FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 Commission file number 1-6627 MICHAEL BAKER CORPORATION ------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0927646 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Airport Office Park, Building 3, 420 Rouser Road, Coraopolis, PA 15108 - ---------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (412) 269-6300 -------------- (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 -------- -------- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of September 30, 1996: ------------------------- Common Stock 7,050,320 shares Series B Common Stock 1,349,971 shares FORM 10-Q PART I PAGE 1 MICHAEL BAKER CORPORATION ------------------------- PART I. FINANCIAL INFORMATION - ------- --------------------- The condensed consolidated financial statements included herein have been prepared by 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. Certain 1995 financial statement amounts have been reclassified to conform with 1996 classifications. 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 and Form 10-K. FORM 10-Q PART I PAGE 2 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) ============================================================================= For the three months ended ------------------------------------ Sept. 30, 1996 Sept. 30, 1995 - ----------------------------------------------------------------------------- (In thousands, except per share amounts) Total contract revenues $114,710 $90,620 Cost of work performed 102,340 80,215 - ----------------------------------------------------------------------------- Gross profit 12,370 10,405 General and administrative expenses 10,121 8,316 - ----------------------------------------------------------------------------- Income from operations 2,249 2,089 Other income/(expense): Interest expense (15) (57) Interest income 65 32 Other, net 34 (15) - ----------------------------------------------------------------------------- Income before income taxes 2,333 2,049 Provision for income taxes 1,073 1,020 - ----------------------------------------------------------------------------- Net income $1,260 $1,029 ============================================================================= Net income per share $0.15 $0.12 ============================================================================= <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 3 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) ============================================================================= For the nine months ended - ----------------------------------------------------------------------------- Sept. 30, 1996 Sept. 30, 1995 - ----------------------------------------------------------------------------- (In thousands, except per share amounts) Total contract revenues $301,725 $266,110 Cost of work performed 266,735 234,403 - ----------------------------------------------------------------------------- Gross profit 34,990 31,707 General and administrative expenses 29,748 26,825 - ----------------------------------------------------------------------------- Income from operations 5,242 4,882 Other income/(expense): Interest expense (61) (316) Interest income 281 81 Other, net 212 84 - ----------------------------------------------------------------------------- Income before income taxes 5,674 4,731 Provision for income taxes 2,610 2,355 - ----------------------------------------------------------------------------- Net income $3,064 $2,376 ============================================================================= Net income per share $0.36 $0.28 ============================================================================= <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 4 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ============================================================================= ASSETS Sept. 30, 1996 Dec. 31, 1995 - ----------------------------------------------------------------------------- (In thousands) Current Assets Cash $7,547 $14,303 Trade receivables 70,870 53,708 Cost of contracts in progress, plus estimated earnings recorded, less billings thereon 22,319 19,104 Prepaid expenses and other 6,886 7,816 - ----------------------------------------------------------------------------- Total current assets 107,622 94,931 - ----------------------------------------------------------------------------- Property, Plant and Equipment, net 12,631 12,558 Other Assets Goodwill, net of accumulated amortization of $1,916,000 and $1,649,000 at September 30, 1996 and December 31, 1995, respectively 5,386 4,667 Other intangible assets, net of accumulated amortization of $2,031,000 and $1,625,000 at September 30, 1996 and December 31, 1995, respectively 2,071 2,467 Other assets 3,253 2,753 - ----------------------------------------------------------------------------- Total other assets 10,710 9,887 - ----------------------------------------------------------------------------- Total assets $130,963 $117,376 ============================================================================= <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 5 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ============================================================================= LIABILITIES AND SHAREHOLDERS' INVESTMENT Sept. 30, 1996 Dec. 31, 1995 - ----------------------------------------------------------------------------- (In thousands) Current Liabilities Notes payable $1,526 $1,204 Accounts payable 34,459 30,879 Accrued employee compensation 6,338 5,703 Accrued insurance 6,775 6,204 Other accrued expenses 15,896 15,261 Excess of billings on contracts in progress over cost and estimated earnings recorded thereon 15,095 10,494 - ----------------------------------------------------------------------------- Total current liabilities 80,089 69,745 - ----------------------------------------------------------------------------- Shareholders' Investment Common Stock, par value $1, authorized 44,000,000 shares, issued 7,050,000 and 7,012,000 shares at September 30, 1996 and December 31, 1995, respectively 7,050 7,012 Series B Common Stock, par value $1, authorized 6,000,000 shares, issued 1,350,000 and 1,352,000 shares at September 30, 1996 and December 31, 1995, respectively 1,350 1,352 Paid-in surplus 36,677 36,534 Retained earnings 5,797 2,733 - ----------------------------------------------------------------------------- Total shareholders' investment 50,874 47,631 - ----------------------------------------------------------------------------- Total liab. and shareholders' investment $130,963 $117,376 ============================================================================= <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 6 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) ============================================================================= For the nine months ended - ----------------------------------------------------------------------------- Sept. 30, 1996 Sept. 30, 1995 - ----------------------------------------------------------------------------- (In thousands) Cash Flows from Operating Activities Net income $3,064 $2,376 Adjustments to reconcile net income to net cash (used in)/provided by operating activities: Depreciation and amortization 3,673 3,937 Deferred income taxes 1,094 327 Changes in assets and liabilities: (Increase)/decrease in receivables, contracts in prog. and advance billings (15,776) 15,745 Increase/(decrease) in accounts payable and accrued expenses 5,753 (13,836) Increase in other net assets (1,434) (448) - ----------------------------------------------------------------------------- Total adjustments (6,690) 5,725 - ----------------------------------------------------------------------------- Net cash (used in)/prov. by operating act. (3,626) 8,101 - ----------------------------------------------------------------------------- Cash Flows from Investing Activities Additions to property, plant and equipment (3,118) (2,521) - ----------------------------------------------------------------------------- Net cash used in investing activities (3,118) (2,521) - ----------------------------------------------------------------------------- Cash Flows from Financing Activities Repayments of revolving credit loans 0 (2,035) Repayments of long-term debt (12) (1,415) - ----------------------------------------------------------------------------- Net cash used in financing activities (12) (3,450) - ----------------------------------------------------------------------------- Net (decrease)/increase in cash (6,756) 2,130 Cash at beginning of year 14,303 3,605 - ----------------------------------------------------------------------------- Cash at end of period $7,547 $5,735 ============================================================================= Supplemental Disclosure of Cash Flow Data Interest paid $57 $520 Income taxes paid $324 $518 ============================================================================= <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 7 MICHAEL BAKER CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1996 (Unaudited) NOTE 1 - PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consists of the following (in thousands): Sept. 30, 1996 Dec. 31, 1995 ------------------------------- Land $ 693 $ 693 Buildings and improvements 6,334 5,952 Equipment and vehicles 30,377 28,202 - ------------------------------------------------------------------------ Total, at cost 37,404 34,847 Less - Accumulated depreciation (24,773) (22,289) - ------------------------------------------------------------------------ Net property, plant and equipment $12,631 $12,558 ======================================================================== NOTE 2 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS In March 1996, the Company entered into an amended secured credit agreement (the "Agreement") with Mellon Bank, N.A. Under its terms, the Agreement provides for a commitment of $25 million through May 31, 1998. Under the Agreement, the commitment includes the sum of the principal amount of revolving credit borrowings outstanding and the aggregate face value of outstanding letters of credit. As of September 30, 1996, no borrowings were outstanding; however, letters of credit totaling $4.0 million were outstanding under the Agreement. NOTE 3 - EARNINGS PER SHARE Earnings per share computations are based upon weighted average shares of 8,401,760 and 8,371,838 for the three-month periods, and 8,403,296 and 8,366,314 for the nine-month periods, ended September 30, 1996 and 1995, respectively. FORM 10-Q PART I PAGE 8 MICHAEL BAKER CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1996 (Unaudited) NOTE 3 - EARNINGS PER SHARE (Cont.) The Company's 1995 Stock Incentive Plan and 1996 Nonemployee Directors' Stock Incentive Plan had no significant impact on earnings per share for the three- month or nine-month periods ended September 30, 1996 and 1995. NOTE 4 - LITIGATION The Company has been named as a defendant or co-defendant in 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 these proceedings and their ultimate resolutions will not have a material adverse effect on the consolidated financial position or annual results of operations of the Company. The only significant proceeding relates to a lawsuit brought in 1987 in the Supreme Court of the State of New York, Bronx County, by the Dormitory Authority of the State of New York against a number of parties, including the Company and one of its wholly-owned subsidiaries, that asserts breach of contract and alleges damages of $13 million. The Company, which was not a party to the contract underlying the lawsuit, contends that there is no jurisdiction with respect to the Company and that it cannot be held liable for any conduct of the subsidiary. Both the Company and the subsidiary are contesting liability issues and have filed cross-claims and third-party claims against other entities involved in the project. FORM 10-Q PART I PAGE 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS TOTAL CONTRACT REVENUES Total contract revenues were $114.7 million for the third quarter of 1996, compared to $90.6 million for the same period in 1995, an increase of $24.1 million. The Buildings unit accounted for $12.1 million of this overall increase, while the Civil unit contributed an additional $10.5 million. The increase in the Buildings unit's revenue was almost entirely attributable to its significant construction contract for an airport terminal in Buffalo. The Civil unit's increase resulted primarily from its engineering division having generated third quarter revenues totaling $7.0 million from its contract to provide engineering services in Mexico. Both of these contracts were awarded in late 1995 and contributed no third quarter 1995 revenues. Total contract revenues were $301.7 million for the first nine months of 1996 compared to $266.1 million for the same period in 1995, an increase of $35.6 million. The Civil unit was responsible for $21.7 million of this overall revenue increase, whereas the Buildings and Transportation units had increases of $6.4 million and $5.3 million, respectively. Again, the Civil unit's increase primarily relates to its significant engineering contract in Mexico. GROSS PROFIT The Company's gross profit of $12.4 million for the third quarter of 1996 represents a 19% improvement over the gross profit of $10.4 million from its year ago third quarter. The most significant components of this overall increase emanated from the Energy and Civil units. As a percentage of total contract revenues, gross profit decreased to 10.8% in the third quarter of 1996 from 11.5% in the third quarter of 1995. While the Civil unit increased its gross profit in the third quarter of 1996, its gross profit expressed as a percentage of total contract revenues decreased. Civil's decrease in profitability percentages explains the majority of the Company's related overall decrease and is related to its contract in Mexico which has realized lower than normal margins to date. These lower margins are attributable to this project's more significant subcontracted components (on which lower margins are earned) than are typical for engineering contracts and a conservative reporting of earnings pending the resolution of certain project- related issues. This contract is expected to be completed in early 1997. The Energy unit recorded third quarter improvements in both its gross profit and profitability percentages. This resulted mainly from Baker/MO having received several awards of profitable new work since the prior year. FORM 10-Q PART I PAGE 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GROSS PROFIT (Cont.) Gross profit for the first nine months of 1996 was $35.0 million versus $31.7 million for the first nine months of 1995, a 10% increase. The Civil, Energy and Transportation units each contributed to this overall increase. The Transportation unit's nine-month improvement was partially attributable to a construction contract litigation settlement which adversely affected its 1995 results. The Civil and Energy units increased for the same reasons as mentioned in the preceding paragraph. As a percentage of total contract revenues, gross profit was 11.6% for the first nine months of 1996 versus 11.9% for the same period in 1995. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative ("G&A") expenses increased to $10.1 million for the third quarter of 1996 from $8.3 million in the prior year third quarter. This increase in G&A expenses primarily reflects the 1996 general increase in revenue volumes. Expressed as a percentage of total contract revenues, G&A expenses decreased from 9.2% in the third quarter of 1995 to 8.8% in 1996. G&A expenses increased by $2.9 million to $29.7 million for the first nine months of 1996 versus $26.8 million for the same period in 1995. This increase is also related to the 1996 increase in revenue volumes. G&A expenses expressed as a percentage of total contract revenues decreased slightly from 10.1% for the first nine months of 1995 to 9.9% over the same period in 1996. INCOME TAXES The Company had provisions for income taxes of 46.0% for the third quarter and first nine months of 1996 and 49.8% for the same periods in 1995. The 1996 provision rate decrease primarily reflects certain current year tax benefits attributable to prior year expenditures, as partially offset by a 1996 increase in foreign taxes paid. FORM 10-Q PART I PAGE 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACT BACKLOG The funded backlog of work to be performed was $311 million as of September 30, 1996, compared to funded backlog of $300 million at December 31, 1995. Funded backlog represents that portion of work supported by signed contracts and for which the procuring agency has appropriated and allocated the funds to pay for the work. Total backlog, which incrementally includes that portion of contract value for which options are still to be exercised ("unfunded backlog"), was $506 million as of September 30, 1996 and $508 million as of December 31, 1995. Among the more significant new projects added during the third quarter of 1996 were three five-year Civil unit contracts totaling $22.4 million to provide communications equipment maintenance for two military bases and multi-family housing maintenance at another base, a $9.8 million Environmental unit subcontract for engineering services to be provided to the U.S. Navy under its ten-year CLEAN II Program, a $7.7 million Buildings unit contract to construct a parking garage, and two Energy unit contracts totaling $9.3 million to provide operations and maintenance services for certain off-shore and shore- based oil and gas production facilities. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $3.6 million for the first nine months of 1996, compared to net cash provided by operating activities of $8.1 million for the same period in 1995. The 1996 increase in cash used resulted from higher receivables associated with the overall higher revenue volumes achieved during the third quarter. Net cash used in investing activities approximated $3.1 million for the first nine months of 1996 compared to $2.5 million in the first nine months of 1995. These amounts solely comprise capital expenditures for both periods. Net cash used in financing activities was negligible for the first nine months of 1996, as compared with net cash used in financing activities of $3.4 million for the first nine months of 1995. The Company repaid all borrowings under its revolving credit facility during the first nine months of 1995. Working capital increased marginally during the first nine months of 1996 to $27.5 million at September 30, 1996, from $25.2 million at December 31, 1995. The current ratio was 1.34:1 at the end of the first nine months of 1996, compared to 1.36:1 at year-end 1995. FORM 10-Q PART I PAGE 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Cont.) In March 1996, the Company entered into an amended secured credit agreement with Mellon Bank, N.A. Under its terms, the agreement provides for a commitment of $25 million, which covers borrowings and letters of credit, through May 31, 1998. As of September 30, 1996, no borrowings were outstanding; however, letters of credit totaling $4.0 million were outstanding under the agreement. The Company is required to provide bid and performance bonding on certain construction contracts, and has a $350 million bonding line available through Aetna Casualty and Surety Company of America. Management believes that its bonding line will be sufficient to meet its bid and performance needs for the foreseeable future. A significant portion of the Company's cash flow is dependent upon appropriations of public funds and financial terms under long-term contracts. The Company's short- and long-term liquidity will be affected by the improved but still narrow margins on construction work in backlog, and its ability to sustain profitable operations and to control costs during periods of lower volumes. Additional external factors such as price fluctuations in the energy industry and the effects of interest rates on private construction projects could affect the Company. At this time, management believes that its funds generated from operations, its existing credit facility and its longer-term borrowing capabilities will be sufficient to meet its operating requirements for the foreseeable future. FORM 10-Q PART II PAGE 13 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (b) Reports on Form 8-K During the quarter ended September 30, 1996, the Company filed no reports on Form 8-K. 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 Dated: November 4, 1996 By: /s/ J. Robert White -------------------- Executive Vice President, Chief Financial Officer and Treasurer