UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
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.)
Airside Business Park, 100 Airside Drive, Moon Township, 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 by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act.)
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act.)
Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 2005:
Common Stock 8,559,922 shares
EXPLANATORY NOTE
In this Form 10-Q/A, the terms "we," "us," or "our" refer to Michael Baker
Corporation and its subsidiaries.
In connection with preparing our second quarter 2005 condensed consolidated
financial statements, management identified errors in our accounting for income
taxes in our Energy segment's Nigerian operations. We also concluded that we had
not properly recorded an incurred but not reported ("IBNR") liability for
certain self-insured professional liability losses. Subsequently, we identified
additional errors related to underaccrued and underpaid international and state
income, payroll and other indirect taxes, our improper accounting for a project
claim settlement, and certain vehicle and equipment leases that should have been
accounted for as capital leases, and stated that all errors would be corrected
in our restated consolidated financial statements to be included in an amended
Form 10-Q for the first quarter of 2005, our Form 10-Q filings for the second
and third quarters of 2005, and our 2005 Form 10-K.
As discussed in Note 1 to the accompanying condensed consolidated financial
statements, we are filing this Amendment No. 1 on Form 10-Q/A to our Quarterly
Report on Form 10-Q for the quarterly period ending March 31, 2005, which was
originally filed with the Securities and Exchange Commission ("SEC") on May 10,
2005, to reflect the restatement of our condensed consolidated statements of
income for the three months ended March 31, 2005 and 2004; our condensed
consolidated balance sheets at March 31, 2005 and December 31, 2004 and our
condensed consolidated statements of cash flows for the three months ended March
31, 2005 and 2004; and the related notes.
Although this Form 10-Q/A contains the Original Form 10-Q in its entirety, it
amends and restates only Items 1, 2 and 4 of Part I and Exhibits 31.1, 31.2 and
32.1 referred to in Item 6 of Part II of the Original Form 10-Q. No other
information in the Original Form 10-Q is hereby amended.
Except for the amended information referred above, this Form 10-Q/A continues to
speak as of May 10, 2005 and we have not updated or modified the disclosures
herein for events that occurred at a later date. Forward-looking statements made
in the original filing have not been revised to reflect events, results or
developments that have become known to us since the date of the original filing
(other than the restatement) and should be read in their historical context.
Events occurring after the date of the Original Form 10-Q, and other disclosures
necessary to reflect subsequent events, will be addressed in our second and
third quarter 2005 Forms 10-Q and our 2005 Form 10-K, which are being filed
concurrently with this Form 10-Q/A; and/or in other reports filed with the SEC
subsequent to the date of the Original Form 10-Q.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In this Form 10-Q/A, the terms "we," "us," or "our" refer to Michael Baker
Corporation and its subsidiaries.
We have prepared the condensed consolidated financial statements which follow,
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 accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, we believe 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, except those described in
Note 1 resulting from the restatement. These condensed consolidated financial
statements should be read in conjunction with our Reports on Form 8-K dated
January 26, 2006 and June 1, 2006, as well as the consolidated financial
statements and notes thereto included in our concurrent filings on Forms 10-Q
for the second and third quarters of 2005 and our 2005 Annual Report on Form
10-K.
-2-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
-------------------------------
MARCH 31, 2005 March 31, 2004
(AS RESTATED - (As Restated -
SEE NOTE 1) See Note 1)
-------------- --------------
(In thousands, except
per share amounts)
Total contract revenues $144,195 $125,328
Cost of work performed 121,820 104,550
-------- --------
Gross profit 22,375 20,778
Selling, general and administrative expenses 15,520 16,231
-------- --------
Income from operations 6,855 4,547
Other income/(expense):
Interest income 45 5
Interest expense (367) (413)
Other, net 99 290
-------- --------
Income before income taxes 6,632 4,429
Provision for income taxes 3,777 2,594
-------- --------
NET INCOME $ 2,855 $ 1,835
Other comprehensive loss, net of tax -
Reclassification of accumulated unrealized gain on
sale of marketable securities included in net
income -- (109)
Foreign currency translation adjustments (34) (17)
-------- --------
COMPREHENSIVE INCOME $ 2,821 $ 1,709
======== ========
BASIC NET INCOME PER SHARE $ 0.33 $ 0.22
DILUTED NET INCOME PER SHARE $ 0.33 $ 0.22
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MAR. 31, 2005 Dec. 31, 2004
(AS RESTATED - (As Restated -
SEE NOTE 1) See Note 1)
-------------- --------------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,283 $ 15,471
Receivables, net 91,206 79,559
Unbilled revenues on contracts in progress 74,506 73,852
Prepaid expenses and other 8,261 11,893
-------- --------
Total current assets 185,256 180,775
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 18,837 19,013
OTHER ASSETS
Goodwill and other intangible assets, net 8,876 8,947
Other assets 6,856 6,278
-------- --------
Total other assets 15,732 15,225
-------- --------
TOTAL ASSETS $219,825 $215,013
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 52,639 $ 48,723
Accrued employee compensation 28,297 31,596
Accrued insurance 9,211 9,758
Other accrued expenses 26,894 25,413
Billings in excess of revenues on contracts in progress 9,615 9,704
Deferred tax liability 11,957 11,957
-------- --------
Total current liabilities 138,613 137,151
-------- --------
OTHER LIABILITIES
Other liabilities 3,060 3,081
Commitments and contingencies -- --
-------- --------
Total liabilities 141,673 140,232
-------- --------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,939,159 and 8,910,371 shares at 3/31/05 and 12/31/04, respectively 8,939 8,910
Additional paid-in-capital 41,233 40,730
Retained earnings 32,143 29,288
Accumulated other comprehensive loss (1,163) (1,129)
Unearned compensation expense (47) (65)
Less - 391,237 shares of Common Stock in treasury, at cost, at
3/31/05 and 12/31/04. (2,953) (2,953)
-------- --------
Total shareholders' investment 78,152 74,781
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $219,825 $215,013
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
-------------------------------
MARCH 31, 2005 March 31, 2004
(AS RESTATED - (As Restated -
SEE NOTE 1) See Note 1)
-------------- --------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,855 $ 1,835
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Depreciation and amortization 1,251 1,213
Changes in assets and liabilities:
Increase in receivables and contracts in progress (12,400) (4,496)
(Decrease)/increase in accounts payable and accrued expenses (705) 11,305
Decrease in other net assets 3,449 2,384
-------- --------
Total adjustments (8,405) 10,406
-------- --------
Net cash (used in)/provided by operating activities (5,550) 12,241
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (715) (411)
-------- --------
Net cash used in investing activities (715) (411)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in cash overdrafts 2,086 (1,122)
Payments for capital lease obligations (150) (51)
Repayments of long-term debt -- (9,622)
Proceeds from the exercise of stock options 141 16
-------- --------
Net cash provided by/(used in) financing activities 2,077 (10,779)
-------- --------
Net (decrease)/increase in cash and cash equivalents (4,188) 1,051
Cash and cash equivalents, beginning of year 15,471 9,126
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,283 $ 10,177
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 30 $ 153
Income taxes paid $ -- $ 319
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Vehicles and equipment acquired through capital lease obligations $ 297 $ 20
Equipment acquired on credit $ 13 $ 44
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDED MARCH 31, 2005
(UNAUDITED)
NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS
We have restated the accompanying condensed consolidated financial statements to
correct the accounting errors described below. The following table presents the
impact of the restatement on our net income and diluted earnings per share for
the three-month periods ended March 31, 2005 and 2004 (amounts in thousands,
except earnings per share). For ease of comparison, the items in the below table
are presented in the order in which they will appear in our 2005 consolidated
financial statements.
Three months ended March 31
---------------------------------------------
2005 2004
--------------------- ---------------------
Amount Diluted EPS Amount Diluted EPS
------- ----------- ------- -----------
Net income as originally reported $ 3,456 $0.40 $ 3,098 $0.37
------- ----- ------- -----
Restatement items, pre-tax:
Penalties and interest on taxes (1) (435) (404)
Domestic sales and use taxes (2) (393) (335)
International payroll taxes (3) (276) (484)
International value added taxes (4) (145) (231)
Minority interest adjustments (5) (102) (138)
Sale of marketable securities (6) -- (145)
Unrecorded capital leases (7) (4) (2)
Revenue for reimbursable taxes (8) 232 323
Incentive compensation adjustment (9) 2,295 --
Project claim settlement (10) (499) --
------- -------
Subtotal pre-tax adjustments 673 (1,416)
------- -------
International income taxes (11) (155) (353)
Income tax effects on the above (12) (1,119) 506
------- ----- ------- -----
Net income as restated $ 2,855 $0.33 $ 1,835 $0.22
======= ===== ======= =====
Our accompanying condensed consolidated financial statements for the first
quarter of 2005 and 2004 are being restated to correct the following errors:
(1) The underaccrual of estimated penalties and interest related to the
underpayment of international income, payroll, and value added taxes and
domestic sales and use taxes by certain wholly-owned Energy segment
subsidiaries, as noted in items (2)-(4) and (11) below.
(2) The underaccrual of domestic sales and use taxes by one of our wholly-owned
Energy segment subsidiaries.
(3) The underaccrual of international payroll taxes by a wholly-owned Energy
subsidiary related to employees working on international projects.
(4) The underaccrual of international value added taxes by certain wholly-owned
Energy segment subsidiaries.
(5) Adjustments related to minority interest balances recorded by our
majority-owned Nigerian subsidiary. These adjustments are related to
valuation allowances recorded against prepaid income tax asset balances
that are referred to in item (11) below.
-6-
(6) Failure to record an adjustment related to the demutualization of an
insurance company (which had previously provided us with coverage), from
which shares of stock were received and subsequently sold. The shares were
not valued and recorded as an asset when received in 2000, unrealized gains
and losses were not recorded as other comprehensive income during the
holding period, and the entire amount of sale proceeds was improperly
recorded as a gain when sold in the first quarter of 2004.
(7) Unrecorded capital lease assets and obligations related to leased equipment
and vehicles. These adjustments also resulted in additional capital lease
assets and related capital lease obligations totaling $1.3 million being
recorded as of March 31, 2005.
(8) Adjustments to record additional revenue related to certain income, payroll
and value added taxes (as discussed in items (3) and (4) above and item
(11) below) which are reimbursable by a customer pursuant to terms of the
related contract.
(9) An adjustment to reduce our long-term incentive compensation plan expense
for the impact the restatement had on reducing net income. Because a key
element of our plan is our financial results, these incentive compensation
amounts were not subsequently paid.
(10) Failure to properly record a non-routine accounting adjustment related to a
self-insured project claim settlement.
(11) The underaccrual of international income taxes by certain wholly-owned
Energy segment subsidiaries. Additionally, we recorded valuation allowances
against the prepaid income tax asset balances recorded in prior periods by
a majority-owned Nigerian subsidiary, which valuation allowances should
have been previously recorded based on our inability to realize these
assets.
(12) The incremental effects of all foregoing restatement adjustments on the
provision for income taxes in our Consolidated Statements of Income, as
well as certain other adjustments that we determined to be necessary when
the restated income tax provisions were prepared, such as the balance
sheet effect on paid-in capital of the windfall tax benefits associated
with stock option exercises.
-7-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
---------------------------------------------------
March 31, 2005 March 31, 2004
------------------------ ------------------------
As Originally As As Originally As
Reported Restated Reported Restated
------------- -------- ------------- --------
Total contract revenues $143,963 $144,195 $125,005 $125,328
Cost of work performed 121,046 121,820 104,064 104,550
-------- -------- -------- --------
Gross profit 22,917 22,375 20,941 20,778
Selling, general and administrative
expenses 17,194 15,520 15,556 16,231
-------- -------- -------- --------
Income from operations 5,723 6,855 5,385 4,547
Other income/(expense):
Interest income 45 45 5 5
Interest expense (10) (367) (118) (413)
Other, net 201 99 573 290
-------- -------- -------- --------
Income before income taxes 5,959 6,632 5,845 4,429
Provision for income taxes 2,503 3,777 2,747 2,594
-------- -------- -------- --------
NET INCOME $ 3,456 $ 2,855 $ 3,098 $ 1,835
-------- -------- -------- --------
Other comprehensive loss, net of tax -
Reclassification of accumulated
unrealized gain on sale of
marketable securities included in
net income -- -- -- (109)
Foreign currency translation
adjustments (19) (34) (9) (17)
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 3,437 $ 2,821 $ 3,089 $ 1,709
-------- -------- -------- --------
BASIC NET INCOME PER SHARE $ 0.41 $ 0.33 $ 0.37 $ 0.22
DILUTED NET INCOME PER SHARE $ 0.40 $ 0.33 $ 0.37 $ 0.22
-------- -------- -------- --------
-8-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, 2005 December 31, 2004
------------------------ ------------------------
As Originally As As Originally As
Reported Restated Reported Restated
------------- -------- ------------- --------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,283 $ 11,283 $ 15,471 $ 15,471
Receivables, net 91,206 91,206 79,559 79,559
Unbilled revenues on contracts in progress 72,200 74,506 71,280 73,852
Prepaid expenses and other 9,322 8,261 12,941 11,893
-------- -------- -------- --------
Total current assets 184,011 185,256 179,251 180,775
-------- -------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 17,528 18,837 17,879 19,013
OTHER ASSETS
Goodwill and other intangible assets, net 8,876 8,876 8,947 8,947
Other assets 6,244 6,856 5,667 6,278
-------- -------- -------- --------
Total other assets 15,120 15,732 14,614 15,225
-------- -------- -------- --------
TOTAL ASSETS $216,659 $219,825 $211,744 $215,013
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 52,162 $ 52,639 $ 48,326 $ 48,723
Accrued employee compensation 26,251 28,297 27,278 31,596
Accrued insurance 8,633 9,211 9,180 9,758
Other accrued expenses 23,872 26,894 13,484 25,413
Billings in excess of revenues on contracts in progress 9,615 9,615 9,705 9,704
Deferred tax liability -- 11,957 11,145 11,957
-------- -------- -------- --------
Total current liabilities 120,533 138,613 119,118 137,151
-------- -------- -------- --------
OTHER LIABILITIES
Other liabilities 5,621 3,060 6,094 3,081
Commitments and contingencies -- -- -- --
-------- -------- -------- --------
Total liabilities 126,154 141,673 125,212 140,232
-------- -------- -------- --------
SHAREHOLDERS' INVESTMENT
Common stock 8,939 8,939 8,910 8,910
Additional paid-in-capital 40,503 41,233 40,000 40,730
Retained earnings 45,225 32,143 41,769 29,288
Unearned compensation (46) (47) (65) (65)
Accumulated other comprehensive loss (1,163) (1,163) (1,129) (1,129)
Less - Treasury stock (2,953) (2,953) (2,953) (2,953)
-------- -------- -------- --------
Total shareholders' investment 90,505 78,152 86,532 74,781
-------- -------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $216,659 $219,825 $211,744 $215,013
======== ======== ======== ========
-9-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
---------------------------------------------------------
March 31, 2005 March 31, 2004
--------------------------- ---------------------------
(In thousands)
As Originally As Originally
Reported As Restated Reported As Restated
------------- ----------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,456 $ 2,855 $ 3,098 $ 1,835
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Depreciation and amortization 1,129 1,251 1,160 1,213
Changes in assets and liabilities:
Increase in receivables and contracts in
progress (12,667) (12,400) (4,172) (4,496)
(Decrease)/increase in accounts payable and
accrued expenses (1,045) (705) 9,976 11,305
Decrease in other net assets 3,440 3,449 2,172 2,384
-------- -------- -------- --------
Total adjustments (9,143) (8,405) 9,136 10,406
-------- -------- -------- --------
Net cash (used in)/provided by operating
activities (5,687) (5,550) 12,234 12,241
-------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (728) (715) (455) (411)
-------- -------- -------- --------
Net cash used in investing activities (728) (715) (455) (411)
-------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase/(decrease) in book overdrafts 2,086 2,086 (1,122) (1,122)
Repayments of long-term debt -- -- (9,622) (9,622)
Payments for capital lease obligations -- (150) -- (51)
Proceeds from the exercise of stock options 141 141 16 16
-------- -------- -------- --------
Net cash provided by/(used in) financing
activities 2,227 2,077 (10,728) (10,779)
-------- -------- -------- --------
Net (decrease)/increase in cash and cash
equivalents (4,188) (4,188) 1,051 1,051
Cash and cash equivalents, beginning of year 15,471 15,471 9,126 9,126
-------- -------- -------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,283 $ 11,283 $ 10,177 $ 10,177
======== ======== ======== ========
-10-
These restatement adjustments had the following effects on our opening balances
within shareholders' investment as of January 1, 2004:
As Previously
Reported Adjustments As Restated
------------- ----------- -----------
Additional paid-in capital $38,298 $ 236 $38,534
Retained earnings $29,477 $(8,583) $20,894
Accumulated other comprehensive loss $ (912) $ 109 $ (803)
Total shareholders' investment $72,581 $(8,238) $64,343
NOTE 2 - EARNINGS PER SHARE
The following table summarizes our weighted average shares outstanding for the
quarters ended March 31, 2005 and 2004. The additional shares included in
diluted shares outstanding are entirely attributable to stock options.
2005 2004
--------- ---------
Weighted average shares outstanding
Basic 8,524,149 8,320,417
Diluted 8,726,788 8,444,460
As of March 31, 2005, we did not have stock options which were not included in
the computations of diluted shares outstanding because the option exercise
prices were less than the average market prices of our common shares. In
comparison, we had 194,096 stock options outstanding as of March 31, 2004, which
were not included in the computation of diluted shares outstanding for the
three-month period then ended because the option exercise prices were greater
than the average market prices of the common shares.
NOTE 3 - BUSINESS SEGMENT INFORMATION
Our business segments reflect how management makes resource decisions and
assesses its performance. Our Non-Core segment is considered to be fully wound
down. Accordingly, we reclassified the 2004 activity (in the table which
follows) to Corporate/Insurance expense to reflect this change. Effective
January 1, 2005, we have the following two reportable segments:
- - Our Engineering segment provides a variety of design and related consulting
services. Such services include program management, design-build,
construction management, consulting, planning, surveying, mapping,
geographic information systems, architectural and interior design,
construction inspection, constructability reviews, site assessment and
restoration, strategic regulatory analysis, regulatory compliance, and
advanced management systems.
- - Our Energy segment provides a full range of services for operating energy
production facilities worldwide. These services range from complete
outsourcing solutions to specific services such as training, personnel
recruitment, pre-operations engineering, maintenance management systems,
field operations and maintenance, procurement, and supply chain management.
Many of these service offerings are enhanced by the utilization of this
segment's Managed Services operating model as a service delivery method.
Our Energy segment serves both major and smaller independent oil and gas
producing companies, but does not pursue exploration opportunities for our
own account or own any oil or natural gas reserves.
-11-
We evaluate the performance of our segments primarily based on operating income
before Corporate overhead allocations. Corporate overhead includes functional
unit costs related to finance, legal, human resources, information technology
and communications, and is allocated between our Engineering and Energy segments
based on a three-part formula comprising revenues, assets and payroll.
The following table reflects the required disclosures for our reportable
segments (in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
For the three months ended
-------------------------------
RESTATED Restated
MARCH 31, 2005 March 31, 2004
-------------- --------------
ENGINEERING
Revenues $ 93.9 $ 74.9
Income from operations before Corporate overhead 11.3 7.1
Less: Corporate overhead (2.8) (2.7)
------ ------
Income from operations $ 8.5 $ 4.4
------ ------
ENERGY
Revenues $ 50.3 $ 50.4
Income from operations before Corporate overhead -- 1.6
Less: Corporate overhead (1.1) (1.2)
------ ------
(Loss)/income from operations (1.1) 0.4
------ ------
TOTAL REPORTABLE SEGMENTS
Revenues 144.2 125.3
Income from operations before Corporate overhead 11.3 8.7
Less: Corporate overhead (3.9) (3.9)
------ ------
Income from operations 7.4 4.8
------ ------
Other Corporate/Insurance expense (0.5) (0.3)
------ ------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 6.9 $ 4.5
====== ======
RESTATED Restated
MARCH 31, 2005 Dec. 31, 2004
-------------- -------------
Segment assets:
Engineering $123.8 $113.7
Energy 81.6 71.8
------ ------
Subtotal - segments 205.4 185.5
Corporate/Insurance 14.4 29.5
------ ------
Total $219.8 $215.0
====== ======
-12-
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
We have an unsecured credit agreement ("the Agreement") with a consortium of
financial institutions. The Agreement provides for a commitment of $60 million
through September 17, 2008. 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 March 31, 2005, no borrowings were
outstanding under the Agreement; however, outstanding letters of credit totaled
$7.1 million as of this date.
NOTE 5 - CONTINGENCIES
We currently believe that amounts recorded for certain tax exposures identified
through our restatement process may ultimately either be recoverable from
clients or may otherwise be reduced. Actual payments could differ from amounts
estimated due to the assessment of certain indirect tax obligations by tax
authorities to our clients in situations where we had the obligation to charge
the client for these taxes, collect the tax and remit it to the tax authorities,
or our successful negotiation of tax penalties and interest at less than full
statutory rates in situations where such penalty and interest obligations have
been estimated and accrued at full statutory rates based on the best information
currently available. Based on information currently available, these exposures
have been determined to reflect probable liabilities. However, depending on the
outcome of future negotiations and discussions with clients and tax authorities,
subsequent conclusions may be reached which indicate that portions of these
additional tax exposures may not require payment and therefore changes in our
estimates could be necessary in future periods. This could result in favorable
effects on our income statements in future periods.
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. We require our insurers to meet
certain minimum financial ratings at the time the coverages are placed; however,
insurance recoveries remain subject to the risk that the insurer will be
financially able to pay the claims as they arise. We are insured with respect to
our workers' compensation and general liability exposures subject to deductibles
or self-insured retentions. Loss provisions for these exposures are recorded
based upon our estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
We are self-insured for our 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.
Our professional liability insurance coverage had been placed on a claims-made
basis with Reliance Insurance Group ("Reliance") for the period July 1, 1994
through June 30, 1999. In 2001, the Pennsylvania Insurance Commissioner placed
Reliance into liquidation. We remain uncertain at this time what effect this
action will have on any claim we or our subsidiaries may have for insurance
coverage under policies issued by Reliance with respect to past years. A
wholly-owned subsidiary of ours was subject to one substantial claim which fell
within the Reliance coverage period. This claim was settled in the amount of
$2.5 million and payment was made by us in 2003. Due to the liquidation of
Reliance, we are currently uncertain what amounts paid to settle this claim will
be recoverable under the insurance policy with Reliance. We are pursuing a claim
in the Reliance liquidation and believe that some recovery will result from the
liquidation, but the amount of such recovery cannot currently be estimated. We
had no related receivables recorded from Reliance as of March 31, 2005.
-13-
In July 2001, we announced that we had become aware that certain activities
related to the operations of a 53% owned Nigerian subsidiary acquired in 1993
were the subject of an inquiry by the U.S. Department of Justice. There has been
no activity in this matter since 2002. At this time, we do not expect that any
remaining costs associated with this matter will have a material impact on our
consolidated financial statements.
We have been named as a defendant or co-defendant in other legal proceedings
wherein substantial damages are claimed. Such proceedings are not uncommon to
our business. After consultations with counsel, management believes that we have
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these proceedings, and that their ultimate resolutions will not
have a material impact on our consolidated financial position or annual results
of operations.
At March 31, 2005, we had certain guarantees and indemnifications outstanding
which could result in future payments to third parties. These guarantees
generally result from the conduct of our business in the normal course. Our
outstanding guarantees were as follows at March 31, 2005:
Maximum Related liability
undiscounted balance recorded
future payments at 3/31/05
--------------- -----------------
(Dollars in millions)
Standby letters of credit:
Insurance related $ 6.8 $6.8
Other 0.3 --
Performance and payment bonds 0.1 --
Sale of certain construction assets Unlimited --
Our banks issue standby letters of credit ("LOCs") on our behalf under the
Agreement discussed in Note 4. As of March 31, 2005, most of these LOCs had been
issued to insurance companies to serve as collateral for payments the insurers
are required to make under our self-insurance programs. These LOCs may be drawn
upon in the event that we do not reimburse the insurance companies for claims
payments made on our behalf. Such LOCs renew automatically on an annual basis
unless either the LOCs are returned to the bank by the beneficiary or our banks
elect not to renew them.
The liability associated with the insurance-related letters of credit reflects
the claims payments for which we expect to reimburse the insurance company
(subsequent to their payments of these claims) in order to avoid the insurance
company's need to draw on the letter of credit. This liability is included as
accrued insurance in our Condensed Consolidated Balance Sheet.
Bonds are provided on behalf of us by Travelers Casualty and Surety Company of
America ("Travelers"). The beneficiaries under these performance and payment
bonds may request payment from Travelers in the event that we do not perform
under the project or if subcontractors are not paid. We do not currently expect
any amounts to be paid by Travelers under our bonds outstanding at March 31,
2005.
-14-
During 2000, we sold certain assets associated with our former heavy & highway
construction business to A&L, Inc. This sale agreement provided indemnifications
to the buyer for breaches of certain obligations by us. There was no dollar
limit on these indemnifications, and the terms of the indemnifications vary but
will ultimately be governed by the applicable statutes of limitations. In
October 2003, A&L filed a lawsuit against us and one of our subsidiaries
alleging misrepresentation and breach of warranty in connection with the asset
sale. We believe that A&L's claims are without merit and are vigorously
contesting this lawsuit.
NOTE 6 - STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure," which amended SFAS 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for companies that voluntarily change to the fair value based method
of accounting for stock-based employee compensation. Under the prospective
method, we began expensing the fair value of all stock options granted, modified
or settled effective January 1, 2003. There were no stock options granted during
the first quarter of 2005.
Prior to January 1, 2003, we utilized the intrinsic value method of accounting
for stock-based compensation, as originally promulgated by Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and as
permitted under SFAS 123. Accordingly, no compensation cost was recognized for
stock options granted prior to January 1, 2003. If compensation costs for our
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, our pro forma net income and net income per share amounts would have
been as follows:
For the three months ended
-------------------------------
RESTATED Restated
MARCH 31, 2005 March 31, 2004
-------------- --------------
(In thousands)
Net income, as reported $2,855 $1,835
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 53 4
Deduct: Total stock-based employee compensation expense
determined under fair value method, net of related
tax effects (66) (45)
------ ------
Pro forma net income $2,842 $1,794
====== ======
For the three months ended
-------------------------------
RESTATED Restated
MARCH 31, 2005 March 31, 2004
-------------- --------------
Reported earnings per share:
Basic $0.33 $0.22
Diluted 0.33 0.22
Pro forma earnings per share:
Basic 0.33 0.22
Diluted $0.33 $0.21
-15-
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
MARCH 31, 2005 Dec. 31, 2004
-------------- -------------
Goodwill:
Engineering $1,006 $1,006
Energy 7,465 7,465
------ ------
Total goodwill 8,471 8,471
------ ------
Other intangible assets, net of accumulated
amortization of $1,595 and $1,524, respectively 405 476
------ ------
Goodwill and other intangible assets, net $8,876 $8,947
====== ======
Under SFAS 142, our goodwill balance is not being amortized and goodwill
impairment tests are being performed at least annually. We completed our most
recent annual impairment review during the second quarter of 2004, and no
impairment charge was required.
Our other intangible assets balance solely comprises a non-compete agreement
from our 1998 purchase of Steen Production Services, Inc. Amortization
expense on the other intangible assets balance is currently estimated to be
$286,000 for the year ending December 31, 2005 with the remaining balance of
$190,000 being amortized in 2006.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS 143, "Accounting
for Asset Retirement Obligations," refers to a legal obligation to perform an
asset retirement activity in which the timing and (or) method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the fair value of the liability can be reasonably estimated. This
statement is effective for the year ending December 31, 2005. We will adopt this
statement as of December 31, 2005 and do not expect any impact on our financial
statements.
In March 2005, the Securities and Exchange Commission ("SEC") released Staff
Accounting Bulletin No. 107 ("SAB 107") which expresses the views of the staff
regarding the interaction between SFAS 123R, "Share-Based Payment," and certain
SEC rules and regulations, and provides the staff's views regarding the
valuation of share-based payment arrangements for public companies. We are
currently evaluating the views expressed in SAB 107 and do not expect there will
be any material impact on our financial statements.
In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123 and
supersedes APB 25, "Accounting for Stock Issued to Employees." The SEC
subsequently amended the effective date of SFAS 123R to be effective for the
first interim period after December 31, 2005 for calendar year companies. SFAS
123R requires that the expense resulting from all share-based payment
transactions be recognized in the financial statements. This statement applies
to all awards granted after the required effective date, and shall not apply to
awards granted in periods before the required effective date, except if prior
awards are modified, repurchased or cancelled after the effective date.
Effective January 1, 2006, we will adopt the provisions of SFAS 123R and do not
expect there will be any material impact on our financial statements.
-16-
In December 2004, the FASB issued SFAS 153 "Exchanges of Nonmonetary Assets-an
Amendment of APB No. 29." APB 29, "Accounting for Nonmonetary Transactions," is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of assets exchanged. The guidance in APB 29, however,
included certain exceptions to that principle. SFAS 153 amends APB 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The provisions of this statement are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We do not expect the provision of this statement will have
any impact on our financial statements.
In December 2004, the FASB issued Staff Position No. ("FSP") 109-1, "Application
of FASB Statement 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," and 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." FSP 109-1
provides guidance on the application of SFAS 109, "Accounting for Income Taxes,"
to the provision within the American Jobs Creation Act of 2004 ("the Act") that
provides a tax deduction on qualified production activities. FSP 109-2 provides
for a special one-time tax benefit on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are met. We are currently
evaluating both provisions of the Act, and the related FASB guidance, to
determine their potential impact on our future financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT
As discussed more fully in the Explanatory Note of this Form 10-Q/A and in Note
1 to the condensed consolidated financial statements in Item 1, Part I, we have
restated our condensed consolidated financial statements in this Form 10-Q/A as
a result of certain accounting errors that were determined subsequent to the
issuance of our condensed consolidated financial statements for the quarter
ended March 31, 2005. All amounts and commentary in this Management's Discussion
and Analysis of Financial Condition and Results of Operations section give
effect to the restatement.
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We provide engineering and energy expertise for public and private sector
clients worldwide. Our primary services include engineering design for the
transportation and civil infrastructure markets, operation and maintenance of
oil and gas production facilities, architectural and environmental services, and
construction management services for buildings and transportation projects. We
view our short and long-term liquidity as being dependent upon our results of
operations, changes in working capital and our borrowing capacity.
BUSINESS ENVIRONMENT
Our operations are affected by appropriations of public funds for infrastructure
and other government-funded projects, capital spending levels in the private
sector, and the demand for our services in the engineering and energy markets.
We could also be affected by additional external factors such as price
fluctuations and capital expenditures in the energy industry.
-17-
The Federal government's TEA-21 legislation has made significant transportation
infrastructure funding available to the various state agencies since its
approval in 1998. Since the expiration of TEA-21 on September 30, 2003, the U.S.
Congress and President Bush have signed several extensions of the program at
current funding levels. The most recent extension, which occurred on September
30, 2004, renewed the same previously extended funding levels through the end of
May 2005. During the current extension period, the House of Representatives has
approved a five-year, $285 billion reauthorization measure, and the Senate is
currently considering its version of the bill. Although further delays in the
reauthorization of TEA-21 could impact our transportation design business
activity for 2005 and beyond, we are seeing funding of selected new
transportation projects in certain states. From 2002 through 2004, we have
observed increased Federal spending activity on Departments of Defense and
Homeland Security activities, including the Federal Emergency Management Agency
("FEMA"). To mitigate the effect of the state transportation budget constraints
on our business, management has focused more marketing and sales activity on
these agencies of the Federal government. Additional government spending in
these areas, or on transportation infrastructure, could result in profitability
and liquidity improvements for us. Significant contractions in any of these
areas could unfavorably impact our profitability and liquidity. In March 2004,
we announced that we had been awarded a five-year contract with FEMA for up to
$750 million to serve as the Program Manager to develop, plan, manage,
implement, and monitor the Multi-Hazard Flood Map Modernization Program for
flood hazard mitigation across the United States and its territories.
Approximately $644 million of this contract value was included in the Company's
backlog as of March 31, 2005. In addition, during 2004, we were selected for
several indefinite delivery/indefinite quantity task order contracts by the U.S.
Army Corps of Engineers, U.S. Air Force and the U.S. National Guard. During
2004, we were also selected for several contracts with the Mineral Management
Service, agencies within the U.S. Departments of Transportation and Homeland
Security (which includes FEMA, US-VISIT and the U.S. Coast Guard), the
Department of Energy, and the Federal Bureau of Investigation. In the first
quarter of 2005, we were selected for a five-year indefinite delivery/indefinite
quantity contract with a potential maximum value of $30 million by the U.S. Army
Corp of Engineers, Transatlantic Programs Center.
In 2003, our Energy business refocused its offshore Managed Services offering to
include onshore U.S. oil and gas producers, as demonstrated by two new four-year
contracts totaling $144 million received during 2003 from Huber Energy. During
the first quarter of 2005, we received an additional $1.0 million per year
onshore Managed Services contract in the Powder River Basin of Wyoming from
Storm Cat Energy, to operate and maintain its coal bed methane production
facilities, which are adjacent to the Huber properties. With regard to offshore
Managed Services, during the third quarter of 2004, we executed a long-term,
multi-million dollar Managed Services contract with Anglo-Suisse Offshore
Partners, LLC ("ASOP") to operate, maintain and optimize the performance of
ASOP's offshore oil and gas producing properties in the Gulf of Mexico. We have
also increased our penetration into the deepwater Gulf of Mexico and
international markets, where oil and gas producers are currently investing
significant amounts of capital for new projects.
RESULTS OF OPERATIONS
The following table reflects a summary of our operating results (excluding
intercompany transactions) for ongoing operations for the periods ended March
31, 2005 and 2004 (dollars in millions). Our Non-Core segment is considered to
be fully wound down. Accordingly, we reclassified the 2004 activity (in the
table which follows) to Corporate/Insurance expense to reflect this change. We
evaluate the performance of our segments primarily based on income from
operations before Corporate overhead allocations.
-18-
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
For the three months ended
-------------------------------
RESTATED Restated
MARCH 31, 2005 March 31, 2004
-------------- --------------
ENGINEERING
Revenues $ 93.9 $ 74.9
Income from operations before Corporate overhead 11.3 7.1
Percentage of Engineering revenues 12.0% 9.5%
Less: Corporate overhead (2.8) (2.7)
Percentage of Engineering revenues (3.0)% (3.6)%
------ ------
Income from operations 8.5 4.4
Percentage of Engineering revenues 9.1% 5.9%
------ ------
ENERGY
Revenues 50.3 50.4
Income from operations before Corporate overhead -- 1.6
Percentage of Energy revenues --% 3.2%
Less: Corporate overhead (1.1) (1.2)
Percentage of Energy revenues (2.2)% (2.4)%
------ ------
(Loss)/income from operations $ (1.1) $ 0.4
Percentage of Energy revenues (2.2)% 0.8%
------ ------
TOTAL REPORTABLE SEGMENTS
Revenues $144.2 $125.3
Income from operations before Corporate overhead 11.3 8.7
Percentage of total reportable segment revenues 7.8% 6.9%
Less: Corporate overhead (3.9) (3.9)
Percentage of total reportable segment revenues (2.7)% (3.1)%
------ ------
Income from operations 7.4 4.8
Percentage of total reportable segment revenues 5.1% 3.8%
------ ------
Other Corporate/Insurance expense (0.5) (0.3)
------ ------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 6.9 $ 4.5
Percentage of total Company revenues 4.8% 3.6%
====== ======
TOTAL CONTRACT REVENUES
Total contract revenues increased 15% in the first quarter of 2005 relative to
the first quarter of 2004. Engineering revenues for the first quarter of 2005
increased 25% from the first quarter of 2004. Engineering's revenues were
positively impacted by the previously mentioned map modernization program
management project with FEMA, which commenced near the end of the first quarter
of 2004. In addition, as a result of achieving certain performance levels on
this FEMA project during the third quarter of 2004, the Engineering
-19-
segment received notification of an incentive award payment and recognized
revenue totaling $2.2 million during the first quarter of 2005. In the Energy
segment, revenues for the first quarter of 2005 decreased slightly from the
first quarter of 2004. Revenue increases primarily associated with the ASOP
Managed Services contract were offset by lower revenues on certain contracts in
Energy's Applied Technology business to assist in implementation of computerized
maintenance management systems. The lower first quarter 2005 revenues associated
with these contracts were due to delays in the commencement of work on certain
projects and the cancellation of one contract.
GROSS PROFIT
Gross profit expressed as a percentage of revenues decreased to 15.5% for the
first quarter of 2005 from 16.6% in the first quarter of 2004. The Engineering
segment's gross profit percentage remained unchanged at 20.5% for the first
quarter of 2005 and 2004. The Energy segment's gross profit percentage decreased
to 7.3% in the first quarter of 2005 from 11.2% in the first quarter of 2004.
This decrease in gross profit as a percentage of revenues is the direct result
of the aforementioned delays in or cancellation of contracts in Energy's Applied
Technology business. Our cost structure related to our computerized maintenance
management systems contracts business was reduced through a headcount reduction
in the second quarter of 2005, and will continue to be closely monitored by
management.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses, including Corporate
overhead, expressed as a percentage of total contract revenues decreased to
10.8% in the first quarter of 2005 from 13.0% in the first quarter of 2004. This
overall decrease in SG&A expenses expressed as a percentage of revenues reflects
comparable Corporate overhead costs in both quarters in combination with a 15%
increase in revenues for the first quarter of 2005 and, to a larger extent, a
reduction in incentive compensation expense for the first quarter of 2005. The
unchanged Corporate overhead costs reflect a decrease in external costs incurred
in connection with our compliance with Section 404 of the Sarbanes-Oxley Act of
2002 ("SOX"), as partially offset by an increase in compensation costs. In the
Engineering segment, SG&A expenses expressed as a percentage of revenues
decreased to 11.4% in the first quarter of 2005 from 14.6% in the first quarter
of 2004. In addition to the unchanged Corporate overhead costs and reduced
incentive compensation expense, the significant increase in Engineering's
revenues contributed to this percentage improvement. In the Energy segment, SG&A
expenses expressed as a percentage of revenues decreased to 9.5% in the first
quarter of 2005 from 10.4% in the first quarter of 2004. This decrease is also
associated with slightly lower allocated corporate overhead and reduced
incentive compensation expense coupled with a slight decrease in revenue in the
first quarter of 2005.
OTHER INCOME
Interest income was negligible for both the first quarter of 2005 and 2004 and
interest expense was $0.4 million for both the first quarter of 2005 and 2004.
Interest expense consists primarily of accruals related to the underpayment of
income, payroll, value added, and sales and use taxes in our Energy segment. In
addition, during the first quarter of 2005, we had minimal net investments as
opposed to minimal net borrowings for the first quarter of 2004, which resulted
in $0.1 million of interest expense in the first quarter of 2004. Other income
for the first quarter of 2005 primarily related to equity earnings from two
unconsolidated minority-owned ventures and minority interest related to a
consolidated subsidiary, as partially offset by the write-off of an investment.
Other income for the first quarter of 2004 primarily resulted from the sale of
an investment that resulted in a gain of $0.2 million.
-20-
INCOME TAXES
We had a provision for income taxes of 57% for the first quarter of 2005, which
reflects our forecasted effective tax rate for the year ending December 31,
2005. For the first quarter of 2004, we had a provision for income taxes of 59%.
The variance between the United States ("U.S.") federal statutory rate and the
effective rate for these periods is due primarily to taxes on foreign income
which we are not able to offset with U.S. foreign tax credits. Our effective
rate is also negatively impacted by state income taxes, permanent items that are
not deductible for U.S. tax purposes and Nigerian income taxes that are levied
on a deemed income basis.
CONTRACT BACKLOG
MARCH 31, 2005 Dec. 31, 2004
-------------- -------------
(In millions)
Engineering $1,164.1 $1,115.2
Energy 256.5 284.3
-------- --------
Total $1,420.6 $1,399.5
======== ========
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of our contracts with the Federal
government and other clients may be terminated at will, or option years may not
be exercised; therefore, no assurance can be given that all backlog will be
realized.
A significant portion of our backlog relates to a $750 million contract in the
Engineering segment to assist FEMA in conducting a large-scale overhaul of the
nation's flood hazard maps, which commenced late in the first quarter of 2004.
This contract includes data collection and analysis, map production, product
delivery, and effective program management; and seeks to produce digital flood
hazard data, provide access to flood hazard data and maps via the Internet, and
implement a nationwide state-of-the-art infrastructure that enables all-hazard
mapping. For Year 1 program objectives, FEMA awarded us Core Task Order 001 with
a total cost-plus-award fee value of $107 million and a performance period of
March 11, 2004 to April 1, 2005. We have submitted both: (1) a Core Task Order
001 modification to provide additional funding and extend the performance period
to September 30, 2005 and (2) our CPAF proposal for a new Core Task Order for
Year 2 program objectives (Core Task Order 2.) Pending definitization, FEMA has
authorized us to incur pre-contract costs to continue performance on Core Task
Order 001 and begin work on Core Task Order 2 during the period of April 1, 2005
to May 31, 2005. Due to the task order structure of the contract, realization of
the timing and amount of the original contract value of $750 million remains
difficult to predict. Among the more significant new work added in the
Engineering segment, during the first quarter of 2005, were two new contracts to
provide transportation related engineering services totaling approximately $57
million.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $5.6 million for the first quarter of
2005, as compared to net cash provided by operating activities of $12.2 million
for the same period in 2004. The first quarter 2005 increase in cash used in
operating activities resulted from increases in our Engineering and Energy
receivable balances due to slower customer payments. Subsequently, in April
2005, we experienced an increase in the amount of monthly cash collected.
Net cash used in investing activities was $0.7 million and $0.4 million for the
first quarters of 2005 and 2004, respectively. These amounts reflect only
capital expenditures for both periods. The 2005 and 2004 amounts primarily
relate to computer software and equipment purchases totaling $0.5 and $0.3
million, respectively. During the first quarter of 2005 and 2004, we procured
additional computer software and equipment under the
-21-
terms of operating leases. We utilize operating leases to acquire assets used in
our daily business activities. These assets include office space, computer and
related equipment, and motor vehicles.
Net cash provided by financing activities was $2.1 million for the first quarter
of 2005 while net cash used in financing activities was $10.8 million for the
first quarter of 2004. The cash provided by financing activities for the first
quarter of 2005 relates to our being in a book overdraft position with our bank
in an amount of $2.1 million and proceeds from the exercise of stock options of
$0.1 million offset by payments for capital lease obligations of $0.1 million.
The cash usage in the first quarter of 2004 results almost entirely from the
repayment of long-term debt of $9.6 million and a reduction in our book
overdraft position of $1.1 million.
Working capital increased to $46.6 million at March 31, 2005 from $43.6 million
at December 31, 2004. Our current ratios were 1.34:1 at the end of the first
quarter of 2005 and 1.32:1 as of year-end 2004.
We have an unsecured credit agreement (the "Agreement") with a consortium of
financial institutions. The Agreement provides for a commitment of $60 million
through September 17, 2008. 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 March 31, 2005, only letters of credit
totaling $7.1 million were outstanding under the Agreement. The Agreement
requires us to meet minimum equity, leverage, interest and rent coverage, and
current ratio covenants. If any of these financial covenants or certain other
conditions of borrowing are not achieved, under certain circumstances, the banks
may demand the repayment of all borrowings outstanding and/or require deposits
to cover the outstanding letters of credit.
In connection with the restatement of our consolidated financial statements
through March 31, 2005, we did not timely file our quarterly reports on Form
10-Q for the second and third quarters of 2005 and the first quarter of 2006, or
our annual report on Form 10-K for the year ended December 31, 2005. As a
result, several covenant violations related to the timing of our financial
reporting occurred under the Agreement. The lenders have waived these violations
by allowing us to file our Forms 10-Q for the quarters ended June 30, 2005 and
September 30, 2005, our Form 10-K for the year ended December 31, 2005, and our
Form 10-Q for the quarter ended March 31, 2006, with the SEC by August 15, 2006.
We currently expect to complete all of these past due filings by August 15,
2006.
Furthermore, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, our lenders have also waived our
resulting covenant violation related to the timing of this filing by allowing us
to file such Form 10-Q by September 30, 2006. We currently expect to be able to
file our Form 10-Q for the second quarter of 2006 by September 30, 2006.
Beginning with our Form 10-Q filing for the third quarter of 2006, we currently
expect to complete our quarterly and annual SEC filings within the SEC's filing
deadlines.
We plan to utilize our borrowing capacity under the Agreement for short-term
working capital needs, to support strategic opportunities that management
identifies, and to make our past due tax payments. Our strategy is to better
position ourselves for growth in our Engineering and Energy segments through
selected opportunistic acquisitions that compliment our experience, skill and
geographic presence. We consider acquisitions and investments as components of
our growth strategy and intend to use both existing cash and the Agreement to
fund such endeavors. If we commit to funding future acquisitions, we may need to
adjust our financing strategies by seeking alternative debt instruments.
-22-
After giving effect to the foregoing, management believes that the combination
of cash generated from operations and our existing credit facility will be
sufficient to meet our operating and capital expenditure requirements for at
least the next year.
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section contains forward-looking statements concerning our future
operations and performance. Forward-looking statements are subject to market,
operating and economic risks and uncertainties that may cause our actual results
in future periods to be materially different from any future performance
suggested herein. Factors that may cause such differences include, among others:
increased competition, increased costs, changes in general market conditions,
changes in industry trends, changes in the regulatory environment, changes in
our relationships and/or contracts with FEMA, changes in anticipated levels of
government spending on infrastructure, including TEA-21, changes in loan
relationships or sources of financing, changes in management, changes in
information systems, and costs to comply with the requirements of the
Sarbanes-Oxley Act of 2002. Such forward-looking statements are made pursuant to
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, our primary interest rate risk relates to our variable-rate
investments, which totaled $9.1 million as of March 31, 2005. Assuming a 10%
decrease in interest rates on these variable-rate investments (i.e., a decrease
from the actual weighted average interest rate of 1.70% as of March 31, 2005, to
a weighted average interest rate of 1.53%), annual interest income would be
approximately $16,000 lower in 2005 based on the outstanding balance of
variable-rate investments as of March 31, 2005. Accordingly, we have no material
exposure to interest rate risk, nor do we have any interest rate swap or
exchange agreements.
We have several foreign subsidiaries that transact portions of their local
activities in currencies other than the U.S. Dollar. In assessing our exposure
to foreign currency exchange rate risk, we recognize that the majority of our
foreign subsidiaries' assets and liabilities reflect ordinary accounts
receivable and payable balances. These receivable and payable balances are
substantially settled in the same currencies as the functional currencies of the
related foreign subsidiaries, thereby not exposing us to material transaction
gains and losses. Assuming that foreign currency exchange rates could change
unfavorably by 10%, we would have no material exposure to foreign currency
exchange rate risk. We have no foreign currency exchange contracts.
Based on the nature of our business, we have no direct exposure to commodity
price risk.
ITEM 4. CONTROLS AND PROCEDURES
CONCLUSIONS REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with participation of
our management, including our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of our disclosure controls and procedures, as such
term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of March 31, 2005. This
evaluation considered our various procedures designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to
management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. At the time of the filing of our Quarterly Report
on Form 10-Q for the quarterly
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period ended March 31, 2005, our CEO and CFO concluded that our disclosure
controls and procedures were effective as of March 31, 2005. Subsequent to that
evaluation, our CEO and CFO concluded that, our disclosure controls and
procedures were not effective at a reasonable level of assurance, as of March
31, 2005, because of the material weaknesses described below. Notwithstanding
these material weaknesses, our management has concluded that the financial
statements included in this Form 10-Q/A fairly present in all material respects
our financial position, results of operations and cash flows for the periods
presented in conformity with generally accepted accounting principles in the
United States ("GAAP").
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of a company's annual or interim financial statements would not be
prevented or detected. The following material weaknesses were identified by
management as of March 31, 2005:
1. We did not maintain effective controls, including monitoring, over the
accounting for and disclosure of our income tax and other tax related
accounts. Specifically, we did not maintain a sufficient complement of
personnel within our tax accounting function with the appropriate level of
knowledge, experience and training in the application of GAAP related to
income and other taxes, resulting in us not maintaining effective controls
over the completeness, valuation, existence and presentation of our
deferred income tax assets and liabilities, including the related valuation
allowance; foreign income taxes payable, foreign payroll and value added
taxes payable; state sales taxes payable; prepaid tax accounts and the
related income tax provision and various tax expense accounts. This control
deficiency resulted in the restatement of our consolidated financial
statements for fiscal years 2001, 2002, 2003 and 2004, and our related
interim consolidated financial statements for each of the quarters of 2004
and the first quarter of fiscal year 2005. Additionally, this control
deficiency could result in a misstatement in the aforementioned accounts
that would result in a material misstatement to the annual or interim
consolidated financial statements that would not be prevented or detected.
Accordingly, we have determined that this control deficiency constitutes a
material weakness.
2. We did not maintain effective controls over the accounting for our contract
revenue and related unbilled revenue, other accrued expenses and cost of
work performed accounts. Specifically, we did not maintain effective
controls to ensure the completeness and accuracy of change orders related
to a specific contract. This control deficiency resulted in immaterial
misstatements to our consolidated financial statements for the fourth
quarter of fiscal year 2004, and the first quarter of fiscal year 2005.
Additionally, this control deficiency could result in a misstatement in the
aforementioned accounts that would result in a material misstatement to the
annual or interim consolidated financial statements that would not be
prevented or detected. Accordingly, we have determined that this control
deficiency constitutes a material weakness.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our "internal control over financial reporting" (as such
term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that
occurred during the quarter ended March 31, 2005, and that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PLAN FOR REMEDIATION
We believe the steps described below, some of which we have already taken as
noted herein, together with others that are ongoing or that we plan to take,
will remediate the material weaknesses discussed above:
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(1) We established a tax function with a qualified tax director supported by
internal and external resources (began in July 2005).
(2) We have supplemented our existing accounting and finance staff with
additional internal and external resources as appropriate. We will continue
to add financial personnel as necessary to provide adequate resources with
appropriate levels of experience and knowledge of GAAP (began in July
2005).
(3) We have enhanced our review and documentation of accounting estimates. This
includes but is not limited to estimates of realizability of tax assets and
potential loss contracts (commenced in October 2005).
In addition, we have implemented the following procedures to improve our
internal control over financial reporting:
(1) We have emphasized certain key controls in an effort to mitigate
significant risks and strengthen our control environment. In this regard,
we have elevated within the company the awareness and communication of
tax-related contingencies and financial reporting risks associated with
contract accounting and insurance reserves (began in June 2005).
(2) We have enhanced our monitoring of accounts by deploying account
reconciliation software that facilitates access and review of
reconciliations (deployment began in August 2005).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 5 to the accompanying financial statements.
ITEM 6. EXHIBITS
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
- ----------- -----------
31.1 Certification of the Chief Executive Officer pursuant to Rule
13a-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Rule
13a-14(a)
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
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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
/s/ William P. Mooney Dated: August 15, 2006
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William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: August 15, 2006
- -------------------------------------
Craig O. Stuver
Senior Vice President, Corporate
Controller and Treasurer (Chief
Accounting Officer)
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