Q3 Shareholder letter
October 29, 2012
Dear UGSI Shareholder,
The third quarter of 2012 was a busy one for Underground Solutions. We set a new quarterly record for revenue in the Fusible PVC™ pipe business, while at the same time completing the acquisition of a new business line discussed further below. We celebrated our one-year anniversary with Mobile Pipe at the end of the second quarter, and looked back with satisfaction at our tremendously successful first year of ownership. On a consolidated basis, excluding the results of our newest acquisition, revenue through the end of the third quarter is more than 50% above last year, while new order bookings increased by almost 20% over the first three quarters of 2011. Our gross margin percentage increased significantly year-over-year, while our operating expenses declined, both in absolute terms and as a percentage of revenue.
As presaged in my last quarterly letter, the rate of growth of Fusible PVC™ pipe bookings slowed in the third quarter, but much of that will be made up in the fourth quarter as we expect to book several projects that slipped from the third into the fourth quarter. During the third quarter we added our first dedicated sales manager for Mobile Pipe. While we have experienced early success cross-selling Mobile Pipe lining and coating services with our Fusible PVC™ pipe offerings, the addition of a dedicated sales resource at Mobile Pipe will accelerate growth in that business as we will now be able to engage more proactively with our Mobile Pipe customers.
For those of you interested in a good illustration of how Fusible PVC™ pipe saves money for utilities, the American Water Works Association (AWWA) recently published an article in its Opflow magazine entitled, “Trenchless Pipe Repair, Taming Capital Improvement Challenges.” The article details the use of Fusible PVC™ for pipe bursting applications versus traditional dig-and-replace methods. Much of the article centers on the work of Consolidated Mutual Water Company (CMWC), near Denver, Colorado. CMWC has used our pipe extensively for over three years, and has documented millions of dollars of savings. Importantly, CMWC has been a case study for many new customers in the Intermountain Region that have subsequently used pipe bursting with Fusible PVC™ pipe as part of their pipeline rehabilitation programs, including Cheyenne, Wyoming; Denver Water in Colorado; and the City of Aurora, Colorado.
Strong cash flow from our Fusible PVC™ pipe and Mobile Pipe businesses enables us to take advantage of attractive acquisition opportunities as they arise. One such opportunity presented itself in the third quarter, resulting in the purchase of the Wallace & Tiernan® ChemFeed product lines from Siemens Industry, Inc. As many of our shareholders already know, our core management team came out of USFilter, which previously owned the Wallace & Tiernan® ChemFeed business. Our knowledge of that business created our interest in the acquisition, and our historical experience operating that business proved critical in convincing Siemens to sell it to Underground Solutions. We closed the acquisition in early August, and are operating the business from a facility in Vineland, New Jersey. We are already deep into start-up mode, with a solid backlog of orders after two months of operations. Challenges are abundant as we rebuild the business. However, we are blessed with some of the best brands in the business, such as Wallace & Tiernan® and Stranco®, as well as some of the best people in the water industry. We have reassembled much of the original management team that successfully ran the business in the late 1990’s for USFilter. There is no doubt that the brands have suffered over the past few years as Siemens focused on other product lines, but we believe that a relentless focus on quality, delivery, and responsiveness can bring those brands and products back to the pre-eminence they once enjoyed. We look forward to reporting on the progress of our newest business in the quarters ahead.
It has been a strong year for Underground Solutions, no doubt due to the hard work of foundation building over the past six years. Hopefully, the U.S. won’t sail off the “fiscal cliff” at year-end and we will instead see continued strengthening in the economy in 2013.
Thanks for your continued support.
Sincerely,
Andy Seidel
Chairman and Chief Executive Office
