UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airside Business Park, 100 Airside Drive, Moon Township, PA 15108
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(Address of principal executive offices) (Zip Code)
(412) 269-6300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 2004:
--------------------
Common Stock 8,403,831 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements which follow have been prepared
by Michael Baker Corporation ("the Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for
the periods presented. All such adjustments are of a normal and recurring nature
unless specified otherwise. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, particularly the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section in Part
I, contains forward-looking statements concerning future operations and
performance of the Company. Forward-looking statements are subject to market,
operating and economic risks and uncertainties that may cause the Company's
actual results in future periods to be materially different from any future
performance suggested herein. Factors that may cause such differences include,
among others: increased competition, increased costs, changes in general market
conditions, changes in industry trends, changes in the regulatory environment,
changes in anticipated levels of government spending on infrastructure, changes
in loan relationships or sources of financing, changes in management, changes in
information systems, and costs to comply with the requirements of the
Sarbanes-Oxley Act of 2002. Such forward-looking statements are made pursuant to
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995.
-1-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
--------------------------
MARCH 31, 2004 March 31, 2003
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(In thousands, except
per share amounts)
Total contract revenues $ 125,005 $ 99,299
Cost of work performed 104,064 85,853
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Gross profit 20,941 13,446
Selling, general and administrative expenses 15,556 13,557
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Income/(loss) from operations 5,385 (111)
Other income/(expense):
Interest income 5 4
Interest expense (118) (86)
Other, net 573 14
---------------------------------------------------------------------------------------------------------------------------
Income/(loss) before income taxes 5,845 (179)
Provision for/(benefit from) income taxes 2,747 (82)
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NET INCOME/(LOSS) $ 3,098 $ (97)
===========================================================================================================================
BASIC NET INCOME/(LOSS) PER SHARE $ 0.37 $ (0.01)
DILUTED NET INCOME/(LOSS) PER SHARE $ 0.37 $ (0.01)
===========================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
MAR. 31, 2004
ASSETS (UNAUDITED) Dec. 31, 2003
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(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 5,277 $ 3,104
Receivables, net 80,122 74,940
Cost of contracts in progress and estimated earnings, less billings 49,452 51,620
Prepaid expenses and other 7,686 9,899
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Total current assets 142,537 139,563
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PROPERTY, PLANT AND EQUIPMENT, NET 16,749 17,402
OTHER ASSETS
Goodwill and other intangible assets, net 9,161 9,233
Other assets 7,256 7,205
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Total other assets 16,417 16,438
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TOTAL ASSETS $ 175,703 $ 173,403
======================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 26,357 $ 22,109
Accrued employee compensation 21,542 15,394
Accrued insurance 10,361 10,224
Other accrued expenses 20,018 20,464
Excess of billings on contracts in progress over cost and estimated
earnings 15,462 16,611
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Total current liabilities 93,740 84,802
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OTHER LIABILITIES
Long-term debt 3,859 13,481
Other liabilities 2,417 2,539
Commitments and contingencies - -
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Total liabilities 100,016 100,822
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SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,713,141 and 8,711,235 shares at 3/31/04 and 12/31/03, respectively 8,713 8,711
Additional paid-in-capital 38,312 38,298
Retained earnings 32,575 29,477
Other comprehensive loss (928) (912)
Unearned compensation expense (32) (40)
Less - 391,237 shares of Common Stock in treasury, at cost, at
3/31/04 and 12/31/03. (2,953) (2,953)
----------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 75,687 72,581
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 175,703 $ 173,403
======================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
--------------------------
MARCH 31, 2004 March 31, 2003
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 3,098 $ (97)
Adjustments to reconcile net income/(loss) to net
cash used in operating activities:
Depreciation and amortization 1,160 1,261
Changes in assets and liabilities:
Increase in receivables and contracts in progress (4,172) (31,455)
Increase in accounts payable and accrued expenses 9,976 6,567
Decrease in other net assets 2,172 142
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Total adjustments 9,136 (23,485)
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Net cash provided by/(used in) operating activities 12,234 (23,582)
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (455) (2,738)
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Net cash used in investing activities (455) (2,738)
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CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of)/proceeds from long-term debt (9,622) 24,100
Payments to acquire treasury stock - (690)
Proceeds from the exercise of stock options 16 -
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Net cash (used in)/provided by financing activities (9,606) 23,410
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Net increase/(decrease) in cash and cash equivalents 2,173 (2,910)
Cash and cash equivalents, beginning of year 3,104 9,885
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,277 $ 6,975
======================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 144 $ 82
Income taxes paid $ 319 $ 1,954
======================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDED MARCH 31, 2004
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
The following table summarizes the Company's weighted average shares outstanding
for the quarters ended March 31, 2004 and 2003. The additional shares included
in diluted shares outstanding are entirely attributable to stock options.
Weighted average shares outstanding 2004 2003
---------------------------------------------------------------------------------------------------------------------
Basic 8,320,417 8,345,554
Diluted 8,420,672 8,345,554
=====================================================================================================================
As of March 31, 2004 and 2003, the Company had 194,096 and 336,488 stock options
outstanding, respectively, which were not included in the computations of
diluted shares outstanding for the respective three-month periods because the
option exercise prices were greater than the average market prices of the common
shares. Such options could potentially dilute basic earnings per share in future
periods.
NOTE 2 - CAPITAL STOCK
During 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock in the open market. In the first quarter of
2003, the Company reactivated this share repurchase program and repurchased
80,400 treasury shares at market prices ranging from $7.90 to $8.81 per share,
for a total price of $690,000. As of March 31, 2004, treasury shares totaling
414,689 had been repurchased under this program. In February 2003, the Board of
Directors authorized the Company to repurchase up to 500,000 additional shares.
As of March 31, 2004, no shares had been repurchased under the February 2003
authorization.
NOTE 3 - BUSINESS SEGMENT INFORMATION
The Company's business segments reflect how management makes resource decisions
and assesses its performance. The Company has the following three reportable
segments:
- The Engineering segment provides a variety of design and related
consulting services. Such services include design-build, construction
management, consulting, planning, program management, surveying,
mapping, geographic information systems, architectural and interior
design, construction inspection, constructability reviews, software
development, site assessment and restoration, strategic regulatory
analysis, regulatory compliance, and advanced management systems.
- The Energy segment provides a full range of Total Asset Management
services for operating energy production facilities worldwide. These
services range from complete outsourcing solutions to specific services
such as training, personnel recruitment, pre-operations engineering,
maintenance management systems, field operations and maintenance,
procurement, and supply chain management. Many of these service
offerings are enhanced by the utilization of this segment's Managed
Services (formerly known as OPCO(R)) operating model as a service
delivery method.
- The Non-Core segment includes activity associated with the former
buildings and transportation construction operations that are being
wound down.
-5-
The following table reflects the required disclosures for the Company's
reportable segments (in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
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For the three months ended
-----------------------------------
MARCH 31, 2004 March 31, 2003
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ENGINEERING
-----------
Revenue $ 74.9 $ 58.7
Income from operations before Corporate overhead 7.1 2.8
Less: Corporate overhead (2.8) (3.0)
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Income/(loss) from operations 4.3 (0.2)
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ENERGY
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Revenue 50.1 40.6
Income from operations before Corporate overhead 2.4 1.3
Less: Corporate overhead (1.1) (1.1)
---------------------------------------------------------------------------------------------------------------------
Income from operations 1.3 0.2
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NON-CORE
--------
Revenue - -
Income from operations before Corporate overhead 0.3 0.3
Less: Corporate overhead - -
---------------------------------------------------------------------------------------------------------------------
Income from operations 0.3 0.3
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TOTAL REPORTABLE SEGMENTS
Revenues 125.0 99.3
Income from operations before Corporate overhead 9.8 4.4
Less: Corporate overhead (3.9) (4.1)
---------------------------------------------------------------------------------------------------------------------
Income from operations 5.9 0.3
---------------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance expense (0.5) (0.4)
---------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME/(LOSS) FROM OPERATIONS $ 5.4 $ (0.1)
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MARCH 31, 2004 Dec. 31, 2003
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Segment assets:
Engineering $ 103.1 $ 95.3
Energy 58.7 63.1
Non-Core 0.8 0.9
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Subtotal - segments 162.6 159.3
Corporate/Insurance 13.1 14.1
---------------------------------------------------------------------------------------------------------------------
Total $ 175.7 $ 173.4
=====================================================================================================================
-6-
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through June 30, 2005. The commitment includes the sum of the
principal amount of revolving credit loans outstanding and the aggregate face
value of outstanding letters of credit. As of March 31, 2004, borrowings
totaling $3.9 million were outstanding under the Agreement, along with
outstanding letters of credit totaling $7.0 million.
NOTE 5 - CONTINGENCIES
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. The Company requires its insurers to
meet certain minimum financial ratings at the time the coverages are placed;
however, insurance recoveries remain subject to the risk that the insurer will
be financially able to pay the claims as they arise. The Company is insured with
respect to its workers' compensation and general liability exposures subject to
deductibles or self-insured retentions. As a result of adverse market conditions
in the insurance industry, several of these deductibles were either required to
be increased by the Company because expiring coverages were no longer available,
or were voluntarily increased to avoid additional premium cost increases, in
connection with the Company's annual insurance coverage renewals effective July
1, 2003. Loss provisions for these exposures are recorded based upon the
Company's estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
The Company is self-insured for its primary layer of professional liability
insurance through a wholly-owned captive insurance subsidiary. The secondary
layer of the professional liability insurance continues to be provided,
consistent with industry practice, under a "claims-made" insurance policy placed
with an independent insurance company. Under claims-made policies, coverage must
be in effect when a claim is made. This insurance is subject to standard
exclusions.
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. In October 2001, the Pennsylvania Insurance
Commissioner placed Reliance into liquidation. The Company remains uncertain at
this time what effect this action will have on any claim the Company or its
subsidiaries may have for insurance coverage under policies issued by Reliance
with respect to past years. Baker Environmental, Inc. ("BEI"), a wholly-owned
subsidiary of the Company, was subject to one substantial claim which fell
within the Reliance coverage period. This claim reflected an action by LTV Steel
Company ("LTV") against BEI, resulting from the failure of a landfill for which
BEI provided services. In February 2003, LTV and BEI reached a settlement that
provided for a payment to LTV in the amount of $2.5 million, the effect of which
was recorded during the fourth quarter of 2002. This settlement was subsequently
approved by the bankruptcy court in LTV's bankruptcy proceeding, and payment was
made in April 2003. Due to the liquidation of Reliance, the Company is currently
uncertain what amounts paid to LTV will be recoverable under the insurance
policy with Reliance. The Company is pursuing a claim in the Reliance
liquidation and believes that some recovery will result from the liquidation,
but the amount of such recovery cannot currently be estimated. The Company had
no related receivables recorded from Reliance as of March 31, 2004.
In July 2001, the Company announced that it had become aware that certain
activities related to the operations of a 53% owned Nigerian subsidiary engaged
in energy-related operations are the subject of an inquiry by the U.S.
Department of Justice. The Company acquired the Nigerian subsidiary as part of
its acquisition of the Overseas Technical Services companies in 1993. The
inquiry appears to be focused upon payments made to
-7-
certain individuals in connection with the subsidiary's operations in Nigeria as
they relate to potential violations of the Foreign Corrupt Practices Act and
other relevant statutes. The Company retained legal counsel to represent it in
this matter and initiated an internal investigation of these issues. The Company
has cooperated fully with the government's inquiry; however, there has been no
recent activity in this matter. At this time, the Company is uncertain but does
not expect the costs of its investigation, its cooperation with the government's
inquiry or the outcome thereof, to have a material adverse financial impact on
its future financial results. However, the government's inquiry has not been
concluded and the Company's assessment of the outcome may vary as the matter
proceeds.
The Company is aware of an unasserted claim to recover alleged preference
payments made to the Company within 90 days prior to a customer's 2002 Chapter
11 bankruptcy filing. Such claims are not unusual in the bankruptcy context. The
potential claim against the Company has been identified in lists of such claims
included in several reorganization plans submitted to the bankruptcy court.
Management believes that the Company has valid defenses for this potential
claim, and intends to vigorously contest such claim if asserted. No amounts
pertaining to this potential claim are considered probable or reasonably
estimable; accordingly, the Company has not recorded any related accrual as of
March 31, 2004.
The Company has been named as a defendant or co-defendant in other legal
proceedings wherein substantial damages are claimed. Such proceedings are not
uncommon to the Company's business. After consultations with counsel, management
believes that the Company has recognized adequate provisions for probable and
reasonably estimable liabilities associated with these proceedings, and that
their ultimate resolutions will not have a material adverse effect on the
consolidated financial position or annual results of operations of the Company.
At March 31, 2004, the Company had certain guarantees and indemnifications
outstanding which could result in future payments to third parties. These
guarantees generally result from the conduct of the Company's business in the
normal course. The Company's outstanding guarantees were as follows at March 31,
2004:
Maximum Related liability
undiscounted balance recorded
(Dollars in millions) future payments at 3/31/04
---------------------------------------------------------------------------------------------------------------------
Standby letters of credit:
Insurance related $ 6.8 $ 6.8
Other 0.2 -
Performance and payment bonds 1.6 -
Sale of certain construction assets Unlimited -
Sale of BSSI 2.0 -
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The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Agreement discussed above. As of March 31, 2004, most of these
LOCs had been issued to insurance companies to serve as collateral for payments
the insurers are required to make under the Company's self-insurance programs.
These LOCs may be drawn upon in the event that the Company does not reimburse
the insurance companies for claims payments made on behalf of the Company. Such
LOCs renew automatically on an annual basis unless either the LOCs are returned
to the bank by the beneficiary or the Company's banks elect not to renew them.
-8-
Bonds are provided on behalf of the Company by Travelers Casualty and Surety
Company of America ("Travelers"). The beneficiaries under these performance and
payment bonds may request payment from Travelers in the event that the Company
does not perform under the project or if subcontractors are not paid. The
Company does not currently expect any amounts to be paid by Travelers under its
bonds outstanding at March 31, 2004.
During 2000, the Company sold certain assets associated with its former heavy &
highway construction business to A&L, Inc., and all of the outstanding stock of
its former BSSI subsidiary to SKE International LLC. These sale agreements
provided indemnifications to the buyers for breaches of certain obligations by
the Company. For the sale of heavy & highway assets, there was no dollar limit
on the indemnifications, and the terms of these indemnifications vary but will
ultimately be governed by the statutes of limitations. In October 2003, A&L
filed a lawsuit against the Company and a subsidiary alleging misrepresentation
and breach of warranty in connection with the asset sale. The Company believes
that A&L's claims are without merit and is vigorously contesting this lawsuit.
Maximum payments for indemnifications under the BSSI sale were limited to $2.0
million, and the terms are based on the varying statutes of limitations plus 90
days. The Company does not currently expect to make any future payments under
the indemnifications in connection with the BSSI sale.
NOTE 6 - STOCK BASED COMPENSATION
During the first quarter of 2003, the Company adopted the prospective method of
applying Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure." Under the
prospective method, the Company began expensing the fair value of all stock
options granted, modified or settled effective January 1, 2003. No related stock
compensation expense was recorded during the first quarter of 2003.
Prior to January 1, 2003, the Company utilized the intrinsic value method of
accounting for stock-based compensation, as originally promulgated by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
as permitted under SFAS 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost was recognized for stock options granted prior
to January 1, 2003. If compensation costs for the Company's stock incentive
plans had been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method prescribed by SFAS 123, the
Company's pro forma net income and net income per share amounts would have been
as follows:
For the three months ended
--------------------------
(In thousands) MARCH 31, 2004 March 31, 2003
---------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 3,098 $ (97)
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 4 -
Deduct: Total stock-based employee compensation expense
determined under fair value method, net of related tax effects (33) (88)
---------------------------------------------------------------------------------------------------------------------
Pro forma net income/(loss) $ 3,069 $ (185)
=====================================================================================================================
-9-
For the three months ended
--------------------------
MARCH 31, 2004 March 31, 2003
---------------------------------------------------------------------------------------------------------------------
Reported earnings per share:
Basic $ 0.37 $ (0.01)
Diluted 0.37 (0.01)
Pro forma earnings per share:
Basic 0.37 (0.02)
Diluted $ 0.36 $ (0.02)
=====================================================================================================================
NOTE 7 - COMPREHENSIVE INCOME
A reconciliation of the Company's net income and comprehensive income is as
follows:
For the three months ended
--------------------------
MARCH 31, 2004 March 31, 2003
---------------------------------------------------------------------------------------------------------------------
Net income $ 3,098 $ (97)
Other comprehensive loss:
Foreign currency translation adjustment, net of tax (9) (23)
---------------------------------------------------------------------------------------------------------------------
Comprehensive income/(loss) $ 3,089 $ (120)
=====================================================================================================================
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
MARCH 31, 2004 Dec. 31, 2003
--------------------------------------------------------------------------------------------------------------------
Goodwill:
Engineering $ 1,006 $ 1,006
Energy 7,465 7,465
--------------------------------------------------------------------------------------------------------------------
Total goodwill 8,471 8,471
--------------------------------------------------------------------------------------------------------------------
Other intangible assets, net of accumulated amortization
of $1,309 and $1,238, respectively 690 762
--------------------------------------------------------------------------------------------------------------------
Goodwill and other intangible assets, net $ 9,161 $ 9,233
=====================================================================================================================
Under SFAS 142, the Company's goodwill balance is not being amortized and
goodwill impairment tests are being performed at least annually. The Company
completed its most recent annual impairment review during the second quarter of
2003, and no impairment charge was required.
The Company's other intangible assets balance solely comprises a non-compete
agreement from the Company's 1998 purchase of Steen Production Services, Inc.
Future amortization expense on the other intangible assets balance is currently
estimated to be $286,000 for the years ending December 31, 2004 and 2005, with
the remaining balance of $190,000 being amortized in 2006.
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was
subsequently revised in December 2003 ("FIN 46R"). FIN 46 clarifies Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," and requires that
-10-
unconsolidated variable interest entities be consolidated by their primary
beneficiaries. The primary beneficiary is the party that absorbs a majority of
the entity's expected losses or returns as a result of holding the variable
interest. The requirements of FIN 46 were required to be applied immediately to
variable interest entities in which an enterprise obtains an interest, or which
an enterprise creates, after January 31, 2003. For variable interest entities
considered to be special purpose entities (SPEs) in which an enterprise holds a
variable interest that it acquired prior to February 1, 2003, FIN 46 is required
to be adopted for the first fiscal year or interim period ending after December
15, 2003. For non-SPE variable interest entities acquired prior to February 1,
2003, FIN 46 must be adopted no later than the first fiscal year or interim
period ending after March 15, 2004. The Company adopted this interpretation
during the first quarter of 2004; such adoption did not have a material impact
on the Company's financial statements.
NOTE 10 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior year balance sheet amounts
in order to conform to the current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
The Company provides engineering and energy expertise for public and private
sector clients worldwide. The firm's primary services include engineering design
for the transportation and civil infrastructure markets, operation and
maintenance of oil and gas production facilities, architectural and
environmental services, and construction management services for buildings and
transportation projects. The Company views its short and long-term liquidity as
being dependent upon its results of operations, changes in working capital and
its borrowing capacity.
BUSINESS ENVIRONMENT
The Company's operations are affected by appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for the Company's services in the engineering
and energy markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company.
The Federal government's TEA-21 legislation has made significant transportation
infrastructure funding available to the various state agencies since its
approval in 1998. Prior to the expiration of TEA-21 on September 30, 2003, the
U.S. Congress and President Bush signed a five-month extension of the program at
current funding levels. This extension expired on February 29, 2004, at which
time a two-month extension was approved and that provided continued funding
until April 30, 2004. A second two-month extension was approved on April 30,
which will provide continued funding until June 30, 2004. During this extension
period, a long-term reauthorization of the original TEA-21 program is expected
to receive significant Congressional attention. Prior to the extensions, certain
state agencies were limited in their abilities to apply for Federal
transportation funding during 2003, as they were unable to commit the required
matching funds due to budget constraints. The Company is currently seeing
limited funding of new transportation projects and expects this will continue
until any reauthorization of TEA-21 occurs. Significant further delays in the
reauthorization of TEA-21 could impact the Company's transportation design
business activity for 2005 and beyond. From 2002 through the first quarter of
2004, the Company has observed increased Federal spending activity on
Departments of Defense and Homeland Security activities, including the Federal
Emergency Management Agency (FEMA). To mitigate the effect of the state
transportation budget constraints on the Company's business, management has
focused more marketing and sales activity on these agencies of the Federal
government. Additional government spending in these areas, or on transportation
infrastructure, could
-11-
result in profitability and liquidity improvements for the Company. Significant
contractions in any of these areas could unfavorably impact the Company's
profitability and liquidity. In early March 2004, the Company announced that it
had been awarded a five-year contract with FEMA for up to $750 million to serve
as the Program Manager to develop, plan, manage, implement, and monitor the
Multi-Hazard Flood Map Modernization (MHFMM) Program for flood hazard mitigation
across the United States and its territories. Approximately $742 million of this
contract value was included in the Company's backlog as of March 31, 2004. In
addition, during the first quarter of 2004, the Company was selected for several
indefinite delivery/indefinite quantity task order contracts by the U.S. Army
Corps of Engineers and U.S. Air Force.
The Company's Energy business benefited significantly in 2001 and 2002 from the
adoption of its Managed Services (formerly known as OPCO(R)) business model by
several oil and gas producers in the Gulf of Mexico. Energy services provided
via this innovative model generated higher margins than the Company's
traditional service delivery methods. During the second half of 2002, many of
the properties serviced under this model were sold by their owners, and while
the Company continues to provide operations and maintenance services to the
properties' new owners, such services reflect lower margin manpower and
logistics work. Presently, there is uncertainty in the oil and gas marketplace
regarding capital investment and outsourcing decisions in the Gulf of Mexico,
the Company's primary market for its Energy business. As a result, the Company
continues to provide manpower services to its clients in this area, but has been
unable to generate new higher margin offshore Managed Services contracts. This
downturn in the Energy segment's offshore Managed Services market activity has
been partially offset by an expansion of the Company's Managed Services
offerings to onshore U.S. oil and gas producers, as demonstrated by the two new
four-year contracts totaling $144 million received from Huber Energy during
2003. In addition, the Company has been able to increase its penetration into
the deepwater Gulf of Mexico and international markets, where oil and gas
producers are currently investing significant amounts of capital for new
projects.
After giving effect to the foregoing, management believes that the combination
of cash generated from operations and its existing credit facility will be
sufficient to meet its operating and capital expenditure requirements for at
least the next year.
RESULTS OF OPERATIONS
The following table reflects a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended March 31, 2004 and 2003 (dollars in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
--------------------------------------------------------------------------------
For the three months ended
--------------------------
MARCH 31, 2004 March 31, 2003
--------------------------------------------------------------------------------------------------------------------
ENGINEERING
Revenues $ 74.9 $ 58.7
Income from operations before Corporate overhead 7.1 2.8
Percentage of Engineering revenues 9.5% 4.8%
Less: Corporate overhead (2.8) (3.0)
Percentage of Engineering revenues (3.7)% (5.1)%
--------------------------------------------------------------------------------------------------------------------
Income from operations 4.3 (0.2)
Percentage of Engineering revenues 5.8% (0.3)%
--------------------------------------------------------------------------------------------------------------------
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--------------------------------------------------------------------------------------------------------------------
ENERGY
Revenues 50.1 40.6
Income from operations before Corporate overhead 2.4 1.3
Percentage of Energy revenues 4.8% 3.2%
Less: Corporate overhead (1.1) (1.1)
Percentage of Energy revenues (2.2)% (2.7)%
--------------------------------------------------------------------------------------------------------------------
Income from operations 1.3 0.2
Percentage of Energy revenues 2.6% 0.5%
--------------------------------------------------------------------------------------------------------------------
NON-CORE*
Revenues -- --
Income from operations before Corporate overhead 0.3 0.3
Less: Corporate overhead -- --
--------------------------------------------------------------------------------------------------------------------
Income/(loss) from operations 0.3 0.3
--------------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Revenues 125.0 99.3
Income from operations before Corporate overhead 9.8 4.4
Percentage of total reportable segment revenues 7.8% 4.4%
Less: Corporate overhead (3.9) (4.1)
Percentage of total reportable segment revenues (3.1)% (4.1)%
--------------------------------------------------------------------------------------------------------------------
Income from operations 5.9 0.3
Percentage of total reportable segment revenues 4.7% 0.3%
--------------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance expense (0.5) (0.4)
--------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME/(LOSS) FROM OPERATIONS $ 5.4 $ (0.1)
Percentage of total Company revenues 4.3% (0.1)%
====================================================================================================================
* The Non-Core segment includes activity associated with the former
buildings and transportation construction operations that are being
wound down.
TOTAL CONTRACT REVENUES
Total contract revenues increased 26% in the first quarter of 2004 relative to
the first quarter of 2003. Engineering revenues for the first quarter of 2004
increased 28% from the first quarter of 2003. Engineering's revenues were
positively impacted by the Company's above mentioned map modernization program
management project with FEMA, which commenced near the end of the first quarter
of 2004. Also positively impacting Engineering revenues for the first quarter of
2004 were improved labor utilization rates over the first quarter of 2003. These
labor utilization rates have a direct impact on revenues. By contrast, labor
utilization for the first quarter of 2003 was low as a result of delays in the
commencement of certain public sector projects due to state budget constraints
and the January 2003 relocation of the Company's largest Engineering office to
Moon Township, PA. In the Energy segment, revenues for the first quarter of 2004
increased 23% over the first quarter of 2003. This increase is primarily the
result of the two new onshore Managed Services contracts that commenced during
2003, as well as the addition of several new overseas contracts and additions to
existing
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contracts that commenced during 2003. Revenues from Managed Services contracts
composed 14% and 2% of Baker Energy's total contract revenues for the first
quarters of 2004 and 2003, respectively. The Company's Non-Core segment posted
no revenues for the first quarters of 2004 or 2003.
GROSS PROFIT
Gross profit expressed as a percentage of revenues increased to 16.8% for the
first quarter of 2004 from 13.5% in the first quarter of 2003. Overall, the
Company's gross profit expressed as a percentage of revenues benefited from cost
reduction measures implemented by management relative to the Company's medical
and 401(k) retirement benefit plans. The Engineering segment's gross profit
percentage increased to 20.5% in the first quarter of 2004 from 16.7% in the
first quarter of 2003. This increase is primarily attributable to the increase
in labor utilization rates as compared to the first quarter of 2003 and the cost
reduction measures discussed above. The Energy segment's gross profit percentage
increased to 11.6% in the first quarter of 2004 from 9.4% in the first quarter
of 2003. This increase in gross profit as a percentage of revenues is the direct
result of the performance of the previously mentioned two new onshore Managed
Services contracts and the cost reduction measures put in place by management,
as offset by the effect of a reserve related to a customer billing rate dispute.
Energy's Managed Services business posted gross profit of 3.3% for the first
quarter of 2004 versus a loss in the first quarter of 2003. In the Non-Core
segment, gross profit was $0.3 million for both the first quarters of 2004 and
2003. These favorable results were primarily attributable to favorable
developments in certain casualty insurance claims related to the Company's
former construction operations during both first quarter periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses, including Corporate
overhead, expressed as a percentage of total contract revenues decreased to
12.4% in the first quarter of 2004 from 13.7% in the first quarter of 2003. This
overall decrease in SG&A expenses expressed as a percentage of revenues reflect
the additional effects (in this case, related to overhead personnel) of
management's aforementioned cost reduction measures related to the medical and
401(k) retirement benefit plans, as offset by an increase in compensation
expense, in combination with the relatively significant increase in revenues for
the first quarter of 2004. In addition, allocated Corporate overhead costs for
the first quarter of 2004 decreased versus the first quarter of 2003 as a result
of a reduction in costs associated with the Company's new information systems
which were implemented effective January 1, 2003, as partially offset by costs
incurred in connection with the Company's compliance with Section 404 of the
Sarbanes-Oxley Act of 2002 ("SOX"). In the Engineering segment, SG&A expenses
expressed as a percentage of revenues decreased to 14.7% in the first quarter of
2004 from 16.9% in the first quarter of 2003. In addition to the aforementioned
effects of the cost reduction measures, a lower Corporate overhead allocation,
the higher compensation expense, and the relatively significant revenue
increase, the Engineering segment incurred nonrecurring costs associated with
its Moon Township office relocation during the first quarter of 2003. In the
Energy segment, SG&A expenses expressed as a percentage of revenues increased
slightly to 9.1% in the first quarter of 2004 as compared to 8.9% in the first
quarter of 2003. Energy's benefits from the cost reduction measures were offset
by the higher compensation expense and certain segment-specific (i.e.,
non-allocated) SOX compliance costs. The Company's Non-Core operations incurred
no SG&A expenses in either first quarter period.
OTHER INCOME
Interest income was negligible for both the first quarter of 2004 and 2003.
Interest expense was slightly higher for the first quarter of 2004 versus the
first quarter of 2003 as a result of the Company's average net
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borrowings being higher for the first quarter of 2004. The Company's borrowing
rates were similar for both quarters. Other income for the first quarter of 2004
primarily resulted from the sale of an investment that resulted in a gain of
$352,000 and minority interest related to the income of two consolidated
subsidiaries. Other income for the first quarter of 2003 primarily related to
foreign currency related gains.
INCOME TAXES
The Company had a provision for income taxes of 47.0% for the first quarter of
2004, versus a benefit from income taxes of 46.0% for the first quarter 2003.
The effective rate for 2004 reflects the Company's best estimate of U.S.
Federal, foreign and state taxable income for the year ending December 31, 2004.
CONTRACT BACKLOG
(In millions) MARCH 31, 2004 Dec. 31, 2003
--------------------------------------------------------------------------------------------------------------------
Engineering $ 1,161.5 $ 470.7
Energy 267.4 250.0
--------------------------------------------------------------------------------------------------------------------
Total $ 1,428.9 $ 720.7
====================================================================================================================
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of the Company's contracts with the
Federal government and other clients may be terminated at will, or option years
may not be exercised; therefore, no assurance can be given that all backlog will
be realized.
Among the more significant new work added during the first quarter of 2004 was a
new $750 million contract in the Engineering segment to serve as the Program
Manager to develop, plan, manage, implement, and monitor FEMA's Multi-Hazard
Flood Map Modernization (MHFMM) Program for flood hazard mitigation across the
United States and its territories.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $12.2 million for the first
quarter of 2004 as compared to net cash used in operating activities of $23.6
million for the same period in 2003. This increase in cash provided by operating
activities was the direct result of increased net income and the Company
becoming more efficient with its new billing system and the related process
changes that were implemented effective January 1, 2003. The cash used in
operating activities for the first quarter of 2003 was effected by the
implementation of the new billing system and related changes to its billing
process. As a result of these billing system and process changes, the Company
experienced certain data conversion and training issues, which caused delays in
producing client invoices during the first quarter of 2003. Since the new system
was first used to invoice clients in February 2003, the Company has undertaken
various corrective improvement measures, and is invoicing on a current basis
through its new software.
Net cash used in investing activities was $0.5 million and $2.7 million for the
first quarters of 2004 and 2003, respectively. These amounts reflect only
capital expenditures for both periods. The 2004 amount primarily relates to
computer software and equipment purchases totaling $0.3 million, while the 2003
amount relates to leasehold improvements of $1.9 million associated with the
Company's new headquarters and $0.8 million of computer software and equipment
purchases. During the first quarter of 2004, additional computer software and
equipment was procured by the Company under the terms of operating leases. The
Company utilizes operating leases to acquire assets used in its daily business
activities. These assets include office space, computer and related equipment,
and motor vehicles.
-15-
Net cash used in financing activities was $9.6 million for the first quarter of
2004 versus net cash provided by financing activities of $23.4 million for the
same period in 2003. The entire cash usage for financing activities during the
first quarter of 2004 resulted from repayments of long-term debt, while the cash
provided by financing activities in the 2003 period reflects the proceeds from
long-term debt which was used to fund the aforementioned working capital needs
in conjunction with changes in the Company's billing process and system and the
resultant billing and collection delays. During the first quarter of 2003,
pursuant to the Company's stock repurchase program, the Company also paid $0.7
million to acquire 80,400 additional treasury shares.
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through June 30, 2005. The commitment includes the sum of the
principal amount of revolving credit loans outstanding and the aggregate face
value of outstanding letters of credit. As of March 31, 2004, borrowings
totaling $3.9 million were outstanding under the Agreement, along with
outstanding letters of credit totaling $7.0 million. The Company experienced
increased cash collections during the first quarter of 2004, and as a result,
utilized a portion of these collections to reduce the borrowings under its
credit facility. The Company currently expects to renegotiate with its banks
during the second quarter of 2004 to extend the maturity date and increase the
commitment under its credit facility to accommodate additional working capital
and/or acquisition needs. The Company anticipates that it will remain in
compliance with the financial covenants under the Agreement for at least the
next year, and accordingly, has classified its outstanding borrowings as a
long-term liability in its accompanying consolidated financial statements.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America ("Travelers"). At March 31, 2004, performance and
payment bonds totaling $1.6 million were outstanding under this line. Management
believes that this bonding line will be sufficient to meet its bid and
performance bonding needs for at least the next year.
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. In October 2001, the Pennsylvania Insurance
Commissioner placed Reliance into liquidation. The Company remains uncertain at
this time what effect this action will have on any claim the Company or its
subsidiaries may have for insurance coverage under policies issued by Reliance
with respect to past years. Baker Environmental, Inc. ("BEI"), a wholly-owned
subsidiary of the Company, was subject to one substantial claim which fell
within the Reliance coverage period. This claim reflected an action by LTV Steel
Company ("LTV") against BEI, resulting from the failure of a landfill for which
BEI provided services. In February 2003, LTV and BEI reached a settlement that
provided for a payment to LTV in the amount of $2.5 million, the effect of which
was recorded during the fourth quarter of 2002. This settlement was subsequently
approved by the bankruptcy court in LTV's bankruptcy proceeding, and payment was
made in April 2003. Due to the liquidation of Reliance, the Company is currently
uncertain what amounts paid to LTV will be recoverable under the insurance
policy with Reliance. The Company is pursuing a claim in the Reliance
liquidation and believes that some recovery will result from the liquidation,
but the amount of such recovery cannot currently be estimated. The Company had
no related receivables recorded from Reliance as of March 31, 2004.
-16-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company's primary interest rate risk relates to its variable-rate
debt obligations, which totaled $3.9 million as of March 31, 2004. Assuming a
10% increase in interest rates on these variable-rate debt obligations (i.e., an
increase from the actual weighted average interest rate of 3.35% as of March 31,
2004, to a weighted average interest rate of 3.69%), annual interest expense
would be approximately $12,000 higher in 2004 based on the outstanding balance
of variable-rate obligations as of March 31, 2004. Accordingly, the Company has
no material exposure to interest rate risk, nor does it have any interest rate
swap or exchange agreements.
The Company has several foreign subsidiaries that transact portions of their
local activities in currencies other than the U.S. Dollar. In assessing its
exposure to foreign currency exchange rate risk, the Company recognizes that the
majority of its foreign subsidiaries' assets and liabilities reflect ordinary
accounts receivable and payable balances. These receivable and payable balances
are substantially settled in the same currencies as the functional currencies of
the related foreign subsidiaries, thereby not exposing the Company to material
transaction gains and losses. Assuming that foreign currency exchange rates
could change unfavorably by 10%, the Company would have no material exposure to
foreign currency exchange rate risk. The Company has no foreign currency
exchange contracts.
Based on the nature of the Company's business, it has no direct exposure to
commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of March 31, 2004.
Based upon their evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in the Company's "internal control over financial reporting"
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarter ended March 31, 2004, and that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
-17-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 5 to the accompanying financial statements.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed or furnished the following Current Reports on Form 8-K
during the quarter ended March 31, 2004, including the dates filed, the
items reported and listing any financial statements filed:
- dated March 9, 2004, to furnish information required by Item 12 of
Form 8-K, "Results of Operations and Financial Condition."
-18-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAEL BAKER CORPORATION
/s/ William P. Mooney Dated: May 10, 2004
---------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: May 10, 2004
-----------------------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
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