FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 Commission file number 1-6627 MICHAEL BAKER CORPORATION ------------------------- (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-0927646 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Airport Office Park, Building 3, 420 Rouser Road, Coraopolis, PA 15108 - ---------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) (412) 269-6300 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of March 31, 1998: --------------------- Common Stock 6,846,737 shares Series B Common Stock 1,329,040 shares FORM 10-Q PART I PAGE 1 MICHAEL BAKER CORPORATION PART I. FINANCIAL INFORMATION The condensed consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Although certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, the Company believes that the disclosures are adequate to make the information presented not misleading. The statements reflect all adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods presented. All such adjustments are of a normal and recurring nature unless specified otherwise. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's latest annual report and Form 10-K. This Quarterly Report on Form 10-Q, and in particular the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section in Part I, contains forward-looking statements concerning future operations and performance of the Registrant. Forward-looking statements are subject to market, operating and economic risks and uncertainties that may cause the Registrant's actual results in future periods to be materially different from any future performance suggested herein. Such statements are made pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995. FORM 10-Q PART I PAGE 2 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the three months ended -------------------------- MARCH 31, 1998 March 31, 1997 - -------------------------------------------------------------------------- (In thousands, except per share amounts) Total contract revenues $111,097 $94,092 Cost of work performed 98,853 83,216 - -------------------------------------------------------------------------- Gross profit 12,244 10,876 Selling, general and administrative expenses 11,188 10,397 - -------------------------------------------------------------------------- Income from operations 1,056 479 Other income/(expense): Interest expense (10) (18) Interest income 179 130 Other, net 153 518 - -------------------------------------------------------------------------- Income before income taxes 1,378 1,109 Provision for income taxes 648 532 - -------------------------------------------------------------------------- NET INCOME 730 577 ========================================================================== BASIC AND DILUTED NET INCOME PER SHARE $0.09 $0.07 ========================================================================== <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 3 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS MARCH 31, 1998 Dec. 31, 1997 - -------------------------------------------------------------------------- (In thousands) CURRENT ASSETS Cash $9,839 $17,302 Receivables 76,543 80,204 Cost of contracts in progress and estimated earnings, less billings 25,183 21,478 Prepaid expenses and other 3,735 5,799 - -------------------------------------------------------------------------- Total current assets 115,300 124,783 - -------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, NET 11,675 10,985 OTHER ASSETS Goodwill and other intangible assets, net 6,322 6,521 Other assets 2,312 2,136 - -------------------------------------------------------------------------- Total other assets 8,634 8,657 - -------------------------------------------------------------------------- TOTAL ASSETS $135,609 $144,425 ========================================================================== LIABILITIES AND SHAREHOLDERS' INVESTMENT - -------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $37,101 $45,868 Accrued employee compensation 7,602 7,908 Accrued insurance 5,682 4,905 Other accrued expenses 12,733 16,879 Excess of billings on contracts in progress over cost and estimated earnings 16,327 13,003 - -------------------------------------------------------------------------- Total current liabilities 79,445 88,563 - -------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT Common Stock, par value $1, authorized 44,000,000 shares, issued 7,103,826 and 7,086,623 shares at March 31, 1998 and Dec. 31, 1997, respectively 7,104 7,087 Series B Common Stock, par value $1, authorized 6,000,000 shares, issued 1,329,040 and 1,343,983 shares at March 31, 1998 and December 31, 1997, respectively 1,329 1,343 Additional paid-in capital 36,835 36,822 Retained earnings 12,596 11,866 Less 257,089 and 206,980 shares of Common Stock in treasury, at cost, at March 31, 1998 and December 31, 1997, respectively (1,700) (1,256) - -------------------------------------------------------------------------- Total shareholders' investment 56,164 55,862 - -------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $135,609 $144,425 ========================================================================== <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 4 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the three months ended --------------------------- MARCH 31, 1998 March 31, 1997 - --------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $730 $577 Adjustments to reconcile net income to net cash (used in)/provided by operating activities: Depreciation and amortization 1,093 1,083 Changes in assets and liabilities: Decrease in receivables and contracts in progress 3,280 6,803 Decrease in accounts payable and accrued expenses (12,442) (3,938) Decrease/(increase) in other net assets 1,900 (752) - --------------------------------------------------------------------------- Total adjustments (6,169) 3,196 - --------------------------------------------------------------------------- Net cash (used in)/prov by oper activities (5,439) 3,773 - --------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (1,596) (406) - --------------------------------------------------------------------------- Net cash used in investing activities (1,596) (406) - --------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 16 0 Payments to acquire treasury stock (444) 0 - --------------------------------------------------------------------------- Net cash used in financing activities (428) 0 - --------------------------------------------------------------------------- Net (decrease)/increase in cash (7,463) 3,367 Cash at beginning of year 17,302 10,480 - --------------------------------------------------------------------------- CASH AT END OF PERIOD $9,839 $13,847 =========================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA Interest paid $14 $15 Income taxes paid $36 $63 =========================================================================== <FN> The accompanying notes are an integral part of this financial statement. FORM 10-Q PART I PAGE 5 MICHAEL BAKER CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED MARCH 31, 1998 (UNAUDITED) NOTE 1 - EARNINGS PER SHARE Basic net income per share computations are based upon weighted averages of 8,190,728 and 8,196,856 shares outstanding for the three-month periods ended March 31, 1998 and 1997, respectively. Diluted net income per share computations are based upon weighted averages of 8,318,656 and 8,255,310 shares outstanding for the three-month periods ended March 31, 1998 and 1997, respectively. NOTE 2 - CAPITAL STOCK During 1996, the Board of Directors authorized the repurchase of up to 500,000 shares of the Company's Common Stock in the open market. During the first quarter of 1998, the Company repurchased 50,109 treasury shares at market prices ranging from $8.49 to $8.97 per share, for a total price of $444,000. As of March 31, 1998, treasury shares totaling 257,669 had been repurchased under this program. NOTE 3 - CONTINGENCIES The Company has reviewed the status of contingencies outstanding at March 31, 1998, and believes that there have been no significant changes to the information disclosed in its Annual Report on Form 10-K for the year ended December 31, 1997. NOTE 4 - NEW ACCOUNTING STANDARD Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which requires companies to disclose information regarding comprehensive income and its components. Comprehensive income is defined as a change in equity resulting from nonowner sources (e.g., foreign currency gains and losses, unrealized gains on securities, pension liability adjustments). The Company does not have any material items of comprehensive income; accordingly, comprehensive income has not been presented in the accompanying financial statements. FORM 10-Q PART I PAGE 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total Contract Revenues Total contract revenues were $111.1 million for the first quarter of 1998, compared to $94.1 million for the same period in 1997, an increase of $17.0 million. With the exception of the Environmental unit, total contract revenues increased in each of the Company's business units for the first quarter of 1998. The Transportation, Civil and Energy units had the largest increases of $8.2 million, $4.4 million and $3.6 million, respectively. Higher revenues from new construction projects started in 1997 accounted for the majority of the increase in the Transportation unit. Civil's increase resulted from revenues on several new operations & maintenance ("O&M") contracts on which work commenced during the second half of 1997. The Energy unit benefitted from quarter-over-quarter growth of approximately 30% in both its domestic and international operations. Gross Profit In absolute terms, the Company's gross profit of $12.2 million for the first quarter of 1998 represents an improvement over the gross profit of $10.9 million from its 1997 first quarter. As a percentage of total contract revenues, gross profit decreased to 11.0% in the first quarter of 1998 from 11.6% in the first quarter of 1997. Absolute and percentage improvements were registered in the Energy and Transportation units, but offset by decreases in the other three business units. The growth in the Energy and Transportation units is attributable to a combination of the aforementioned revenue growth with profit percentages that increased slightly. The most significant decrease came from the Civil unit, which experienced lower profit percentages on its O&M projects, and which did not have the benefit in the first quarter of 1998 of the relatively higher margins achieved on its significant engineering contract in Mexico. Such contract was substantially completed in 1997. Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased to $11.2 million for the first quarter of 1998 from $10.4 million in the prior year's first quarter. This increase principally reflects the Company's international marketing initiative started during the third quarter of 1997, its anticipated higher 1998 payouts for incentive compensation, and investments in two new markets (Buffalo, NY and Orlando, FL) for heavy & highway construction services. Expressed as a percentage of total contract revenues, SG&A expenses decreased from 11.0% in the first quarter of 1997 to 10.1% in 1998. FORM 10-Q PART I PAGE 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income Other income for the first quarter of 1998 included approximately $0.1 million of income from a new joint venture related to work in the Gulf of Mexico, whereas the comparable 1997 amount included a gain of $0.5 million from the sale of an investment in preferred stock. Income Taxes The Company had provisions for income taxes of 47% for the first quarter of 1998 and 48% for the same period in 1997. The slightly lower 1998 provision rate primarily reflects the Company's higher level of income before taxes expected for the full year of 1998. New Accounting Standard In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). This statement specifies the circumstances under which internal and external costs incurred in connection with the implementation of internal-use software should either be prospectively capitalized or expensed upon adoption. The Company will be required to adopt this new standard effective January 1, 1999. Based on management's assessment, the adoption of SOP 98-1 will not have a material effect on the Company's consolidated results of operations or financial position. CONTRACT BACKLOG The funded backlog of work to be performed was $401 million as of March 31, 1998, compared to funded backlog of $393 million at December 31, 1997. Funded backlog represents that portion of work supported by signed contracts and for which the procuring agency has appropriated and allocated the funds to pay for the work. Total backlog, which incrementally includes that portion of contract value for which options are still to be exercised ("unfunded backlog"), was $654 million as of March 31, 1998 and $649 million as of December 31, 1997. During the first quarter of 1998, the Company's Environmental and Transportation units added to their funded and total backlog amounts, while the funded and total amounts decreased slightly for the Civil, Buildings and Energy units. FORM 10-Q PART I PAGE 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $5.4 million for the first three months of 1998, compared to net cash provided by operating activities of $3.8 million for the same period in 1997. The 1998 cash usage resulted primarily from the timing of certain normal and recurring payments to construction subcontractors during the first quarter of 1998, following substantial cash collections from construction clients during the fourth quarter of 1997. Net cash used in investing activities approximated $1.6 million for the first three months of 1998, compared to $0.4 million in the first three months of 1997. These amounts solely comprise capital expenditures for both periods. The 1998 amount includes computer equipment purchases totaling $1.2 million as compared with $0.3 million in 1997. During 1997, the Company leased additional computer equipment valued at $0.4 million. The remaining increase is primarily attributable to updated computer equipment needed in connection with certain 1998 software upgrades. Net cash used in financing activities totaled $0.4 million for the first quarter of 1998 and zero for the same period in 1997. Pursuant to a stock repurchase program announced in late 1996, the Company paid $0.4 million to acquire approximately 50,000 additional treasury shares during the first quarter of 1998. Working capital decreased marginally during the first three months of 1998 to $35.9 million at March 31, 1998, from $36.2 million at December 31, 1997. The current ratio was 1.45:1 at the end of the first three months of 1998, compared to 1.41:1 at year-end 1997. The Company maintains an unsecured credit agreement with Mellon Bank, N.A. The agreement provides for a commitment of $25 million, which covers borrowings and letters of credit, through May 31, 2000. As of March 31, 1998, no borrowings were outstanding; letters of credit totaling $2.7 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 $500 million bonding line available through Travelers Casualty & 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. FORM 10-Q PART I PAGE 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Cont.) The Company has completed an assessment of its internal 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, management expects that its internal systems will be fully compliant before the turn of the century. Management is also attempting to monitor the compliance of third parties with which it interacts, but has found the compliance of these parties more difficult to monitor and control. 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. FORM 10-Q PART II PAGE 10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (b) Reports on Form 8-K During the quarter ended March 31, 1998, the Company filed no reports on Form 8-K. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. <CAPTION) MICHAEL BAKER CORPORATION Dated: May 13, 1998 By: /s/ J. Robert White --------------------------- J. Robert White Executive Vice President, Chief Financial Officer and Treasurer