Insituform Technologies, Inc

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Insituform Technologies, Inc.

702 Spirit 40 Park Drive
Chesterfield, Missouri 63005
U.S.A.
Telephone: (636) 530-8000
Toll Free: (800) 234-2992
Fax: (636) 519-8010
Web site: http://www.insituform.com

Public Company
Incorporated: 1980 as Insituform of North America, Inc.
Employees: 2,281
Sales: $595.2 million (2005)
Stock Exchanges: NASDAQ
Ticker Symbol: INSU
NAIC: 237110 Water and Sewer Line and Related Structures Construction; 325222 Noncellulosic Organic Fiber Manufacturing; 533110 Owners and Lessors of Other Non-Financial Assets

Insituform Technologies, Inc., rehabilitates and replaces underground pipe, specializing in "trenchless" methods of repairing damaged or aging water and sewer systems. The company's proprietary Insituform CIPP Process uses a resin-coated liner inserted in a damaged section of pipe that hardens, forming a new pipe within the old pipe. The Insituform process accounts for two-thirds of the company's annual revenue. The remaining third of the company's sales are derived from other trenchless infrastructure technologies such as pipebursting, micro-tunneling, sliplining, and its proprietary Tite Liner process, which lines new and existing pipe with corrosion and abrasion resistant polyethylene pipe. Insituform operates in North America, Europe, and South America. The United States is the company's largest market, accounting for 78 percent of annual revenue.

ORIGINS

During Insituform's first quarter-century of business, there were two distinct periods of existence, but both eras shared the same focus: the promotion of the revolutionary Insituform CIPP Process. Developed in England during the early 1970s, the cured-in-place technology saved time, money, and virtually eliminated any disruption while aging water and sewer pipes were being replaced. The process utilized a custom-manufactured lining tube, the Insitutube, made of synthetic fiber that was coated with resin. After being inserted in the damaged pipe and treated with steam and hot water, the resin-coated line hardened, forming a new, rigid pipe within the old pipe, accomplishing the restorative work without disturbing the original position of the pipe. The work was performed in place, or in situ, a trenchless process that afforded advantages similar to those offered by noninvasive surgery in the medical field.

Insituform was incorporated in 1980 as Insituform of North America, Inc., initially pursuing a far less ambitious agenda than the one it would pursue in the 21st century. The company was formed to license the cured-in-place technology from Insituform Group Limited, which owned the global rights to the Insituform Process. Insituform of North America secured the exclusive rights to the process for most of the United States, giving it the right to license the infrastructure technology to other companies. The company made money by marketing and providing Insituform installation services to construction firms, recording revenue from royalty payments and product sales. Insituform of North America operated exclusively as a licensee during its first decade, building a business that generated slightly more than $100 million by the beginning of the 1990s. During its second decade of business, the company's revenue volume nearly quintupled, an increase attributable to a dramatic change in strategy. Insituform of North America went from being a licensee of the cured-in-place technology to becoming its owner, turning into Insituform Technologies, Inc. in the process.

The redefining moment in the company's history occurred in 1992, a year in which revenues reached $156 million. Insituform of North America acquired Insituform Group Limited, gaining full ownership rights of the Insituform Process. At the same time, Insituform of North America changed its name to Insituform Technologies, Inc. The acquisition marked the beginning of a long-term plan to acquire Insituform licensees and organize the worldwide network under one corporate umbrella, under the Insituform Technologies banner unfurled in Chesterfield, Missouri. The company began acquiring licensees of the Insituform Process, who frequently licensed the rights to another infrastructure technology, the NuPipe Process. Another trenchless method of pipeline replacement, the NuPipe Process used a "fold and formed" technology that was suited for repairing small-diameter pipe and for situations in which polyvinylchloride (PVC) pipe was preferred. Insituform acquired a series of licensees in the wake of its purchase of Insituform Group Limited, beginning with the December 1992 acquisition of H.T. Schneider, Inc., an Insituform and NuPipe licensee that was the parent company of Insituform of New England, Inc.

In July 1993, the company purchased Naylor Industries, Inc., the parent company of Insituform Gulf South, Inc., which operated as an Insituform and NuPipe licensee in the Gulf Coast region. At roughly the same time, Insituform Midwest, Inc. was purchased, an Insituform and NuPipe licensee in the Midwest. One year later, Insituform gained control over the Insituform and NuPipe licensee in the Pacific Northwest, acquiring Gelco Services, Inc. and affiliated entities. In late 1995, the company acquired Insituform Southeast, Inc., the Insituform licensee for the southeastern United States, and completed the largest of its acquisitions during the first half of the 1990s, the purchase of Insituform Mid-America, Inc. (IMA). Completed in October 1995, the acquisition gave Insituform control over IMA's operating territory, which included portions of 22 states, Puerto Rico, and the U.S. Virgin Islands. IMA also owned worldwide rights to the Tite Liner process, an abrasion and corrosion protection technology used to rehabilitate oilfield, mining, and industrial process pipelines.

Insituform spent approximately a decade gaining control over licensees and adding new technologies to its capabilities. In February 2000, the company acquired Insituform Metropolitan, a licensee in New York and New Jersey, which left it with only one surviving licensee. Revenues by the end of 2000 reflected the years devoted to expanding via acquisitions, eclipsing $400 million, from which the company recorded an impressive $34.9 million in net income. Insituform continued to acquire companies in the wake of its 20th anniversary, completing deals that moved it into other areas of the infrastructure market, but the years also marked a period of declining profitability. As the company moved forward, the nearly $40 million in posted profits in 2000 stood as a high-water mark it struggled in vain to equal.

COMPANY PERSPECTIVES

Insituform aims to achieve complete customer satisfaction by being the leading worldwide solution provider for underground infrastructure using innovative construction technologies. We will be a company that values its employees by seeking diversity in our management, staff and field crews and providing a safe, rewarding and career-enhancing work environment. We will be a profitable Company known for setting industry standards for reliability, trust and quality for our private and public sector clients.

ACQUISITIONS HURT PROFITS
IN THE 21ST CENTURY

Between its 20th anniversary and its 25th anniversary, Insituform enjoyed the benefits and suffered the damages of its moves on the acquisition front. The company's desire to add to its talents in the infrastructure market and to strengthen its established geographic presence drew little criticism from industry observers initially. In February 2001, the company acquired Houston, Texas-based Kinsel Industries, Inc., an $80 million acquisition that appeared to be an ideal addition to the Insituform fold. Founded in 1976, Kinsel was involved in the water and sewer markets, other pipe rehabilitation and construction, the erection of water and sewer treatment plants, and general construction. Of primary importance to Insituform was Kinsel's water and sewer business, which focused on pipebursting and microtunneling, two new methods of pipeline repair for the Chesterfield-based organization.

Pipebursting, a trenchless method of drilling a new tunnel from surface operation equipment, entailed using a bursting head to propel through the extant pipe, which fractured the existing pipe and displaced the fragments outward, allowing a new pipe to be inserted to replace the old pipe. Microtunneling, another trenchless way to drill a new tunnel, was used primarily for gravity sewers at depths greater than 15 feet, well suited for congested areas, unstable ground conditions, and contamination zones. The acquisition of Kinsel also gave Insituform a 50 percent stake in a Kinsel joint venture company which had been awarded a five-year, $380 million project to repair Jacksonville, Florida's sewer and water system. Awarded by the Jacksonville Electric Authority in late 2000, the contract called for the use of pipebursting techniques, becoming Insituform's largest single project.

Enriched by the Kinsel acquisition, Insituform struck again on the acquisition front two years later, led by Anthony W. Hooper. An Insituform veteran, Hooper rose to the position of senior vice-president of marketing and technology before being promoted to the position of president in 1996. Elected chairman of the board the following year, Hooper maintained firm control over the company when it purchased Kinsel, and at his urging, the company completed the acquisition of Elmor Pipe Jacking, Inc. in May 2002 for $12.5 million. Based in Lake View, California, Elmor specialized in tunneling techniques for pipe repair and replacement, offering Insituform the opportunity to establish a strong presence in California and to reap the rewards of the 12 projects Elmor was working on when it was acquired.

The acquisition of Kinsel and Elmor promised to give Insituform a meaningful strategic advantage, providing entry into new areas of the infrastructure market and allowing the company to perform work that otherwise would have gone to subcontractors. Unfortunately for Hooper and his management team, the two purchases failed to live up to expectations. Between 2000 and 2002, the company revenues increased, but its profits recorded an alarming decline, falling from $34.9 million to $22.7 million. Its stock price plunged during the two-year period, losing half its value. During the first half of 2003, Insituform's financial performance worsened, prompting Hooper to arrange a conference call to investors and analysts to explain the company's predicament.

Before Hooper addressed the investment community, Insituform underwent a change in leadership. In April 2003, perhaps because of the company's anemic financial performance, Thomas S. Rooney was given Hooper's presidential post. Hooper remained chairman and chief executive officer. Rooney also was given the newly created title of chief operating officer. Rooney, a veteran of the construction industry, joined Insituform from Gilbane Building Company, where he served as senior vice-president of the $2.7 billion-in-sales construction firm. Before joining Gilbane Building, Rooney worked at Turner Construction Co. and Centex Golden Construction Co. With Rooney at his side, Hooper attempted to assuage Wall Street's anxiety, acknowledging, as reported in the July 12, 2003 edition of the St. Louis Post-Dispatch, that Insituform "has made several missteps over the last year." At Kinsel, problems arose because of managerial miscues at the business's West Coast operations. "There are execution issues," Hooper said. Hooper also blamed Elmor for Insituform's declining profits, telling analysts, "To our surprise, we uncovered very substantial additional costs on these contracts," referring to the 12 projects the company was working on when it was acquired by Insituform. Despite the problems, Hooper was convinced the acquisition of the two companies was a prudent move. "We are obviously not happy with our integration of those acquisitions," Hooper said, "but the justification for them is unequivocal."

KEY DATES

1980:: Insituform of North America, Inc. is formed to license the Insituform CIPP Process from Insituform Group Limited.
1992:: Insituform of North America acquires Insituform Group Limited and changes its name to Insituform Technologies, Inc.
2001:: Kinsel Industries, Inc. is acquired.
2002:: Insituform acquires Elmor Pipe Jacking, Inc.
2005:: After falling to $597,000 in 2004, net income increases to $13.1 million.

Declining profits persisted after Hooper's conference call, making for an unimpressive start to the 21st century. Hooper resigned in September 2003 to pursue other interests, leaving the task of restoring Insituform's net income to the level enjoyed at the start of the decade to Rooney. Rooney was elected chief executive officer in addition to his responsibilities as president and chief operating officer. Alfred L. Woods, an Insituform board member, was elected non-executive chairman of the company. At the end of 2003, the company's net income plunged from $22.6 million to $3.5 million. The following year, Insituform eked out a paltry $597,000 in net income, more than $34 million below the total recorded four years earlier.

INSITUFORM EYEING HIGHER
PROFITS IN THE FUTURE

Despite the lackluster financial performance, Rooney and his management team were confident that the years ahead would witness a return to higher profit totals. Insituform was suffering from problems it had the power to correct, rather than from flaws in its technology or from occupying a weak position in its market. The company dominated the trenchless segment of the infrastructure market, and was expected to benefit from the federal government's insistence that many cities revamp their sewer systems. "There are literally hundreds of companies that are doing this business, and Insituform is the largest by many times," an analyst said in a December 10, 2004 interview with the St. Louis Post-Dispatch. As the company worked on getting its operations in order, it introduced a new infrastructure technology that bolstered hopes for a more profitable future. In January 2004, the company unveiled "Insituform SP," a method for rehabilitating large diameter gravity sewers and drains with glass-reinforced plastic panels. The company's engineering manager explained the importance of the new procedure in a January 2004 interview with Underground Construction. "The nation's largest sewer lines are among the oldest in use; many have been in service 100 years or more. Because of their age, many are badly deteriorated, but because of their size, many trenchless construction methods cannot be used and repairs are difficult and costly." With Insituform SP and its other proven infrastructure technologies at its disposal, Insituform promised to play a prominent role in fixing underground pipeline in the United States and abroad well into the future.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

Affholder, Inc.; INA Acquisition Corp.; Insituform Belgium NV; Insituform France, S.A.; Insituform Holdings (UK) Limited; Insituform Linings PLC; Insituform (Netherlands) B.V.; Insituform Rioolrenovatietechnieken B.V. (Netherlands); Insituform Technologies Iberica SA (Spain); Insituform Technologies Limited (Canada); Insituform Technologies Limited (U.K.); Insituform Technologies USA, Inc.; Ka-Te Insituform AG (Switzerland); Kinsel Industries, Inc.; Video Injection S.A. (France).