|
5,980
|
|||||||||||||||||
|
Total
comprehensive income
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
$
|
6,577
|
||||||||||||||||
|
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 7)
|
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 or redemption of equity compensation
instruments, including 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 123(R)
|
-
|
-
|
1,235
|
-
|
-
|
-
|
1,235
|
-
|
|||||||||||||||||
|
Restricted
stock issued (See Note 7)
|
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
|
|||||||||||
The
accompanying notes are an integral part of the consolidated financial
statements.
Insituform
Technologies, Inc. and
Subsidiaries
Consolidated
Statements of Cash Flows
For
the Years Ended December 31, 2006, 2005 and 2004
(In
thousands)
|
2006
|
2005
|
2004
|
||||||||
|
Cash
flows from operating activities:
|
||||||||||
|
Net
income
|
$
|
24,678
|
$
|
13,160
|
$
|
597
|
||||
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||||
|
Depreciation
|
20,258
|
19,744
|
17,502
|
|||||||
|
Amortization
|
1,295
|
1,495
|
1,936
|
|||||||
|
(Gain)/loss
on sale of assets/investment
|
(6,195
|
)
|
1,813
|
610
|
||||||
|
Equity-based
compensation expense
|
4,254
|
837
|
640
|
|||||||
|
Write-off
of debt issuance costs
|
-
|
-
|
226
|
|||||||
|
Change
in restricted cash related to operating activities
|
4,653
|
(3,883
|
)
|
(181
|
)
|
|||||
|
Other
|
(1,577
|
)
|
(556
|
)
|
4,282
|
|||||
|
Deferred
income taxes
|
2,175
|
2,352
|
1,481
|
|||||||
|
Tax
benefits related to stock option exercises
|
(772
|
)
|
-
|
-
|
||||||
|
Changes
in operating assets and liabilities (Note 10)
|
(9,027
|
)
|
(11,404
|
)
|
15,464
|
|||||
|
Net
cash provided by operating activities
|
39,742
|
23,558
|
42,557
|
|||||||
|
Cash
flows from investing activities:
|
||||||||||
|
Capital
expenditures
|
(20,635
|
)
|
(27,081
|
)
|
(35,195
|
)
|
||||
|
Proceeds
from sale of fixed assets
|
12,079
|
1,296
|
1,904
|
|||||||
|
Liquidation
of life insurance cash surrender value
|
1,423
|
-
|
-
|
|||||||
|
Other
investing activities
|
-
|
(557
|
)
|
(844
|
)
|
|||||
|
Net
cash used in investing activities
|
(7,133
|
)
|
(26,342
|
)
|
(34,135
|
)
|
||||
|
Cash
flows from financing activities:
|
||||||||||
|
Proceeds
from issuance of common stock
|
4,122
|
1,243
|
3,580
|
|||||||
|
Additional
tax benefit from stock option exercises recorded in additional paid-in
capital
|
772
|
-
|
-
|
|||||||
|
Proceeds
from notes payable
|
2,662
|
6,179
|
-
|
|||||||
|
Principal
payments on notes payable
|
(4,101
|
)
|
(3,650
|
)
|
-
|
|||||
|
Principal
payments on long-term debt and lines of credit, net
|
(15,735
|
)
|
(15,779
|
)
|
(18,978
|
)
|
||||
|
Changes
in restricted cash related to financing activities
|
-
|
-
|
4,602
|
|||||||
|
Deferred
financing costs paid
|
(106
|
)
|
(260
|
)
|
(633
|
)
|
||||
|
Net
cash used in financing activities
|
(12,386
|
)
|
(12,267
|
)
|
(11,429
|
)
|
||||
|
Effect
of exchange rate changes on cash
|
(899
|
)
|
(1,126
|
)
|
2,388
|
|||||
|
Net
increase (decrease) in cash and cash equivalents for the
period
|
19,324
|
(16,177
|
)
|
(619
|
)
|
|||||
|
Cash
and cash equivalents, beginning of year
|
77,069
|
93,246
|
93,865
|
|||||||
|
Cash
and cash equivalents, end of year
|
$
|
96,393
|
$
|
77,069
|
$
|
93,246
|
||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid for:
|
||||||||||
|
Interest
|
$
|
6,402
|
$
|
7,759
|
$
|
8,501
|
||||
|
Income
taxes (refunded) paid, net
|
7,637
|
(5,218
|
)
|
(5,117
|
)
|
|||||
|
Noncash
investing and financing activities:
|
||||||||||
|
Noncompete
liability recovered in settlement
|
$
|
-
|
$
|
-
|
$
|
919
|
||||
The
accompanying notes are an integral part of the consolidated financial
statements.
Insituform
Technologies, Inc. and
Subsidiaries
Notes
to Consolidated Financial Statements
|
1.
|
DESCRIPTION
OF BUSINESS:
|
Insituform
Technologies, Inc. (a Delaware corporation) and subsidiaries (collectively,
the
“Company”) is a worldwide provider of proprietary trenchless technologies for
the rehabilitation and improvement of sewer, water, gas and industrial pipes.
The Company’s primary technology is the Insituform® process, a proprietary
cured-in-place pipeline rehabilitation process (the “Insituform CIPP Process”).
Pipebursting is a non-proprietary trenchless method of dilating and replacing
an
old pipeline with a new high-density polyethylene pipe. The microtunneling
process is a non-proprietary method of drilling a new tunnel from surface
operated equipment. Sliplining is a non-proprietary method used to push or
pull
a new pipeline into an old one. The Company’s Tite Liner® process is a
proprietary method of lining new and existing pipe with a corrosion and abrasion
resistant polyethylene pipe. The Company also engages in tunneling used in
the
installation of new underground services.
|
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 Plc. 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. Certain prior period amounts have been reclassified to conform
to
the current presentation.
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 is SFAS 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 share and deferred stock unit awards is determined using the
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 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 123(R) is described in Note
7.
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, 2006 and 2005, the Company had
provided $0.2 million and $0.5 million for expected losses on contracts.
Revenues from change orders, extra work, variations in the scope of work and
claims are recognized when realization is reasonably assured, and at estimated
recoverable amounts.
Research
and Development
The
Company expenses research and development costs as incurred. Research and
development costs of $3.6
million, $2.9 million and $2.9 million for the years ended December 31, 2006,
2005 and 2004, respectively, are included in operating expenses in the
accompanying consolidated statements of income.
Taxes
on Income
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 Statement of Financial Accounting Standards 109,
Accounting
for Income Taxes.
SFAS
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:
|
2006
|
2005
|
2004
|
||||||||
|
Weighted
average number of common shares used for basic EPS
|
27,043,651
|
26,782,818
|
26,649,030
|
|||||||
|
Effect
of dilutive stock options, stock appreciation rights, restricted
stock and
deferred stock units (Note 7)
|
460,617
|
168,766
|
161,450
|
|||||||
|
Weighted
average number of common shares and dilutive potential common stock
used
in diluted EPS
|
27,504,268
|
26,951,584
|
26,810,480
|
|||||||
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 one 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. 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. Retainage
due after one year was approximately $2.8 million and $0 million at December
31,
2006 and 2005, respectively.
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.
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
licenses, covenants not-to-compete and patents) 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 shortened, the Company would depreciate
or amortize the net book value in excess of the salvage value over its revised
remaining useful life, thereby increasing 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 the Company
considers 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 the Company’s stock price for a sustained period; and
|
|
·
|
market
capitalization is 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. 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.
Goodwill
Under
Statement of Financial Accounting Standards 142, Goodwill
and Other Intangible Assets,
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. Factors that could potentially trigger an impairment review
include (but are not limited to):
|
·
|
significant
underperformance of a segment or division relative to expected, historical
or projected future operating
results;
|
|
·
|
significant
negative industry or economic trends;
and
|
|
·
|
significant
changes in the strategy for a segment or
division.
|
In
accordance with the provisions of SFAS 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, tunneling 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. The Company typically engages a third party valuation
expert to assist in estimating reporting unit fair value. 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 as being
impaired based on management’s impairment analyses performed during 2006, 2005
and 2004. See Note 4 regarding acquired intangible assets and
goodwill.
Treasury
Stock
Treasury
stock is accounted for at acquisition cost.
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.
New
Accounting Pronouncements
In
July
2006, the Financial Accounting Standards Board issued FASB Interpretation No.
48
(“FIN 48”), Accounting
for Uncertainty in Income Taxes,
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 will 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. While
there can be no assurances, the Company does not anticipate a material impact
from the adoption of FIN 48, based on the Company’s current assessment, which
was still in progress at December 31, 2006.
In
September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit and Other Postretirement Plans, under
which companies must recognize a net liability or asset to report the funded
status of defined benefit and other postretirement benefit plans on their
balance sheets. This standard is not expected to have a significant effect
on
the Company’s balance sheet as the Company does not sponsor defined benefit
retirement plans.
In
December 2004, the Financial Accounting Standards Board issued Standard No.
123(R), Share-Based
Payment
(“SFAS
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. 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
7.
|
3.
|
SUPPLEMENTAL
BALANCE SHEET INFORMATION (in
thousands):
|
Allowance
for Doubtful Accounts
Activity
in the allowance for doubtful accounts is summarized as follows for the years
ended December 31:
|
2006
|
2005
|
2004
|
||||||||
|
Balance,
at beginning of year
|
$
|
3,433
|
$
|
4,077
|
$
|
3,008
|
||||
|
Charged
to (reversed from) expense
|
(483
|
)
|
654
|
1,143
|
||||||
|
Write-offs
and adjustments
|
(313
|
)
|
(1,298
|
)
|
(74
|
)
|
||||
|
Balance,
at end of year
|
$
|
2,637
|
$
|
3,433
|
$
|
4,077
|
||||
Costs
and Estimated Earnings on Uncompleted Contracts
Costs
and
estimated earnings on uncompleted contracts consisted of the following at
December 31:
|
2006
|
2005
|
||||||
|
Costs
incurred on uncompleted contracts
|
$
|
446,119
|
$
|
529,105
|
|||
|
Estimated
earnings to date
|
77,426
|
70,331
|
|||||
|
Subtotal
|
523,545
|
599,436
|
|||||
|
Less
- Billings to date
|
(494,404
|
)
|
(580,950
|
)
|
|||
|
Total
|
$
|
29,141
|
$
|
18,486
|
|||
|
Included
in the accompanying balance sheets:
|
|||||||
|
Costs
and estimated earnings in excess of billings
|
$
|
41,512
|
$
|
32,503
|
|||
|
Billings
in excess of costs and estimated earnings
|
(12,371
|
)
|
(14,017
|
)
|
|||
|
Total
|
$
|
29,141
|
$
|
18,486
|
|||
Costs
and
estimated earnings in excess of billings represent work performed that either
due to contract stipulations or lacking contractual documentation needed, could
not be billed. Substantially all unbilled amounts are expected to be billed
and
collected within one year.
Inventories
Inventories
are summarized as follows at December 31 (in thousands):
|
2006
|
2005
|
||||||
|
Raw
materials and supplies
|
$
|
3,072
|
$
|
1,839
|
|||
|
Work-in-process
|
3,897
|
3,947
|
|||||
|
Finished
products
|
2,210
|
1,618
|
|||||
|
Construction
materials
|
8,486
|
8,132
|
|||||
|
Total
|
$
|
17,665
|
$
|
15,536
|
|||
Property,
Plant and Equipment
Property,
plant and equipment consisted of the following at December 31 (in
thousands):
|
Estimated
Useful Lives (Years)
|
2006
|
2005
|
||||||||
|
Land
and land improvements
|
$
|
8,171
|
$
|
10,107
|
||||||
|
Buildings
and improvements
|
5
- 40
|
27,284
|
28,446
|
|||||||
|
Machinery
and equipment
|
4
- 10
|
114,152
|
114,670
|
|||||||
|
Furniture
and fixtures
|
3
- 10
|
8,425
|
7,159
|
|||||||
|
Autos
and trucks
|
3
- 10
|
40,462
|
40,937
|
|||||||
|
Construction
in progress
|
9,757
|
3,825
|
||||||||
|
Subtotal
|
208,251
|
205,144
|
||||||||
|
Less
- Accumulated depreciation
|
(117,798
|
)
|
(109,487
|
)
|
||||||
|
Total
|
$
|
90,453
|
$
|
95,657
|
||||||
Other
Assets
Other
assets are summarized as follows at December 31 (in thousands):
|
2006
|
2005
|
||||||
|
Investment
in affiliates
|
$
|
8,258
|
$
|
7,083
|
|||
|
License
agreements
|
2,081
|
2,250
|
|||||
|
Customer
relationships
|
1,406
|
1,526
|
|||||
|
Patents
and trademarks
|
2,765
|
1,462
|
|||||
|
Non-compete
agreements
|
196
|
839
|
|||||
|
Other
|
3,006
|
3,943
|
|||||
|
Total
|
$
|
17,712
|
$
|
17,103
|
|||
Accounts
Payable and Accrued Expenses
Accounts
payable and accrued expenses consisted of the following at December 31 (in
thousands):
|
2006
|
2005
|
||||||
|
Accounts
payable - trade
|
$
|
63,707
|
$
|
55,154
|
|||
|
Estimated
casualty and healthcare liabilities
|
21,313
|
20,325
|
|||||
|
Job
costs
|
15,364
|
10,314
|
|||||
|
Compensation
and bonus
|
5,375
|
6,126
|
|||||
|
Interest
|
1,314
|
1,838
|
|||||
|
Job
loss reserves
|
197
|
533
|
|||||
|
Warranty
|
50
|
270
|
|||||
|
Total
|
$
|
107,320
|
$
|
94,560
|
|||
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):
|
2006
|
2005
|
||||||
|
Casualty
insurance
|
$
|
19,508
|
$
|
18,219
|
|||
|
Healthcare
benefits
|
1,805
|
2,106
|
|||||
|
Total
|
$
|
21,313
|
$
|
20,325
|
|||
|
4.
|
ACQUIRED
INTANGIBLE ASSETS AND GOODWILL:
|
In
accordance with the requirements of SFAS 142, Goodwill
and Other Intangible Assets,
the
Company performed annual impairment tests for goodwill in the fourth quarter
of
2006 and 2005. Management retained an independent party to perform a valuation
of the Company’s reporting units, which consist of North American
rehabilitation, European rehabilitation, tunneling and Tite Liner®, and
determined that no impairment of goodwill existed.
Changes
in the carrying amount of goodwill for the year ended December 31, 2006 were
as
follows (in thousands):
|
Rehabilitation
|
Tunneling
|
Total
|
||||||||
|
Balance
as of December 31, 2005
|
$
|
122,624
|
$
|
8,920
|
$
|
131,544
|
||||
|
Foreign
currency adjustment
|
(4
|
)
|
-
|
(4
|
)
|
|||||
|
Balance
as of December 31, 2006
|
$
|
122,620
|
$
|
8,920
|
$
|
131,540
|
||||
Intangible
assets were as follows (in thousands):
|
As
of December 31, 2006
|
||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||
|
Amortized
intangible assets:
|
||||||||||
|
License
agreements
|
$
|
3,894
|
$
|
(1,813
|
)
|
$
|
2,081
|
|||
|
Customer
relationships
|
1,797
|
(391
|
)
|
1,406
|
||||||
|
Patents
and trademarks
|
16,048
|
(13,283
|
)
|
2,765
|
||||||
|
Non-compete
agreements
|
3,252
|
(3,056
|
)
|
196
|
||||||
|
Total
|
$
|
24,991
|
$
|
(18,543
|
)
|
$
|
6,448
|
|||
|
As
of December 31, 2005
|
||||||||||
|
Gross
Carrying
Amount
|
Accumulated
Amortization
|
Net
Carrying
Amount
|
||||||||
|
Amortized
intangible assets:
|
||||||||||
|
License
agreements
|
$
|
3,894
|
$
|
(1,644
|
)
|
$
|
2,250
|
|||
|
Customer
relationships
|
1,797
|
(271
|
)
|
1,526
|
||||||
|
Patents
and trademarks
|
14,500
|
(13,038
|
)
|
1,462
|
||||||
|
Non-compete
agreements
|
3,239
|
(2,400
|
)
|
839
|
||||||
|
Total
|
$
|
23,430
|
$
|
(17,353
|
)
|
$
|
6,077
|
|||
|
For
the year ended December 31:
|
2006
|
|
2005
|
||||
|
Aggregate
amortization expense:
|
$
|
1,295
|
$
|
1,495
|
|||
|
Estimated
amortization expense:
|
|||||||
|
For
year ending December 31, 2007
|
$
|
1,166
|
|||||
|
For
year ending December 31, 2008
|
758
|
||||||
|
For
year ending December 31, 2009
|
291
|
||||||
|
For
year ending December 31, 2010
|
291
|
||||||
|
For
year ending December 31, 2011
|
291
|
||||||
|
5.
|
LONG-TERM
DEBT AND LINE OF CREDIT
FACILITY:
|
Long-term
debt, line of credit and notes payable consisted of the following at December
31
(in thousands):
|
2006
|
2005
|
||||||
|
8.88%
Senior Notes, Series A, payable in $15,715 annual installments
beginning
February 2001 through 2007, with interest payable
semiannually
|
$
|
15,710
|
$
|
31,425
|
|||
|
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%
|
1,150
|
2,607
|
|||||
|
Subtotal
|
81,860
|
99,032
|
|||||
|
Less
- Current maturities and notes payable
|
(16,814
|
)
|
(18,264
|
)
|
|||
|
Total
|
$
|
65,046
|
$
|
80,768
|
|||
Principal
payments required to be made for each of the next five years and thereafter
are
summarized as follows (in thousands):
|
Year
|
Amount
|
|||
|
2007
|
$
|
16,814
|
||
|
2008
|
13
|
|||
|
2009
|
13
|
|||
|
2010
|
13
|
|||
|
2011
|
7
|
|||
|
Thereafter
|
65,000
|
|||
|
Total
|
$
|
81,860
|
||
At
December 31, 2006 and 2005, the estimated fair value of the Company’s long-term
debt was approximately $74.4 million and $94.3 million, respectively. Fair
value
was estimated using market rates for debt of similar risk and
maturity.
Senior
Notes
Effective
March 16, 2005, the Company agreed to increase the interest rate on the Series
A
Senior Notes from 8.63% per annum to 8.88% per annum and to increase the
interest rate on the Series 2003-A Senior Notes from 6.04% per annum to 6.54%
per annum, to obtain less restrictive financial covenants and waivers of
defaults that existed prior to that date. In 2005, the Company paid its
creditors approximately $260,000 in fees to obtain the waivers and amendments
to
certain covenant violations at December 31, 2004.
Line
of Credit Facility
At
December 31, 2006, the Company had $15.5 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 $1.0 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, 2006, resulting in $19.5 million
in
available borrowing capacity under the line of credit facility as of that
date.
During
2006, there was financing of certain annual insurance premiums in the amount
of
$2.7 million, of which $1.1 million remained outstanding at December 31,
2006.
These notes will be repaid in full during 2007.
At
December 31, 2006, the Company was in compliance with all of its debt covenants
as required under the Senior Notes and line of 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.
|
6.
|
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.
The
Employee Plan replaces the 2001 Employee Equity Incentive Plan, and contains
substantially the same provisions as the former plan. At December 31, 2006,
there were 970,112 options outstanding, 131,500 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.
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,
2006, there were 45,000 options and 89,625 deferred stock units outstanding
under the 2001 Non-Employee Director Equity Incentive Plan.
At
December 31, 2006, there were 276,780 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 7,
“Equity
Based Compensation.”
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.
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.
|
7.
|
EQUITY
BASED COMPENSATION
|
On
January 1, 2006, the Company adopted Statement of Financial Accounting Standards
No. 123(R), Share
Based Payment. This
standard revised the measurement, valuation and recognition of financial
accounting and reporting standards for equity-based compensation plans contained
in SFAS No. 123, Accounting
for Stock Based Compensation. 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.
Stock
Options
The
fair
value of each option award was estimated on the grant date using the
Black-Scholes option pricing model. Assumptions regarding volatility, expected
term, dividend yield and risk-rate are required for the Black-Scholes model.
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. The assumptions for volatility,
expected term, dividend yield and risk-free rate for stock option awards
in 2006
and 2005 are presented in the table below:
|
2006
|
2005
|
||||||||||||
|
Range
|
Weighted
Average
|
Range
|
Weighted
Average
|
||||||||||
|
Volatility
|
41.7%
- 45.6
|
%
|
41.9
|
%
|
44.0
|
%
|
44.0
|
%
|
|||||
|
Expected
term (years)
|
4.5
- 4.8
|
4.8
|
5.6
|
5.6
|
|||||||||
|
Dividend
yield
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
0.0
|
%
|
|||||
|
Risk-free
rate
|
4.3%
- 5.0
|
%
|
4.3
|
%
|
4.0
|
%
|
4.0
|
%
|
|||||
|
Turnover
|
2.3%
- 2.9
|
%
|
2.3
|
%
|
3.3
|
%
|
3.3
|
%
|
|||||
Stock
options generally have terms of seven to ten years and are required to have
an
exercise price equal to the market value of the underlying common stock on
the
date of grant. A summary of option activity in 2006 follows:
|
Shares
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
(Yrs)
|
Aggregate
Intrinsic
Value
|
||||||||||
|
Outstanding
at December 31, 2005
|
1,381,476
|
$
|
19.53
|
||||||||||
|
Granted
|
330,500
|
19.74
|
|||||||||||
|
Exercised
|
(243,370
|
)
|
16.88
|
||||||||||
|
Forfeited/Expired
|
(170,214
|
)
|
21.46
|
||||||||||
|
Outstanding
at December 31, 2006
|
1,298,392
|
$
|
19.85
|
4.8
|
$
|
8,476,463
|
|||||||
|
Exercisable
at December 31, 2006
|
901,667
|
$
|
20.60
|
4.4
|
$
|
5,396,866
|
|||||||
|
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||||
|
Range
of
Exercise
Price
|
Number
Outstanding
|
Weighted
Average
Remaining
Contractual
Term
(Yrs)
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
Number
Exercisable
|
Weighted
Average
Exercise
Price
|
Aggregate
Intrinsic
Value
|
|||||||||||||||
|
$4.00
to $10.00
|
29,400
|
0.9
|
$
|
8.75
|
$
|
503,034
|
29,400
|
$
|
8.75
|
$
|
503,034
|
|||||||||||
|
$10.01
to $20.00
|
751,846
|
5.1
|
16.49
|
7,045,843
|
391,996
|
15.38
|
4,107,136
|
|||||||||||||||
|
$20.00
and above
|
517,146
|
4.6
|
25.37
|
927,586
|
480,271
|
25.59
|
786,696
|
|||||||||||||||
|
Total
Outstanding
|
1,298,392
|
4.8
|
$
|
19.84
|
$
|
8,476,463
|
901,667
|
$
|
20.60
|
$
|
5,396,866
|
|||||||||||
The
intrinsic values above are based on the Company’s closing stock price of $25.86
on December 29, 2006. The weighted-average grant-date fair value of options
awarded during 2006 was $8.30. During 2006, the Company collected $4.1 million
from stock option exercises that had a total intrinsic value of $2.3 million.
The Company recorded a tax benefit from stock option exercises of $0.8 million
in additional paid-in capital on the consolidated balance sheet and as an
adjustment from operating activity and as a cash flow from financing
activities on
the
consolidated statements of cash flows. Under the fair value provisions of
SFAS
123(R), the Company recorded pretax expense of $2.9 million related to stock
option awards in the year ended December 31, 2006. Unrecognized pretax expense
of $1.1 million related to stock options is expected to be recognized over
the
weighted average remaining service period of 0.9 years for awards outstanding
at
December 31, 2006.
At
December 31, 2006, 1,993,500 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.
Restricted
Stock
Restricted
shares of the Company’s common stock are awarded from time to time to executive
officers and certain key employees of the Company. Restricted shares are
generally 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 stock price on the grant date and charged to expense
ratably through the restriction period. Forfeitures cause the reversal of
all
previous expense recorded as a reduction of current period expense.
The
following table summarizes information about restricted stock activity during
the years ended December 31, 2006, 2005 and 2004:
|
For
the Years Ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
Shares
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||||||||
|
Outstanding,
beginning of period
|
83,900
|
$
|
16.64
|
73,600
|
$
|
15.53
|
28,400
|
$
|
15.72
|
||||||||||
|
Granted
|
50,800
|
19.41
|
55,000
|
14.65
|
65,000
|
17.97
|
|||||||||||||
|
Vested
|
(1,700
|
)
|
15.72
|
(2,917
|
)
|
15.61
|
—
|
—
|
|||||||||||
|
Forfeited
|
(1,500
|
)
|
15.50
|
(41,783
|
)
|
15.97
|
(19,800
|
)
|
15.72
|
||||||||||
|
Outstanding,
end of period
|
131,500
|
$
|
17.73
|
83,900
|
$
|
16.64
|
73,600
|
$
|
15.53
|
||||||||||
Expense
(benefit) associated with grants of restricted stock and the effect of related
forfeitures are presented below (in thousands):
|
For
the Years Ended
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Restricted
stock expense
|
$
|
796
|
$
|
485
|
$
|
242
|
||||
|
Forfeitures
|
(15
|
)
|
(187
|
)
|
(114
|
)
|
||||
|
Restricted
stock expense, net
|
781
|
298
|
128
|
|||||||
|
Tax
benefit
|
(304
|
)
|
(104
|
)
|
(44
|
)
|
||||
|
Net
expense
|
$
|
477
|
$
|
194
|
$
|
84
|
||||
Deferred
Stock Units
Deferred
stock units are generally 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 in
full
on the date of grant.
The
following table summarizes information about deferred stock units activity
during the years ended December 31, 2006, 2005 and 2004:
|
For
the Years Ended December 31,
|
|||||||||||||||||||
|
2006
|
2005
|
2004
|
|||||||||||||||||
|
Deferred
Stock
Units
|
Weighted
Average
Grant
Date
Fair
Value
|
Deferred
Stock
Units
|
Weighted
Average
Grant
Date
Fair
Value
|
Deferred
Stock
Units
|
Weighted
Average
Grant
Date
Fair
Value
|
||||||||||||||
|
Outstanding,
beginning of period
|
78,432
|
$
|
16.39
|
58,800
|
$
|
16.11
|
27,500
|
$
|
15.75
|
||||||||||
|
Granted
|
24,900
|
24.20
|
32,282
|
16.69
|
31,300
|
16.42
|
|||||||||||||
|
Shares
distributed
|
(9,525
|
)
|
15.75
|
(12,650
|
)
|
15.85
|
—
|
—
|
|||||||||||
|
Outstanding,
end of period
|
93,807
|
$
|
18.53
|
78,432
|
$
|
16.39
|
58,800
|
$
|
16.11
|
||||||||||
Expense
associated with grants of deferred stock units is presented in the table
below:
|
For
the Years Ended
December
31,
|
||||||||||
|
2006
|
2005
|
2004
|
||||||||
|
Deferred
stock units expense
|
$
|
603
|
$
|
539
|
$
|
512
|
||||
|
Tax
benefit
|
(234
|
)
|
(189
|
)
|
(180
|
)
|
||||
|
Net
expense
|
$
|
369
|
$
|
350
|
$
|
332
|
||||
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 years
ended
December 31, 2005 and 2004 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):
|
For
the Years Ended December 31,
|
|||||||
|
2005
|
2004
|
||||||
|
Net
income, as reported
|
$
|
13,160
|
$
|
597
|
|||
|
Add:
Total equity-based compensation expense included in net income,
net of
related tax benefits
|
544
|
416
|
|||||
|
Deduct:
Total equity-based compensation expense determined under fair value
method
for all awards, Net of related tax effects
|
(2,307
|
)
|
(2,093
|
)
|
|||
|
Pro
forma net income
|
$
|
11,397
|
$
|
(1,080
|
)
|
||
|
Basic
earnings per share as reported:
|
$
|
0.49
|
$
|
0.02
|
|||
|
Basic
earnings per share pro forma:
|
0.43
|
(0.04
|
)
|
||||
|
Diluted
earnings per share as reported:
|
$
|
0.49
|
$
|
0.02
|
|||
|
Diluted
earnings per share pro forma:
|
0.42
|
(0.04
|
)
|
||||
In
accordance with SFAS 148, Accounting
for Stock-Based Compensation - Transition and Disclosure,
the
equity-based compensation expense recorded in the determination of reported
net
income during the years ended December 31, 2005 and 2004 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.
|
8.
|
OTHER
INCOME (EXPENSE):
|
Other
income (expense) was comprised of the following for the years ended December
31
(in thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Gain
(loss) on sale/disposal of assets
|
$
|
6,195
|
$
|
(1,813
|
)
|
$
|
(610
|
)
|
||
|
Other
|
61
|
1,115
|
425
|
|||||||
|
Total
|
$
|
6,256
|
$
|
(698
|
)
|
$
|
(185
|
)
|
||
|
9.
|
TAXES
ON INCOME:
|
Income
(loss) from continuing operations before taxes on income was as follows for
the
years ended December 31 (in thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Domestic
|
$
|
11,623
|
$
|
1,066
|
$
|
(8,310
|
)
|
|||
|
Foreign
|
23,147
|
15,595
|
8,395
|
|||||||
|
Total
|
$
|
34,770
|
$
|
16,661
|
$
|
85
|
||||
Provisions
(benefits) for taxes on income from continuing operations consisted of the
following components for the years ended December 31 (in
thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Current:
|
||||||||||
|
Federal
|
$
|
985
|
$
|
(3,187
|
)
|
$
|
(6,778
|
)
|
||
|
Foreign
|
7,323
|
4,531
|
4,274
|
|||||||
|
State
|
574
|
492
|
188
|
|||||||
|
Subtotal
|
8,882
|
1,836
|
(2,316
|
)
|
||||||
|
Deferred:
|
||||||||||
|
Federal
|
1,169
|
2,662
|
2,735
|
|||||||
|
Foreign
|
364
|
217
|
(713
|
)
|
||||||
|
State
|
642
|
(527
|
)
|
(541
|
)
|
|||||
|
Subtotal
|
2,175
|
2,352
|
1,481
|
|||||||
|
Total
tax provision
|
$
|
11,057
|
$
|
4,188
|
$
|
(835
|
)
|
|||
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):
|
2006
|
2005
|
2004
|
||||||||
|
Income
taxes at U.S. federal statutory tax rate
|
$
|
12,170
|
$
|
5,832
|
$
|
30
|
||||
|
Increase
(decrease) in taxes resulting from:
|
||||||||||
|
State
income taxes, net of federal income tax benefit
|
791
|
(23
|
)
|
(229
|
)
|
|||||
|
Amortization
of intangibles
|
(711
|
)
|
(715
|
)
|
(616
|
)
|
||||
|
Foreign
tax matters
|
(1,787
|
)
|
(581
|
)
|
(126
|
)
|
||||
|
Valuation
allowance on net operating loss carryforwards (NOL)
|
648
|
(204
|
)
|
100
|
||||||
|
Non-deductible
meals and entertainment
|
203
|
200
|
668
|
|||||||
|
Other
matters
|
(257
|
)
|
(321
|
)
|
(662
|
)
|
||||
|
Total
tax provision
|
$
|
11,057
|
$
|
4,188
|
$
|
(835
|
)
|
|||
|
Effective
tax rate
|
31.8
|
%
|
25.1
|
%
|
(982.4
|
)%
|
||||
Net
deferred taxes consisted of the following at December 31 (in
thousands):
|
2006
|
2005
|
||||||
|
Deferred
income tax assets:
|
|||||||
|
Foreign
tax credit carryforwards
|
$
|
491
|
$
|
605
|
|||
|
Net
operating loss carryforwards
|
7,105
|
6,467
|
|||||
|
Accrued
expenses
|
8,831
|
9,437
|
|||||
|
Other
|
2,171
|
2,485
|
|||||
|
Total
gross deferred income tax assets
|
18,598
|
18,994
|
|||||
|
Less
valuation allowance
|
(4,571
|
)
|
(4,524
|
)
|
|||
|
Net
deferred income tax assets
|
14,027
|
14,470
|
|||||
|
Deferred
income tax liabilities:
|
|||||||
|
Property,
plant and equipment
|
(8,335
|
)
|
(7,696
|
)
|
|||
|
Other
|
(6,380
|
)
|
(5,394
|
)
|
|||
|
Total
deferred income tax liabilities
|
(14,715
|
)
|
(13,090
|
)
|
|||
|
Net
deferred income tax (liabilities)/assets
|
$
|
(688
|
)
|
$
|
1,380
|
||
The
Company’s tax assets and liabilities, netted by taxing location, are in the
following captions in the balance sheets (in thousands):
|
2006
|
2005
|
||||||
|
Current
deferred income tax assets, net
|
$
|
2,805
|
$
|
3,454
|
|||
|
Noncurrent
deferred income tax liabilities, net
|
(3,493
|
)
|
(2,074
|
)
|
|||
|
Net
deferred income tax (liabilities)/assets
|
$
|
(688
|
)
|
$
|
1,380
|
||
The
Company’s deferred tax assets at December 31, 2006 include $7.1 million in
federal, state and foreign net operating loss carryforwards. These NOLs include
$2.6 million, which if not used will expire between the years 2008 and 2026,
and
$4.5 million that has no expiration dates. The Company also has foreign tax
credit carryforwards of $0.5 million, which will begin to expire in
2011.
For
financial reporting purposes, a valuation allowance of $4.6 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, 2005, was $4.5 million relating to the same items described
above.
|
10.
|
CHANGES
IN OPERATING ASSETS:
|
The
following are the cash flow effects of changes in operating assets, excluding
the effect of acquisitions and divestitures (in thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Receivables,
net, retainage and costs and estimated earnings in excess of
billings
|
$
|
(14,657
|
)
|
$
|
(15,213
|
)
|
$
|
4,460
|
||
|
Inventories
|
(1,741
|
)
|
(2,500
|
)
|
(404
|
)
|
||||
|
Prepaid
expenses and other assets
|
(2,096
|
)
|
(6,693
|
)
|
2,818
|
|||||
|
Accounts
payable and accrued expenses
|
9,467
|
13,002
|
8,590
|
|||||||
|
Total
|
$
|
(9,027
|
)
|
$
|
(11,404
|
)
|
$
|
15,464
|
||
|
11.
|
COMMITMENTS
AND CONTINGENCIES:
|
Leases
The
Company leases a number of its administrative operations facilities under
noncancellable operating leases expiring at various dates through 2020. In
addition, the Company leases certain construction, automotive and computer
equipment on a multi-year, monthly or daily basis. Rental expense in 2006,
2005
and 2004 was $18.5 million, $19.4 million and $21.3 million, respectively.
At
December 31, 2006, the future minimum lease payments required under the
noncancellable operating leases were as follows (in thousands):
|
Year
|
Minimum
Lease
Payments
|
|||
|
2007
|
$
|
13,636
|
||
|
2008
|
11,346
|
|||
|
2009
|
7,062
|
|||
|
2010
|
2,639
|
|||
|
2011
|
1,215
|
|||
|
Thereafter
|
1,592
|
|||
|
Total
|
$
|
37,490
|
||
Litigation
In
the
third quarter of 2002, an accident on an Insituform® cured-in-place-pipe
(“CIPP”) process project in Des Moines, Iowa resulted in the death of two
workers and the injury of five workers. The Company fully cooperated with
Iowa’s
state OSHA in the investigation of the accident. Iowa OSHA issued a citation
and
notification of penalty in connection with the accident, including several
willful citations. Iowa OSHA proposed penalties of $808,250. The Company
challenged Iowa OSHA’s findings, and in the fourth quarter of 2003, an
administrative law judge reduced the penalties to $158,000. In the second
quarter of 2004, the Iowa Employment Appeal Board reinstated many of the
original penalties, ordering total penalties in the amount of $733,750.
The
Company appealed the decision of the Employment Appeal Board to the Iowa
District Court for Polk County, which, in the first quarter of 2005, reduced
the
penalties back to $158,000. The Company appealed the decision of the Iowa
District Court and, on February 8, 2006, the Company’s appeal was heard by the
Iowa Court of Appeals. On March 17, 2006, the Court of Appeals issued its
opinion, vacating all citations issued under the general industry standards
(all
citations except two serious citations) and reducing total penalties against
the
Company to $4,500. Thereafter, the Employment Appeal Board filed a petition
for
further review to the Iowa Supreme Court, and the Company filed a resistance
to
the petition. On September 29, 2006, the Iowa Supreme Court granted the
Employment Appeal Board’s petition for further review, and set the case for
consideration during the week of December 4, 2006.
On
February 16, 2007, the Iowa Supreme Court issued its opinion, reinstating
all
citations issued under the general industry standards, including several
willful
citations,
and
reinstating
penalties
in
the
amount of $733,750. The Iowa Supreme Court remanded the case back to the
Iowa
District Court to enter an order consistent with its opinion. The Company
is
reviewing the Court’s opinion
and the
Company’s options regarding further judicial review of the Court's
opinion.
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, where the
matter is now pending. The Company believes that the factual allegations
and
legal claims made against it and Kinsel are without merit and intends to
vigorously defend them.
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 has been affirmed, but the award of damages and finding
of willfulness was subject to rehearing. The Company believed that it had
a
strong position in upholding the original damage award and, after investigation,
concluded that the defendants had a viable source to collect all or a portion
of
the award if confirmed. On the basis of these determinations, the Company
decided to aggressively pursue the rehearing on damages. The damages hearing
was
completed in the third quarter of 2006. The Company currently is awaiting
the
Court’s decision. At December 31, 2006, the Company had not recorded any
receivable related to this matter.
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).
At December 31, 2006, 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) 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, 2006, the Company had not recorded
any
receivable related to this lawsuit.
Boston
Installation
In
August
2003, the Company began a CIPP process installation in Boston. The $1.0 million
project required the Company to line 5,400 feet of a 109-year-old, 36- to
41-inch diameter unusually shaped hand-laid rough brick pipe. Many aspects
of
this project were atypical of the Company’s normal CIPP process installations.
Following installation, the owner rejected approximately 4,500 feet of the
liner
and all proposed repair methods. All rejected liner was removed and
re-installed, and the Company recorded a loss of $5.1 million on this project
in
the year ended December 31, 2003. During the first quarter of 2005, the Company,
in accordance with its agreement with the client, inspected the lines. During
the course of such inspection, it was determined that the segment of the
liner
that was not removed and re-installed in early 2004 was in need of replacement
in the same fashion as all of the other segments replaced in 2004. The Company
completed its assessment of the necessary remediation and related costs and
began work with respect to such segment late in the second quarter of 2005.
The
Company’s remediation work with respect to this segment was completed during the
third quarter of 2005. The Company incurred costs of approximately $2.4 million
with respect to the 2005 remediation work, which costs were accrued for 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
($6.4 million in actual damages and $1.25 million in pre-judgment interest).
The
excess insurance carrier also filed a motion for summary judgment as to the
issue of primary coverage. The Court heard oral arguments on the motions
on
November 20, 2006. The parties are now awaiting a ruling from the Court.
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 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 decision in March 2005 and the
acknowledgement of coverage and payment from the Company’s primary insurance
carrier, the Company believes that recovery from the excess insurance carrier
is
both probable and estimable and has recorded an insurance claim receivable
in
connection with this matter.
The
total
claim receivable was $7.6 million at December 31, 2006 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
|
|||||||
|
Interest
recorded in 2006
|
-
|
811
|
811
|
|||||||
|
Claim
receivable balance, December 31, 2006
|
$
|
6,398
|
$
|
1,251
|
$
|
7,649
|
||||
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. The Company has been advised by the government
that it is not considered a target of the investigation at this time. The
investigation is ongoing and the Company may have to continue to incur
substantial costs in complying with its obligations in connection with the
investigation. The Company has been fully cooperative throughout the
investigation.
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 $1.8 million, $2.1 million, and $1.9
million for the years ended December 31, 2006, 2005 and 2004,
respectively.
In
addition, certain foreign subsidiaries maintain various other defined
contribution retirement plans. Company contributions to such plans for the
years
ended December 31, 2006, 2005 and 2004 were $0.9 million, $1.1 million and
$1.0
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.
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, 2006 on its consolidated
balance sheet.
|
12.
|
SEGMENT
AND GEOGRAPHIC INFORMATION:
|
The
Company has three operating segments: rehabilitation; tunneling; 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, pipebursting and microtunneling. The tunneling segment engages in
tunneling used in the installation of new underground services, large diameter
microtunneling and sliplining. 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.
There
were no customers which accounted for more than 10% of the Company’s revenues
during any year in the three-year period ended December 31,
2006.
Financial
information by segment was as follows at December 31 (in
thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Revenues:
|
||||||||||
|
Rehabilitation
|
$
|
481,220
|
$
|
445,072
|
$
|
409,408
|
||||
|
Tunneling
|
69,296
|
111,687
|
108,729
|
|||||||
|
Tite
Liner®
|
46,199
|
38,523
|
24,461
|
|||||||
|
Total
revenues
|
$
|
596,715
|
$
|
595,282
|
$
|
542,598
|
||||
|
Operating
income (loss):
|
||||||||||
|
Rehabilitation
|
$
|
31,749
|
$
|
34,310
|
$
|
17,132
|
||||
|
Tunneling
|
(9,386
|
)
|
(16,907
|
)
|
(13,208
|
)
|
||||
|
Tite
Liner®
|
9,096
|
6,340
|
4,254
|
|||||||
|
Total
operating income
|
$
|
31,459
|
$
|
23,743
|
$
|
8,178
|
||||
|
Total
assets:
|
||||||||||
|
Rehabilitation
|
$
|
370,582
|
$
|
345,893
|
$
|
301,006
|
||||
|
Tunneling
|
53,660
|
63,253
|
73,822
|
|||||||
|
Tite
Liner®
|
20,810
|
15,255
|
9,349
|
|||||||
|
Corporate
|
105,017
|
93,927
|
124,644
|
|||||||
|
Total
assets
|
$
|
550,069
|
$
|
518,328
|
$
|
508,821
|
||||
|
Capital
expenditures:
|
||||||||||
|
Rehabilitation
|
$
|
12,601
|
$
|
19,571
|
$
|
22,002
|
||||
|
Tunneling
|
885
|
2,434
|
8,549
|
|||||||
|
Tite
Liner®
|
870
|
527
|
1,322
|
|||||||
|
Corporate
|
6,279
|
4,549
|
3,322
|
|||||||
|
Total
capital expenditures
|
$
|
20,635
|
$
|
27,081
|
$
|
35,195
|
||||
|
Depreciation
and amortization:
|
||||||||||
|
Rehabilitation
|
$
|
13,838
|
$
|
13,266
|
$
|
12,278
|
||||
|
Tunneling
|
4,933
|
4,867
|
4,099
|
|||||||
|
Tite
Liner®
|
594
|
818
|
797
|
|||||||
|
Corporate
|
2,188
|
2,288
|
2,264
|
|||||||
|
Total
depreciation and amortization
|
$
|
21,553
|
$
|
21,239
|
$
|
19,438
|
||||
Rehabilitation
2006
operating results in the rehabilitation segment decreased to $31.7 million
as
higher revenues were offset by slightly lower gross profit margins and higher
operating expenses. While revenue was higher, revenue was somewhat tempered
by
market price reductions during the year as a result of competitiveness the
Company has gained through cost efficiencies gained from implementation of
steam
and other technological improvements. While crew efficiencies improved, enabling
the rehabilitation business to generate higher revenues on essentially flat
labor costs, higher subcontract costs and higher material costs offset the
efficiencies, causing a lower gross profit margin. Material costs, in
particular, increased significantly due to resin costs. Resin, a petroleum-based
product, is subject to pricing volatility. In many cases, price increases
can be
passed through to customers. However, to the extent that there are longer
term
contracts that contain fixed pricing, the ability to pass through such increases
may be limited. The rehabilitation segment also recognized a $0.5 million
benefit from additional amounts relating to a claim receivable from our excess
general liability insurance carrier. See Note 11, - “Commitments and
Contingencies” for further discussion of the claim receivable. Operating
expenses were higher due to corporate expenses, including equity compensation
and legal expenses.
During
2005, the rehabilitation segment was favorably impacted by a claim receivable
from the Company’s excess
general liability insurance carrier that was recorded in the second quarter
of
2005. See Note 11, “Commitments
and Contingencies” for further discussion of the claim
receivable.
Tunneling
Tunneling’s
operating loss narrowed to $9.4 million in 2006 as a result of the completion
of
several problematic low-margin or loss jobs. Tunneling project margins have
improved, but with the slow addition of new work, considerable idle tunneling
equipment remains, resulting in underutilized equipment costs. Underutilized
equipment costs, primarily depreciation and operating lease expenses, of
$9.2
million adversely affected tunneling’s operating results in 2006. Accordingly,
the Company continues to seek alternatives to further reduce equipment to
a
level appropriate for the size of the tunneling business. Slightly offsetting
under-utilized equipment costs are $1.3 million recorded on claims in 2006,
relating to completed projects.
During
2005, the tunneling segment was adversely impacted by the continuation of
a few
large projects on which margins were written down in late 2004. A large project
in Chicago, Illinois experienced further margin deterioration in 2005 of
$5.7
million and negative gross margin adjustments of $6.8 million (net of estimated
claims recovery of $2.7 million) on two other significant projects were
experienced during 2005. All three of the aforementioned projects were completed
in the first half of 2006.
During
2004, the tunneling segment experienced significant negative gross margin
adjustments on one large tunneling project in the amount of $11.0 million,
$7.3
million of which occurred in the fourth quarter. During the third quarter
of
2004, the Company recorded a downward adjustment to the gross margin on this
project of $3.7 million.
At
December 31, 2006, the tunneling segment had approximately $18.7
million in outstanding claims against third parties relating to, among other
things, differing site conditions and defective specifications. Of this amount,
$7.2 million had been recorded to income through the end of 2006. In accordance
with the Company’s accounting
policies, a claim is recorded to income when the realization of the claim
is
reasonably assured, and a recoverable amount can be estimated.
In
2005
and 2006, the Company increased its efforts regarding tunneling
claims and was aggressively pursuing all outstanding claims, either through
discussions and/or negotiations with our clients, alternative dispute resolution
proceedings or, if necessary, litigation. During 2006, $1.3 million
was recognized in tunneling claims compared to $4.6 million in 2005 and
$1.7 million in 2004.
Tite
Liner®
Tite
Liner's® operating results were stronger in 2006 compared to 2005 with higher
revenues and gross profit margins. Operating expenses were higher in the
Tite
Liner® segment due to additional staffing and corporate expenses necessary to
support Tite Liner's® growing business. Tite Liner's® results were also
favorable in 2005, as business from South American operations grew
significantly.
Demand
for Tite Liner®’s product is normally strong during periods when pricing for oil
and other mined commodities is high. Tite Liner®’s strong performance is
expected to continue into 2007, but it may not exceed 2006 results, as this
year
was exceptionally strong for the Tite Liner® business, and backlog is lower
at December 31, 2006 as compared to last year.
Financial
information by geographic area was as follows at December 31 (in
thousands):
|
2006
|
2005
|
2004
|
||||||||
|
Revenues:
|
||||||||||
|
United
States
|
$
|
448,350
|
$
|
462,541
|
$
|
439,618
|
||||
|
Canada
|
44,101
|
31,169
|
25,595
|
|||||||
|
Europe
|
90,259
|
89,716
|
75,914
|
|||||||
|
Other
foreign
|
14,005
|
11,856
|
1,471
|
|||||||
|
Total
revenues
|
$
|
596,715
|
$
|
595,282
|
$
|
542,598
|
||||
|
Operating
income (loss):
|
||||||||||
|
United
States
|
$
|
10,328
|
$
|
8,289
|
$
|
946
|
||||
|
Canada
|
9,484
|
5,296
|
4,005
|
|||||||
|
Europe
|
8,945
|
8,734
|
3,271
|
|||||||
|
Other
foreign
|
2,702
|
1,424
|
(44
|
)
|
||||||
|
Total
operating income
|
$
|
31,459
|
$
|
23,743
|
$
|
8,178
|
||||
|
Long-lived
assets:
|
||||||||||
|
United
States
|
$
|
84,695
|
$
|
91,692
|
$
|
88,442
|
||||
|
Canada
|
2,222
|
2,292
|
2,066
|
|||||||
|
Europe
|
20,163
|
17,993
|
17,230
|
|||||||
|
Other
foreign
|
1,085
|
783
|
675
|
|||||||
|
Total
long-lived assets
|
$
|
108,165
|
$
|
112,760
|
$
|
108,413
|
||||
|
13.
|
SUBSEQUENT
EVENTS:
|
Treasury
Stock Retirement
On
January 24, 2007, the Company’s Board of Directors resolved to retire the
Company’s treasury stock. Consequently, the Company’s 2,357,464 shares of
treasury stock will be retired and the number of issued shares will be reduced
accordingly. The effects on stockholders’ equity will include a reduction in
common stock by the $0.01 par value of the shares, and a reduction in additional
paid-in capital.
|
14.
|
SELECTED
QUARTERLY FINANCIAL DATA
(UNAUDITED):
|
(In
thousands, except per share data)
|
First
|
Second
|
Third
|
Fourth
|
||||||||||
|
Year
ended December 31, 2006
|
|||||||||||||
|
Revenues
|
$
|
143,564
|
$
|
154,201
|
$
|
144,076
|
$
|
154,874
|
|||||
|
Gross
profit
|
28,665
|
34,061
|
31,640
|
33,588
|
|||||||||
|
Operating
income
|
5,778
|
8,185
|
7,347
|
10,149
|
|||||||||
|
Net
income
|
3,034
|
5,514
|
5,695
|
10,435
|
|||||||||
|
Basic
earnings per share:
|
0.11
|
0.20
|
0.21
|
0.39
|
|||||||||
|
Diluted
earnings per share:
|
0.11
|
0.20
|
0.21
|
0.38
|
|||||||||
|
Year
ended December 31, 2005:
|
|||||||||||||
|
Revenues
|
$
|
136,277
|
$
|
157,841
|
$
|
155,213
|
$
|
145,951
|
|||||
|
Gross
profit
|
26,099
|
28,223
|
32,850
|
29,669
|
|||||||||
|
Operating
income
|
2,641
|
5,484
|
9,459
|
6,159
|
|||||||||
|
Net
income
|
400
|
2,735
|
5,760
|
4,265
|
|||||||||
|
Basic
earnings per share:
|
0.01
|
0.10
|
0.21
|
0.16
|
|||||||||
|
Diluted
earnings per share:
|
0.01
|
0.10
|
0.21
|
0.16
|
|||||||||
____________________
|
Item
9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not
applicable.
|
Item
9A.
|
Controls
and Procedures
|
Our
management, with the participation of our Chief Executive Officer and our
Controller (Principal Financial and Accounting Officer), had conducted an
evaluation of the effectiveness of our disclosure controls and procedures
(as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31,
2006.
Based on their evaluation, our Chief Executive Officer and our Controller
have
concluded that our disclosure controls were effective at December 31,
2006.
We
maintain internal controls and procedures designed to ensure that we are
able to
collect the information subject to required disclosure in reports we file
with
the United States Securities and Exchange Commission (the “SEC”), and to
process, summarize and disclose this information within the time specified
by
the rules set forth by the SEC.
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, 2006. Our independent registered public accounting firm attested to,
and
reported on, this report. Their attestation report, along with our management’s
report, are included in Item 8 of this report under the captions entitled
“Report of Independent Registered Public Accounting Firm” and “Management’s
Report on Internal Control Over Financial Reporting,” respectively, and are
incorporated herein by reference.
There
were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting during our fourth fiscal quarter of
2006.
|
Item
9B.
|
Other
Information
|
|
Not
applicable.
|
|
Item
10.
|
Directors,
Executive Officers and Corporate
Governance
|
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 2007 Annual Meeting of Shareholders (“2007 Proxy
Statement”) and is incorporated herein by reference
|
Item
11.
|
Executive
Compensation
|
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 2007 Proxy
Statement and is incorporated herein by reference.
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
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 2007 Proxy Statement and is incorporated
herein by reference.
|
Item
13.
|
Certain
Relationships and Related Transactions, and Director Independence
|
Information
concerning this item is included under the caption “Corporate
Governance—Independent Directors” in the 2007 Proxy Statement and is
incorporated herein by reference.
|
Item
14.
|
Principal
Accountant Fees and
Services
|
Information
concerning this item is included under the caption “Independent Auditors’ Fees”
in the 2007 Proxy Statement and is incorporated herein by
reference.
|
Item
15.
|
Exhibits
and Financial Statement Schedules
|
(a) 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.
SIGNATURES
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:
|
February
22, 2007
|
INSITUFORM
TECHNOLOGIES, INC.
|
||
|
By:
|
/s/
Thomas S. Rooney, Jr.
|
|||
|
Thomas
S. Rooney, Jr.
|
||||
|
President
and Chief Executive Officer
|
||||
POWER
OF ATTORNEY
The
registrant and each person whose signature appears below hereby appoint Thomas
S. Rooney, Jr. 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/
Thomas S. Rooney, Jr.
|
Principal
Executive Officer and
|
February
22, 2007
|
||
|
Thomas
S. Rooney, Jr.
|
Director
|
|||
|
/s/
David A. Martin
|
Principal
Financial and
|
February
22, 2007
|
||
|
David
A. Martin
|
Accounting
Officer
|
|||
|
/s/
Alfred L. Woods
|
Director
|
February
22, 2007
|
||
|
Alfred
L. Woods
|
||||
|
/s/
Stephen P. Cortinovis
|
Director
|
February
22, 2007
|
||
|
Stephen
P. Cortinovis
|
||||
|
/s/
Stephanie A. Cuskley
|
Director
|
February
22, 2007
|
||
|
Stephanie
A. Cuskley
|
|
/s/
John P. Dubinsky
|
Director
|
February
22, 2007
|
||
|
John
P. Dubinsky
|
||||
|
/s/
Juanita H. Hinshaw
|
Director
|
February
22, 2007
|
||
|
Juanita
H. Hinshaw
|
||||
|
/s/
Alfred T. McNeill
|
Director
|
February
22, 2007
|
||
|
Alfred
T. McNeill
|
||||
|
/s/
Sheldon Weinig
|
Director
|
February
22, 2007
|
||
|
Sheldon
Weinig
|
Index
to Exhibits (1,2)
|
3.1
|
Restated
Certificate of Incorporation of the Company, as amended through
April 27,
2005 (incorporated by reference to Appendix A to the definitive
proxy
statement on Schedule 14A filed on March 24, 2005 in connection
with the
2005 annual meeting of stockholders), 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,
2006
(incorporated by reference to Exhibit 3.1 to the current report
on Form
8-K dated and filed July 27, 2006).
|
|
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
dated
March 8, 2002).
|
|
10.1
|
Second
Amended and Restated Credit Agreement (the “Credit Agreement”) dated as of
February 17, 2006 between the Company and Bank of America, N.A.,
as
Administrative Agent and Letter of Credit Issuing Lender (incorporated
by
reference to Exhibit 10.1 to the current report on Form 8-K dated
and
filed February 21, 2006).
|
|
10.2
|
Note
Purchase Agreement (the “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 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).
|
|
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 dated and filed February 21,
2006).
|
|
10.4
|
Amended
and Restated Intercreditor Agreement dated as of April 24, 2003
among Bank
of America, N.A. 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
|
Employment
Letter dated March 7, 2003 between the Company and Thomas S. Rooney,
Jr.
(incorporated by reference to Exhibit 10.3 to the quarterly report
on Form
10-Q for the quarter ended March 31, 2003), as amended by Amendment
dated
March 1, 2004 (incorporated by reference to Exhibit 10.6 to the
annual
report on Form 10-K for the year ended December 31, 2003).
(3)
|
|
10.6
|
Employment
letter dated May 2, 2005 between the Company and Thomas E. Vossman
(incorporated by reference to Exhibit 10.1 to the current report
on Form
8-K dated and filed May 4, 2005).
(3)
|
|
10.7
|
Resin
Purchase Agreement dated as of March 29, 2005 by and between the
Company
and AOC, LLC (incorporated by reference to Exhibit 10.1 to the
current
report on Form 8-K dated and filed April 4, 2005), as amended by
First
Amendment to Resin Purchase Agreement entered into as of August
17, 2005
and effective as of July 15, 2005 (incorporated by reference to
Exhibit
10.1 to the current report on Form 8-K dated and filed August 19,
2005).
|
|
10.8
|
2007
Management Annual Incentive Plan (incorporated by reference to
Exhibit
10.1 to the current report on Form 8-K dated and filed January
17, 2007).
(3)
|
|
10.9
|
1992
Employee Stock Option Plan of the Company (incorporated by reference
to
Exhibit 10.11 to the annual report on Form 10-K for the year ended
December 31, 1999). (3)
|
|
10.10
|
1992
Director Stock Option Plan of the Company (incorporated by reference
to
Exhibit 10.12 to the annual report on Form 10-K for the year ended
December 31, 1999). (3)
|
|
10.11
|
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)
|
|
10.12
|
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)
|
|
10.13
|
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, dated and filed
on April
14, 2006). (3)
|
|
10.14
|
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)
|
|
10.15
|
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)
|
|
|
|
10.16
|
Stock
Purchase Program of the Company (incorporated by reference to Exhibit
99.1
to the Registration Statement on Form S-8 dated and filed on May
18,
2006). (3)
|
|
10.17
|
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 dated and filed January 11, 2006).
(3)
|
|
10.18
|
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)
|
|
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 Thomas S. Rooney, Jr. 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 Thomas S. Rooney, Jr. 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.
|