.
.
.
EXHIBIT 13.1
SELECTED FINANCIAL DATA
(In thousands, except
per share information) 2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
RESULTS OF OPERATIONS
Total contract revenues $ 405,264 $ 403,222 $ 390,710 $ 506,012 $ 521,271
Operating income/(loss) 17,227 20,378 10,725 (8,175) (1,667)
Net income/(loss) 9,566 11,186 5,376 (8,164) (2,419)
Diluted net income/
(loss) per share $ 1.12 $ 1.33 $ 0.65 $ (1.00) $ (0.30)
Return on average equity 14.4% 20.0% 11.3% (16.7)% (4.4)%
--------- --------- --------- --------- ---------
FINANCIAL CONDITION
Total assets $ 145,097 $ 148,386 $ 137,379 $ 155,047 $ 156,977
Working capital $ 40,512 $ 40,954 $ 29,391 $ 25,733 $ 31,855
Current ratio 1.57 1.48 1.35 1.29 1.34
Long-term debt $ -- $ 30 $ 51 $ 14,867 $ 3,138
Shareholders' investment 71,419 61,493 50,329 44,799 52,862
Book value per
outstanding share 8.52 7.43 6.09 5.48 6.47
Year-end closing share price $ 10.95 $ 15.20 $ 7.75 $ 6.63 $ 9.75
--------- --------- --------- --------- ---------
CASH FLOW
Cash (used in)/provided by
operating activities $ (9,120) $ 19,626 $ 12,425 $ 1,143 $ (1,379)
Cash (used in)/provided by
investing activities (20) (7,831) 2,672 (10,255) (11,416)
Cash provided by/(used in)
financing activities 543 (2,435) (9,660) 7,783 1,935
--------- --------- --------- --------- ---------
(Decrease)/increase in cash $ (8,597) $ 9,360 $ 5,437 $ (1,329) $ (10,860)
--------- --------- --------- --------- ---------
BACKLOG
Total $ 545,200 $ 509,600 $ 501,900 $ 657,300 $ 735,300
--------- --------- --------- --------- ---------
SHARE INFORMATION
Year-end shares outstanding 8,384 8,278 8,267 8,181 8,166
Average diluted shares
outstanding during year 8,515 8,425 8,238 8,175 8,178
--------- --------- --------- --------- ---------
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
operations for the years ended December 31, 2002, 2001 and 2000 (dollars in
millions):
TOTAL CONTRACT REVENUES
-----------------------------------------------------
CHANGE
2002 FROM 2001 2001 2000
-------- --------- -------- --------
ENGINEERING $ 242.6 (0.4%) $ 243.6 $ 228.4
Percentage of total revenues 59.9% 60.4% 58.5%
ENERGY 162.6 2.8% 158.2 120.7
Percentage of total revenues 40.1% 39.2% 30.9%
NON-CORE* 0.1 (92.9%) 1.4 41.6
Percentage of total revenues 0.0% 0.4% 10.6%
-------- ---- -------- --------
Total $ 405.3 0.5% $ 403.2 $ 390.7
======== ==== ======== ========
INCOME/(LOSS) FROM OPERATIONS
-----------------------------------------------------
CHANGE
2002 FROM 2001 2001 2000
-------- --------- -------- --------
ENGINEERING $ 10.3 (18.9%) $ 12.7 $ 11.5
Percentage of Engineering revenues 4.2% 5.2% 5.0%
ENERGY 6.6 (34.7%) 10.1 8.1
Percentage of Energy revenues 4.1% 6.4% 6.7%
NON-CORE* 1.2 170.6% (1.7) (7.6)
CORPORATE/INSURANCE (0.9) (28.6%) (0.7) (1.3)
-------- ----- -------- --------
Total $ 17.2 (15.7%) $ 20.4 $ 10.7
======== ===== ======== ========
* The Non-Core segment includes activity associated with the former
buildings and transportation construction operations that are being wound
down, and the former Baker Support Services, Inc. ("BSSI") subsidiary
which was sold in June 2000.
Total Contract Revenues
The Company's total contract revenues, as well as those from ongoing operations
(defined as consolidated revenues less Non-Core revenues), increased slightly
for 2002. The Energy segment posted revenue growth of 3% for 2002. This lower
growth rate relative to prior years was the direct result of the expiration of
several older international contracts that were not renewed in late 2001 and
early 2002, and weaker sales of new work in both the domestic and international
markets. A 9% increase in domestic revenues for the Energy segment in 2002 was
partially offset by lower international revenues. Revenues from OPCO(R), Baker
Energy's Operations Consolidation Model, decreased by 18% for 2002. Such OPCO
revenues composed 24% and 30% of Energy's total contract revenues for 2002 and
2001, respectively. This decrease in OPCO revenues as a percentage of Energy
revenues resulted from the conversion of a significant OPCO account to non-OPCO
status during the third quarter of 2002, and the attrition of several OPCO
properties due to client sales of operating facilities since the third quarter
of 2001. The non-OPCO related increase in Energy's domestic 2002 revenues
primarily reflects labor and logistics services provided to a new customer.
Engineering revenues decreased slightly in 2002 as a result of reduced activity
related to pipeline and telecommunications projects in the Western U.S., which
offset a 10% overall revenue gain in the transportation-related sector. The
increase in transportation revenues was a result of continued funding of
transportation infrastructure projects associated with the U.S. government's
1998 Federal transportation legislation ("TEA-21"). The Engineering segment's
2002 results also were negatively impacted by a $1.2 million increase in the
amount of revenue that had not been recognized at year-end 2002 because the
related services had not yet been approved by clients. As further discussed in
Note 1 to the accompanying financial statements, under the Company's revenue
recognition policy, costs incurred in providing services that are unapproved by
clients as to scope and price are expensed as incurred; however, related
revenues are not recognized until the contracts and/or change orders have been
fully executed by the clients, other suitable written project approvals are
received from the clients, or until management determines that revenue
recognition is appropriate based on the probability of client acceptance. The
Company's Non-Core segment recorded revenues of only $0.1 million for 2002, as
compared with revenues of $1.4 million for 2001. The Company does not expect to
record any additional Non-Core revenues for 2003 and beyond.
For 2001, the Company's total contract revenues from ongoing operations
increased 15%. This increase included the effect of Energy revenues totaling
$9.9 million, which resulted from the consolidation of local currency activities
for two less-than-wholly-owned operating subsidiaries in Nigeria and Thailand.
Such activities of these subsidiaries were consolidated for the first time in
2001. Including these first-time revenues, the Energy segment's revenues
increased by 31% for 2001. In addition to the newly consolidated revenues, the
increase was driven by higher revenues from OPCO, which contributed 28% of this
segment's total revenues for 2000, as well as higher revenues associated with
new work in Energy's operations engineering business. Energy's OPCO revenues
increased on an overall basis by 41% for 2001, primarily as a result of new OPCO
contracts that were added during the second half of 2000. The Engineering
segment posted revenue growth of 7% for 2001, with its transportation and civil
businesses registering the most significant improvements of 10% and 5%,
respectively. The increase in transportation revenues was the result of state
transportation funding increases associated with TEA-21, while the growth in
civil came primarily from several new significant projects. The Company's
Non-Core segment posted 2000 revenues of $41.6 million. The majority of Non-Core
revenues for 2000 reflected five months of activity for BSSI, which was sold
effective June 1, 2000, with the remainder attributable to the Company's former
construction operations.
Gross Profit
Expressed as a percentage of total contract revenues, gross profit decreased
slightly to 16.3% in 2002 from 16.7% in 2001. The Company's gross profit from
ongoing operations was 15.5% of total contract revenues for 2002 and 16.6% in
2001. Higher 2002 costs associated with the Company's self-insured medical plan
and its casualty insurance coverages, as well as the fourth quarter 2002
settlement of the LTV Steel Company ("LTV") litigation (as discussed more fully
in Note 13 to the accompanying financial statements), adversely impacted gross
profit from ongoing operations for 2002. The Energy segment's gross profit
percentage was 14.1% for 2002, down from 18.2% for 2001. Contributing to this
Energy decrease were the expiration of several higher margin international
contracts that were either not renewed or renewed at lower margins in late 2001
and early 2002, charges associated with an international project that was
terminated during the second quarter of 2002, and bad debt expense associated
with an Energy customer's bankruptcy filing during 2002. Also adversely
affecting Energy's 2002 gross profit were several new lower margin domestic
contracts that commenced during the first quarter of 2002, and the
aforementioned higher 2002 costs for medical and casualty insurance. Energy's
OPCO operations posted a gross profit margin percentage of 28.6% and 24.8% in
2002 and 2001, respectively. The Engineering segment's gross profit percentage
was 16.7% for 2002 as compared to 15.8% in the comparable period of 2001.
Contributing to this overall increase were a more favorable mix of higher margin
engineering contracts attributable partially to more self-performed work and
less usage of subcontractors during 2002, and favorable adjustments on several
projects that were completed during
the year. These improvements were partially offset by the higher 2002 costs for
medical and casualty insurance and the effect of the LTV settlement. The
Company's Non-Core segment posted gross profit of $3.5 million for 2002 versus
$0.7 million in the prior year period. The 2002 profit resulted from the
favorable settlement of the ADF International, Inc. ("ADF") litigation
(discussed in Note 4 to the accompanying financial statements), as partially
offset by adverse developments in casualty insurance claims related to the
Company's former construction and BSSI operations and by charges associated with
the resolution of disputes related to the sale of BSSI.
As a percentage of total contract revenues, gross profit increased in 2001 from
13.3% in 2000. The Company's gross profit from ongoing operations was 15.8% of
total contract revenues in 2000. The Energy segment's gross profit percentage
decreased in 2001 from 19.4% in 2000. OPCO contracts posted a gross profit
percentage of 24.8% in 2001 compared to 20.1% in 2000. This increased
profitability in the OPCO operations was offset by lower 2001 margins associated
with Energy's growing manpower supply business and, to a lesser extent, its 50%
owned subsidiary in Venezuela. The previously mentioned first-time consolidation
of Energy's local currency activities in Nigeria and Thailand had no material
effect on its gross margin or net income for the year ended December 31, 2001.
In the Engineering segment, gross margin improved in 2001 from 14.5% in 2000.
This improvement was primarily driven by profitability associated with several
telecommunications projects which commenced during the third quarter of 2000, as
well as an overall improvement in the execution of client contracts and change
orders, which thereby permitted 2001 revenue recognition totaling $0.6 million
for which the related costs were expensed in a prior period. The Company's
Non-Core segment recorded a gross loss of $3.2 million in 2000. See Note 4 to
the accompanying financial statements for a discussion of Non-Core charges
recorded during 2000.
Direct labor expressed as a percentage of total contract revenues was 36%, 32%
and 33% in 2002, 2001 and 2000, respectively. This is a major component of the
Company's cost of work performed due to the nature of its service businesses.
The 2002 increase is attributable to less usage of subcontractors by both the
Engineering and Energy segments during the year.
Substantially all of the Company's current insurance coverages are scheduled to
renew effective July 1, 2003. Based on current general market conditions, the
Company may again experience significant increases in costs and/or deductibles,
as well as potential decreases in primary policy limits, in connection with
these renewals. Under the terms of certain of the Company's contracts, all or
portions of any such cost increases may be passed on to customers. Management
currently expects that its costs for insurance coverages will increase again
effective July 1, 2003, but is uncertain how much of the cost increases will be
recoverable from clients under existing contracts.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses expressed as a percentage
of total contract revenues increased to 12.1% for 2002 versus 11.7% in 2001.
SG&A expenses for the Company's ongoing operations increased to 11.5% in 2002
compared to 11.1% in 2001. This increase in SG&A expenses as a percentage of
total contract revenues primarily resulted from higher medical costs, higher
professional fees, and pre-implementation expenses incurred during the first
quarter of 2002 in connection with a new Enterprise Resource Planning ("ERP")
system. These cost increases were partially offset by a 92% reduction in
incentive compensation expense and the absence of goodwill amortization expense
in 2002. The Energy segment's SG&A expenses expressed as a percentage of
revenues decreased to 10.1% in 2002 from 11.8% in 2001. In addition to the
incentive compensation expense reduction, the Energy segment's percentage
decrease was also supplemented by lower personnel costs associated with several
departures of management personnel during 2002 and the absence of goodwill
amortization expense during 2002. These Energy cost decreases were partially
offset by higher medical and ERP-related costs. In the Engineering segment, SG&A
expenses expressed as a percentage of revenues increased to 12.4% in 2002 from
10.6% in 2001. In addition to the higher first quarter 2002 ERP costs, this
increase is also
attributable to the relatively unchanged Engineering revenues coupled with
higher medical costs, as partially offset by the decrease in incentive
compensation expense. For the Company's Non-Core operations, SG&A expenses were
$2.4 million and $2.5 million for 2002 and 2001, respectively. In 2002, these
SG&A expenses related to legal costs associated with the Company's ADF appeal
and its claim against Hellmuth, Obata & Kassabaum, Inc. ("HOK"), both of which
are discussed in Note 4 to the accompanying financial statements, and the
write-down of a non-trade receivable balance in connection with an offer to
settle a dispute related to the sale of a business. The Non-Core segment's 2001
SG&A expenses related entirely to legal costs associated with the ADF and HOK
litigation.
In 2001, both total SG&A expenses and those from the Company's ongoing
operations, expressed as a percentage of revenues, increased from 10.6% in 2000.
In the Energy segment, SG&A expenses expressed as a percentage of revenues
decreased in 2001 from 12.7% in 2000. This decrease is primarily attributable to
the addition of operations and maintenance 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. This percentage decrease was
partially offset by the combination of higher incentive compensation expenses
and higher 2001 corporate overhead allocations to the Energy and Engineering
segments. SG&A expenses expressed as a percentage of revenues in the Engineering
segment increased for 2001 from 9.4% in 2000. This percentage increase is
primarily attributable to the aforementioned increases in incentive compensation
expenses and corporate overhead allocations. In the Non-Core segment, SG&A
expenses decreased from $4.4 million in 2000.
Other Income and Expense
Interest income decreased to $0.3 million in 2002 from $0.7 million in 2001 due
to a combination of the significant reduction in interest rates that occurred
over the course of 2001 and a reduction in the Company's invested cash balances
during 2002. Interest expense also decreased to $0.1 million from $0.9 million
in 2001. This reduction in interest expense was due to the favorable February
2002 rulings on the ADF matters which made the further recording of interest
expense on the ADF escrow unnecessary, and the Company's third quarter 2001
repayment of all remaining seller-financed debt related to the 1999 Steen
acquisition. The Company recorded other expenses for 2002 that were negligible
versus other income of $0.3 million in 2001. The 2002 expense resulted
principally from minority interest expense related to the net income of three
consolidated Energy subsidiaries, as almost entirely offset by equity income
from an unconsolidated joint venture in the Energy segment. Aside from minority
interest expense and the again offsetting equity income from the unconsolidated
joint venture, the 2001 other income amount incrementally included miscellaneous
income from a non-income-tax-related settlement.
Interest income increased in 2001 from $0.4 million in 2000, due to interest
earned on the cash placed in escrow for the appeal of the ADF judgments.
Interest expense remained unchanged at $0.9 million for both 2001 and 2000. In
2001, the Company recorded interest expense associated with the ADF escrow, and
in 2000, the Company was in a net borrowed position for the first five months of
the year, which resulted in higher interest expense under its credit agreement
during that period. Other income decreased in 2001 from $0.7 million in 2000.
The primary components of the 2000 other income amount were a $2.2 million gain
on the sale of BSSI, as offset by net charges totaling $0.9 million related to
the disposition of certain leased heavy and highway construction equipment.
Income Taxes
The Company's full year provision for income taxes resulted in an effective tax
rate of 45.0% in 2002, compared to an effective tax rate of 45.5% and 51% in
2001 and 2000, respectively. The differences between these percentages and the
35% statutory U.S. Federal rate are primarily attributable to state and foreign
income taxes. The Company's slightly lower effective tax rate for 2002 reflects
the effect of a more favorable mix of domestic and foreign income before taxes,
as impacted by the 2002 settlements of
the ADF and LTV matters (as discussed in Notes 4 and 13 to the accompanying
financial statements). The higher effective tax rate for 2000 resulted from the
effects of certain foreign and state taxes that could not be offset against tax
benefits derived from other jurisdictions within reporting periods.
Non-Core Operations
As discussed more fully in Note 4 to the accompanying financial statements,
pursuant to a March 2000 settlement agreement, Baker Mellon Stuart Construction,
Inc. ("BMSCI"), a wholly-owned subsidiary of the Company, paid Universal City
Development Partners ("UCDP") $2.0 million to resolve the claims between them.
BMSCI remained responsible for resolution of remaining subcontractor and vendor
claims, the most significant of which was a suit brought by ADF. A liability
judgment totaling $10.0 million was entered in favor of ADF by the U.S. District
Court during the fourth quarter of 2000. As a result, in addition to amounts
that had been previously accrued, the Company recorded additional charges
totaling $6.8 million in the fourth quarter of 2000.
In January 2001, BMSCI filed an appeal of the ADF liability judgment with the
U.S. Court of Appeals for the 11th Circuit ("Court of Appeals"). In April 2001,
the District Court entered an additional judgment totaling $1.1 million on
behalf of ADF relative to its claim for attorney's fees and costs in connection
with the foregoing action. The effect of this judgment had been included in the
charges recorded by the Company during 2000. BMSCI and ADF subsequently filed
appeals of this judgment with the Court of Appeals.
In separate rulings during February 2002, the Court of Appeals reversed both of
the District Court's prior judgments for liability and attorney's fees and costs
on behalf of BMSCI, and remanded the ADF matters back to the District Court for
further proceedings. Based on the decisions of the Court of Appeals, on August
2, 2002, the Company received approximately $12.3 million of a $12.7 million
amount previously being held in escrow as a result of this litigation. The
remaining escrow amount of approximately $0.4 million, relating to an aspect of
the litigation that was not contested by BMSCI, was also disbursed by the escrow
agent in August 2002 to ADF.
Court-mandated mediation of the ADF litigation was conducted in Orlando, Florida
on October 23-25, 2002. As a result of the mediation, the Company reached a
settlement with ADF providing for the payment of $5.0 million by the Company to
ADF. Also resulting from the mediation, the Company agreed to release its
existing claim against HOK arising out of the same project, in exchange for an
additional payment of $2.75 million by HOK to ADF. As a result of the
settlement, the Company became obligated to pay contingent legal fees related to
its claim against HOK. Accordingly, the Company reduced its "accrued litigation
reserve" liability balance and accrued an estimate of the contingent legal fees,
thereby resulting in a net favorable impact of $5.1 million on the Non-Core
segment's operating income for the quarter ended September 30, 2002. Both the
ADF settlement of $5.0 million and the contingent legal fees of $1.0 million
were paid by the Company during the fourth quarter of 2002.
As a result of the foregoing, the following table summarizes the net effect of
the ADF and HOK litigation on the Non-Core segment's operating income for the
three years ended December 31, 2002:
(In millions) 2002 2001 2000
------ ------- -----
Legal costs $ (1.6) $ (2.5) $ --
Judgments -- -- (6.8)
Settlement 5.8 -- --
------ ------- ------
Favorable/(unfavorable) effect $ 4.2 $ (2.5) $ (6.8)
====== ======= ======
In connection with the UCDP litigation, the Company determined in early 1999
that it would no longer participate in general construction projects for
buildings or transportation infrastructure. Accordingly, certain assets held by
the Company's former transportation (heavy and highway) construction business,
including substantially all fixed assets and the remaining contractual rights
and obligations associated with eight active construction projects, were sold to
A&L, Inc. ("A&L") in March 2000 in exchange for cash proceeds of $0.7 million
and A&L's assumption of certain debt and lease obligations. During the second
quarter of 2000, charges totaling $1.2 million were recorded relative to lease
obligations on heavy and highway construction equipment. An offset of $0.2
million to this amount was recorded during the third quarter of 2000 when
certain of this construction equipment was sold and the lease obligations were
settled. All work on heavy and highway construction projects was substantially
completed at December 31, 2001.
As also discussed more fully in Note 4 to the accompanying financial statements,
effective June 1, 2000, the Company completed the sale of BSSI, a former
wholly-owned subsidiary, to SKE International LLC ("SKE"). In connection
therewith, during the second and third quarters of 2000, the Company received
cash proceeds of $13.5 million and $0.4 million, respectively, and recorded
gains totaling $2.0 million and $0.2 million, respectively, from the sale of
BSSI. Sale-related disputes arose between SKE and the Company during 2002. As a
result of settlement discussions, charges totaling $0.7 million were recorded to
the Non-Core segment's selling, general and administrative expenses during 2002.
Although a final settlement agreement has not yet been executed between the
parties, the Company believes that its disputes with SKE were fully resolved at
December 31, 2002.
CONTRACT BACKLOG
(In millions) DECEMBER 31, 2002 December 31, 2001
----------------- -----------------
Engineering $ 448.8 $ 378.9
Energy 96.4 130.7
Non-Core -- --
----------------- -----------------
Total $ 545.2 $ 509.6
================= =================
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, or option years
may not be exercised; therefore, no assurance can be given that all backlog will
be realized.
The 2002 increase shown above for Engineering reflects a 25% increase in backlog
for its transportation business, as a result of continued TEA-21 funding. In the
Energy segment, backlog decreased during 2002 due to expected reductions
associated with certain OPCO properties in the Gulf of Mexico. Oil and gas
industry merger, acquisition and disposition programs affecting the Company's
clients can also result in increases or decreases to the Company's Energy
backlog.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $9.1 million in 2002 as compared to
net cash provided by operating activities of $19.6 million and $12.4 million in
2001 and 2000, respectively. The 2002 cash usage is primarily the result of
fourth quarter payments related to both the settlement and related tax effects
of the ADF litigation (which is discussed more fully in Note 4 to the
accompanying financial statements), the first quarter payment of 2001 incentive
compensation bonuses, and increases in
receivables and other net contract-related assets. The 2001 increase in cash
provided by operating activities primarily resulted from the improvement in net
income.
Net cash used in investing activities was negligible in 2002 and $7.8 million in
2001, compared to net cash provided by investing activities of $2.7 million in
2000. The cash used in investing activities for 2002 reflects the receipt of
$12.3 million of the funds placed into escrow during 2001 in connection with the
ADF litigation, as reduced by capital expenditures of $11.4 million and a $1.0
million investment in Energy Virtual Partners, a management service business
that offers a high-value alternative to selling mature, under-resourced oil and
gas properties. The 2001 cash used in investing activities reflected the funding
of $12.7 million into an escrow account stipulated in connection with the
Company's appeal of the ADF judgment and capital expenditures of $4.1 million,
as partially offset by a $9.0 million sale of short-term investments which were
purchased just prior to year-end 2000. Proceeds totaling $13.9 million from the
sale of BSSI also contributed positively to the cash provided by investing
activities for 2000. The Company's capital expenditures included computer
equipment and software purchases totaling $10.4 million, $2.3 million and $1.8
million for 2002, 2001 and 2000, respectively. The significantly higher 2002
amount includes the purchase and development of computer software totaling $8.7
million related to the implementation of certain modules of a new ERP system.
Another significant component of the 2001 capital expenditures amount was $1.2
million related to purchases of office equipment, primarily associated with
several office expansions.
Net cash provided by financing activities was $0.5 million in 2002, as compared
to cash used in financing activities of $2.4 million and $9.7 million in 2001
and 2000, respectively. The net cash provided by financing activities for 2002
primarily reflects proceeds from the exercise of stock options. The cash used in
financing activities for 2001 primarily reflected the final payment of $2.2
million on a seller note associated with the 1999 Steen acquisition. The
negative cash flow from financing activities for 2000 was the result of the
Company paying off its revolving credit debt due to its bank.
In 1996, the Company's Board of Directors authorized the repurchase of up to
500,000 shares of the Company's Common Stock in the open market. As of December
31, 2002, approximately 166,000 shares remained available for repurchase under
this program. During 2001, 31,300 shares of treasury stock were acquired at a
total cost of $0.4 million. The Company made no treasury share repurchases
during 2002 or 2000. In January 2003, the Company reactivated its share
repurchase program. As of March 17, 2003, 80,400 additional treasury shares had
been repurchased by the Company during 2003 at a total cost of $0.7 million. In
February 2003, the Board of Directors authorized the Company to repurchase up to
500,000 additional shares.
Working capital decreased slightly to $40.5 million at December 31, 2002 from
$41.0 million at December 31, 2001. The Company's current ratio was 1.6:1 and
1.5:1 at the end of 2002 and 2001, respectively. The improvement in the current
ratio for 2002 resulted primarily from the impact of the ADF settlement (as
discussed in Note 4 to the accompanying financial statements).
In September 2001, the Company entered into an unsecured credit agreement (the
"Agreement") with a consortium of financial institutions. The Agreement provides
for a commitment of $40 million through September 30, 2004. The commitment
includes the sum of the principal amount of revolving credit loans outstanding
and the aggregate face value of outstanding letters of credit. The Agreement
also requires the Company to meet minimum equity, leverage, interest and rent
coverage, and current ratio covenants. If any of these covenants or certain
other conditions of borrowing are not achieved by the Company, under certain
circumstances, the banks may demand the repayment of all borrowings outstanding
and/or require deposits to cover the outstanding letters of credit. As of
December 31, 2002, no borrowings were outstanding under the Agreement; however;
letters of credit totaling $7.7 million were outstanding as of this date.
The Company plans to utilize its borrowing capacity under the Agreement for
short-term working capital needs and to support strategic opportunities that
management identifies. The Company's strategy is to better position itself for
growth in its Engineering and Energy segments through acquisitions that
compliment the Company's experience and skills. The Company views acquisitions
and investments as an important component of its growth strategy and intends to
use both existing cash and the credit facility to fund such endeavors. If the
Company commits to funding future acquisitions, it may need to adjust its
financing strategies by seeking alternative debt instruments. The Company
currently expects to lengthen the maturity date of the Agreement during 2003.
A summary of the Company's contractual obligations and other commercial
commitments as of December 31, 2002 is as follows:
(Amounts in thousands)
PAYMENTS DUE BY PERIOD
------------------------------------------------------
LESS THAN 1 - 3 4 - 5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
------- --------- ------- ------- -------
Operating leases $64,392 $11,960 $19,264 $13,934 $19,234
------- ------- ------- ------- -------
Total contractual obligations $64,392 $11,960 $19,264 $13,934 $19,234
======= ======= ======= ======= =======
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
TOTAL -----------------------------------------------------
AMOUNTS LESS THAN 1 - 3 4 - 5 OVER 5
OTHER COMMERCIAL COMMITMENTS COMMITTED 1 YEAR YEARS YEARS YEARS
---------- --------- ------- ------- -------
Standby letters of credit $ 7,735 $ 25 $ -- $ -- $ 7,710
Performance and payment bonds See below
------- ------- ------- ------- -------
Total commercial commitments $ 7,735 $ 25 $ -- $ -- $ 7,710
======= ======= ======= ======= =======
The Company utilizes operating leases to acquire assets used in its daily
business activities. These assets include office space, computer and related
equipment, and motor vehicles. The lease payments for use of these assets are
recorded as expenses, but do not appear as liabilities on the Company's
consolidated balance sheets. During January 2003, the Company relocated certain
Engineering and Corporate personnel from office space previously leased in
Coraopolis, PA, and occupied approximately 117,000 square feet of office space
in Moon Township, PA. The ten-year operating lease commitment totaling $22.2
million for the new space is scheduled to expire on January 31, 2013.
The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Agreement discussed above. As of December 31, 2002, most of
these LOCs had been issued to insurance companies to serve as collateral for
payments the insurers are required to make under the Company's self-insurance
programs. These LOCs may be drawn upon in the event that the Company does not
reimburse the insurance companies for claims payments made on behalf of the
Company. Such LOCs renew automatically on an annual basis unless either the LOCs
are returned to the bank by the beneficiary or the Company's banks elect not to
renew them.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America ("Travelers"). At December 31, 2002, performance
and payment bonds totaling $37.8 million were outstanding under this line. As
further discussed in Note 13 to the accompanying financial statements, these
outstanding bonds included two bonds totaling $36.3 million related to the
Company's former construction operations, of which one for $11.9 million was
terminated during the first quarter of 2003. These bonds are terminated by
Travelers when the related projects are completed and all appropriate releases
are received from the client. In prior years, the utilization of this bonding
line was
higher due to the bonding requirements of the Company's former construction and
BSSI operations. Management believes that this bonding line will be sufficient
to meet its bid and performance bonding needs for at least the next year.
The Company's 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. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation; and on October 3, 2001,
Reliance was placed into liquidation. The Company is uncertain at this time what
effect these actions will have on any claim the Company or its subsidiaries may
have for insurance coverage under policies issued by Reliance with respect to
past years. Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary of the
Company, is subject to one substantial claim which falls within the Reliance
coverage period. This claim reflects an action by LTV against BEI, resulting
from the failure of a landfill for which BEI provided services. In December
2002, after a hearing in the U.S. District Court for the Western District of
Pennsylvania, out-of-court settlement discussions between LTV and BEI commenced.
In February 2003, LTV and BEI reached an out-of-court settlement that will
provide a payment to LTV in the amount of $2.5 million. As a result of the
settlement, pre-tax charges totaling $2.4 million were included in the
Engineering segment's cost of work performed during the fourth quarter of 2002.
This settlement is subject to the approval of the Bankruptcy Court overseeing
the LTV bankruptcy proceeding. The Company expects the Bankruptcy Court to take
action by the end of March 2003, and payment by the Company will be required
soon thereafter. Due to the liquidation of reliance, the Company is currently
uncertain what amounts paid to LTV will be recoverable under the insurance
policy with Reliance. Accordingly, the Company recorded no receivable from
Reliance as of December 31, 2002.
The Company views its short and long-term liquidity as being dependent upon its
results of operations, changes in working capital and its borrowing capacity.
These factors are further dependent upon appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for the Company's services in the engineering
and energy markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The Federal government's TEA-21
legislation has made significant transportation funding available to the various
state agencies since its approval in 1998. The Federal budget approved for the
U.S. government's 2002-2003 fiscal year included transportation funding equal to
that approved for its 2001-2002 fiscal year; however, certain state agencies may
not apply for Federal transportation funding during 2003 as they may be unable
to commit the required matching funds. Transportation funding is expected to
receive significant attention during the Federal budget approval process for its
2003-2004 fiscal year, as TEA-21 is up for reauthorization. During 2002, the
Company observed increased Federal spending activity on FEMA, Department of
Defense and Homeland Security activities. Additional government spending in
these areas, or on transportation infrastructure, could result in profitability
and liquidity improvements for the Company. Significant contractions in any of
these areas could unfavorably impact the Company's profitability and liquidity.
During the first half of 2003, the Company expects that its short-term liquidity
will be impacted by changes in its billing process and system, which took effect
on January 1, 2003. As a result of these changes, client billing delays are
currently being experienced. At this time, management expects that the timing of
its client billings will return to normal during the second quarter of 2003, and
that client payments will begin to return to normal terms during the third
quarter of 2003. Until then, the Company expects that these delays will
adversely impact its working capital, and that borrowings under its credit
facility will increase accordingly. The Company also currently expects to pay
the $2.5 million cash settlement to LTV during the second quarter of 2003. After
giving effect to the foregoing, management still believes that the combination
of cash generated from operations and its existing credit facility will be
sufficient to meet its operating and capital expenditure requirements for at
least the next year.
CRITICAL ACCOUNTING POLICIES
The Company has identified the following critical accounting policies as those
that are most important to the portrayal of its results of operations and
financial condition, and which require management's most difficult, subjective
or complex judgments. Each of these policies is also addressed in Note 1 to the
consolidated financial statements.
Project Cost Estimates to Complete - The Company utilizes the
percentage-of-completion method of accounting for the majority of contracts in
its Engineering segment. Revenues on these contracts are computed by multiplying
the total contract value for each contract by the project's percentage of
completion to date, and subtracting revenues recognized in prior periods. In
applying the percentage-of-completion method, a project's percent complete as of
any balance sheet date is computed as the ratio of labor costs incurred to date
divided by the total estimated labor costs at completion. Estimated labor costs
at completion reflect labor costs incurred to date plus an estimate of the labor
costs to complete the project. As changes in estimates of total labor costs at
completion and/or estimated total losses on projects are identified, appropriate
earnings adjustments are recorded during the period that the change or loss is
identified. Due to the volume and varying degrees of complexity of the Company's
active Engineering projects, as well as the many factors that can affect
estimated costs at completion, the computations of these estimates require the
use of complex and subjective judgments. Accordingly, labor cost estimates to
complete require regular review and revision to ensure that project earnings are
not misstated.
Unclaimed Revenues - Under certain circumstances, the Company may agree to
provide new or additional engineering services to a client without a fully
executed contract or change order. In these instances, although the costs of
providing these services are expensed as incurred, the recognition of related
contract revenues is delayed until the contracts and/or change orders have been
fully executed by the clients, other suitable written project approvals are
received from the clients, or until management determines that revenue
recognition is appropriate based on the probability of client acceptance. The
probability of client acceptance is assessed based on such factors as the
Company's historical relationship with the client, the nature and scope of the
services to be provided, and management's ability to accurately estimate the
realizable value of the services to be provided. Under this policy, the Company
had not recognized potential future revenues estimated at $3.6 million and $2.4
million as of December 31, 2002 and 2001, respectively, for which the related
costs had already been expensed as of these dates. The consistent application of
this policy may result in revenues being recognized in a period subsequent to
the period in which the related costs were incurred and expensed.
Contingencies - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities as of the date of the
financial statements, and also affect the amounts of revenues and expenses
reported for each period. Specifically, management estimates are inherent in the
assessment of the Company's exposure to insurance claims that fall below policy
deductibles, and to litigation and other legal claims and contingencies.
Significant management judgment and reliance on third-party experts are utilized
in determining probable and/or reasonably estimable amounts to be recorded or
disclosed in the Company's financial statements. The results of any changes in
accounting estimates are reflected in the financial statements of the period in
which the changes are determined.
RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," which requires that
obligations associated with retirements of tangible long-lived assets be
recorded as liabilities when those obligations are incurred. The Company will be
required to adopt this standard effective January 1, 2003, and does not believe
that the adoption of this statement will have a material impact on its financial
statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities," which addresses issues
associated with exit or disposal activities initiated after December 31, 2002.
The Company does not believe that the adoption of this statement will have a
material impact on its financial statements.
In January 2003, the FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS
148"). SFAS 148 amends FASB Statement No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), to provide alternative methods of transition for
companies that voluntarily change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results (see related disclosures in Note 1 to the accompanying financial
statements). For entities that elect to adopt the fair value based method of
accounting of SFAS 123 in a fiscal year beginning before December 16, 2003, any
of three methods can be applied. The Company intends to adopt the prospective
method of SFAS 148 effective January 1, 2003. Under the prospective method, the
Company will begin expensing the value of all stock options granted, modified or
settled after January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies", relating to the guarantor's accounting
for and disclosures of certain guarantees issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
such disclosure requirements in connection with the issuance of the accompanying
financial statements, in which the related disclosure requirements can be found
in Note 13. The Company does not believe that the adoption of the initial
recognition and measurement provisions of this interpretation will have a
material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. The primary beneficiary is the party that absorbs a majority of the
entity's expected losses or returns as a result of holding the variable
interest. The interpretation applies to variable interest entities in which an
enterprise obtains an interest, or which an enterprise creates, after January
31, 2003. For variable interest entities created before February 1, 2003, the
interpretation shall be applied for the first interim or annual reporting period
beginning after June 15, 2003. The Company plans to adopt this interpretation
effective July 1, 2003. Since it currently has no variable interest entities,
the Company does not believe that such adoption will have a material impact on
its financial statements.
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
(In thousands, except per share amounts) 2002 2001 2000
--------- --------- ---------
Total contract revenues $ 405,264 $ 403,222 $ 390,710
Cost of work performed 339,056 335,842 338,629
--------- --------- ---------
Gross profit 66,208 67,380 52,081
Selling, general and administrative expenses 48,981 47,002 41,356
--------- --------- ---------
Income from operations 17,227 20,378 10,725
Other income/(expense):
Interest income 290 687 413
Interest expense (89) (888) (866)
Other, net (34) 348 700
--------- --------- ---------
Income before income taxes 17,394 20,525 10,972
Provision for income taxes 7,828 9,339 5,596
--------- --------- ---------
Net income $ 9,566 $ 11,186 $ 5,376
========= ========= =========
Basic net income per share $ 1.15 $ 1.35 $ 0.65
Diluted net income per share $ 1.12 $ 1.33 $ 0.65
========= ========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
AS OF DECEMBER 31,
------------------------
(In thousands) 2002 2001
-------- --------
CURRENT ASSETS
Cash and cash equivalents $ 9,885 $ 18,482
Receivables, net 65,742 67,594
Cost of contracts in progress and estimated earnings, less billings 29,723 25,341
Litigation escrow -- 12,710
Prepaid expenses and other 6,220 1,429
-------- --------
Total current assets 111,570 125,556
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 17,459 10,278
OTHER ASSETS
Goodwill and other intangible assets, net 9,519 9,804
Other assets 6,549 2,748
-------- --------
Total other assets 16,068 12,552
-------- --------
TOTAL ASSETS $145,097 $148,386
======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND SHAREHOLDERS' INVESTMENT
AS OF DECEMBER 31,
---------------------------
(In thousands) 2002 2001
--------- ---------
CURRENT LIABILITIES
Accounts payable $ 20,373 $ 21,885
Accrued employee compensation 10,909 15,413
Accrued insurance 7,867 5,359
Accrued litigation reserve -- 11,770
Income taxes payable 2,801 1,827
Other accrued expenses 24,917 22,263
Excess of billings on contracts in progress over cost and estimated earnings 4,191 6,085
--------- ---------
Total current liabilities 71,058 84,602
--------- ---------
OTHER LIABILITIES 2,620 2,291
Commitments and contingencies (Notes 11 and 13) -- --
--------- ---------
Total liabilities 73,678 86,893
--------- ---------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,694,360 and 7,315,894 shares in 2002 and 2001, respectively 8,694 7,316
Series B Common Stock, par value $1, authorized 6,000,000 shares, issued
0 and 1,296,696 shares in 2002 and 2001, respectively -- 1,297
Additional paid-in-capital 38,146 37,734
Retained earnings 27,411 17,845
Other comprehensive loss (569) (266)
Less - 310,837 and 334,289 shares of Common Stock in treasury, at cost,
in 2002 and 2001, respectively (2,263) (2,433)
--------- ---------
Total shareholders' investment 71,419 61,493
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 145,097 $ 148,386
========= =========
The accompanying notes are an integral part of the consolidated financial
statements.
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------
(In thousands) 2002 2001 2000
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,566 $ 11,186 $ 5,376
Adjustments to reconcile net income to net cash
(used in)/provided by operating activities:
Depreciation and amortization 4,004 5,200 7,068
(Increase)/decrease in deferred income taxes (911) 3,731 (3,207)
Gain on sale of BSSI -- -- (2,157)
Changes in assets and liabilities:
(Increase)/decrease in receivables and contracts in progress (5,102) (4,766) 7,191
(Decrease)/increase in accounts payable and accrued
expenses (10,371) 2,604 2,175
(Decrease)/increase in advance billings (1,894) 1,396 (7,559)
(Increase)/decrease in other net assets (4,412) 275 3,538
-------- -------- --------
Total adjustments (18,686) 8,440 7,049
-------- -------- --------
Net cash (used in)/provided by operating activities (9,120) 19,626 12,425
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (11,355) (4,120) (2,944)
Investment in Energy Virtual Partners (1,000) -- --
Receipt of litigation escrow 12,335 -- --
Funding of litigation escrow -- (12,710) --
Sale of short-term investments -- 8,999 --
Purchase of short-term investments -- -- (8,999)
Proceeds from the sale of BSSI -- -- 13,867
Proceeds from the sale of certain construction assets -- -- 748
-------- -------- --------
Net cash (used in)/provided by investing activities (20) (7,831) 2,672
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 573 209 467
Repayments of long-term debt (30) (2,264) (10,127)
Payments to acquire treasury stock -- (380) --
-------- -------- --------
Net cash provided by/(used in) financing activities 543 (2,435) (9,660)
-------- -------- --------
Net (decrease)/increase in cash and cash equivalents (8,597) 9,360 5,437
Cash and cash equivalents, beginning of year 18,482 9,122 3,685
-------- -------- --------
Cash and cash equivalents, end of year $ 9,885 $ 18,482 $ 9,122
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 58 $ 267 $ 985
Income taxes paid $ 7,751 $ 3,615 $ 2,127
======== ======== ========
The accompanying notes are an integral part of the consolidated financial
statements.
MICHAEL BAKER CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
SERIES B OTHER
COMMON COMMON COMPRE-
STOCK, STOCK, TREASURY ADDITIONAL HENSIVE
PAR VALUE PAR VALUE ---------------- PAID-IN RETAINED INCOME/
(In thousands) $1 $1 SHARES AMOUNT CAPITAL EARNINGS (LOSS)
--------- --------- ------ ------- ---------- -------- -------
BALANCE, DECEMBER 31, 1999 $ 7,171 $ 1,314 (303) $(2,053) $ 37,084 $ 1,283 $ --
Net income -- -- -- -- -- 5,376 --
Series B Common Stock
conversions to Common
Stock 9 (9) -- -- -- -- --
Stock options exercised 81 -- -- -- 386 -- --
Restricted stock issued 4 -- -- -- 18 -- --
Foreign currency translation
adjustments -- -- -- -- -- -- (335)
------- ------- ---- ------- -------- ------- -----
BALANCE, DECEMBER 31, 2000 7,265 1,305 (303) (2,053) 37,488 6,659 (335)
------- ------- ---- ------- -------- ------- -----
Net income -- -- -- -- -- 11,186 --
Series B Common Stock
conversions to Common
Stock 8 (8) -- -- -- -- --
Stock options exercised 35 -- -- -- 174 -- --
Restricted stock issued 8 -- -- -- 72 -- --
Treasury stock purchases -- -- (31) (380) -- -- --
Foreign currency translation
adjustments -- -- -- -- -- -- 69
------- ------- ---- ------- -------- ------- -----
BALANCE, DECEMBER 31, 2001 7,316 1,297 (334) (2,433) 37,734 17,845 (266)
------- ------- ---- ------- -------- ------- -----
Net income -- -- -- -- -- 9,566 --
Series B Common Stock
conversions to Common
Stock 1,297 (1,297) -- -- -- -- --
Stock options exercised 76 -- -- -- 497 -- --
Restricted stock issued 8 -- -- -- 112 -- --
Restricted stock forfeited (3) -- -- -- (27) -- --
Premium on Series B exchange -- -- 23 170 (170) -- --
Foreign currency translation
adjustments -- -- -- -- -- -- (303)
------- ------- ---- ------- -------- ------- -----
BALANCE, DECEMBER 31, 2002 $ 8,694 $ -- (311) $(2,263) $ 38,146 $27,411 $(569)
======= ======= ==== ======= ======== ======= =====
COMPREHENSIVE INCOME
(In thousands) 2002 2001 2000
------- -------- -------
Net income $ 9,566 $ 11,186 $ 5,376
Other comprehensive (loss)/income:
Foreign currency translation adjustment (303) 69 (335)
------- -------- -------
Comprehensive income $ 9,263 $ 11,255 $ 5,041
======= ======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Michael Baker
Corporation and its subsidiaries (the "Company"), as well as entities over which
it exercises significant influence and owns at least 50%. Minority interest
amounts relating to the Company's less-than-wholly-owned consolidated
subsidiaries are included within the "other, net" caption in the Consolidated
Statements of Income and within the other liabilities caption in the
Consolidated Balance Sheets. Investments in non-consolidated affiliates (20 to
50% owned companies) are accounted for under the equity method, and entities in
which the Company owns less than 20% are accounted for under the cost method, in
the Consolidated Balance Sheets and Statements of Income. All intercompany
accounts and transactions have been eliminated in consolidation.
Accounting for Contracts
The Company earns its revenues from the provision of Engineering and Energy
related services. In providing these services, the Company typically incurs
direct labor, subcontractor and certain other direct costs ("ODCs"). Under
certain cost-type contracts with governmental agencies in the Engineering
segment, the Company is not contractually permitted to earn a margin on
subcontractor costs and ODCs. The Company reflects revenues related to its
direct labor, subcontractors and ODCs in its total contract revenues as long as
the Company remains responsible to the client for the acceptability of the
services provided.
The majority of contracts in the Engineering segment qualify for revenue
recognition under the percentage-of-completion method of accounting. Revenues on
fixed-price and cost-type contracts are determined by multiplying the total
contract value for each contract by the project's percentage of completion to
date, and subtracting revenues recognized in prior periods. In applying the
percentage-of-completion method to these contracts, the Company measures the
extent of progress toward completion as the ratio of labor costs incurred to
date over total estimated labor costs at completion. As work is performed under
contracts, estimates of the labor costs to complete are regularly reviewed and
updated. As changes in estimates of total labor costs at completion and/or
estimated total losses on projects are identified, appropriate earnings
adjustments are recorded during the period that the change or loss is
identified. For contracts that do not qualify for percentage-of-completion
accounting, revenue is recognized based on management's best estimate of the
efforts expended relative to the services provided.
Under certain circumstances, the Company may agree to provide new or additional
engineering services to a client without a fully executed contract or change
order. In these instances, although the costs of providing these services are
expensed as incurred, the recognition of related contract revenues is delayed
until the contracts and/or change orders have been fully executed by the
clients, other suitable written project approvals are received from the clients,
or until management determines that revenue recognition is appropriate based on
the probability of client acceptance. The probability of client acceptance is
assessed based on such factors as the Company's historical relationship with the
client, the nature and scope of the services to be provided, and management's
ability to accurately estimate the realizable value of the services to be
provided.
Total contract revenues for the operations and maintenance contracts in the
Energy segment are primarily recognized as related services are provided.
Performance bonuses are earned under certain operations and maintenance
contracts in the Energy segment. Because the amounts of these bonuses are
difficult to
estimate, such bonuses are recorded as revenues when the amounts are both
probable and reasonably estimable.
Fair Value of Financial Instruments
The fair value of financial instruments classified as current assets and
liabilities approximates carrying value due to the short-term nature of the
instruments. The carrying value of all long-term debt approximates its fair
value.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the financial statements,
and also affect the amounts of revenues and expenses reported for each period.
Actual results could differ from those which result from using the estimates.
The use of estimates is an integral part of determining cost estimates to
complete under the percentage-of-completion method of accounting for contracts.
Management also utilizes estimates in the assessment of the Company's exposure
to insurance claims that fall below policy deductibles, and to assess its
litigation and other legal claims and contingencies. The results of any changes
in accounting estimates are reflected in the financial statements of the period
in which the changes are determined.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand or deposit, and money market
mutual funds with remaining maturities of less than 90 days at the time of
purchase.
Foreign Currency Translation
The Company's foreign subsidiaries typically utilize local currencies as the
functional currency for each location. Adjustments resulting from translating
functional currency financial statements into U.S. dollars are included as a
component of other comprehensive income/(loss) in the shareholders' investment
section of the Company's Consolidated Balance Sheets.
Depreciation and Amortization
Depreciation on property, plant and equipment is recorded using straight-line
and accelerated methods over the estimated useful lives of the assets. The
estimated useful lives range from 2 to 40 years on buildings and improvements, 3
to 10 years on equipment and vehicles, 30 years for marine vessels, and 3 to 7
years on computer hardware and software. Upon disposal of property, the asset
and related accumulated depreciation accounts are relieved of the amounts
recorded therein for such items, and any resulting gain or loss is reflected in
income. Amortization of other intangible assets is provided primarily on a
straight-line basis over the estimated useful lives of the assets. Aside from
goodwill, the Company's sole intangible asset is a non-compete agreement which
is being amortized over 7 years.
Goodwill
Goodwill, which represents the excess of cost over net assets of acquired
companies, has not been amortized since the Company adopted Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142") on January 1, 2002. This unamortized balance is evaluated during
the second quarter of each year or when events occur or circumstances change
that could cause goodwill to be impaired. Management assesses the impairment of
its goodwill balances using its current enterprise value, estimates of future
net cash flows, and EBITDA multiples. Through December 31, 2001, goodwill was
amortized on a straight-line basis over periods ranging from 5 to 20 years.
Accounting for Stock Options
As permitted under Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), during 2002, the Company
continued to utilize 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." Accordingly, no compensation
cost was recognized for stock options granted in 2002 and 2000; however,
$219,000 was expensed in 2001 as the result of decisions to accelerate the
vesting and extend the expiration date of an individual's options. As discussed
more fully in Note 2 to these financial statements, the Company plans to adopt
the prospective method of SFAS No. 148 effective January 1, 2003.
If compensation costs for the Company's stock incentive plans had been
determined based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by SFAS 123, the Company's net
income and diluted net income per share amounts would have been reduced. If SFAS
123 had been used, the Company's pro forma net income and net income per share
amounts would have been as follows:
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
(In thousands) 2002 2001 2000
------- -------- -------
Net income, as reported $ 9,566 $ 11,186 $ 5,376
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects -- 120 --
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects (428) (322) (117)
------- -------- -------
Pro forma net income $ 9,138 $ 10,984 $ 5,259
======= ======== =======
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
2002 2001 2000
------- -------- -------
Reported earnings per share:
Basic $ 1.15 $ 1.35 $ 0.65
Diluted 1.12 1.33 0.65
Pro forma earnings per share:
Basic 1.09 1.32 0.64
Diluted $ 1.07 $ 1.30 $ 0.64
Earnings Per Common Share
The following table summarizes the Company's weighted average shares outstanding
for the years ended December 31, 2002, 2001 and 2000. The additional shares
included in diluted shares outstanding are entirely attributable to stock
options.
Weighted Average Shares Outstanding 2002 2001 2000
--------- --------- ---------
Basic 8,350,940 8,291,005 8,209,395
Diluted 8,515,154 8,425,079 8,237,791
Reclassifications
Certain reclassifications have been made to prior years' amounts in the
Consolidated Balance Sheets and Statements of Cash Flows, as well as the
business segment disclosures in Note 5, in order to conform to the current year
presentation.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations," which requires that obligations associated with
retirements of tangible long-lived assets be recorded as liabilities when those
obligations are incurred. The Company will be required to adopt this standard
effective January 1, 2003, and does not believe that the adoption of this
statement will have a material impact on its financial statements.
In July 2002, the FASB issued Statement of Financial Accounting Standards No.
146, "Accounting for Exit or Disposal Activities," which addresses issues
associated with exit or disposal activities initiated after December 31, 2002.
The Company does not believe that the adoption of this statement will have a
material impact on its financial statements.
In January 2003, the FASB issued Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure" ("SFAS
148"). SFAS 148 amends SFAS 123 to provide alternative methods of transition for
companies that voluntarily change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. For entities that elect to adopt the fair value based method of
accounting of SFAS 123 in a fiscal year beginning before December 16, 2003, any
of three methods can be applied. The Company intends to adopt the prospective
method of SFAS 148 effective January 1, 2003. Under the prospective method, the
Company will begin expensing the value of all stock options granted, modified or
settled after January 1, 2003.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements of SFAS
No. 5, "Accounting for Contingencies," relating to the guarantor's accounting
for and disclosures of certain guarantees issued. The initial recognition and
measurement provisions of this interpretation are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The disclosure
requirements of this interpretation are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Company adopted
such disclosure requirements in connection with the issuance of these financial
statements; the related disclosure requirements can be found in Note 13. The
Company does not believe that the adoption of the initial recognition and
measurement provisions of this interpretation will have a material impact on its
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries if the entities do not effectively disperse risks among parties
involved. The primary beneficiary is the party that absorbs a majority of the
entity's expected losses or returns as a result of holding the variable
interest. This interpretation applies to variable interest entities in which an
enterprise obtains an interest, or which an enterprise creates, after January
31, 2003. For variable interest entities created before February 1, 2003, the
interpretation shall be applied for the first interim or annual reporting period
beginning after June 15, 2003. The Company plans to adopt this interpretation
effective July 1, 2003. Since it currently has no variable interest entities,
the Company does not believe that such adoption will have a material impact on
its financial statements.
3. CONTRACTS
The total cost of contracts in progress (used to determine cost of work
performed) plus accumulated gross profit recorded was $979,839,000 and
$922,079,000 at December 31, 2002 and 2001, respectively. Billings to date on
contracts in progress at December 31, 2002 and 2001 were $954,307,000 and
$902,823,000, respectively.
Trade accounts receivable balances totaling $6,287,000 and $5,937,000 at
December 31, 2002 and 2001, respectively, relate to retainage provisions under
long-term contracts which will be due upon completion of the contracts. Based on
management's estimates, $3,112,000 of the retention balance at December 31, 2002
is expected to be collected in 2003.
The Company had allowances for doubtful accounts totaling $2,425,000 and
$1,508,000 as of December 31, 2002 and 2001, respectively. These allowance
amounts reflect receivable balances for which collection is doubtful, and have
been netted against the receivables balances shown in the Consolidated Balance
Sheets.
Consistent with industry practice, within each of the Company's operating
segments, credit is granted to customers for the payment of services rendered.
Although the Company has a diversified client base, a substantial portion of its
receivables and net underbillings reflected in the Consolidated Balance Sheets
is dependent upon U.S. Federal and state government funding.
Internationally, the Company conducts business in certain countries where the
local political environment subjects the Company's related trade receivables,
due from subsidiaries of major oil companies, to lengthy collection delays.
Based upon past experience with these clients, after giving effect to the
Company's related allowance for doubtful accounts balance at December 31, 2002,
management believes that these receivable balances will be fully collectible.
4. NON-CORE OPERATIONS
During 2000, the Company recorded losses related to the CityWalk construction
project being performed by Baker Mellon Stuart Construction, Inc. ("BMSCI"), a
wholly-owned subsidiary of the Company, for Universal City Development Partners
("UCDP") at the Universal Studios theme park in Orlando, Florida. Under this
contract, BMSCI acted as the construction manager and self-performed a portion
of the work to construct a new entrance to the park. Following its inception in
1997, this project suffered delays and performance issues arose. In March 1999,
BMSCI was terminated by UCDP from the project, which was over 90% complete. Both
parties filed lawsuits in this matter during the first quarter of 1999. Pursuant
to a March 2000 settlement agreement, BMSCI paid UCDP $2.0 million; the Company
recorded related charges during 1999.
Certain subcontractors also sued BMSCI seeking reimbursement for costs incurred
and related damages. The most material of these claims involved a suit brought
against BMSCI in U.S. District Court by ADF International, Inc. ("ADF"), BMSCI's
subcontractor for structural steel and miscellaneous metals, seeking damages for
alleged breaches of contract relating to the project. On December 28, 2000,
liability judgments were entered by the District Court in favor of ADF against
BMSCI in the amount of $10.0 million. As a result, BMSCI recorded additional
charges during the fourth quarter of 2000 totaling $5.5 million related to the
liability judgments and $1.3 million in estimated ADF attorney's fees.
In January 2001, BMSCI filed an appeal of the ADF liability judgment with the
U.S. Court of Appeals for the 11th Circuit ("Court of Appeals"). In April 2001,
the District Court entered an additional judgment totaling $1.1 million on
behalf of ADF relative to its claim for attorney's fees and costs in connection
with the foregoing action. The effect of this judgment had been included in the
charges recorded by the Company during 2000. BMSCI and ADF subsequently filed
appeals of this judgment with the Court of Appeals. In conjunction with filing
these appeals, BMSCI was required by the Court of Appeals to post security, and
subsequently placed amounts totaling $12.7 million into an escrow account during
2001. The Company recorded both interest income (at a fluctuating market
investment rate) and interest expense (at a rate of 6.052%, as stipulated by the
Court of Appeals) on the escrow amount during 2001.
In separate rulings during February 2002, the Court of Appeals reversed both of
the District Court's prior judgments for liability and attorney's fees and costs
on behalf of BMSCI, and remanded the ADF matters back to the District Court for
further proceedings. Based on the decisions of the Court of Appeals, on August
2, 2002, the Company received $12.3 million of the $12.7 million previously
being held in the escrow account. The remaining escrow amount of $0.4 million,
relating to an aspect of the litigation that was not contested by BMSCI, was
also disbursed by the escrow agent in August 2002 to ADF.
Court-mandated mediation of the ADF litigation was conducted in Orlando, Florida
on October 23-25, 2002. As a result of the mediation, the Company reached a
settlement with ADF providing for the payment of $5.0 million by the Company to
ADF. Also resulting from the mediation, the Company agreed to release its
existing claim against Hellmuth, Obata & Kassabaum, Inc. ("HOK") arising out of
the same project, in exchange for an additional payment of $2.75 million by HOK
to ADF. As a result of the settlement, the Company became obligated to pay
contingent legal fees related to its claim against HOK. Accordingly, the Company
reduced its "accrued litigation reserve" liability balance and accrued an
estimate of the contingent legal fees, thereby resulting in a net favorable
impact of $5.1 million on the Non-Core segment's operating income for the
quarter ended September 30, 2002. Both the ADF settlement of $5.0 million and
the contingent legal fees of $1.0 million were paid by the Company during the
fourth quarter of 2002.
In connection with the UCDP litigation, the Company determined in early 1999
that it would no longer participate in general construction projects for
buildings or transportation infrastructure. Accordingly, certain assets held by
the Company's former transportation (heavy and highway) construction business,
including substantially all fixed assets and the remaining contractual rights
and obligations associated with eight active construction projects, were sold to
A&L, Inc. ("A&L") in March 2000 in exchange for cash proceeds of $0.7 million
and A&L's assumption of certain debt and lease obligations. During the second
quarter of 2000, charges totaling $1.2 million were recorded relative to lease
obligations on heavy and highway construction equipment. An offset of $0.2
million to this amount was recorded during the third quarter of 2000 when
certain of this construction equipment was sold and the lease obligations were
settled. All work on heavy and highway construction projects was substantially
completed at December 31, 2001.
Effective June 1, 2000, the Company completed the sale of Baker Support
Services, Inc. ("BSSI"), a former wholly-owned subsidiary, to SKE International
LLC ("SKE"). BSSI primarily provided operations and maintenance services on U.S.
military bases worldwide. In exchange for 100% of the common stock of BSSI, the
Company received cash proceeds of $13.5 million, and another $0.5 million was
placed in escrow by SKE pending resolution of a post-closing purchase price
adjustment. Management's discussions with SKE during the third quarter of 2000
resulted in an additional payment of approximately $0.4 million of the $0.5
million escrowed by SKE. These total payments resulted in the Company recording
a related gain on sale of $2.2 million during 2000. BSSI's results of operations
through May 31, 2000 are included in the Consolidated Statements of Income.
Sale-related disputes arose between SKE and the Company during 2002. As a result
of settlement discussions, charges totaling $0.7 million were recorded to the
Non-Core segment's selling, general and administrative expenses during 2002.
Although a final settlement agreement has not yet been executed between the
parties, the Company believes that its disputes with SKE were fully resolved at
December 31, 2002.
5. BUSINESS SEGMENT INFORMATION
The Company's business segments reflect how management makes resource decisions
and assesses its performance. The Company has the following three reportable
segments:
- - The Engineering segment provides a variety of design and related
consulting services. Such services include design-build, construction
management, consulting, planning, program management, surveying, mapping,
geographic information systems, architectural and interior design,
construction inspection, constructability reviews, software development,
site assessment and restoration, strategic regulatory analysis, regulatory
compliance, and advanced management systems.
- - The Energy segment provides a full range of Total Asset Management
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,
mechanical equipment maintenance, procurement, and supply chain
management. Many of these service offerings are enhanced by the
utilization of this segment's OPCO(R) managed production model as a
service delivery method.
- - The Non-Core segment includes activity associated with the former
buildings and transportation construction operations that are being wound
down, and the former BSSI subsidiary, which was sold in June 2000.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies (see Note 1). The Company evaluates
the performance of its segments primarily based on operating income before
Corporate overhead allocations.
The following tables reflect the required disclosures for the Company's
reportable segments (in millions):
2002 2001 2000
-------- -------- --------
Total contract revenues:
Engineering $ 242.6 $ 243.6 $ 228.4
Energy 162.6 158.2 120.7
Non-Core 0.1 1.4 41.6
-------- -------- --------
Total $ 405.3 $ 403.2 $ 390.7
======== ======== ========
2002 2001 2000
-------- -------- --------
Income/(loss) from operations without
Corporate expenses allocated:
Engineering $ 16.0 $ 18.6 $ 16.1
Energy 9.5 12.8 9.7
Non-Core 3.5 0.7 (6.9)
-------- -------- --------
Subtotal - segments 29.0 32.1 18.9
Corporate/Insurance (11.8) (11.7) (8.2)
-------- -------- --------
Total $ 17.2 $ 20.4 $ 10.7
======== ======== ========
2002 2001
--------- ---------
Segment assets:
Engineering $ 76.8 $ 72.4
Energy 52.6 46.6
Non-Core 1.0 14.6
--------- ---------
Subtotal - segments 130.4 133.6
Corporate/Insurance 14.7 14.8
--------- ---------
Total $ 145.1 $ 148.4
========= =========
2002 2001 2000
--------- --------- ---------
Capital expenditures:
Engineering $ 2.0 $ 2.8 $ 2.0
Energy 0.5 1.2 0.7
Non-Core -- -- 0.1
--------- --------- ---------
Subtotal - segments 2.5 4.0 2.8
Corporate 8.9 0.1 0.1
--------- --------- ---------
Total $ 11.4 $ 4.1 $ 2.9
========= ========= =========
2002 2001 2000
--------- --------- ---------
Depreciation and amortization expense:
Engineering $ 2.8 $ 3.4 $ 4.7
Energy 1.1 1.7 1.9
Non-Core -- -- 0.4
--------- --------- ---------
Subtotal - segments 3.9 5.1 7.0
Corporate 0.1 0.1 0.1
--------- --------- ---------
Total $ 4.0 $ 5.2 $ 7.1
========= ========= =========
The Company has determined that intersegment revenues, equity in the net income
of investees accounted for by the equity method, and the amount of investment in
equity method investees, by segment, are immaterial for further disclosure in
these financial statements.
The Company's enterprise-wide disclosures are as follows (in millions):
2002 2001 2000
--------- --------- ---------
Total contract revenues by type of service:
Engineering $ 242.6 $ 243.6 $ 228.4
Operations & maintenance 162.6 158.2 144.1
Construction 0.1 1.4 18.2
--------- --------- ---------
Total $ 405.3 $ 403.2 $ 390.7
========= ========= =========
2002 2001 2000
--------- --------- ---------
Total contract revenues by geographic origin:
Domestic $ 358.0 $ 346.4 $ 354.2
Foreign 47.3 56.8 36.5
--------- --------- ---------
Total $ 405.3 $ 403.2 $ 390.7
========= ========= =========
2002 2001 2000
---- ---- ----
Total contract revenues by principal markets:
United States government 13.9% 11.8% 17.4%
Various state governmental and quasi-governmental agencies 32.1% 28.4% 34.5%
Commercial, industrial and private clients 54.0% 59.8% 48.1%
The Company's business is substantially conducted in the United States.
Contracts with various branches of the U.S. government accounted for 14%, 12%
and 17% of the Company's total contract revenues for the years ended December
31, 2002, 2001 and 2000, respectively. No individual contract accounted for more
than 10% of the Company's total contract revenues in 2002, 2001 or 2000.
Long-lived assets are principally held in the United States; amounts held in
other locations are immaterial.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following (in thousands):
2002 2001
-------- --------
Land $ 486 $ 486
Buildings and improvements 6,465 6,039
Equipment and vehicles 11,157 11,817
Computer hardware 12,013 11,517
Computer software 14,109 5,351
-------- --------
Total, at cost 44,230 35,210
Less - Accumulated depreciation (26,771) (24,932)
-------- --------
Net property, plant and equipment $ 17,459 $ 10,278
======== ========
7. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
2002 2001
-------- --------
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 $952 and $667, respectively 1,048 1,333
-------- --------
Goodwill and other intangible assets, net $ 9,519 $ 9,804
======== =========
Under SFAS 142, which was adopted effective January 1, 2002, the Company's
goodwill balance is no longer being amortized, and goodwill impairment tests are
being performed at least annually. The Company completed its initial impairment
test during the second quarter of 2002, and no impairment charge was required.
During 2000, the Company determined that goodwill related to its 1998
acquisition of GeoResearch, Inc. was impaired and wrote off $375,000.
Reconciliations of the Company's reported net income and earnings per share, to
related amounts adjusted for the adoption of SFAS 142, are as follows:
For the year ended
-----------------------------------------------------
(In thousands) DEC. 31, 2002 Dec. 31, 2001 Dec. 31, 2000
------------- ------------- -------------
Reported net income $ 9,566 $ 11,186 $ 5,376
Add back: Goodwill
amortization, net of tax -- 378 535
-------- --------- --------
Adjusted net income $ 9,566 $ 11,564 $ 5,911
======== ========= ========
For the year ended
-----------------------------------------------------
DEC. 31, 2002 Dec. 31, 2001 Dec. 31, 2000
------------- ------------- -------------
Reported earnings per share:
Basic $ 1.15 $ 1.35 $ 0.65
Diluted $ 1.12 $ 1.33 $ 0.65
Adjusted earnings per share:
Basic $ 1.15 $ 1.39 $ 0.72
Diluted $ 1.12 $ 1.37 $ 0.72
Amortization expense recorded on the other intangible assets was $285,000,
$348,000 and $663,000 for 2002, 2001 and 2000, respectively. Future amortization
expense on the other intangible assets balance is currently estimated to be
$286,000 for the years ending December 31, 2003 through 2005, with the remaining
balance of $190,000 being amortized in 2006.
8. LONG-TERM DEBT AND BORROWING AGREEMENTS
In September 2001, the Company entered into an unsecured credit agreement ("the
Agreement") with a consortium of financial institutions. The Agreement provides
for a commitment of $40 million through September 30, 2004. The commitment
includes the sum of the principal amount of revolving credit loans outstanding
and the aggregate face value of outstanding letters of credit. As of December
31, 2002, no borrowings were outstanding under the Agreement; however; letters
of credit totaling $7.7 million were outstanding as of this date.
The Agreement provides for the Company to borrow at the bank's prime interest
rate or at LIBOR plus an applicable margin determined by the Company's leverage
ratio (based on a measure of EBITDA to indebtedness). The Agreement also
requires the Company 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 by the Company, under
certain circumstances, the banks may demand the repayment of all borrowings
outstanding and/or require deposits to cover the outstanding letters of credit.
Under the Agreement, the Company pays the bank commitment fees of 3/8% per year
based on the unused portion of the commitment.
The Company did not borrow under the Agreement during 2002. For 2001, the
average daily balance outstanding when the Company was in a borrowed position
was $1,500,000 at a weighted-average interest rate of 6.5%. The proceeds from
2001 borrowings under the Agreement were used to meet various working capital
requirements.
9. CAPITAL STOCK
In 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock in the open market. As of December 31,
2002, 334,289 treasury shares had been repurchased under this program. During
2001, the Company repurchased 31,300 treasury shares at an
average market price of $12.14 per share (based on market prices ranging from
$11.00 to $13.30 per share) for a total cost of $380,000. The Company made no
treasury share repurchases during 2002 or 2000. In January 2003, the Company
reactivated its share repurchase program. As of March 17, 2003, 80,400
additional treasury shares had been repurchased by the Company during 2003 at a
total cost of $690,000. In February 2003, the Board of Directors authorized the
Company to repurchase up to 500,000 additional shares.
The Company's Common Stock is divided into two series, Common Stock and Series B
Common Stock. Each share of Common Stock entitles the holder thereof to one vote
on all matters submitted to the shareholders, and each share of Series B Common
Stock entitles the holder thereof to ten votes on all such matters. During the
fourth quarter of 2001, the Company announced that all of its Series B Common
Stock would be exchanged into Common Stock. Under this program, each Series B
share held by the Company's Employee Stock Ownership Plan ("ESOP") was exchanged
for approximately 1.018 shares of Common Stock during the first quarter of 2002.
Immediately following that exchange, the remaining Series B shares were
automatically converted into Common equivalents in accordance with provisions of
the Company's Articles of Incorporation. This exchange resulted in 23,452 shares
of Common Stock being withdrawn from the Company's treasury stock. The effect of
this exchange was reflected in the Company's Consolidated Balance Sheet during
2002, and did not impact its net income for the year ended December 31, 2002.
The utilization of the treasury shares did not have any material effect on the
Company's earnings per share computations.
The Company's Articles of Incorporation authorize the issuance of 300,000 shares
of Cumulative Preferred Stock, par value $1 per share. At December 31, 2002 and
2001, there were no shares of such Preferred Stock outstanding.
10. RIGHTS AGREEMENT
In November 1999, the Company's Board of Directors adopted a Rights Agreement
(the "Rights Agreement"). In connection with the Rights Agreement, the Company
declared a distribution of one Right (a "Right") for each outstanding share of
Common Stock to shareholders of record at the close of business on November 30,
1999. The Rights will become exercisable after a person or group has acquired
25% or more of the Company's outstanding Common Stock or has announced a tender
offer that would result in the acquisition of 25% or more of the Company's
outstanding Common Stock. The Board of Directors has the option to redeem the
Rights for $0.001 per Right prior to their becoming exercisable. The Rights will
expire on November 16, 2009, unless they are earlier exchanged or redeemed.
Assuming the Rights have not been redeemed, after a person or group has acquired
25% or more of the Company's outstanding Common Stock, each Right (other than
those owned by a holder of 25% or more of the Common Stock) will entitle its
holder to purchase, at the Right's then current exercise price, a number of
shares of Common Stock of the Company having a value equal to two times the
exercise price of the Rights. In addition, at any time after the Rights become
exercisable and prior to the acquisition by the acquiring party of 50% or more
of the outstanding Common Stock, the Company's Board of Directors may exchange
the Rights (other than those owned by the acquiring person or its affiliates)
for Common Stock of the Company at an exchange ratio of one share of Common
Stock per Right.
11. LEASE COMMITMENTS
The Company's noncancellable leases relate to office space, computer equipment,
office equipment and vehicles, with lease terms ranging from 1 to 10 years.
Future annual minimum lease payments under noncancellable operating leases as of
December 31, 2002 were as follows (in thousands):
FISCAL YEAR
- -----------
2003 $ 11,960
2004 10,326
2005 8,938
2006 7,294
2007 6,640
Thereafter 19,234
--------
Total $ 64,392
========
Rent expense under noncancellable operating leases was $11,432,000 in 2002,
$10,532,000 in 2001 and $10,870,000 in 2000.
12. INCOME TAXES
The provision for income taxes consisted of the following (in thousands):
2002 2001 2000
------- ------- -------
Current income taxes:
Federal $ 6,821 $ 3,181 $ 219
State 583 380 721
Foreign 1,335 2,047 1,449
------- ------- -------
Total current income taxes 8,739 5,608 2,389
------- ------- -------
Deferred income taxes:
Federal (842) 3,638 3,547
State (69) 93 (340)
------- ------- -------
Total deferred income taxes (911) 3,731 3,207
------- ------- -------
Total provision for income taxes $ 7,828 $ 9,339 $ 5,596
======= ======= =======
The following is a reconciliation of income taxes computed at the Federal
statutory rate to income tax expense recorded by the Company (in thousands):
2002 2001 2000
------- ------- -------
Computed income taxes at
U.S. Federal statutory rate $ 6,088 $ 7,184 $ 3,743
Foreign taxes, net of Federal
income tax benefit 791 1,330 964
State income taxes, net of
Federal income tax benefit 334 307 248
Nondeductible charges 376 513 384
Other, net 239 5 257
------- ------- -------
Total provision for income taxes $ 7,828 $ 9,339 $ 5,596
======= ======= =======
The domestic and foreign components of the Company's income before income taxes
are as follows (in thousands):
2002 2001 2000
-------- -------- --------
Domestic $ 17,983 $ 16,989 $ 8,766
Foreign (589) 3,536 2,206
-------- -------- --------
Total $ 17,394 $ 20,525 $ 10,972
======== ======== ========
The components of the Company's deferred income tax assets and liabilities at
December 31, 2002 and 2001 are as follows (in thousands):
2002 2001
-------- --------
Deferred income tax assets:
Deductible temporary differences:
Provision for expenses and losses $ 8,428 $ 5,017
Contract overbillings 1,589 2,304
Accrued vacation pay 1,668 1,511
Fixed and intangible assets 1,164 1,317
Charitable contribution carryforward 74 91
Other 95 463
-------- --------
Total deferred income tax assets 13,018 10,703
-------- --------
Deferred income tax liabilities:
Contract underbillings (12,471) (10,494)
Undistributed foreign earnings (2,767) (3,340)
-------- --------
Total deferred income tax liabilities (15,238) (13,834)
-------- --------
Net deferred tax liability $ (2,220) $ (3,131)
======== ========
The Company has contribution carryforwards totaling $196,000 at December 31,
2002 that will expire in 2006. During 2002, the Internal Revenue Service
completed its examination of the Company's 1998 U.S. income tax return and made
no adjustments. The Company's 1999, 2000 and 2001 U.S. income tax returns remain
subject to audit. Management believes that adequate provisions have been made
for income taxes at December 31, 2002.
13. CONTINGENCIES
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. The Company requires its 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. The Company is insured with
respect to its workers' compensation and general liability exposures subject to
deductibles or self-insured retentions. As a result of adverse market conditions
in the insurance industry, several of these deductibles were either required to
be increased by the Company because expiring coverages were no longer available,
or were voluntarily increased to avoid additional premium cost increases, in
connection with the Company's most recent insurance coverage renewals effective
July 1, 2002. Loss provisions for these exposures are recorded based upon the
Company's estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
The Company is self-insured for its primary layer of professional liability
insurance through a wholly-owned captive insurance subsidiary. The secondary
layer of the professional liability insurance continues to be provided,
consistent with industry practice, under a "claims-made" insurance policy placed
with an
independent insurance company. Under claims-made policies, coverage must be in
effect when a claim is made. This insurance is subject to standard exclusions.
The Company's 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. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation; and on October 3, 2001,
Reliance was placed into liquidation. The Company is uncertain at this time what
effect these actions will have on any claim the Company or its subsidiaries may
have for insurance coverage under policies issued by Reliance with respect to
past years. Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary of the
Company, is subject to one substantial claim which falls within the Reliance
coverage period. This claim reflects an action by LTV Steel Company ("LTV")
against BEI, resulting from the failure of a landfill for which BEI provided
services. In December 2002, after a hearing in the U.S. District Court for the
Western District of Pennsylvania, out-of-court settlement discussions between
LTV and BEI commenced. In February 2003, LTV and BEI reached an out-of-court
settlement that will provide a payment to LTV in the amount of $2.5 million. As
a result of the settlement, pre-tax charges totaling $2.4 million were included
in the Engineering segment's cost of work performed during the fourth quarter of
2002. This settlement is subject to the approval of the Bankruptcy Court
overseeing the LTV bankruptcy proceeding. The Company expects the Bankruptcy
Court to take action by the end of March 2003. Due to the liquidation of
Reliance, the Company is currently uncertain what amounts paid to LTV will be
recoverable under the insurance policy with Reliance. Accordingly, the Company
has recorded no receivable from Reliance as of December 31, 2002.
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 the Overseas Technical Services companies in 1993. 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 has
been cooperating fully with 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
internal investigation and the government's inquiry are ongoing and the
Company's assessment of the outcome may vary as the investigation and inquiry
proceed.
The Company has been named as a defendant or co-defendant in other legal
proceedings wherein substantial damages are claimed. Such proceedings are not
uncommon to the Company's business. After consultations with counsel, management
believes that the Company has recognized adequate provisions for probable and
reasonably estimable liabilities associated with these proceedings, and that
their ultimate resolutions will not have a material adverse effect on the
consolidated financial position or annual results of operations of the Company.
At December 31, 2002, the Company had certain guarantees and indemnifications
outstanding which could result in future payments to third parties. These
guarantees generally result from the conduct of the Company's business in the
normal course. The Company's outstanding guarantees were as follows at December
31, 2002:
Maximum Related liability
undiscounted future balance recorded
(Dollars in millions) payments at 12/31/02
------------------- -----------------
Standby letters of credit:
Insurance related $ 7.6 $ 7.9
Other 0.1 --
Performance and payment bonds 37.8 --
Sale of certain construction assets Unlimited --
Sale of BSSI 2.0 --
==============================
The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Agreement discussed above. As of December 31, 2002, most of
these LOCs had been issued to insurance companies to serve as collateral for
payments the insurers are required to make under the Company's self-insurance
programs. These LOCs may be drawn upon in the event that the Company does not
reimburse the insurance companies for claims payments made on behalf of the
Company. Such LOCs renew automatically on an annual basis unless either the LOCs
are returned to the bank by the beneficiary or the Company's banks elect not to
renew them. The related liability balance of $7.9 million recorded at December
31, 2002 reflects the entire accrued insurance balance in the Company's
Consolidated Balance Sheet.
Bonds are provided on behalf of the Company by Travelers Casualty and Surety
Company of America ("Travelers"). The performance and payment bonds outstanding
at December 31, 2002 included two bonds totaling $36.3 million related to the
Company's former construction operations, of which one for $11.9 million was
terminated during the first quarter of 2003. These bonds are terminated by
Travelers when the related projects are completed and all appropriate releases
are received from the client. The remaining construction bond relates to a
construction project that is substantially completed; accordingly, this bond is
currently expected to be terminated during the first half of 2003. The
beneficiaries under these performance and payment bonds may request payment from
Travelers in the event that the Company does not perform under the project or if
subcontractors are not paid. The Company does not currently expect any amounts
to be paid by Travelers under its bonds outstanding at December 31, 2002.
During 2000, the Company sold certain assets associated with its former heavy &
highway construction business to A&L, Inc., and all of the outstanding stock of
its former BSSI subsidiary to SKE International LLC. These sale agreements
provided indemnifications to the buyers for breaches of certain obligations by
the Company. For the sale of heavy & highway assets, there was no dollar limit
on the indemnifications, and the terms vary but will ultimately be governed by
the statutes of limitations. Maximum payments for indemnifications under the
BSSI sale were limited to $2.0 million, and the terms are based on the varying
statutes of limitations plus 90 days. The Company does not currently expect to
make any future payments under these indemnifications.
14. EMPLOYEE STOCK OWNERSHIP PLAN AND TRUST
The Company maintains a defined contribution retirement program through its
ESOP, in which substantially all employees are eligible to participate. The ESOP
offers participants several investment options, including a variety of mutual
funds and Company stock. Contributions to the ESOP are derived from a 401(k)
Salary Redirection Program with a Company matching contribution, and a
discretionary contribution as determined by the Company's Board of Directors.
Under the 401(k) Salary Redirection Program, the Company matches 100% of the
first 5% and 50% of the next full 1% of eligible salary
contributed by participants, thereby resulting in a Company match of as much as
5.5% of eligible salary contributed. The Company's matching contributions are
invested not less than 25% in Michael Baker Corporation Common Stock, with the
remaining 75% being available to invest in mutual funds or the Company's Common
Stock, as directed by the participants. Company contributions under this program
amounted to $6,006,000, $5,343,000 and $4,965,000 in 2002, 2001 and 2000,
respectively.
As of December 31, 2002, the market value of all ESOP investments was
$98,017,000, of which 34% represented the market value of the ESOP's investment
in Michael Baker Corporation Common Stock. The Company's ESOP held 36% of both
the shares and voting power for the outstanding Common Stock of the Company at
the end of 2002.
15. STOCK OPTION PLANS
As of December 31, 2002, the Company has two fixed stock option plans. Under the
amended 1995 Stock Incentive Plan (the "Plan"), the Company may grant options
for an aggregate of 1,500,000 shares of Common Stock to key employees. Under the
1996 Nonemployee Directors' Stock Incentive Plan (the "Directors' Plan"), the
Company may grant options and restricted shares for an aggregate of 150,000
shares of Common Stock to nonemployee board members. Under both plans, the
exercise price of each option equals the average market price of the Company's
stock on the date of grant. Unless otherwise established, one-fourth of the
options granted to key employees become immediately vested, and the remaining
three-fourths vest in annual one-fourth increments under the Plan, while the
options under the Directors' Plan are fully vested at date of grant. Vested
options remain exercisable for a period of ten years from the grant date under
both plans.
Under the Directors' Plan, each nonemployee director was issued 1,000 restricted
shares of Common Stock for a total of 8,000 shares of restricted stock issued in
each of 2002 and 2001. In 2000, each nonemployee director was issued 500
restricted shares of Common Stock for a total restricted stock issuance of 3,000
shares. The Company recognized compensation expense totaling $120,000, $80,000
and $21,000 related to the issuance of these restricted shares in 2002, 2001 and
2000, respectively. Restrictions on the shares expire two years after the issue
date.
The following table summarizes all stock option activity for both plans in 2002,
2001 and 2000:
WEIGHTED AVERAGE
SHARES SUBJECT EXERCISE PRICE
TO OPTION PER SHARE
-------------- ----------------
BALANCE AT DECEMBER 31, 1999 615,816 $ 7.86
Options granted 6,000 6.25
Options exercised (82,097) 5.72
Options forfeited or expired (144,060) 9.24
---------- --------
BALANCE AT DECEMBER 31, 2000 395,659 7.78
---------- --------
Options granted 149,162 8.83
Options exercised (34,514) 6.05
Options forfeited or expired (19,370) 8.42
---------- --------
BALANCE AT DECEMBER 31, 2001 490,937 8.20
---------- --------
Options granted 232,470 15.58
Options exercised (76,270) 7.51
Options forfeited or expired (67,283) 12.78
---------- --------
BALANCE AT DECEMBER 31, 2002 579,854 $ 10.72
========== ========
The weighted average fair value of options granted during 2002, 2001, and 2000
was $7.92, $4.51 and $3.37, respectively. As of December 31, 2002, 286,248
shares of the Company's Common Stock were available for future issuance under
the Plan, and 48,000 shares were available under the Directors' Plan.
The following table summarizes information about stock options outstanding under
both plans as of December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- ----------------------------
NUMBER OF AVERAGE WEIGHTED AVERAGE NUMBER OF WEIGHTED AVERAGE
RANGE OF EXERCISE PRICES OPTIONS LIFE* EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- ------- ---------------- --------- ----------------
$ 4.8125 - $ 6.9063 138,709 2.6 $ 6.17 138,709 $ 6.17
$ 7.8125 - $ 9.0000 111,641 6.4 8.52 70,365 8.52
$ 9.5313 - $ 12.850 132,710 5.6 10.11 45,871 9.94
$15.035 - $15.625 196,794 8.8 15.58 65,470 15.50
------- --- -------- ------- -------
Total 579,854 6.1 $ 10.72 320,415 $ 9.13
======= === ======== ======= =======
*Average life remaining in years
The fair value of options on the respective grant dates was estimated using a
Black-Scholes option pricing model, based on the following assumptions:
2002 2001 2000
------ ------ ------
Weighted average risk-free 5.7% 5.8% 5.9%
interest rate
Weighted average expected
volatility 47.7% 48.5% 49.1%
Expected option life 6 years 6 years 6 years
Expected dividend yield 0% 0% 0%
16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the two years ended December 31, 2002 (in thousands, except per share
information):
2002 - THREE MONTHS ENDED
-----------------------------------------------------------------
Mar. 31 June 30 Sept. 30 (1) Dec. 31 (2)
--------- --------- ------------ -----------
Total contract revenues $ 95,922 $ 104,760 $ 102,200 $ 102,382
Gross profit 15,272 17,825 23,725 9,386
Income/(loss) before income taxes 3,146 6,225 10,762 (2,739)
Net income/(loss) 1,714 3,486 6,376 (2,010)
Diluted net income/(loss) per common
share $ 0.20 $ 0.41 $ 0.75 $ (0.24)
2001 - THREE MONTHS ENDED
-----------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31
--------- --------- ------------ -----------
Total contract revenues $ 94,950 $ 102,652 $ 100,799 $ 104,821
Gross profit 15,349 17,561 17,903 16,567
Income before income taxes 4,588 5,682 5,560 4,695
Net income 2,488 3,092 2,947 2,659
Diluted net income per common share $ 0.30 $ 0.37 $ 0.35 $ 0.31
(1) Includes the effect of the ADF settlement (see Note 4).
(2) Includes the effect of the LTV settlement (see Note 13).
Report of Management
To The Shareholders of Michael Baker Corporation
Management of Michael Baker Corporation ("the Company") is responsible for
preparing the accompanying financial statements and for ensuring their integrity
and objectivity. These financial statements were prepared in accordance with
accounting principles generally accepted in the United States of America and
fairly represent the transactions and financial position of the Company. The
financial statements include amounts that are based on management's best
estimates and judgments.
The Company's financial statements have been audited by PricewaterhouseCoopers
LLP, independent accountants, as selected by the Audit Committee. Management has
made available to PricewaterhouseCoopers LLP all the Company's financial records
and related data, as well as the minutes of shareholders' and directors'
meetings.
Management of the Company has established and maintains a system of internal
accounting controls that is designed to provide reasonable assurance that assets
are safeguarded, transactions are properly recorded and executed in accordance
with management's authorization, and the books and records accurately reflect
the disposition of assets. The system of internal controls includes appropriate
division of responsibility. The Company maintains an internal audit department
that conducts internal audits and assesses the effectiveness of the internal
controls.
The Audit Committee is composed of directors who are not officers or employees
of the Company. It meets regularly with members of management, the internal
auditors and the independent accountants to discuss the adequacy of the
Company's internal controls, its financial statements, and the nature, extent
and results of the audit effort. Both the internal auditors and the independent
accountants have free and direct access to the Audit Committee without the
presence of management.
/s/ Donald P. Fusilli, Jr.
- ------------------------------
Donald P. Fusilli, Jr.
President and
Chief Executive Officer
/s/ William P. Mooney
- ------------------------------
William P. Mooney
Executive Vice President
and Chief Financial Officer
/s/ Craig O. Stuver
- ------------------------------
Craig O. Stuver
Senior Vice President,
Corporate Controller and Treasurer
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Michael Baker Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' investment and of cash flows
present fairly, in all material respects, the financial position of Michael
Baker Corporation and its subsidiaries (the Company) at December 31, 2002 and
2001, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 7 to the consolidated financial statements, the Company
changed its method of accounting for goodwill and other intangible assets in
2002.
/s/ PricewaterhouseCoopers LLP
- -------------------------------
Pittsburgh, PA
March 17, 2003
SUPPLEMENTAL FINANCIAL INFORMATION
Market Information - Common Shares
The principal market on which Michael Baker Corporation Common Stock is traded
is the American Stock Exchange. High and low closing prices of the Common Stock
for each quarter during 2002 and 2001 were as follows:
2002 2001
--------------------------------------------- ---------------------------------------------
Fourth Third Second First Fourth Third Second First
------ ----- ------ ----- ------ ----- ------ --------
High $11.00 $15.94 $15.80 $15.80 $15.20 $14.60 $14.50 $ 8.93
Low 9.40 10.30 14.00 13.75 12.60 11.38 7.60 7.1875