Exhibit 13.1
SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
============================================================================
(In thousands, except per share information)
RESULTS OF OPERATIONS
Total contract revenues $446,432 $418,388 $354,728 $437,193 $434,791
Operating income/(loss) 8,020 7,663 5,180 (9,097) (21,805)
Net income/(loss) 4,953 4,180 2,900 (7,945) (15,128)
Diluted net income/(loss)
per share $ 0.60 $ 0.50 $ 0.35 $ (0.95) $ (1.82)
Return on average equity 9.3% 8.5% 6.3% (16.3)% (25.6)%
FINANCIAL CONDITION
Total assets $144,425 $126,082 $117,376 $134,794 $145,805
Working capital $ 36,220 $ 27,417 $ 25,186 $ 22,391 $ 33,042
Current ratio 1.41 1.36 1.36 1.26 1.39
Long-term debt $ -- $ -- $ -- $ 3,960 $ 7,670
Shareholders' investment 55,862 50,752 47,631 44,731 52,676
Book value per
outstanding share 6.79 6.19 5.70 5.35 6.30
Year-end closing
share price $ 9.75 $ 6.38 $ 5.00 $ 3.75 $ 11.00
CASH FLOW
Cash provided by
operating activities $ 9,231 $ 1,167 $ 15,539 $ 5,415 $ 4,758
Cash used in investing
activities (2,533) (3,739) (2,294) (5,436) (11,232)
Cash provided by/(used in)
financing activities 124 (1,251) (2,547) (1,477) 5,105
---------------------------------------------------
Increase/(decrease)
in cash $ 6,822 $ (3,823) $ 10,698 $ (1,498) $ (1,369)
BACKLOG
Funded $393,200 $332,800 $299,900 $283,300 $357,600
Total $648,700 $543,700 $507,800 $468,300 $587,600
SHARE INFORMATION
Year-end shares
outstanding 8,224 8,197 8,364 8,364 8,364
Average diluted shares
outstanding during year 8,299 8,383 8,368 8,364 8,304
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Solid progress continued in 1997 as the Company closed out its third
successful year of improved profitability. During the year, record
performances were achieved in funded and total backlog and in full-year
total contract revenues and net income, while financial position was
also further strengthened. All nine operating divisions of the Company's
five business units were profitable for the first time in 1997, thereby
contributing to an improvement in diluted earnings per share of $0.60
per share in 1997, compared with $0.50 per share in 1996.
TOTAL CONTRACT REVENUES
Total contract revenues reached a record $446 million in 1997, up from
$418 million in 1996. The Transportation, Energy and Civil units recorded
the largest increases in total contract revenues of $14 million,
$12 million, and $9 million, respectively. Revenue growth from new heavy &
highway construction work, particularly in Chicago, accounted for the
Transportation unit's improvement, while the Energy unit's offshore platform
operations in the Gulf of Mexico fueled its growth. The Civil unit's net
increase resulted from higher revenues on new operations and maintenance
("O&M") contracts, despite lower revenues in its engineering division due
to the 1997 completion of its significant project in Mexico.
For 1996, total contract revenues increased from $355 million in 1995.
The Civil unit posted the largest 1996 increase due primarily to the
aforementioned engineering project in Mexico, which was new in 1996 and
generated revenues of $24 million for that year. 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.
TOTAL CONTRACT REVENUES - 1997
BUILDINGS 28%
CIVIL 27%
ENERGY 12%
ENVIRONMENTAL 5%
TRANSPORTATION 28%
GROSS PROFIT
Gross profit increased to $51.9 million in 1997 from $48.6 million in 1996.
As a percentage of total contract revenues, gross profit remained relatively
constant at 12% in both 1997 and 1996. The gross profit percentage increased
for all of the Company's business units except the Energy unit. The Civil
and Transportation units registered the most significant improvements in
1997. While the Civil unit raised the gross profit percentages for both its
engineering and O&M businesses, the recovery in the Transportation unit was
attributable to its unfavorable performance on certain construction projects
during 1996. The percentage decrease in the Energy unit resulted primarily
from lower margins associated with its new work added in 1997.
The 1996 gross profit represented an increase from $40.0 million in 1995. As
a percentage of total contract revenues, gross profit increased slightly in
1996 from 11% in 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 1996
performance on certain construction projects, while Environmental's decrease
followed the 1996 award of a major contract, under which the Company began
working as a subcontractor instead of as the prime contractor. 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.
INCOME FROM OPERATIONS - 1997
BUILDINGS 5%
CIVIL 45%
CORPORATE/INSURANCE 2%
ENERGY 21%
ENVIRONMENTAL 4%
TRANSPORTATION 23%
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses increased to $43.9 million in
1997 from $40.9 million in 1996. The 1997 increase principally reflected
international marketing costs and the Energy unit's investment in the
Venezuela market. Expressed as a percentage of total contract revenues, G&A
expenses remained constant at 9.8% in both 1997 and 1996.
G&A expenses increased in 1996 from $34.9 million in 1995. This increase
related to the general increase in revenue volumes, combined with higher
marketing costs in several of the Company's business units. G&A expenses
also represented 9.8% of total contract revenues in 1995.
OTHER INCOME AND EXPENSE
Interest income increased to $552,000 in 1997 from $402,000 in 1996, due to
the combination of a higher daily average investment amount and slightly
higher interest rates in 1997. Other income increased to $811,000 in 1997
from $50,000 in 1996, primarily due to gains realized on the sales of
certain investments and income from a new joint venture related to work in
the Gulf of Mexico.
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 1996. Interest income increased in 1996 from $221,000 in
1995, due to the Company's maintenance of an invested cash balance throughout
most of 1996. In 1995, the Company was in a borrowing position under its
revolving credit agreement for the majority of the year.
INCOME TAXES
The provision for income taxes resulted in an effective tax rate of 47% in
1997, 48% in 1996, and 43% in 1995. The difference between these percentages
and the 34% statutory U.S. federal rate is attributable primarily to state
and foreign income taxes and foreign withholding taxes. The 1996 provision
rate was unfavorably impacted by higher foreign income taxes paid in that
year. The 1995 provision rate was favorably impacted by the realization of a
$600,000 tax benefit from a 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 $393 million
at December 31, 1997, an increase from $333 million at the end of 1996. The
overall increase in funded backlog is attributable to new work added and
transfers from unfunded backlog during the year. With the exception of the
Environmental unit, each of the Company's business units entered 1998 with
higher funded backlog than at the end of 1996.
Total backlog, which incrementally includes that portion of contract value
for which options are still to be exercised (unfunded backlog), was $649
million at the end of 1997 versus $544 million at the end of 1996. All units
showed higher total backlog at year-end 1997 than at year-end 1996.
FUNDED BACKLOG - YEAR END 1997
BUILDINGS 33%
CIVIL 21%
ENERGY 6%
ENVIRONMENTAL 5%
TRANSPORTATION 35%
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased significantly in 1997 to
$9.2 million, compared to $1.2 million in 1996 and $15.5 million in 1995. The
1997 improvement is mainly attributed to a combination of the Company's
higher net income and the collection of retention amounts totaling $3.0
million on a significant construction project. The favorable 1995 cash flow
from operations was largely related to the 19% reduction in total contract
revenues for that year.
Net cash used in investing activities was $2.5 million in 1997, compared to
$3.7 million in 1996 and $2.3 million in 1995. These amounts solely comprise
capital expenditures for all years. The 1997 decrease is attributable to
higher 1996 expenditures for building improvements and office equipment
related to the Buildings unit's 1996 relocation from Pittsburgh to
Coraopolis, PA, and higher vehicle and equipment purchases during 1996 to
meet the requirements of new O&M projects in the Civil unit.
The Company did not use any cash in financing activities in 1997, compared
to usage of $1.3 million in 1996 and $2.5 million in 1995. 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.
Working capital increased to $36.2 million at December 31, 1997 from $27.4
million at December 31, 1996. This year-end improvement is attributable to
the Company's overall 1997 business growth. The Company's current ratios were
1.41:1 and 1.36:1 at the end of 1997 and 1996, respectively.
In June 1997, the Company converted its credit agreement with Mellon
Bank, N.A. from secured to unsecured. The agreement continued to provide
for a commitment of $25 million, which covers borrowings and letters of
credit, through May 31, 2000. As of December 31, 1997, no borrowings were
outstanding; however, letters of credit totaling $3.5 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. In October 1997, the Company's available bonding
line was increased from $350 million to $500 million by Travelers
Casualty & Surety Company of America (formerly 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.
The Company has completed a preliminary assessment of its exposures
relative to the upcoming change to the 21st century. While the Company
continues to modify its own noncompliant systems and equipment that are
integral to its business, it is also monitoring the compliance of third
parties with which it interacts. Based on information currently
available, management does not believe that the incremental costs
associated with Year 2000 compliance will be material to the Company's
consolidated results of operations or financial position.
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 STATEMENT OF INCOME
For the years ended December 31,
--------------------------------
1997 1996 1995
------------------------------------------------------------------
(In thousands, except per share amounts)
Total contract revenues $446,432 $418,388 $354,728
Cost of work performed 394,527 369,826 314,698
------------------------------------------------------------------
Gross profit 51,905 48,562 40,030
General and admin. expenses 43,885 40,899 34,850
------------------------------------------------------------------
Income from operations 8,020 7,663 5,180
Other income/(expense):
Interest expense (39) (76) (336)
Interest income 552 402 221
Other, net 811 50 15
------------------------------------------------------------------
Income before income taxes 9,344 8,039 5,080
Provision for income taxes 4,391 3,859 2,180
------------------------------------------------------------------
Net income $ 4,953 $ 4,180 $ 2,900
==================================================================
Basic and diluted net
income per share $ 0.60 $ 0.50 $ 0.35
==================================================================
<FN>
The accompanying notes are an integral part of this statement.
CONSOLIDATED BALANCE SHEET
As of December 31,
------------------
1997 1996
======================================================================
(In thousands)
Assets
----------------------------------------------------------------------
Current Assets
Cash $ 17,302 $ 10,480
Receivables 80,204 69,621
Cost of contracts in progress and
estimated earnings, less billings 21,478 16,276
Prepaid expenses and other 5,799 6,370
----------------------------------------------------------------------
Total current assets 124,783 102,747
----------------------------------------------------------------------
Property, Plant and Equipment, net 10,985 12,265
----------------------------------------------------------------------
Other Assets
Goodwill and other intangible assets, net 6,521 7,242
Other assets 2,136 3,828
----------------------------------------------------------------------
Total other assets 8,657 11,070
----------------------------------------------------------------------
TOTAL ASSETS $144,425 $126,082
======================================================================
Liabilities and Shareholders' Investment
----------------------------------------------------------------------
Current Liabilities
Accounts payable $ 45,868 $ 34,960
Accrued employee compensation 7,908 6,596
Accrued insurance 4,905 5,425
Other accrued expenses 16,879 19,045
Excess of billings on contracts in
progress over cost and estimated earnings 13,003 9,304
----------------------------------------------------------------------
Total current liabilities 88,563 75,330
----------------------------------------------------------------------
Shareholders' Investment
Common Stock, par value $1, authorized
44,000,000 shares, issued 7,086,623 and
7,055,784 shares, in 1997 and 1996,
respectively 7,087 7,056
Series B Common Stock, par value $1,
authorized 6,000,000 shares, issued
1,343,983 and 1,348,632 shares, in 1997
and 1996, respectively 1,343 1,349
Additional paid-in capital 36,822 36,694
Retained earnings 11,866 6,913
Less 206,980 and 207,560 shares of
Common Stock in treasury, at cost, in
1997 and 1996, respectively (1,256) (1,260)
----------------------------------------------------------------------
Total shareholders' investment 55,862 50,752
----------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT $144,425 $126,082
======================================================================
<FN>
The accompanying notes are an integral part of this statement.
CONSOLIDATED STATEMENT OF CASH FLOWS
For the years ended December 31,
--------------------------------
1997 1996 1995
==========================================================================
(In thousands)
Cash Flows from Operating Activities
Net income $ 4,953 $ 4,180 $ 2,900
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4,483 4,851 5,049
Deferred income taxes 1,827 2,629 460
Changes in assets and liabilities:
(Increase)/decrease in receivables
and contracts in progress (12,086) (14,275) 22,909
Decrease/(increase) in other
net assets 520 (3,005) 3,847
Increase/(decrease) in accounts
payable and accrued expenses 9,534 6,787 (19,626)
--------------------------------------------------------------------------
Total adjustments 4,278 (3,013) 12,639
--------------------------------------------------------------------------
Net cash provided by operating
activities 9,231 1,167 15,539
--------------------------------------------------------------------------
Cash Flows from Investing Activities
Additions to property, plant and
equipment (2,533) (3,739) (2,294)
--------------------------------------------------------------------------
Net cash used in investing
activities (2,533) (3,739) (2,294)
--------------------------------------------------------------------------
Cash Flows from Financing Activities
Proceeds from exercise of stock
options 124 21 --
Repayments of revolving credit loans -- -- (2,035)
Repayments of other long-term debt -- (12) (512)
Payments to acquire treasury stock -- (1,260) --
--------------------------------------------------------------------------
Net cash provided by/(used in)
financing activities 124 (1,251) (2,547)
--------------------------------------------------------------------------
Net increase/(decrease) in cash 6,822 (3,823) 10,698
--------------------------------------------------------------------------
Cash at beginning of year 10,480 14,303 3,605
--------------------------------------------------------------------------
Cash at end of year $ 17,302 $ 10,480 $ 14,303
=====================================================-====================
Supplemental Disclosure of Cash Flow Data
Interest paid $ 50 $ 73 $ 537
Income taxes paid $ 2,039 $ 950 $ 1,671
==========================================================================
<FN>
The accompanying notes are an integral part of this statement.
/TABLE
CONSOLIDATED STATEMENT OF SHAREHOLDERS' INVESTMENT
----------------------------------------------------------------------------
Series B
Common Common
Stock, Stock,
Par Par
Value $1 Value $1 Treasury Additional
(One vote (Ten votes -------------- Paid-in Retained
per share) per share) Shares Amount Capital Earnings
============================================================================
Bal, 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) -- -- -- --
----------------------------------------------------------------------------
Bal, 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 --
----------------------------------------------------------------------------
Bal, Dec. 31, 1996 7,056 1,349 208 1,260 36,694 6,913
Net income -- -- -- -- -- 4,953
Series B Common
Stock conversions
to regular
Common Stock 6 (6) -- -- -- --
Restricted stock
issued 3 -- -- -- 21 --
Issuance of
treasury stock -- -- (1) (4) 2 --
Stock options
exercised 22 -- -- -- 102 --
Other -- -- -- -- 3 --
----------------------------------------------------------------------------
Bal, Dec. 31, 1997 $7,087 $1,343 207 $1,256 $36,822 $11,866
============================================================================
<FN>
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 and unapproved change orders 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
In the accompanying Consolidated Balance Sheet, the Company records its
interest in all majority-owned construction joint ventures based on the
equity method of accounting for investments. The Company's proportionate
share of majority-owned construction joint venture revenue and cost of
contracts is included in the accompanying Consolidated Statement of
Income. The Company's investment in these joint ventures, for which the
related projects are expected to be completed within one year, is included
within 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 as of 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
During 1997, the Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share," which changes the
computation and presentation of earnings per share ("EPS"). The adoption of
SFAS 128 requires the presentation of both basic and diluted EPS. Basic EPS
are computed using the weighted average of actual shares outstanding. Diluted
EPS are computed using the sum of basic weighted average shares outstanding
and the dilutive share equivalents under the Company's stock option plans.
Such dilutive share equivalents are computed using the treasury stock method.
In accordance with SFAS 128, previously reported EPS amounts and the weighted
average shares were required to be restated; however, the adoption of this
standard had no effect on the previously reported EPS amounts for 1996 and
1995.
Basic net income per share computations are based upon weighted averages of
8,207,786, 8,372,034 and 8,363,552 shares outstanding for the years 1997,
1996 and 1995, respectively. Diluted net income per share computations are
based upon weighted averages of 8,299,083, 8,382,592 and 8,368,206 shares
outstanding for the years 1997, 1996 and 1995, respectively.
RECLASSIFICATIONS
Certain 1996 and 1995 financial statement amounts have been reclassified
to conform with 1997 classifications.
2. CONTRACTS
The total cost of contracts in progress (used to determine cost of work
performed) plus accumulated gross profit recorded was $858,705,000 and
$761,153,000 at December 31, 1997 and 1996, respectively. Billings to date
on contracts in progress at December 31, 1997 and 1996 were $850,231,000 and
$754,181,000, respectively.
Trade accounts receivable totaling $12,088,000 and $11,855,000 at
December 31, 1997 and 1996, 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, 1997 is expected to be collected in 1998.
As of December 31, 1997 and 1996, accounts payable included amounts due to
subcontractors of $8,888,000 and $8,051,000, 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
$1,737,000 and $1,612,000 at December 31, 1997 and 1996, 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 U.S. federal and state
government appropriations.
Internationally, the Company conducts business in certain countries where
unstable governments subject the Company's related trade receivables, due
from subsidiaries of major oil companies, to unique collection delays. Based
upon past experience with these clients, management believes that these
receivables will be fully collectible.
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):
1997 1996 1995
=============================================================
Total contract revenues
from:
Buildings Unit $126.4 $127.4 $116.3
Civil Unit 118.2 109.4 73.9
Energy Unit 54.8 43.2 37.0
Environmental Unit 21.5 27.3 27.7
Transportation Unit 125.5 111.1 99.8
-------------------------------------------------------------
Total $446.4 $418.4 $354.7
=============================================================
1997 1996 1995
=============================================================
Income from
operations from:
Buildings Unit $0.4 $0.9 $ 1.8
Civil Unit 3.6 3.2 (0.6)
Energy Unit 1.7 2.3 0.8
Environmental Unit 0.3 0.4 1.9
Transportation Unit 1.8 0.9 1.3
Corporate/Insurance 0.2 -- --
-------------------------------------------------------------
Total $8.0 $7.7 $ 5.2
=============================================================
The following represents identifiable assets (both tangible and
intangible) that are associated with the operations of each business
unit (in millions):
1997 1996
============================================================
Identifiable assets from:
Buildings Unit $ 22.1 $ 29.9
Civil Unit 31.7 30.7
Energy Unit 22.2 17.5
Environmental Unit 3.7 5.8
Transportation Unit 37.9 29.4
Corporate/Insurance* 26.8 12.8
------------------------------------------------------------
Total $144.4 $126.1
============================================================
<FN>
*Includes primarily cash and fixed assets.
Based on total contract revenues, the principal markets for the
Company's services are as follows:
1997 1996 1995
============================================================
United States government 23.8% 22.5% 24.1%
Various state governmental
and quasi-governmental
agencies 40.9% 46.6% 44.4%
Commercial, industrial
and private clients 35.3% 30.9% 31.5%
============================================================
The Company's business is substantially conducted in the U.S. No
individual contract accounted for more than 10% of the Company's total
contract revenues in 1997, 1996, or 1995; however, several contracts
with the U.S. Department of Navy and the State of Illinois provided 10.9%
and 10.5%, respectively, of the Company's total contract revenues in 1995.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
1997 1996
============================================================
Land $ 552 $ 693
Buildings and improvements 6,388 6,345
Equipment and vehicles 32,319 30,873
------------------------------------------------------------
Total, at cost 39,259 37,911
------------------------------------------------------------
Less - Accumulated depreciation 28,274 25,646
------------------------------------------------------------
Net property, plant
and equipment $10,985 $12,265
============================================================
5. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in
thousands):
1997 1996
=================================================================
Goodwill, net of accumulated
amortization of $2,437,000 and
$2,005,000, respectively $5,078 $5,297
Other intangible assets, net of
accumulated amortization of
$1,817,000 and $2,157,000,
respectively 1,443 1,945
------------------------------------------------------------------
Net intangible assets $6,521 $7,242
==================================================================
6. LONG-TERM DEBT AND BORROWING AGREEMENTS
In June 1997, the Company entered into an unsecured credit agreement (the
"Agreement") with Mellon Bank, N.A. (the "Bank"). The Agreement provides for
a commitment of $25 million through May 31, 2000. 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, 1997, no borrowings were outstanding; however, letters of
credit totaling $3,517,000 were outstanding under the Agreement.
The Agreement provides for the Company to borrow at 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. Under the Agreement, the Company pays the Bank commitment fees
of 3/8% per year based on the unused portion of the commitment.
The Company did not borrow under the Agreement during 1997. For the period
during 1996 in which the Company was in a net borrowing position, the average
daily balance outstanding was $324,000 at a weighted average rate of 8.5%.
The proceeds of the 1996 loans under the Agreement were used for various
working capital requirements.
7. 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
of $1,260,000.
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,
1997, there were no shares of such Preferred Stock outstanding.
8. LEASE COMMITMENTS
Rent expense under noncancelable leases was $10,364,000 in 1997, $9,972,000
in 1996 and $8,388,000 in 1995.
Minimum annual rentals payable under noncancelable leases in each of the
five years after December 31, 1997 are $10,436,000, $8,203,000, $6,550,000,
$4,467,000 and $1,726,000, respectively. These noncancelable leases relate
to office space, computer equipment, office equipment and vehicles, with
lease terms ranging from one to 10 years.
9. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
1997 1996 1995
================================================================
Current income taxes:
Federal $1,401 $ (176) $ --
State 139 -- 837
Foreign 1,024 1,406 883
----------------------------------------------------------------
Total current
income taxes 2,564 1,230 1,720
----------------------------------------------------------------
Deferred income taxes:
Federal 1,705 2,538 994
State 122 91 (534)
----------------------------------------------------------------
Total deferred
income taxes 1,827 2,629 460
----------------------------------------------------------------
Total provision for
income taxes $4,391 $3,859 $2,180
================================================================
The following is a reconciliation of income taxes at the federal
statutory rate to income taxes recorded by the Company (in thousands):
1997 1996 1995
================================================================
Computed income
taxes at U.S. federal
statutory rate $3,177 $2,733 $1,727
Foreign taxes, net of
federal income tax
benefit 676 928 583
State income taxes,
net of federal income
tax benefit 172 61 153
Nondeductible charges 300 249 246
Realization of
tax benefit -- -- (600)
Other, net 66 (112) 71
----------------------------------------------------------------
Total provision for
income taxes $4,391 $3,859 $2,180
================================================================
The domestic and foreign components of income before income taxes are as
follows (in thousands):
1997 1996 1995
============================================
Domestic $7,148 $3,530 $2,816
Foreign 2,196 4,509 2,264
--------------------------------------------
Total $9,344 $ 8,039 $5,080
============================================
The components of the Company's deferred income tax assets and
liabilities at December 31, 1997 and 1996 are as follows (in thousands):
1997 1996
===============================================================
Deferred income tax assets:
Deductible temporary differences:
Provision for expenses and losses $ 2,227 $3,098
Contract overbillings 705 633
Federal tax operating loss
carryforward 98 808
Accrued vacation pay 1,404 1,255
Fixed and intangible assets 795 724
Other 516 570
---------------------------------------------------------------
Total deferred income tax assets 5,745 7,088
---------------------------------------------------------------
Deferred income tax liabilities:
Contract underbillings (6,159) (5,692)
---------------------------------------------------------------
Total deferred income liabilities (6,159) (5,692)
Net deferred tax
(liability)/asset $ (414) $1,396
===============================================================
As of December 31, 1997, the Company had a U.S. net operating loss
carryforward of $288,000. This carryforward expires in the year 2010.
The Company's U.S. income tax returns have been examined and accepted 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, 1997.
10. CONTINGENCIES
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.
In the Company's ordinary course of business, many of its public contracts
are subject to recurring audits by the Defense Contract Audit Agency ("DCAA")
and other governmental entities. During 1997, DCAA commenced an audit of
certain contracts for the years 1992 through 1995. DCAA has not yet issued
its preliminary audit report and, at this time, management is unable to
determine the significance, if any, of this matter.
At December 31, 1997, 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.
11. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
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 eligible salary contributed by participants. Beginning in
February 1998, the Company will match 100% of the first 5-1/2% of eligible
salary contributed by participants. Effective in July 1997, participants were
enabled to direct not less than 50% of the Company's matching contributions
to be invested in Michael Baker Corporation Common Stock, with the remaining
50% being available to invest in Baker Common Stock or mutual funds, as
directed by the participants. Prior to July 1997, the Company's matching
contributions were required to be invested 100% in Baker Common Stock.
Company contributions under this program amounted to $3,321,000, $3,306,000
and $2,912,000 in 1997, 1996 and 1995, respectively.
As of December 31, 1997, the market value of all ESOP investments was
$79,248,000, of which 47% represented the market value of the ESOP's
investment in Michael Baker Corporation Common Stock. The Company's ESOP
held 45% 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 1997.
12. STOCK OPTION PLANS
As of December 31, 1997, the Company has 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.
Under the Directors Plan, each nonemployee director was issued 500
restricted shares of common stock for a total of 4,500 and 3,500 shares of
restricted stock issued in 1997 and 1996, respectively. Restrictions on the
shares expire two years after the issue date.
The following table summarizes all stock option activity for both plans
in 1997 and 1996:
Average
Shares exercise
subject price
to option per share
-------------------------------------------------------
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
Options granted 179,593 $ 6.90
Options exercised (22,690) $ 5.48
Options forfeited (10,581) $ 5.76
-------------------------------------------------------
Balance at December 31, 1997 341,014 $ 5.92
=======================================================
The following table summarizes information about stock options
outstanding under both plans as of December 31, 1997:
Options Exercise Outstanding Average Exercisable
granted in price options life* options
-------------------------------------------------------------------
Jan. 1995 $5.00 114,319 7.0 85,962
Feb. 1996 $4.81 51,596 8.2 25,902
May 1996 $5.03 6,000 8.4 6,000
Feb. 1997 $6.91 161,099 9.2 36,678
May 1997 $6.84 8,000 9.4 8,000
-------------------------------------------------------------------
Total 341,014 8.3 162,542
===================================================================
<FN>
*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 1997
and 1996. 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
net income and diluted net income per share amounts would have been reduced.
The Company's pro forma net income amounts would have been $4,725,000,
$4,077,000 and $2,763,000 for the years ended December 31, 1997, 1996 and
1995, respectively. The Company's pro forma diluted net income per share
would have been $0.57, $0.49 and $0.33 for the years ended December 31, 1997,
1996 and 1995, respectively.
The fair value of options on the respective grant dates was estimated using
a Black-Scholes option pricing model with certain assumptions. The key
assumptions used include a weighted average risk-free interest rate of 7.0%,
weighted average expected volatility of 51.8%, an expected option life of 6
years, and a 0% expected dividend yield.
13. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for the two years ended December 31, 1997:
1997 - Three Months Ended
(In thousands) March 31 June 30 Sept. 30 Dec.31
======================================================================
Total contract revenues $94,092 $105,477 $116,627 $130,236
Gross profit 10,876 12,914 13,413 14,702
Income before income taxes 1,109 2,634 2,942 2,659
Net income 577 1,369 1,530 1,477
Diluted net income
per common share $ 0.07 $ 0.17 $ 0.18 $ 0.18
======================================================================
1996 - Three Months Ended
(In thousands) 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 13,572
Income before income taxes 948 2,393 2,333 2,365
Net income 512 1,292 1,260 1,116
Diluted net income
per common share $ 0.06 $ 0.15 $ 0.15 $ 0.13
======================================================================
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, 1997 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
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 3, 1998
SUPPLEMENTAL FINANCIAL INFORMATION
Market Information - Common Shares
The principal 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 1997 and 1996 were as follows:
1997 1996
----------------------------------------------------------------------------
First Second Third Fourth First Second Third Fourth
============================================================================
High 7 11/16 7 3/8 10 5/8 11 5/8 5 3/8 5 3/4 5 5/16 6 7/16
Low 6 3/8 6 1/2 6 3/4 9 4 5/16 4 3/4 4 9/16 4 3/4
============================================================================