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FORM 10-Q
UNITED STATES
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, 2001
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
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(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
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(Address of principal executive offices) (Zip Code)
(412) 269-6300
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 1, 2001:
---------------------
Common Stock 7,011,067 shares
Series B Common Stock 1,297,446 shares
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements which follow have been prepared
by Michael Baker Corporation ("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 on 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 Company. Forward looking statements are
subject to market, operating and economic risks and uncertainties that may cause
the Company's 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 the regulatory environment, changes in
anticipated levels of government spending on infrastructure, and changes in loan
relationships or sources of financing. Such forward looking statements are made
pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
--------------------------
JUNE 30, 2001 June 30, 2000
========================================================================================================
(In thousands)
Total contract revenues $100,237 $97,762
Cost of work performed 83,107 83,491
- --------------------------------------------------------------------------------------------------------
Gross profit 17,130 14,271
Selling, general and administrative expenses 11,443 10,389
- --------------------------------------------------------------------------------------------------------
Income from operations 5,687 3,882
Other income/(expense):
Interest income 190 51
Interest expense (238) (263)
Other, net (17) 1,056
- --------------------------------------------------------------------------------------------------------
Income before income taxes 5,622 4,726
Provision for income taxes 2,530 2,221
- --------------------------------------------------------------------------------------------------------
NET INCOME $ 3,092 $ 2,505
========================================================================================================
BASIC AND DILUTED NET INCOME PER SHARE $ 0.37 $ 0.31
========================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the six months ended
------------------------
JUNE 30, 2001 June 30, 2000
===================================================================================================
(In thousands)
Total contract revenues $192,860 $206,057
Cost of work performed 160,795 176,971
- ---------------------------------------------------------------------------------------------------
Gross profit 32,065 29,086
Selling, general and administrative expenses 21,964 21,316
- ---------------------------------------------------------------------------------------------------
Income from operations 10,101 7,770
Other income/(expense):
Interest income 449 71
Interest expense (412) (663)
Other, net 8 856
- ---------------------------------------------------------------------------------------------------
Income before income taxes 10,146 8,034
Provision for income taxes 4,566 3,776
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 5,580 $ 4,258
===================================================================================================
BASIC AND DILUTED NET INCOME PER SHARE $ 0.67 $ 0.52
===================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, 2001 Dec. 31, 2000
==================================================================================================================
CURRENT ASSETS (In thousands)
Cash and cash equivalents $ 7,568 $ 9,122
Short-term investments -- 8,999
Receivables 68,869 68,042
Cost of contracts in progress and estimated earnings, less billings 23,171 16,105
Litigation escrow 12,701 --
Prepaid expenses and other 6,831 7,335
- ------------------------------------------------------------------------------------------------------------------
Total current assets 119,140 109,603
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PROPERTY, PLANT AND EQUIPMENT, NET 10,000 10,058
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OTHER ASSETS
Goodwill and other intangible assets, net 10,299 10,846
Other assets 3,758 2,850
- ------------------------------------------------------------------------------------------------------------------
Total other assets 14,057 13,696
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TOTAL ASSETS $143,197 $133,357
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt $ 2,191 $ 2,244
Accounts payable 20,572 25,670
Accrued employee compensation 13,566 9,697
Accrued insurance 4,520 5,321
Accrued litigation reserve 11,418 11,334
Income taxes payable 8,040 4,443
Other accrued expenses 21,918 20,348
Excess of billings on contracts in progress over cost and estimated earnings 1,684 1,155
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 83,909 80,212
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OTHER LIABILITIES
Long-term debt 45 51
Other 2,836 2,765
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 86,790 83,028
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SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
7,312,666 and 7,265,149 shares at 6/30/01 and 12/31/00, respectively 7,313 7,265
Series B Common Stock, par value $1, authorized 6,000,000 shares, issued
1,298,836 and 1,304,927 shares at 6/30/01 and 12/31/00, respectively 1,299 1,305
Additional paid-in-capital 37,731 37,488
Retained earnings 12,239 6,659
Other comprehensive loss (122) (335)
Less 302,989 shares of Common Stock in treasury, at cost,
at 6/30/01 and 12/31/00 (2,053) (2,053)
- ------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 56,407 50,329
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $143,197 $133,357
==================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
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JUNE 30, 2001 June 30, 2000
=================================================================================================================
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,580 $ 4,258
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation and amortization 2,648 3,090
Gain on sale of BSSI -- (2,002)
Changes in assets and liabilities:
(Increase)/decrease in receivables and contracts in progress (7,892) 3,296
Increase/(decrease) in accounts payable and accrued expenses 3,293 (1,342)
Increase/(decrease) in advance billings 529 (9,575)
Increase in other net assets (106) (141)
- -----------------------------------------------------------------------------------------------------------------
Total adjustments (1,528) (6,674)
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) operating activities 4,052 (2,416)
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,124) (1,561)
Proceeds from the sale of short-term investments 8,999 --
Funding of litigation escrow (12,701) --
Proceeds from the sale of certain construction assets -- 748
Proceeds from the sale of BSSI -- 13,500
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities (5,826) 12,687
- -----------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (60) (10,110)
Proceeds from exercise of stock options 280 43
- -----------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities 220 (10,067)
- -----------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents (1,554) 204
Cash and cash equivalents, beginning of year 9,122 3,685
- -----------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,568 $ 3,889
=================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 42 $ 469
Income taxes paid $ 1,597 $ 436
=================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2001
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,301,363 and 8,191,159 shares outstanding for the three-month periods, and
8,289,389 and 8,189,974 for the six-month periods, ended June 30, 2001 and 2000,
respectively. Diluted net income per share computations are based upon weighted
averages of 8,415,696 and 8,212,623 shares outstanding for the three-month
periods, and 8,365,228 and 8,211,720 for the six month periods, ended June 30,
2001 and 2000, respectively. The additional shares included in diluted shares
outstanding are entirely attributable to stock options.
NOTE 2 - BUSINESS SEGMENT INFORMATION
The Company has the following three reportable segments:
o The Engineering segment provides a variety of services including
design-build, construction management, consulting, planning, program
management, surveying, mapping, geographic information systems,
architectural and interior design, construction inspection,
constructability reviews and software development capabilities.
o The Energy segment offers services that include training, personnel
recruitment, pre-operations engineering, field operations and
maintenance, mechanical equipment maintenance and logistics management.
o The Non-Core segment consists of the former Building and Transportation
construction divisions, which are currently in the process of being
wound down, and the former Baker Support Services, Inc. division, which
was sold effective June 1, 2000. All remaining construction activity
within this segment is expected to be finalized during 2001.
The following tables reflect the required disclosures for the Company's segments
(in millions):
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2001 June 30, 2000 JUNE 30, 2001 June 30, 2000
==================================================================================================
Total contract revenues:
Engineering $ 61.2 $56.0 $118.3 $113.6
Energy 39.0 28.8 74.1 54.4
Non-Core - 12.9 0.5 37.9
- --------------------------------------------------------------------------------------------------
Subtotal - segments 100.2 97.7 192.9 205.9
Corporate/Insurance - 0.1 - 0.2
- --------------------------------------------------------------------------------------------------
Total $100.2 $97.8 $192.9 $206.1
==================================================================================================
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For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2001 June 30, 2000 JUNE 30, 2001 June 30, 2000
========================================================================================================
Income/(loss) from operations
without Corporate expenses
allocated:
Engineering $ 5.4 $ 4.1 $ 9.0 $ 7.8
Energy 3.5 1.4 6.2 2.9
Non-Core 0.1 0.3 0.5 0.8
- --------------------------------------------------------------------------------------------------------
Subtotal - segments 9.0 5.8 15.7 11.5
Corporate/Insurance (3.3) (1.9) (5.6) (3.7)
- --------------------------------------------------------------------------------------------------------
Total $ 5.7 $ 3.9 $ 10.1 $ 7.8
========================================================================================================
JUNE 30, 2001 Dec. 31, 2000
========================================================================================================
Segment assets:
Engineering $ 69.0 $ 62.4
Energy 53.2 43.2
Non-Core 13.5 2.8
- --------------------------------------------------------------------------------------------------------
Subtotal - segments 135.7 108.4
Corporate/Insurance 7.5 25.0
- --------------------------------------------------------------------------------------------------------
Total $143.2 $133.4
========================================================================================================
A reclassification was made to the segment asset balances as of December 31,
2000 in order to conform to the current year presentation.
NOTE 3 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has a secured credit agreement ("the Agreement") with its bank which
provides for a commitment of $20 million through January 31, 2002. The
commitment includes the sum of the principal amount of revolving credit loans
outstanding and the aggregate face value of outstanding letters of credit. For
the period June 1, 2000 thru June 30, 2001, no borrowings were outstanding under
the Agreement; however; letters of credit totaling $2.6 million were outstanding
as of June 30, 2001.
The Agreement includes a provision that related borrowings shall be limited to
80% of the eligible receivables, as therein defined. The Agreement also provides
for the Company to borrow at the bank's prime interest rate or LIBOR plus 2.25%,
and requires the Company to meet certain cash flow, leverage, interest coverage
and tangible net worth requirements. Under the Agreement, the Company pays the
bank commitment fees of 3/8% per year based on the unused portion of the
commitment.
Other amounts totaling $2.2 million at June 30, 2001, and included in current
portion of long-term debt and long-term debt in the accompanying Consolidated
Balance Sheet, primarily reflect debt associated with the 1999 Steen
acquisition.
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NOTE 4 - CONTINGENCIES
The Company has reviewed the status of contingencies outstanding at June 30,
2001. Except as noted below, management 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, 2000.
The Company's professional liability errors and omissions insurance coverage had
been placed with Reliance Insurance Group ("Reliance") for the period July 1,
1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation. The Company is uncertain at
this time whether this action will adversely affect any claim the Company may
have for insurance coverage under policies issued by Reliance with respect to
past years. Currently, the Company is subject to one substantial claim which, if
decided adversely to the Company, would be within the scope of an insurance
policy issued by Reliance. Although the plaintiff in this case claims damages of
$10-11 million, the litigation is in progress and, at this time, it is uncertain
whether the Company will have any liability with respect to this claim and, if
so, whether any such liability will be funded by Reliance. Reliance continues to
fund the Company's litigation costs related to this matter.
NOTE 5 - NON-CORE OPERATIONS
On January 10, 2001, Baker Mellon Stuart Construction, Inc. ("BMSCI"), a
subsidiary of the Company, and Travelers Casualty and Surety Company of America,
BMSCI's surety, filed an appeal of the previously reported judgment by the
United States District Court for the Middle District of Florida (the "Court") in
favor of ADF. As a result of this appeal, the Company was required by the
appellate court to place $11.3 million into an escrow account (see Note 2 of the
Company's consolidated financial statements for the year ended December 31,
2000). This escrow amount reflects the $10.0 million principal judgment against
BMSCI and post-judgment interest expense of $1.3 million. The Company will
record both interest income (at a fluctuating market investment rate) and
interest expense (at a rate of 6.052%, as stipulated by the appellate court) on
the escrow amount until settlement.
On April 6, 2001, the Court entered a judgment on ADF's claim for attorney's
fees and costs in connection with the foregoing action. The Court awarded ADF
$1.1 million in attorney's fees and costs, but denied ADF's claim for an
additional $0.4 million in expenses. BMSCI, Travelers and ADF subsequently
appealed this judgment. As a result of this appeal, the Company was required by
the appellate court to place $1.2 million into an escrow account. This escrow
amount reflects the $1.1 million fee and cost judgment against BMSCI and
post-judgment interest expense of $0.1 million. As stated above, the Company
will also record both interest income and interest expense on this escrow amount
until settlement.
Pursuant to the terms of the preceding escrow arrangements, interest income on
the escrowed amounts up to pre-established limits will be retained in the escrow
accounts as security for attorney's fees incurred by ADF in pursuing the
appeals. These amounts will be paid to ADF in the event that they prevail and
are awarded such fees. Such escrowed interest amounts totaled $0.2 million at
June 30, 2001.
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During August 2001, the Company was notified that its appeal on the principal
judgment had been scheduled for oral argument in November 2001. Accordingly, the
Company reclassified its long-term asset and liability balances related to the
ADF judgments to current asset and liability accounts, as management now
believes that its appeals will be resolved within 12 months.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations completed after June 30, 2001 to be
accounted for under the purchase method. This standard also establishes specific
criteria for the recognition of intangible assets separate from goodwill in
conjunction with business combinations completed after June 30, 2001. The
Company has accounted for all past acquisitions under the purchase method, and
will account for all future business combinations in accordance with SFAS 141.
Under SFAS 142, goodwill amortization will no longer be recorded once the new
standard is adopted. The new rules also require an initial goodwill impairment
assessment in the year of adoption and annual impairment tests thereafter. The
Company will be required to adopt this statement effective January 1, 2002. Once
adopted, annual goodwill amortization expense of approximately $0.7 million will
cease, resulting in additional earnings per share of approximately $0.04 to
$0.05. The Company does not expect that any impairment charge will result from
the adoption of this statement.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following tables reflect a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended June 30, 2001 and 2000 (in millions):
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2001 June 30, 2000 JUNE 30, 2001 June 30, 2000
======================================================================================================
Total contract revenues:
Engineering $ 61.2 $56.0 $118.3 $113.6
Energy 39.0 28.8 74.1 54.4
Non-Core* - 12.9 0.5 37.9
- ------------------------------------------------------------------------------------------------------
Subtotal - segments 100.2 97.7 192.9 205.9
Corporate/Insurance - 0.1 - 0.2
- ------------------------------------------------------------------------------------------------------
Total $100.2 $97.8 $192.9 $206.1
======================================================================================================
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For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2001 June 30, 2000 JUNE 30, 2001 June 30, 2000
=====================================================================================================
Income/(loss) from operations
with Corporate expenses
allocated:
Engineering $ 4.1 $ 3.1 $ 6.3 $ 5.8
Energy 2.8 1.0 5.0 2.2
Non-Core* (1.0) 0.2 (0.7) 0.2
- -----------------------------------------------------------------------------------------------------
Subtotal - segments 5.9 4.3 10.6 8.2
Corporate/Insurance (0.2) (0.4) (0.5) (0.4)
- -----------------------------------------------------------------------------------------------------
Total $ 5.7 $ 3.9 $10.1 $ 7.8
=====================================================================================================
* Non-Core operations are defined as the construction operations that are being
wound down within the Buildings and Transportation units, and the Civil-BSSI
division, which was sold effective June 1, 2000.
TOTAL CONTRACT REVENUES
Total contract revenues from the Company's ongoing operations (consolidated
revenues less non-core) increased 18% in the second quarter of 2001 over the
second quarter of 2000. Engineering revenues increased 9% in the second quarter
of 2001 as a result of growth within the civil, transportation and architectural
markets. In the Energy segment, revenues increased 35% in the second quarter of
2001 as compared to the second quarter of 2000. This increase was driven by
OPCO(SM), Baker Energy's Operations Consolidation Model, which contributed 31%
and 26% of Baker Energy's total contract revenues for the second quarter of 2001
and 2000, respectively, and higher revenues associated with new work in Energy's
operations engineering business. The absence of revenue for the Company's
non-core operations during the second quarter of 2001 reflects the wind-down of
the former Buildings and Transportation construction divisions as well as the
sale of Baker Support Services, Inc. ("BSSI") effective June 1, 2000.
For the first six months of 2001, total contract revenues from the Company's
ongoing operations increased 15% over the corresponding period in 2000.
Engineering revenues increased 4% during the first half of 2001 due primarily to
the aforementioned second quarter growth, as partially offset by a decline in
Environmental revenue due to the wind-down of the Navy CLEAN program and delays
in client funding which slowed the initiation of certain projects in early 2001.
In the Energy segment, revenues increased 36% for the first six months of 2001
as compared to the first six months of 2000. This increase is again attributable
to OPCO, which contributed 31% and 22% of Baker Energy's total contract revenues
for the first six months of 2001 and 2000, respectively, and new work in
Energy's operations engineering business.
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GROSS PROFIT
For the Company's ongoing operations, gross profit expressed as a percentage of
revenues for the Company's ongoing operations increased to 17.0% in the second
quarter of 2001 from 15.3% in the second quarter of 2000. The Engineering
segment posted a gross profit percentage of 17.6% in the second quarter of 2001,
up from 14.7% in the comparable period of 2000, due primarily to profitability
associated with telecommunications projects which commenced during the third
quarter of 2000, and lower fringe benefit costs, higher project utilization
(billable hours as a percentage of total labor hours), and an overall
performance improvement on existing projects for 2001. The Energy segment's
gross profit percentage decreased to 16.7% in the second quarter of 2001 from
17.6% in the second quarter of 2000, primarily due to fluctuations in the
materials and services costs incurred in connection with the transition of
several OPCO contracts to phase II of the OPCO model during the second half of
2000. During phase I of a typical OPCO contract, only labor and logistics
services are provided by the Energy segment; phase II incrementally includes the
provision of turnkey operations and maintenance ("O&M") services. OPCO contracts
posted a gross profit percentage of 16% in the second quarter of 2001 as
compared to 24% in the comparable period of 2000. This lower OPCO profitability
was partially offset by improved profitability on operations engineering
projects within the Energy segment during the second quarter of 2001. Gross
profit for the Company's non-core operations was only $0.1 million for the
second quarter of 2001 versus $1.3 million for the comparable period of 2000.
The 2000 results for non-core operations included BSSI through its sale date of
June 1, 2000 and the two former construction divisions, while the related 2001
results reflected only the substantially completed operations of a few projects
still being wound down by the two construction divisions.
For the Company's ongoing operations, gross profit expressed as a percentage of
revenues increased to 16.4% for the first half of 2001 from 15.2% in the
comparable period of 2000. The Engineering segment's gross profit percentage
improved to 16.1% for the first six months of 2001 from 14.5% in the same period
of 2000. This increase in gross profit percentage was again the result of the
aforementioned telecommunications projects and improvements on other existing
projects, and lower fringe benefit costs and higher project utilization during
2001. The Energy segment's gross profit percentage remained unchanged at 17.4%
in the first half of 2001 and 2000. Over these same periods, Energy's OPCO-
related gross profit percentage was 20% for the first six months of 2001 as
compared to 25% for the comparable period of 2000, as offset by profitability
improvements on operations engineering projects. For the first six months of
2001, the Company's non-core operations posted gross profit of $0.5 million
versus $3.6 million for the comparable period of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the Company's ongoing operations, selling, general and administrative
expenses expressed as a percentage of total contract revenues decreased to 10.4%
in the second quarter of 2001 from 10.9% in the second quarter of 2000. In the
Engineering segment, selling, general and administrative expenses expressed as a
percentage of total revenues increased to 10.9% in the second quarter of 2001
from 9.2% in 2000. This percentage increase is attributable to the combination
of higher compensation-related expenses and higher corporate overhead
allocations to the Engineering (and Energy) segment(s) due to the wind-down of
the construction divisions.
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In the Energy segment, selling, general and administrative expenses expressed as
a percentage of total revenues decreased to 9.5% in the second quarter of 2001
from 14.0% in 2000. This decrease resulted from the addition of O&M services to
several OPCO contracts during the second half of 2000, which resulted in a 2001
revenue increase without a corresponding increase in overhead costs. For the
non-core operations, selling, general and administrative expenses decreased
slightly from $1.2 million in the second quarter of 2000 to $1.0 million in the
second quarter of 2001. The 2001 amount relates entirely to construction-related
legal spending in connection with the Company's ADF appeal and its claim against
HOK, both related to the Universal project. These 2001 legal costs were included
in Corporate overhead and allocated entirely to non-core operations.
For the first six months of 2001, selling, general and administrative expenses
for the Company's ongoing operations expressed as a percentage of related total
contract revenues increased only slightly to 10.8% in the first half of 2001
from 10.6% in the first half of 2000. In the Engineering segment, selling,
general and administrative expenses expressed as a percentage of total revenues
increased to 10.8% for the first six months of 2001 from 9.4% in the
corresponding period of 2000. In the Energy segment, selling, general and
administrative expenses expressed as a percentage of total revenues decreased to
10.7% in the first six months of 2001 from 13.3% in 2000. The reasons for these
segments' percentage variances are discussed in the preceding paragraph. For the
non-core operations, selling, general and administrative expenses decreased
significantly from $3.4 million in the first half of 2000 to $1.2 million in the
first half of 2001, due to the sale of BSSI and wind-down of the two former
construction divisions.
OTHER INCOME
Interest income was higher for the second quarter of 2001 as compared to the
second quarter of 2000 due primarily to the Company's investment of excess cash
with its bank and interest earned on the money placed in escrow for the appeal
of the ADF judgments. Interest expense was relatively comparable for the second
quarters of 2001 and 2000 due to the offsetting impacts of the Company recording
interest expense associated with the ADF escrow during the second quarter of
2001 and interest expense associated with the Company being in a net borrowed
position during the second quarter of 2000. Other expense was negligible for the
second quarter of 2001, compared to other income of $1.1 million for the second
quarter of 2000. Affecting other income for the second quarter of 2000 was a
gain of $2.0 million from the sale of BSSI, as offset by non-core charges
totaling $1.2 million related to leased construction equipment.
Interest income was higher and interest expense was lower for the first half of
2001 as compared to the first half of 2000 for the same reasons as discussed in
the preceding paragraph. During the first five months of 2000, the Company was
in a net borrowed position which resulted in higher interest expense during that
period. Other income was negligible for the first half of 2001 versus $0.9
million for the first half of 2000. Again, the previously discussed offsetting
impact of the BSSI sale and construction equipment charges primarily composed
the other income amount for the first half of 2000.
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As discussed in Note 5 to the accompanying financial statements, the Company
will record both interest income (at a fluctuating market investment rate) and
interest expense (at a rate of 6.052%, as stipulated by the appellate court) on
the ADF escrow amount until settlement. If investment rates continue to fall
during 2001, the Company's net interest expense on the escrow funds will
continue to increase.
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INCOME TAXES
The Company had provisions for income taxes of 45% and 47% for the three- and
six-month periods ended June 30, 2001 and 2000, respectively. The lower rate for
2001 reflects the Company's expectation of higher income before taxes for 2001,
with most of the growth coming from lower tax rate jurisdictions within the
United States.
CONTRACT BACKLOG
JUNE 30, 2001 December 31, 2000
========================================================================
Engineering $350.1 $318.7
Energy 171.9 183.2
Non-Core - -
- ------------------------------------------------------------------------
Total $522.0 $501.9
========================================================================
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of the Company's contracts with the
Federal Government and other clients may be terminated at will; therefore, no
assurance can be given that all backlog will be realized.
Among the more significant new work added during the second quarter of 2001 were
two new Engineering contracts to provide bridge inspection and GIS support
services totaling $8 million, and two Energy contracts to provide operations and
maintenance services totaling $9 million. The overall decrease in the Energy
segment's backlog results from the loss of a lower margin operations and
maintenance contract, changes in the scope of two other contracts and a client's
sale of certain properties.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities improved to $4.1 million for the first
six months of 2001 from cash used in operating activities of $2.4 million for
the same period in 2000. Operating cash flow for the first half of 2000 was
abnormally and unfavorably impacted by the wind-down of the former construction
divisions and the sale of certain heavy and highway construction assets and
contracts.
Net cash used in investing activities was $5.8 million for the first six months
of 2001, compared to net cash provided by investing activities of 12.7 million
for the first six months of 2000. The net cash used in investing activities for
the first half of 2001 reflects the funding of $12.7 million into an escrow
account stipulated in connection with the Company's appeal of the ADF judgment
(see Note 5 to the accompanying financial statements) and capital expenditures
of $2.1 million, as partially offset by proceeds from the sale of short-term
investments totaling $9.0 million. The net cash provided by investing activities
for the first half of 2000 included proceeds from the sale of BSSI and certain
heavy and highway construction assets totaling $13.5 million and $0.7 million,
respectively, as offset by capital expenditures of $1.6 million. The increase in
capital expenditures resulted from the Company's purchase of computer equipment
in the first half of 2001; similar equipment was acquired under operating leases
during the first half of 2000.
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Net cash provided by financing activities totaled $0.2 million for the first six
months of 2001, compared to net cash used in financing activities of $10.1
million for the same period in 2000. The net cash provided by financing
activities for the first six months of 2001 primarily reflects the proceeds of
stock option exercises, while the first half 2000 amount resulted from the
Company's repayment of its outstanding borrowings under its credit agreement.
Working capital increased to $35.2 million at June 30, 2001 from $29.4 million
at December 31, 2000. The current ratio was 1.42:1 at the end of the second
quarter of 2001, compared to 1.37:1 at year-end 2000. These improvements are
principally attributable to an increase in unbilled revenues, particularly in
the Engineering segment. In addition to the Company's higher volumes in 2001,
this increase also reflects situations where the Company's Engineering and
Energy segments have provided services and recognized costs, but the contract
execution is pending and/or the contract revenue recognition has been delayed
until the related contracts and change orders have been fully documented with
the clients. The other factor impacting working capital and the current ratio
for the first half of 2001 was the reclassification of the Company's litigation
escrow and reserve accounts from long-term to current assets and liabilities, as
discussed in Note 5 to the accompanying financial statements. This
reclassification had the effect of increasing working capital while slightly
reducing the current ratio.
The Company currently has a secured credit agreement with its bank, which
provides for a commitment of $20 million through January 31, 2002. The
commitment includes the sum of the principal amount of revolving credit loans
outstanding and the aggregate face value of outstanding letters of credit. No
borrowings have been outstanding since June 1, 2000; however, letters of credit
totaling $2.6 million were outstanding under the agreement as of June 30, 2001.
The Company is currently negotiating with a syndicate of banks to finalize a new
credit agreement that is expected to provide up to $40 million for working
capital needs and acquisition funding. The increased facility is expected to
better position the Company for growth within its stated core businesses. The
Company currently expects to have its new credit agreement in place during the
third quarter of 2001.
The Company's professional liability errors and omissions insurance coverage had
been placed with Reliance Insurance Group ("Reliance") for the period July 1,
1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation. The Company is uncertain at
this time whether this action will adversely affect any claim the Company may
have for insurance coverage under policies issued by Reliance with respect to
past years. Currently, the Company is subject to one substantial claim which, if
decided adversely to the Company, would be within the scope of an insurance
policy issued by Reliance. Although the plaintiff in this case claims damages of
$10-11 million, the litigation is in progress and, at this time, it is uncertain
whether the Company will have any liability with respect to this claim and, if
so, whether any such liability will be funded by Reliance. Reliance continues to
fund the Company's litigation costs related to this matter.
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Short- and long-term liquidity is dependent upon appropriations of public funds
for infrastructure and other government-funded projects, the demand for the
Company's services in the oil and gas markets, and capital spending levels in
the private sector. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The current federal transportation
legislation (TEA-21 and AIR-21) will provide significant increases in funding
for transportation infrastructure projects during the remainder of 2001 and
beyond. At this time, management believes that its funds generated from
operations and its pending new credit facility will be sufficient to meet its
operating and capital expenditure requirements for at least the next year.
As a result of its 1999 restructuring, the Company will become increasingly less
reliant on its bonding line during 2001. Management believes that its bonding
line will be sufficient to meet its bid and performance needs for at least the
next year. The Company has historically been required to provide bid and
performance bonding on certain construction contracts, and has a $500 million
bonding line available through Travelers Casualty & Surety Company of America.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations completed after June 30, 2001 to be
accounted for under the purchase method. This standard also establishes specific
criteria for the recognition of intangible assets separate from goodwill in
conjunction with business combinations completed after June 30, 2001. The
Company has accounted for all past acquisitions under the purchase method, and
will account for all future business combinations in accordance with SFAS 141.
Under SFAS 142, goodwill amortization will no longer be recorded once the new
standard is adopted. The new rules also require an initial goodwill impairment
assessment in the year of adoption and annual impairment tests thereafter. The
Company will be required to adopt this statement effective January 1, 2002. Once
adopted, annual goodwill amortization expense of approximately $0.7 million will
cease, resulting in additional earnings per share of approximately $0.04 to
$0.05. The Company does not expect that any impairment charge will result from
the adoption of this statement.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary interest rate risk relates to its variable rate debt
obligations, which totaled $2.2 million as of June 30, 2001. If interest rates
were to change unfavorably by 10%, the Company would have no material exposure
to interest rate risk. The Company has no interest rate swap or exchange
agreements.
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Less than 1% of the Company's total assets and total contract revenues as of and
for the periods ended June 30, 2001 were denominated in currencies other than
the U.S. Dollar. If foreign currency exchange rates were to change unfavorably
by 10%, the Company would have no material exposure to foreign currency exchange
risk. The Company has no foreign currency exchange contracts.
Based on the nature of the Company's business, it has no direct exposure to
commodity price risk.
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 25,
2001.
(b) Each of management's nominees to the board of directors, as listed in
Item 4(c) below, was elected. There was no solicitation in opposition
to management's nominees.
(c) The only 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 18,212,900 874,952
Nicholas P. Constantakis 18,215,579 872,273
Donald P. Fusilli, Jr. 18,081,690 1,006,162
Thomas D. Larson 18,094,140 993,712
John E. Murray, Jr. 17,730,273 1,357,579
Richard L. Shaw 18,102,933 984,919
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 Copeland 6,075,521 344,731
Roy V. Gavert, Jr. 6,079,950 340,302
Pamela S. Pierce 6,146,748 273,504
ITEM 5. OTHER INFORMATION
On July 24, 2001, the Company announced that it had become aware that certain
activities related to the operations of a 53% owned Nigerian subsidiary engaged
in energy-related operations are the subject of an inquiry by the U.S.
Department of Justice. The Company acquired the Nigerian subsidiary as part of
its acquisition of London-based Overseas Technical Services, Inc. in 1993.
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The inquiry appears to be focused upon payments made to certain individuals in
connection with the subsidiary's operations in Nigeria as they relate to
potential violations of the Foreign Corrupt Practices Act and other relevant
statutes.
The Company has retained legal counsel to represent it in this matter and is
conducting an internal investigation of these issues. The Company intends to
cooperate fully in the government's inquiry. At this time, the Company is
uncertain but does not expect the costs of its investigation, its cooperation in
the government's inquiry or the outcome thereof, to have a material adverse
financial impact on its future financial results. However, the Company's
investigation and the government's inquiry are ongoing and the Company's
assessment of the outcome may vary as the investigation and inquiry proceed.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
----------- -----------
10.2(c) Consulting Agreement dated April 25, 2001, by and
between the Registrant and Richard L. Shaw, filed
herewith.
10.6 Employment Continuation Agreement dated April 16,
2001, by and between the Registrant and Craig O.
Stuver, filed herewith.
(b) Reports on Form 8-K
During the quarter ended June 30, 2001, the Company filed no reports on
Form 8-K.
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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 10, 2001
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William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: August 10, 2001
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Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Principal Accounting Officer)
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