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 June 30, 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 June 30, 1998: -------------------- Common Stock 6,855,729 shares Series B Common Stock 1,327,275 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 -------------------------- JUNE 30, 1998 June 30, 1997 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Total contract revenues $127,118 $105,477 Cost of work performed 111,376 92,563 - -------------------------------------------------------------------------------- Gross profit 15,742 12,914 Selling, general and administrative expenses 12,828 10,486 - -------------------------------------------------------------------------------- Income from operations 2,914 2,428 Other income/(expense): Interest expense (7) (16) Interest income 147 137 Other, net 69 85 - -------------------------------------------------------------------------------- Income before income taxes 3,123 2,634 Provision for income taxes 1,468 1,265 - -------------------------------------------------------------------------------- NET INCOME $1,655 $1,369 ================================================================================ BASIC AND DILUTED NET INCOME PER SHARE $0.20 $0.17 ================================================================================ <FN> The accompanying notes are an integral part of this financial statement. </FN> FORM 10-Q PART I PAGE 3 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the six months ended ------------------------ JUNE 30, 1998 June 30, 1997 - -------------------------------------------------------------------------------- (In thousands, except per share amounts) Total contract revenues $238,215 $199,569 Cost of work performed 210,229 175,779 - -------------------------------------------------------------------------------- Gross profit 27,986 23,790 Selling, general and administrative expenses 24,016 20,883 - -------------------------------------------------------------------------------- Income from operations 3,970 2,907 Other income/(expense): Interest expense (17) (34) Interest income 326 267 Other, net 222 603 - -------------------------------------------------------------------------------- Income before income taxes 4,501 3,743 Provision for income taxes 2,116 1,797 - -------------------------------------------------------------------------------- NET INCOME $2,385 $1,946 ================================================================================ BASIC AND DILUTED NET INCOME PER SHARE $0.29 $0.24 ================================================================================ <FN> The accompanying notes are an integral part of this financial statement. </FN> FORM 10-Q PART I PAGE 4 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Unaudited) ASSETS JUNE 30, 1998 Dec. 31, 1997 - -------------------------------------------------------------------------------- (In thousands) CURRENT ASSETS Cash $8,697 $17,302 Receivables 77,765 80,204 Cost of contracts in progress and estimated earnings, less billings 25,795 21,478 Prepaid expenses and other 3,157 5,799 - -------------------------------------------------------------------------------- Total current assets 115,414 124,783 - -------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT, NET 12,770 10,985 OTHER ASSETS Goodwill and other intangible assets, net 6,064 6,521 Other assets 2,502 2,136 - -------------------------------------------------------------------------------- Total other assets 8,566 8,657 - -------------------------------------------------------------------------------- Total assets $136,750 $144,425 ================================================================================ LIABILITIES AND SHAREHOLDERS' INVESTMENT - -------------------------------------------------------------------------------- CURRENT LIABILITIES Accounts payable $39,595 $45,868 Accrued employee compensation 7,746 7,908 Accrued insurance 5,177 4,905 Other accrued expenses 15,170 16,879 Excess of billings on contracts in progress over cost and estimated earnings 11,189 13,003 - -------------------------------------------------------------------------------- Total current liabilities 78,877 88,563 - -------------------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT Common Stock, par value $1, authorized 44,000,000 shares, issued 7,112,818 and 7,086,623 shares at June 30, 1998 and December 31, 1997, respectively 7,113 7,087 Series B Common Stock, par value $1, authorized 6,000,000 shares, issued 1,327,275 and 1,343,983 shares at June 30, 1998 and December 31, 1997, respectively 1,327 1,343 Additional paid-in capital 36,882 36,822 Retained earnings 14,251 11,866 Less 257,089 and 206,980 shares of Common Stock in treasury, at cost, at June 30, 1998 and December 31, 1997, respectively (1,700) (1,256) - -------------------------------------------------------------------------------- Total shareholders' investment 57,873 55,862 - -------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $136,750 $144,425 ================================================================================ <FN> The accompanying notes are an integral part of this financial statements. </FN> FORM 10-Q PART I PAGE 5 MICHAEL BAKER CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) For the six months ended ------------------------ JUNE 30, 1998 June 30, 1997 - -------------------------------------------------------------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $2,385 $1,946 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 2,300 2,147 Changes in assets and liabilities: Increase in receivables and contracts in progress (3,691) (3,739) Decrease in accounts payable and accrued expenses (7,871) (812) Decrease in other net assets 2,361 191 - -------------------------------------------------------------------------------- Total adjustments (6,901) (2,213) - -------------------------------------------------------------------------------- Net cash used in operating activities (4,516) (267) - -------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to property, plant and equipment (3,679) (796) - -------------------------------------------------------------------------------- Net cash used in investing activities (3,679) (796) - -------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from exercise of stock options 34 0 Payments to acquire treasury stock (444) 0 - -------------------------------------------------------------------------------- Net cash used in financing activities (410) 0 - -------------------------------------------------------------------------------- Net decrease in cash (8,605) (1,063) Cash at beginning of year 17,302 10,480 - -------------------------------------------------------------------------------- CASH AT END OF PERIOD $8,697 $9,417 ================================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA Interest paid $36 $31 Income taxes paid $419 $89 ================================================================================ <FN> The accompanying notes are an integral part of this financial statement. </FN> FORM 10-Q PART I PAGE 6 MICHAEL BAKER CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED JUNE 30, 1998 (Unaudited) NOTE 1 - EARNINGS PER SHARE Basic net income per share computations are based upon weighted averages of 8,178,792 and 8,199,277 shares outstanding for the three-month periods, and 8,184,727 and 8,198,073 for the six-month periods, ended June 30, 1998 and 1997, respectively. Diluted net income per share computations are based upon weighted averages of 8,322,090 and 8,257,297 shares outstanding for the three-month periods, and 8,320,373 and 8,256,304 for the six-month periods, ended June 30, 1998 and 1997, respectively. The additional shares included in diluted shares outstanding are entirely attributable to stock options. 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 six months 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 June 30, 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 June 30, 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. FORM 10-Q PART I PAGE 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Total Contract Revenues Total contract revenues were $127.1 million for the second quarter of 1998, compared to $105.5 million for the same period in 1997. All of the Company's business units experienced increases in total contract revenues for the second quarter of 1998. The Transportation, Buildings and Civil units posted the largest increases of $8.4 million, $6.5 million and $4.4 million, respectively. Higher revenues from new construction projects started during 1997 accounted for the majority of the 1998 increase in both the Transportation and Buildings units. Civil's increase resulted from revenues on several new operations & maintenance ("O&M") contracts on which work commenced during the second half of 1997. Total contract revenues were $238.2 million for the first six months of 1998, compared to $199.6 million for the same period in 1997. For the first half of 1998, all units except Environmental recorded increases in total contract revenues. The Transportation, Civil and Buildings units had the largest increases of $16.6 million, $8.8 million and $8.2 million, respectively. These increases are attributable to the same reasons stated in the preceding paragraph. Gross Profit The Company's gross profit of $15.7 million for the second quarter of 1998 represents a 22% improvement over its gross profit of $12.9 million for the second quarter of 1997. As a percentage of total contract revenues, gross profit increased slightly to 12.4% for the second quarter of 1998 from 12.2% in the second quarter of 1997. Absolute dollar and percentage improvements in gross profit were registered in each of the Company's business units except Buildings. The most significant improvements occurred in the Transportation and Energy units, where the aforementioned revenue growth came with the additional benefit of higher margins. Despite its higher revenues, Buildings' decreases in gross profit and its profitability percentage were attributable to its contract mix being not as rich as in 1997. Gross profit for the first six months of 1998 increased by 18% to $28.0 million from $23.8 million in the first six months of 1997; however, as a percentage of total contract revenues, gross profit remained relatively constant at nearly 12% in the first half of both years. The Transportation and Energy units had the greatest improvements for the six month period, primarily for the same reasons expressed in the previous paragraph. The most significant decreases for the first half of 1998 were in the Buildings unit, whose 1998 contract mix again was not as rich as in 1997. FORM 10-Q PART I PAGE 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Selling, General and Administrative Expenses Selling, general and administrative ("SG&A") expenses increased to $12.8 million for the second quarter of 1998 from $10.5 million in the second quarter of 1997. This increase is due in part to the Company's anticipated higher 1998 payouts for incentive compensation, its international marketing initiative started during the third quarter of 1997, and investments in technological support costs and new transportation markets. Expressed as a percentage of total contract revenues, SG&A expenses increased slightly to 10.1% for the second quarter of 1998 from 9.9% in the second quarter of 1997. SG&A expenses increased to $24.0 million for the first six months of 1998 from $20.9 million for the same period in 1997. Expressed as a percentage of total contract revenues, SG&A expenses decreased to 10.1% for the first half of 1998 from 10.5% for the same period in 1997. The 1998 increase in absolute dollars is attributable to the reasons cited above. Other Income Other income for the first six months of 1998 included $0.2 million of income from a 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 six months of 1998 and 48% for the comparable period in 1997. The slightly lower 1998 provision rate primarily reflects management's expectations of lower payments of foreign taxes and a higher level of income before taxes for the full year of 1998. New Accounting Standard In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). As suggested by its title, this statement establishes accounting and disclosure requirements for derivative instruments and hedging activities. The Company is required to adopt this new standard in the third quarter of 1999. Based on management's assessment, the adoption of SFAS 133 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 reached a record high of $466 million as of June 30, 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"), also reached a record high of $725 million at June 30, 1998, as compared to $649 million as of December 31, 1997. FORM 10-Q PART I PAGE 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS CONTRACT BACKLOG (Cont.) During the second quarter of 1998, the Company added significant funded and total backlog in the Energy and Transportation units, while the Buildings, Civil and Environmental units experienced reductions in funded and total backlog. The most significant second quarter backlog growth came from the Energy unit, which added two new long-term contracts to provide operations and maintenance services to major U.S. oil companies. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities was $4.5 million for the first six months of 1998, compared to $0.3 million for the same period in 1997. The 1998 cash usage resulted primarily from the timing of certain normal and recurring payments to subcontractors during the first quarter of 1998, following substantial cash collections from clients during the fourth quarter of 1997. Net cash used in investing activities was $3.7 million for the first six months of 1998, compared to $0.8 million for the first six months of 1997. These amounts solely comprise capital expenditures for both periods. The 1998 amount includes computer equipment purchases totaling $2.5 million as compared with $0.4 million in 1997. During the first half of 1997, the Company leased additional computer equipment valued at $0.8 million. The remaining 1998 increase is primarily attributable to updated computer equipment needed in connection with certain software upgrades. Net cash used in financing activities totaled $0.4 million for the first six months 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 increased marginally during the first six months of 1998 to $36.5 million at June 30, 1998, from $36.2 million at December 31, 1997. The current ratio was 1.46:1 at the end of the second quarter of 1998, compared to 1.41:1 at year-end 1997. FORM 10-Q PART I PAGE 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES (Cont.) 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 June 30, 1998, no borrowings were outstanding; letters of credit totaling $4.6 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 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. 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 new 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. FORM 10-Q PART II PAGE 11 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- (a) The Company's annual meeting of shareholders was held on April 23, 1998. (b) Each of management's nominees to the board of directors, as listed in the Company's proxy statement, was elected. There was no solicitation in opposition to management's nominees. (c) The first matter voted upon at the meeting was the election of the Company's directors to one-year terms or until their respective successors have been elected. The votes cast by holders of the Company's Common Stock and Series B Common Stock in approving the following directors were: Name of Director Votes for Votes withheld ---------------- --------- -------------- Robert N. Bontempo 17,813,846 1,203,887 Charles I. Homan 17,771,465 1,246,268 Thomas D. Larson 17,764,209 1,253,524 Richard L. Shaw 17,784,800 1,232,933 Konrad M. Weis 17,781,400 1,236,333 J. Robert White 17,824,812 1,192,921 The votes cast by holders of the Company's Common Stock in approving the following directors were: Name of Director Votes for Votes withheld ---------------- --------- -------------- William J. Copeland 5,713,492 563,281 Roy V. Gavert, Jr. 5,724,344 552,429 John E. Murray 5,723,644 553,129 The second and final matter voted upon at the meeting was the approval of amendments to the Company's 1995 Stock Incentive Plan, to increase the total number of shares of the Company's Common Stock which may be issued thereunder, and increase the maximum number of shares as to which stock options may be granted to any one employee during a calendar year. The votes cast by holders of the Company's Common Stock and Series B Common Stock in approving such amendments were 9,895,983 votes in favor, 6,823,525 votes against, and 1,014,533 abstentions. FORM 10-Q PART II PAGE 12 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (b) Reports on Form 8-K During the quarter ended June 30, 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. MICHAEL BAKER CORPORATION Dated: August 14, 1998 By:/s/ J. Robert White -------------------------- J. Robert White Executive Vice President, Chief Financial Officer and Treasurer