Exhibit 13.1
Selected Financial Data
- ------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------
(In thousands, except per share information)
RESULTS OF OPERATIONS
Total contract revenues $418,388 $354,728 $437,193 $434,791 $355,820
Operating income/(loss) 7,460 5,104 (9,097) (21,805) 8,543
Net income/(loss) 4,180 2,900 (7,945) (15,128) 4,403
Net income/(loss) per
share $ 0.50 $ 0.35 $ (0.95) $ (1.82) $ 0.67
Return on average equity 8.50% 6.28% (16.31)% (25.59)% 8.67%
FINANCIAL CONDITION
Total assets $126,082 $117,376 $134,794 $145,805 $130,917
Working capital $ 27,417 $ 25,186 $ 22,391 $ 33,042 $ 42,981
Current ratio 1.36 1.36 1.26 1.39 1.75
Long-term debt $ -- $ -- $ 3,960 $ 7,670 $ 2,625
Shareholders' investment 50,752 47,631 44,731 52,676 65,536
Book value per share 6.19 5.70 5.35 6.30 8.03
Year-end closing share
price $ 6.38 $ 5.00 $ 3.75 $ 11.00 $ 14.75
CASH FLOW
Cash provided by/(used in)
operating activities $ 1,188 $ 15,539 $ 5,415 $ 4,758 $(11,324)
Cash used in investing
activities (3,739) (2,294) (5,436) (11,232) (4,876)
Cash (used in)/provided by
financing activities (1,272) (2,547) (1,477) 5,105 22,158
-----------------------------------------------------
(Decrease)/increase in cash
and cash equivalents $ (3,823) $ 10,698 $ (1,498) $(1,369) $ 5,958
BACKLOG
Funded $332,800 $299,900 $283,300 $357,600 $296,800
Total $543,700 $507,800 $468,300 $587,600 $469,600
SHARE INFORMATION
Year-end shares
outstanding 8,197 8,364 8,364 8,364 8,161
Average shares outstanding
during year 8,383 8,368 8,364 8,304 6,561
- ------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ------------------------------------------------------------------------------
The year 1996 was marked by a return to revenue growth, the maintenance of
overall gross profit margins, and a sizable improvement in net income.
Although public spending on infrastructure projects remained relatively flat,
or even decreased in some areas, the Company achieved growth through entering
new markets for its engineering services, achieving additional penetration in
its energy niches, and gaining some modest increases in its commercial sector
businesses. The improved performance helped to fund increased investments in
technology development and in the opening of new offices, including one in
Mexico. This performance improvement translated to earnings of $0.50 per share
in 1996, compared to $0.35 per share in 1995.
TOTAL CONTRACT REVENUES
Total contract revenues grew to $418 million in 1996 from $355 million in
1995. While total contract revenues climbed in each of the Company's business
units for 1996, the Civil unit had the largest increase due primarily to a new
engineering project in Mexico which generated revenues of $24 million. The
Buildings and Transportation units were also significant contributors to the
overall increase with improvements of $12 million and $11 million,
respectively. Revenue growth in the construction divisions of each of these
two units caused their respective improvements.
For 1995, total contract revenues decreased from $437 million in 1994. The
most significant component, totaling $70 million, of this overall decrease
occurred in the Buildings unit primarily due to greater bidding selectivity in
its construction division, as well as from the substantial completion of Baker
Support Services' military housing renovation business during 1994. While the
Buildings unit added the same volume of new construction work in both 1995 and
1994, most of its new work added in 1995 was contracted during the second half
of the year and did not significantly enhance its 1995 revenues. Another 1995
decrease resulted in the Energy unit from Baker/MO having terminated certain
lower margin and loss contracts during the year.
TOTAL CONTRACT REVENUES - 1996
BUILDINGS 30%
CIVIL 26%
ENERGY 10%
ENVIRONMENTAL 7%
TRANSPORTATION 27%
GROSS PROFIT
The Company's gross profit increased to $46.6 million in 1996 from $40.0
million in 1995. As a percentage of total contract revenues, gross profit
remained relatively constant at 11% in both 1996 and 1995. Lower gross profit
percentages in the Transportation and Environmental units were offset by an
improvement in the Energy unit. The percentage decline in the Transportation
unit resulted from its performance on certain construction projects, while
Environmental's decrease followed the 1996 award of a major contract, under
which the Company now works as a subcontractor instead of being the prime
contractor as was the case under the related but expired previous contract.
In the Energy unit, Baker/MO received several awards of profitable new work
in 1996 and received the first full year's benefit from having terminated
certain lower margin and loss contracts during 1995, thus contributing
to its continued profitability improvement.
The 1995 gross profit represented an increase from $32.9 million in 1994.
Gross profit expressed as a percentage of total contract revenues climbed from
8% in 1994. With the exception of the Civil unit, each of the Company's
business units reported improvements in its gross profit as a percentage of
total contract revenues for the year. Despite lower 1995 volumes in the
Buildings and Energy units, these units provided the most significant
percentage improvements. Specifically, the 1995 improvement in the Energy unit
resulted primarily from a combination of certain 1994 contract-related charges
at Baker/MO and improved 1995 margins related to the previously mentioned
terminations of several Baker/MO contracts during the year. In the Buildings
unit, the improvement was effected by the combination of a favorable 1995
contract settlement and 1994 writedowns on certain construction contracts.
The percentage decline in the Civil unit resulted primarily from 1995 charges
taken on a significant operations and maintenance contract.
INCOME FROM OPERATIONS - 1996
BUILDINGS 12%
CIVIL 43%
ENERGY 29%
ENVIRONMENTAL 5%
TRANSPORTATION 11%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses increased to $39.2 million in 1996
from $34.9 million in 1995. The 1996 increase principally reflects the general
increase in revenue volumes combined with higher marketing costs in several of
the Company's business units. Expressed as a percentage of total contract
revenues, G&A expense decreased slightly to 9.4% in 1996 from 9.8% in 1995.
G&A expenses decreased in 1995 from $42.0 million in 1994. While the 1994
amount included restructuring charges totaling $1.1 million, the remainder of
the overall decrease is attributable to the cost reduction programs at
Baker/MO and in the construction divisions of the Company's Buildings and
Transportation business units. These cost reductions were effected during 1994
and early 1995 to better align each of the divisions with its expected
revenues, and resulted in cost reductions totaling approximately $5.6 million
in 1995. Expressed as a percentage of total contract revenues, G&A expenses
for 1995 increased from 9.6% in 1994.
OTHER INCOME AND EXPENSE
Interest expense decreased to $76,000 in 1996 from $336,000 in 1995, as a
result of the Company's limited borrowings under its revolving credit
agreement during the year. Interest income increased to $402,000 in 1996 from
$221,000 in 1995, due to the Company's maintenance of its invested cash
balance throughout 1996.
Despite higher interest rates during 1995, interest expense decreased from
$732,000 in 1994 as a result of the Company's repayment of all working capital
borrowings under its revolving credit agreement in September 1995. Interest
income increased in 1995 from $80,000 in 1994, again due to the Company's
repayment of its borrowings and its subsequent investment of cash generated
from operations.
INCOME TAXES
The provision for/(benefit from) income taxes resulted in an effective tax
rate of 48% in 1996, 43% in 1995, and (17%) in 1994. The difference between
these percentages and the 34% statutory U.S. federal rate is attributable
primarily to state and foreign income and withholding taxes. The 1996
provision rate was unfavorably impacted by higher foreign taxes paid. The 1995
provision rate was impacted both by the Company returning to profitability for
the year, and by the realization of a $600,000 tax benefit from a Baker
Support Services joint venture.
CONTRACT BACKLOG
- -----------------------------------------------------------------------------
The Company's funded backlog, which consists of that portion of work
represented by signed contracts and for which the procuring agency has
appropriated and allocated the funds to pay for the work, was $333 million at
December 31, 1996, an increase from $300 million at the end of 1995. The
overall 1996 increase in funded backlog is attributable to a combination of
new work added and transfers from unfunded backlog during the year.
Total backlog, which incrementally includes that portion of contract value for
which options are still to be exercised (unfunded backlog), was $544 million
at the end of 1996 versus $508 million at the end of 1995. A portion of this
increase resulted from the first-time inclusion of total backlog for the
Energy unit's Baker/OTS division in the amount of $24 million as of
December 31, 1996, without a restatement of the related year-end 1995 amount.
As the Company entered 1997, its Civil, Transportation and Energy units showed
improvements in funded backlog relative to the prior year. While the
Environmental unit replaced its 1996 revenues with new funded work during the
year, the Buildings unit's construction division did not, thereby resulting in
a 1996 decrease in this unit's funded backlog amount.
FUNDED BACKLOG - YEAR END 1996
BUILDINGS 38%
CIVIL 19%
ENERGY 5%
ENVIRONMENTAL 7%
TRANSPORTATION 31%
LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------------------------------------------
Net cash provided by operating activities declined to $1.2 million in 1996,
compared to $15.5 million in 1995 and $5.4 million in 1994. The 1996 decrease
is mainly attributed to increases in accounts receivable associated with the
1996 increase in revenue volumes. The 1995 cash flow improvement resulted
primarily from the Company achieving net income totaling $2.9 million for 1995
versus 1994's net loss of $7.9 million.
Net cash used in investing activities was $3.7 million in 1996, compared to
$2.3 million in 1995 and $5.4 million in 1994. These amounts solely comprise
purchases of property, plant and equipment for all years. The 1996 increase in
capital purchases resulted in large part from equipment purchases required
under certain new contracts that were awarded during the year. During 1994,
non-recurring capital expenditures totaling $1.0 million, related to the
completion of renovations to the Company's office building in Beaver,
Pennsylvania, were incurred. The remainder of the 1995 reduction reflected
management's concerted effort to more closely monitor capital expenditures and
the effect of the Company having entered into a leasing arrangement for the
majority of computer equipment during 1995. This leasing arrangement was also
utilized for the majority of computer equipment acquired in 1996.
Net cash used in financing activities was $1.3 million in 1996, compared to
$2.5 million in 1995 and $1.5 million in 1994. In late 1996, pursuant to an
announced stock repurchase program, the Company paid $1.3 million to acquire
approximately 208,000 treasury shares. In 1995, the Company totally repaid
its borrowings under its revolving credit facility. All 1994 and 1995 cash
uses resulted from repayments of long-term debt and borrowings on the revolving
credit facility.
Working capital increased to $27.4 million at December 31, 1996 from $25.2
million at December 31, 1995. This slight increase is again attributable to
the Company's 1996 revenue volume improvement, which caused expected increases
in the related receivable and payable balances. The Company's current ratios
were 1.36:1 at the end of both 1996 and 1995.
In March 1997, the Company agreed with Mellon Bank, N.A. to revised and
improved terms under its credit agreement. Under the revised terms, the
commitment of $25 million, which covers loans and letters of credit, will be
extended through May 31, 2000, and the bank will release all security in
Company assets previously held. As of December 31, 1996, no loans were
outstanding; however, letters of credit totaling $3.8 million were outstanding
under the agreement. Management believes that the credit agreement will be
adequate to meet its borrowing and letter of credit requirements for at least
the next year.
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 at
least the next year.
Short and long-term liquidity is dependent upon 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
oil and gas markets. 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 and its existing credit facility will be
sufficient to meet its operating and capital expenditure requirements for at
least the next year.
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------
As of December 31,
------------------
ASSETS 1996 1995
- ----------------------------------------------------------------------------
(In thousands)
CURRENT ASSETS
Cash $ 10,480 $ 14,303
Receivables 69,621 53,708
Cost of contracts in progress and
estimated earnings, less billings 16,276 19,104
Prepaid expenses and other 6,370 7,816
- ----------------------------------------------------------------------------
Total current assets 102,747 94,931
- ----------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 12,265 12,558
- ----------------------------------------------------------------------------
OTHER ASSETS
Goodwill, net of accumulated amortization
of $2,005,000 and $1,649,000 in 1996 and
1995, respectively 5,297 4,667
Other intangible assets, net of accumulated
amortization of $2,157,000 and $1,625,000
in 1996 and 1995, respectively 1,945 2,467
Other assets 3,828 2,753
- ----------------------------------------------------------------------------
Total other assets 11,070 9,887
- ----------------------------------------------------------------------------
TOTAL ASSETS $126,082 $117,376
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CONSOLIDATED BALANCE SHEET
- ----------------------------------------------------------------------------
As of December 31,
------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1996 1995
- ----------------------------------------------------------------------------
(In thousands)
CURRENT LIABILITIES
Accounts payable $ 34,960 $ 30,879
Accrued employee compensation 6,596 5,703
Accrued insurance 5,425 6,204
Other accrued expenses 19,045 16,465
Excess of billings on contracts
in progress over cost and
estimated earnings 9,304 10,494
- ----------------------------------------------------------------------------
Total current liabilities 75,330 69,745
- ----------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized
44,000,000 shares, issued 7,055,784
and 7,011,302 shares, in 1996 and
1995, respectively 7,056 7,012
Series B Common Stock, par value $1,
authorized 6,000,000 shares, issued
1,348,632 and 1,352,250 shares, in
1996 and 1995, respectively 1,349 1,352
Additional paid-in capital 36,694 36,534
Retained earnings 6,913 2,733
Less 207,560 shares of Common Stock
in treasury, at cost (1,260) --
- ----------------------------------------------------------------------------
Total shareholders' investment 50,752 47,631
- ----------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT $126,082 $117,376
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF INCOME
- ----------------------------------------------------------------------------
For the years ended December 31,
---------------------------------
1996 1995 1994
- ----------------------------------------------------------------------------
(In thousands, except per share amounts)
Total contract revenues $418,388 $354,728 $437,193
Cost of work performed 371,766 314,774 404,262
- ----------------------------------------------------------------------------
Gross profit 46,622 39,954 32,931
General and administrative expenses 39,162 34,850 42,028
- ----------------------------------------------------------------------------
Income/(loss) from operations 7,460 5,104 (9,097)
Other income/(expense):
Interest expense (76) (336) (732)
Interest income 402 221 80
Other, net 253 91 204
- ----------------------------------------------------------------------------
Income/(loss) before inc taxes 8,039 5,080 (9,545)
Prov for/(benefit from) inc taxes 3,859 2,180 (1,600)
- ----------------------------------------------------------------------------
NET INCOME/(LOSS) $ 4,180 $ 2,900 $ (7,945)
- ----------------------------------------------------------------------------
NET INCOME/(LOSS) PER SHARE $ 0.50 $ 0.35 $ (0.95)
- ----------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
- ----------------------------------------------------------------------------
For the years ended December 31,
--------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 4,180 $ 2,900 $(7,945)
Adjustments to reconcile net income/(loss) to net
cash provided by operating activities:
Depreciation and amortization 4,851 5,049 5,279
Deferred income taxes 1,523 460 (1,765)
Changes in assets and liabilities:
(Increase)/decrease in receivables and
contracts in progress (14,275) 22,909 8,406
(Increase)/decrease in other net
assets (1,878) 3,847 (1,007)
Increase/(decrease) in accounts payable
and accrued expenses 6,787 (19,626) 2,447
- -----------------------------------------------------------------------------
Total adjustments (2,992) 12,639 13,360
- -----------------------------------------------------------------------------
Net cash prov by operating activities 1,188 15,539 5,415
- -----------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and
equipment (3,739) (2,294) (5,436)
- -----------------------------------------------------------------------------
Net cash used in investing activities (3,739) (2,294) (5,436)
- -----------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of revolving credit loans -- (2,035) (965)
Repayments of other long-term debt (12) (512) (512)
Payments to acquire treasury stock (1,260) -- --
- -----------------------------------------------------------------------------
Net cash used in financing activities (1,272) (2,547) (1,477)
- -----------------------------------------------------------------------------
Net (decrease)/increase in cash (3,823) 10,698 (1,498)
- -----------------------------------------------------------------------------
Cash at beginning of year 14,303 3,605 5,103
- -----------------------------------------------------------------------------
CASH AT END OF YEAR $ 10,480 $ 14,303 $ 3,605
- -----------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Interest paid $ 73 $ 537 $ 690
Income taxes paid $ 950 $ 1,671 $ 3,184
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
- -----------------------------------------------------------------------------
Series B
Common Common
Stock Stock
Par Par
Value $1 Value $1 Treasury Additional
(In thousands) (1 vote/ (10 votes/ --------- Paid-in Retained
share) share) Shrs Amt Capital Earnings
- -----------------------------------------------------------------------------
Balance, Dec 31, 1993 $6,993 $1,371 -- $ -- $36,534 $ 7,778
Net loss -- -- -- -- -- (7,945)
Series B Common Stock
conversions to regular
Common Stock 9 (9) -- -- -- --
- -----------------------------------------------------------------------------
Balance, Dec 31, 1994 7,002 1,362 -- -- 36,534 (167)
Net income -- -- -- -- -- 2,900
Series B Common Stock
conversions to regular
Common Stock 10 (10) -- -- -- --
- -----------------------------------------------------------------------------
Balance, Dec 31, 1995 7,012 1,352 -- -- 36,534 2,733
Net income -- -- -- -- -- 4,180
Series B Common Stock
conversions to regular
Common Stock 3 (3) -- -- -- --
Stock issued for Maguire
acquisition 33 -- -- -- 129 --
Restricted stock issued 4 -- -- -- 14 --
Treasury stock purchases -- -- 208 1,260 -- --
Stock options exercised 4 -- -- -- 17 --
- -----------------------------------------------------------------------------
Balance, Dec 31, 1996 $7,056 $1,349 208 $1,260 $36,694 $ 6,913
- -----------------------------------------------------------------------------
The accompanying notes are an integral part of this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- -----------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. All material intercompany accounts and transactions have
been eliminated in consolidation.
ACCOUNTING FOR CONTRACTS
Total contract revenues have been recorded on the percentage-of-completion
method of accounting for the engineering and construction contracts in the
Buildings, Civil, Environmental and Transportation Units. Contract revenues
attributable to claims are recognized when realization is probable and the
amounts can be reliably estimated. Earnings on fixed-price contracts are
determined by multiplying the total estimated gross profit for the contracts
by the percentage of physical completion to date (which approximates costs
incurred to date in relation to total estimated costs), less earnings
recognized in prior periods. Earnings under cost reimbursement contracts are
recorded as costs are incurred and include estimated fees in the proportion
that costs incurred to date compare to total estimated costs. As work is
performed under long-term contracts, estimates of the costs are reviewed and,
when necessary, revised on a current basis. Contract costs include costs of
subcontracts, direct labor, supplies and overhead. Estimated losses on
contracts in progress, if significant, are recorded as they are identified.
Total contract revenues for the operations and maintenance contracts within
the Civil and Energy Units are primarily recognized as costs are incurred and
related services are provided. The Civil Unit's government contracts are
typically binding on the Company for a multi-year period and are renewable at
the option of the respective government agency. Modifications to contract
terms that result in retroactive adjustments to contract revenues are
recognized when realization is probable.
ACCOUNTING FOR JOINT VENTURES
The Company records its interest in all majority-owned joint ventures based on
the equity method of accounting for investments, in the accompanying
Consolidated Balance Sheet. The Company's proportionate share of majority-
owned joint venture revenue and cost of contracts is included in the
accompanying Consolidated Statement of Income. The Company's investment in
joint ventures for which the related projects are expected to be completed
within one year is shown as other current assets in the accompanying
Consolidated Balance Sheet.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses for the reporting period.
Actual results could differ from those which result from using the estimates.
The use of estimates is an integral part of applying percentage-of-completion
accounting for contracts.
DEPRECIATION AND AMORTIZATION
Depreciation on property, plant and equipment is recorded using straight-line
and accelerated methods over the estimated useful lives of the assets which
range from three to 31 years. Amortization of intangible assets is provided
primarily on a straight-line basis over the estimated useful lives of the
assets, which range from five to 10 years. Upon disposal of property items,
the asset and related accumulated depreciation accounts are relieved of the
amounts recorded therein for such items and any resulting gain or loss is
reflected in income.
GOODWILL
Goodwill, which represents the excess of cost over net assets of acquired
companies, is being amortized on a straight-line basis over periods ranging
from 15 to 40 years.
EARNINGS PER COMMON SHARE
Per share computations are based upon weighted averages of 8,382,592,
8,368,206, and 8,363,552 shares outstanding for the years 1996, 1995, and
1994, respectively. Stock options are included as share equivalents in the
computation of weighted average shares outstanding using the treasury stock
method.
RECLASSIFICATIONS
Certain 1995 and 1994 financial statement amounts have been reclassified to
conform with 1996 classifications.
2 CONTRACTS
- -----------------------------------------------------------------------------
The total cost of contracts in progress (used to determine cost of work
performed) plus accumulated gross profit recorded was $761,153,000 and
$624,971,000 at December 31, 1996 and 1995, respectively. Billings to date on
contracts in progress at December 31, 1996 and 1995 were $754,181,000 and
$616,361,000, respectively.
Trade accounts receivable totaling $11,855,000 and $7,384,000 at December 31,
1996 and 1995, respectively, relate to retainage provisions under long-term
contracts which will be due upon completion of the contracts. Based on
management's estimates, substantially all of the retention balance at
December 31, 1996 is expected to be collected in 1997.
As of December 31, 1996 and 1995, the Company had an allowance for doubtful
accounts of $385,000 and $1,357,000, respectively.
As of December 31, 1996 and 1995, accounts payable included amounts due to
subcontractors of $8,051,000 and $4,553,000, respectively, which have been
retained under contractual terms pending the completion and acceptance of the
work performed by the subcontractors.
Certain subsidiaries of the Company participate in joint ventures that are
typically formed to accomplish a specific project and then dissolved upon
completion of the project. The number of joint ventures in which the Company
participates and the size, scope and duration of the projects vary between
periods. The Company's equity investment in these joint ventures was
$1,612,000 and $1,891,000 at December 31, 1996 and 1995, respectively.
Consistent with industry practice, within each of the Company's operating
units, credit is granted to customers for the payment of services rendered.
Although the Company has a diversified client base, a substantial portion of
its receivables and net underbillings reflected in the accompanying
Consolidated Balance Sheet is dependent upon federal and state government
appropriations.
3 BUSINESS SEGMENT INFORMATION
- -----------------------------------------------------------------------------
The Company is organized into the following five market-focused business unit
segments: Buildings, Civil, Energy, Environmental and Transportation. The
following tables reflect the revenues and income from operations for the five
business units (in millions):
1996 1995 1994
- -----------------------------------------------------------------------------
Total contract revenues from:
Buildings Unit $127.4 $116.3 $186.2
Civil Unit 109.4 73.9 78.2
Energy Unit 43.2 37.0 45.5
Environmental Unit 27.3 27.7 30.2
Transportation Unit 111.1 99.8 97.1
- -----------------------------------------------------------------------------
Total $418.4 $354.7 $437.2
- -----------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------
Income/(loss) from operations from:
Buildings Unit $0.9 $ 1.8 $(5.4)
Civil Unit 3.2 (0.6) 4.8
Energy Unit 2.2 0.8 (7.7)
Environmental Unit 0.4 1.9 1.0
Transportation Unit 0.8 1.2 (1.8)
- -----------------------------------------------------------------------------
Total $7.5 $ 5.1 $(9.1)
- -----------------------------------------------------------------------------
The following represents identifiable assets (both tangible and intangible)
that are associated with the operations of each business unit (in millions):
1996 1995
- -----------------------------------------------------------------------------
Identifiable assets from:
Buildings Unit $ 29.9 $ 33.1
Civil Unit 30.7 22.5
Energy Unit 17.5 14.2
Environmental Unit 5.8 6.1
Transportation Unit 29.4 27.1
Corporate 12.8 14.4
- -----------------------------------------------------------------------------
Total $126.1 $117.4
- -----------------------------------------------------------------------------
Based on total contract revenues, the principal markets for the Company's
services are as follows:
1996 1995 1994
- -----------------------------------------------------------------------------
United States government 22.5% 24.1% 24.7%
Various state governmental
and quasi-governmental agencies 46.6% 44.4% 35.6%
Commercial, industrial and
private clients 30.9% 31.5% 39.7%
- -----------------------------------------------------------------------------
The Company's business is substantially conducted in the domestic marketplace.
No individual contract accounted for more than 10% of the Company's total
contract revenues in 1996, 1995, or 1994; however, several contracts with the
State of Illinois provided 10.5% and 13.5% of the Company's total contract
revenues in 1995 and 1994, respectively. Several contracts with the U.S.
Department of Navy provided 10.9% and 12.1% of the Company's 1995 and 1994
total contract revenues, respectively.
4 PROPERTY, PLANT AND EQUIPMENT
- -----------------------------------------------------------------------------
Property, plant and equipment consists of the following (in thousands):
1996 1995
- -----------------------------------------------------------------------------
Land $ 693 $ 693
Buildings and improvements 6,345 5,952
Equipment and vehicles 30,873 28,202
- -----------------------------------------------------------------------------
Total, at cost 37,911 34,847
Less - Accumulated depreciation 25,646 22,289
- -----------------------------------------------------------------------------
Net property, plant
and equipment $12,265 $12,558
- -----------------------------------------------------------------------------
/TABLE
5 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. (the "Bank"). 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 loans outstanding and the aggregate face value of outstanding
letters of credit.
As of December 31, 1996, no loans were outstanding; however, letters of credit
totaling $3,829,000 were outstanding under the Agreement.
The Agreement provides for the Company to borrow at 1/4% over the Bank's prime
interest rate or at other indexed rates that may be lower, and for the Company
to meet certain cash flow, leverage, interest coverage and tangible net worth
requirements. The Agreement also limits the Company's capital expenditures and
the declaration or payment of dividends to the Company's shareholders, and is
secured by substantially all of the Company's assets, excluding the accounts
receivable for certain bonded construction projects.
Under the Agreement, the Company also pays the Bank commitment fees of 1/2%
per year based on the unused portion of the commitment. The maximum amount of
borrowings outstanding under the Agreement during 1996 was $695,000. For 1996,
the average daily balance outstanding when the Company was in a net borrowing
position was $324,000 at a weighted average rate of 8.5%. For the period
during 1995 in which the Company was in a net borrowing position, the average
daily balance outstanding was $4,249,000 at a weighted average rate of 9.1%.
The proceeds of any loans under the Agreement have been used to meet various
working capital requirements.
In March 1997, the Company agreed with the Bank to revised and improved terms
of its Agreement, under which the $25 million commitment will be
extended through May 31, 2000. Other significant terms that have already been
agreed between the parties include the release of all security in Company
assets held under the Agreement, a reduction in the borrowing rate to the
Bank's prime interest rate or other indexed rates that may be lower, and a
reduction in the commitment fees to 3/8% per year based on the unused portion
of the commitment.
6 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. During 1996, the
Company repurchased 207,560 treasury shares of common stock at market prices
ranging from $5.63 to $6.25 per share, for a total price paid of $1,260,000.
Under the 1996 Nonemployee Directors' Stock Incentive Plan, each nonemployee
director was issued 500 restricted shares of common stock for a total of 3,500
restricted shares issued. Restrictions on the 3,500 shares expire two years
after the issue date.
The Company's Articles of Incorporation authorize the issuance of 300,000
shares of Cumulative Preferred Stock, par value $1 per share. At December 31,
1996, there were no shares of such Preferred Stock outstanding.
7 LEASE COMMITMENTS
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Rent expense under noncancelable leases was $9,972,000 in 1996, $8,388,000 in
1995, and $8,111,000 in 1994.
Minimum annual rentals payable under noncancelable leases in each of the five
years after December 31, 1996 are $10,011,000, $8,111,000, $5,738,000,
$5,104,000, and $3,697,000, respectively. These noncancelable leases relate to
office space, computer equipment, office equipment, and vehicles with lease
terms ranging from one to 10 years.
8 INCOME TAXES
- -----------------------------------------------------------------------------
The provision for/(benefit from) income taxes consisted of the following (in
thousands):
1996 1995 1994
- -----------------------------------------------------------------------------
Current income taxes:
Federal $ (176) $ -- $ (808)
State -- 837 80
Foreign 1,406 883 893
- -----------------------------------------------------------------------------
Total current
income taxes 1,230 1,720 165
- -----------------------------------------------------------------------------
Deferred income taxes:
Federal 2,538 994 (2,190)
State 91 (534) 425
- -----------------------------------------------------------------------------
Total deferred
income taxes 2,629 460 (1,765)
- -----------------------------------------------------------------------------
Total provision for/(benefit
from) income taxes $3,859 $2,180 $(1,600)
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The following is a reconciliation of income taxes at the federal statutory
rate to income taxes recorded by the Company (in thousands):
1996 1995 1994
- -----------------------------------------------------------------------------
Computed income taxes at
U.S. federal statutory rate $2,733 $1,727 $(3,245)
Loss of foreign tax credits -- -- 629
Foreign taxes, net of federal
income tax benefit 928 583 377
State income taxes, net of
federal income tax benefit 61 153 333
Nondeductible charges 249 246 179
Realization of tax benefit -- (600) --
Other, net (112) 71 127
- -----------------------------------------------------------------------------
Total provision for/(benefit
from) income taxes $3,859 $2,180 $(1,600)
- -----------------------------------------------------------------------------
The domestic and foreign components of income/(loss) before income taxes are
as follows (in thousands):
1996 1995 1994
- -----------------------------------------------------------------------------
Domestic $3,530 $2,816 $(12,120)
Foreign 4,509 2,264 2,575
- -----------------------------------------------------------------------------
Total $8,039 $5,080 $ (9,545)
- -----------------------------------------------------------------------------
The components of the Company's deferred income tax assets and liabilities at
December 31, 1996 and 1995 are as follows (in thousands):
1996 1995
- -----------------------------------------------------------------------------
Deferred income tax assets:
Deductible temporary differences:
Provision for expenses and losses $ 3,098 $ 4,540
Contract overbillings 633 1,326
Federal tax operating
loss carryforward 808 1,476
Accrued vacation pay 1,255 1,134
Fixed and intangible assets 724 517
Other 570 1,721
- -----------------------------------------------------------------------------
Total deferred income tax assets 7,088 10,714
- -----------------------------------------------------------------------------
Deferred income tax liabilities:
Contract underbillings (5,692) (6,689)
- -----------------------------------------------------------------------------
Total deferred income
tax liabilities (5,692) (6,689)
- -----------------------------------------------------------------------------
Net deferred tax asset $ 1,396 $ 4,025
- -----------------------------------------------------------------------------
/TABLE
The Company believes that it will have sufficient future taxable income to
make it more likely than not that the net deferred tax asset at December 31,
1996 will be realized.
As of December 31, 1996, the Company had a U.S. net operating loss
carryforward of $2,377,000. This carryforward expires in the year 2010.
The Company's U.S. income tax returns are currently being examined by the
Internal Revenue Service for the years 1990 through 1994. Management believes
that adequate provisions have been made for income taxes at December 31, 1996.
9 CONTINGENCIES
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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 is self-insured up to certain limits with respect to its workers'
compensation and general liability exposures. Provisions for losses expected
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. Insurance coverage
is obtained for catastrophic exposures as well as those risks required to be
insured by law or contract.
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 $13,000,000. 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.
At December 31, 1996, certain subcontractors performing work on uncompleted
Company and joint venture construction contracts and certain contractors on
construction management projects had not been required to furnish performance
bonds. In the opinion of management, provision has been made for all costs
that will be incurred as a result of such contractors not performing in
accordance with their agreements.
10 EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
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The Company maintains a defined contribution retirement program through an
Employee Stock Ownership Plan ("ESOP"), in which substantially all employees
are eligible to participate. In addition to providing a vehicle for investment
in Company stock, the ESOP offers participants several other investment
options. Contributions to the ESOP are derived from a 401(k) Salary
Redirection Program with a Company matching contribution, and a discretionary
contribution as determined by the Company's Board of Directors. Under the
401(k) Salary Redirection Program, the Company matches 100% of the first 5% of
salary contributed by an employee. The Company's matching contributions are
invested in Michael Baker Corporation Common Stock. Such contributions under
this program amounted to $3,306,000, $2,912,000, and $2,925,000 in 1996, 1995,
and 1994, respectively.
As of December 31, 1996, the market value of all ESOP investments was
approximately $55,439,000, of which 44% represented the market value of the
ESOP's investment in Michael Baker Corporation Common Stock. The Company's
ESOP held 46% of the shares and 72% of the voting power for the outstanding
Common Stock and Series B Common Stock of the Company at the end of 1996.
11 STOCK OPTION PLANS
- -----------------------------------------------------------------------------
As of December 31, 1996, the Company had two fixed stock option plans. Under
the 1995 Stock Incentive Plan (the "Plan"), the Company may grant options for
an aggregate of 500,000 shares of Common Stock to key employees. Under the 1996
Nonemployee Directors' Stock Incentive Plan (the "Directors' Plan"), the
Company may grant options for an aggregate of 150,000 shares of Common Stock
to nonemployee board members. Under both plans, the exercise price of each
option equals the market price of the Company's stock on the date of grant.
One-fourth of the options granted become immediately vested, and the
remaining three-fourths vest in annual one-fourth increments under the Plan,
while the options under the Directors' Plan are fully vested at date of grant.
Vested options remain exercisable for a period of ten years from the grant
date under both plans.
The following table summarizes all stock option activity for both plans in
1995 and 1996:
Shares Average
subject exercise price
to option per share
- -----------------------------------------------------------------------------
Balance at January 1, 1995 -- --
Options granted 176,894 $5.00
Options exercised -- --
Options forfeited (25,106) $5.00
- -----------------------------------------------------------------------------
Balance at December 31, 1995 151,788 $5.00
Options granted 67,947 $4.83
Options exercised (4,125) $5.00
Options forfeited (20,918) $4.97
- -----------------------------------------------------------------------------
Balance at December 31, 1996 194,692 $4.94
- -----------------------------------------------------------------------------
The following table summarizes information about stock options outstanding
under both plans as of December 31, 1996:
Options Exercise Outstanding Average Exercisable
granted in price options life* options
- -----------------------------------------------------------------------------
Jan. 1995 $5.00 130,094 8.0 120,180
Feb. 1996 $4.81 57,598 9.2 15,236
May 1996 $5.03 7,000 9.6 7,000
- -----------------------------------------------------------------------------
Total 194,692 8.4 142,416
- -----------------------------------------------------------------------------
*Average life remaining in years
During 1996, the Company adopted Statement of Financial Accounting Standards
No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation," for
disclosure purposes only. As allowed under SFAS 123, the Company continues to
apply APB Opinion No. 25, "Accounting for Stock Issued to Employees," and
related Interpretations in its accounting for stock-based compensation plans.
Accordingly, no compensation cost was recognized in 1996. Had compensation
cost for the Company's stock incentive plans 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 net income and earnings per share
would have been reduced by immaterial amounts.
12 EMPLOYEE BENEFITS
- -----------------------------------------------------------------------------
The Company contributes to multiemployer, union-administered, construction-
related pension funds based on rates per hour worked by member employees.
Related contribution costs included in the cost of work performed were
approximately $1,161,000, $863,000, and $1,060,000 for the years ended
December 31, 1996, 1995, and 1994, respectively.
13 QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
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The following is a summary of the unaudited quarterly results of operations
for the two years ended December 31, 1996. The results for the fourth quarter
of 1995 were adversely affected by provisions for certain litigation, contract
claims and rework, and by charges taken on a significant base operating
support services contract. These provisions were offset by favorable
adjustments for medical and casualty insurance costs and a reduction in the
Company's tax provision rate. The insurance adjustments, which totaled
approximately $3.9 million, were based on changes in estimates of the Company's
insurance exposures relative to its reserves and also reflected more favorable
levels of insurance experience over the preceding several years. The tax
provision adjustment resulted from the realization of a tax benefit from a
Baker Support Services joint venture, which reduced the Company's tax
provision by $600,000 during the fourth quarter. Each of these fourth quarter
adjustments either arose from decisions reached during the fourth quarter of
1995, or from changes in accounting estimates based on information which
became available during that period.
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
1996 - Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------
Total contract revenues $84,019 $102,996 $114,710 $116,663
Gross profit 10,406 12,214 12,370 11,632
Income before income taxes 948 2,393 2,333 2,365
Net income 512 1,292 1,260 1,116
Net income
per common share $ 0.06 $ 0.15 $ 0.15 $ 0.13
- -----------------------------------------------------------------------------
(In thousands, except per share amounts)
- -----------------------------------------------------------------------------
1995 - Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
- -----------------------------------------------------------------------------
Total contract revenues $86,543 $88,946 $90,620 $88,619
Gross profit 9,890 11,411 10,405 8,248
Income before income taxes 829 1,852 2,049 350
Net income 431 915 1,029 525
Net income
per common share $ 0.05 $ 0.11 $ 0.12 $ 0.07
- -----------------------------------------------------------------------------
Report of Independent Accountants
To the Shareholders and Board of Directors
of Michael Baker Corporation:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of shareholders' investment and of cash
flows present fairly, in all material respects, the financial position of
Michael Baker Corporation and its subsidiaries at December 31, 1996 and 1995,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ Price Waterhouse LLP
- ------------------------
Price Waterhouse LLP
Pittsburgh, Pennsylvania
February 6, 1997
Supplemental Financial Information
- -----------------------------------------------------------------------------
Market Information -- Common Shares
The principal market on which the Michael Baker Corporation Common Stock is
traded is the American Stock Exchange. High and low closing prices of the
Common Stock for each quarter during 1996 and 1995 were as follows:
1996 1995
----------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
- -----------------------------------------------------------------------------
High 5 3/8 5 3/4 5 5/16 6 7/16 4 3/8 5 5/8 6 1/4 6 1/4
Low 4 5/16 4 3/4 4 9/16 4 3/4 3 3/4 3 15/16 4 3/4 4 1/4
- -----------------------------------------------------------------------------