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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Office Park, Building 3, 420 Rouser Road, Coraopolis, PA 15108
- ---------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(412) 269-6300
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 31, 2002:
--------------------
Common Stock 8,385,523 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The condensed consolidated financial statements which follow have been prepared
by Michael Baker Corporation ("the Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for
the periods presented. All such adjustments are of a normal and recurring nature
unless specified otherwise. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, and in particular the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in Part I, contains forward-looking statements concerning future
operations and performance of the Company. Forward-looking statements are
subject to market, operating and economic risks and uncertainties that may cause
the Company's actual results in future periods to be materially different from
any future performance suggested herein. Factors that may cause such differences
include, among others: increased competition, increased costs, changes in
general market conditions, changes in industry trends, changes in the regulatory
environment, changes in anticipated levels of government spending on
infrastructure, management changes, and changes in loan relationships or sources
of financing. Such forward-looking statements are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
-1-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
----------------------------
JUNE 30, 2002 June 30, 2001
==================================================================================
(In thousands, except
per share amounts)
Total contract revenues $ 104,760 $ 102,652
Cost of work performed 86,935 85,091
- ----------------------------------------------------------------------------------
Gross profit 17,825 17,561
Selling, general and administrative expenses 11,669 11,826
- ----------------------------------------------------------------------------------
Income from operations 6,156 5,735
Other income/(expense):
Interest income 79 190
Interest expense (20) (238)
Other, net 10 (5)
- ----------------------------------------------------------------------------------
Income before income taxes 6,225 5,682
Provision for income taxes 2,739 2,590
- ----------------------------------------------------------------------------------
NET INCOME $ 3,486 $ 3,092
==================================================================================
BASIC NET INCOME PER SHARE $ 0.42 $ 0.37
DILUTED NET INCOME PER SHARE $ 0.41 $ 0.37
==================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the six months ended
----------------------------
JUNE 30, 2002 June 30, 2001
=================================================================================
(In thousands, except
per share amounts)
Total contract revenues $ 200,681 $ 197,602
Cost of work performed 167,584 164,692
- ---------------------------------------------------------------------------------
Gross profit 33,097 32,910
Selling, general and administrative expenses 23,781 22,710
- ---------------------------------------------------------------------------------
Income from operations 9,316 10,200
Other income/(expense):
Interest income 171 449
Interest expense (41) (412)
Other, net (76) 33
- ---------------------------------------------------------------------------------
Income before income taxes 9,370 10,270
Provision for income taxes 4,170 4,690
- ---------------------------------------------------------------------------------
NET INCOME $ 5,200 $ 5,580
=================================================================================
BASIC NET INCOME PER SHARE $ 0.63 $ 0.67
DILUTED NET INCOME PER SHARE $ 0.61 $ 0.67
=================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS JUNE 30, 2002 Dec. 31, 2001
=====================================================================================================
(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 23,083 $ 18,482
Receivables 68,827 67,594
Cost of contracts in progress and estimated earnings, less billings 28,225 25,341
Litigation escrow 375 12,710
Prepaid expenses and other 2,640 1,429
- -----------------------------------------------------------------------------------------------------
Total current assets 123,150 125,556
- -----------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 13,019 10,278
- -----------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 9,661 9,804
Other assets 3,858 2,748
- -----------------------------------------------------------------------------------------------------
Total other assets 13,519 12,552
- -----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 149,688 $ 148,386
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 19,903 $ 21,885
Accrued employee compensation 13,169 15,413
Accrued insurance 5,933 5,359
Accrued litigation reserve 11,770 11,770
Income taxes payable 4,350 1,827
Other accrued expenses 21,159 22,263
Excess of billings on contracts in progress over cost and estimated
earnings 3,336 6,085
- -----------------------------------------------------------------------------------------------------
Total current liabilities 79,620 84,602
- -----------------------------------------------------------------------------------------------------
OTHER LIABILITIES 2,708 2,291
Commitments and contingencies -- --
- -----------------------------------------------------------------------------------------------------
Total liabilities 82,328 86,893
- -----------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,696,360 and 7,315,894 shares at 6/30/02 and 12/31/01, respectively 8,696 7,316
Series B Common Stock, par value $1, authorized 6,000,000 shares,
issued 0 and 1,296,696 shares at 6/30/02 and 12/31/01, respectively -- 1,297
Additional paid-in-capital 38,169 37,734
Retained earnings 23,045 17,845
Other comprehensive loss (287) (266)
Less - 310,837 and 334,289 shares of Common Stock in treasury,
at cost, at 6/30/02 and 12/31/01, respectively (2,263) (2,433)
- -----------------------------------------------------------------------------------------------------
Total shareholders' investment 67,360 61,493
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 149,688 $ 148,386
=====================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
------------------------
JUNE 30, 2002 June 30, 2001
=========================================================================================
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,200 $ 5,580
Adjustments to reconcile net income to net
cash (used in)/provided by operating activities:
Depreciation and amortization 2,067 2,648
Changes in assets and liabilities:
Increase in receivables and contracts in progress (6,866) (7,363)
(Decrease)/increase in accounts payable and
accrued expenses (1,814) 3,293
Increase in other net assets (1,126) (106)
- -----------------------------------------------------------------------------------------
Total adjustments (7,739) (1,528)
- -----------------------------------------------------------------------------------------
Net cash (used in)/provided by operating activities (2,539) 4,052
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (4,766) (2,124)
Investment in Energy Virtual Partners (1,000) --
Receipt of litigation escrow 12,335 --
Proceeds from sale of short-term investments -- 8,999
Funding of litigation escrow -- (12,701)
- -----------------------------------------------------------------------------------------
Net cash provided by/(used in) investing activities 6,569 (5,826)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (2) (60)
Proceeds from exercise of stock options 573 280
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 571 220
- -----------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 4,601 (1,554)
Cash and cash equivalents, beginning of year 18,482 9,122
- -----------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 23,083 $ 7,568
=========================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 25 $ 42
Income taxes paid $ 1,733 $ 1,597
=========================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2002
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,346,474 and 8,301,363 for the three-month periods, and 8,316,457 and 8,289,389
for the six-month periods, ended June 30, 2002 and 2001, respectively. Diluted
net income per share computations are based upon weighted averages of 8,539,427
and 8,415,696 shares outstanding for the three-month periods, and 8,521,368 and
8,365,228 for the six-month periods, ended June 30, 2002 and 2001, respectively.
The additional shares included in diluted shares outstanding are entirely
attributable to stock options.
NOTE 2 - BUSINESS SEGMENT INFORMATION
The Company has the following three reportable segments:
- - 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 technical services for
operating energy production facilities. 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, and
supply chain management. Many of these service offerings are enhanced by
the utilization of this segment's OPCO(SM) operating model as a service
delivery method.
- - The Non-Core segment consists of the former buildings and transportation
construction operations that are being wound down.
-6-
The following tables reflect the required disclosures for the Company's
reportable segments (in millions):
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2002 June 30, 2001 JUNE 30, 2002 June 30, 2001
=========================================================================================================================
Total contract revenues:
Engineering $ 61.9 $ 61.3 $ 120.2 $ 118.3
Energy 42.9 41.4 80.5 78.8
Non-Core - - - 0.5
- -------------------------------------------------------------------------------------------------------------------------
Total $ 104.8 $ 102.7 $ 200.7 $ 197.6
=========================================================================================================================
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2002 June 30, 2001 JUNE 30, 2002 June 30, 2001
=========================================================================================================================
Income/(loss) from operations
without Corporate expenses
allocated:
Engineering $ 6.1 $ 5.4 $ 10.4 $ 9.0
Energy 3.3 3.5 5.0 6.3
Non-Core (0.5) 0.1 (0.6) 0.5
- -------------------------------------------------------------------------------------------------------------------------
Subtotal - segments 8.9 9.0 14.8 15.8
Corporate/Insurance (2.7) (3.3) (5.5) (5.6)
=========================================================================================================================
Total $ 6.2 $ 5.7 $ 9.3 $ 10.2
=========================================================================================================================
JUNE 30, 2002 Dec. 31, 2001
=========================================================================================================================
Segment assets:
Engineering $ 76.1 $ 72.4
Energy 51.7 46.6
Non-Core 1.1 14.6
- -------------------------------------------------------------------------------------------------------------------------
Subtotal - segments 128.9 133.6
Corporate/Insurance 20.8 14.8
- -------------------------------------------------------------------------------------------------------------------------
Total $ 149.7 $ 148.4
=========================================================================================================================
NOTE 3 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through September 30, 2003. 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 June 30, 2002, no borrowings were
outstanding under the Agreement; however; letters of credit totaling $6.3
million were outstanding as of this date.
-7-
NOTE 4 - CONTINGENCIES
The Company's professional liability errors and omissions 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. Currently, Baker Environmental, Inc. ("BEI"), a
wholly-owned subsidiary of the Company, is subject to one substantial claim
which, if decided adversely to the Company, would be within the scope of an
insurance policy issued by Reliance. This claim reflects an action by LTV Steel
Company ("LTV") against BEI, which is pending in the U.S. District Court for the
Western District of Pennsylvania, and resulted from the failure of a landfill
for which BEI provided services. Although LTV claims damages of $10-11 million,
the litigation is in progress and, at this time, it is uncertain whether BEI
will have any liability with respect to this claim and, if so, whether any such
liability will be funded by Reliance. Based on the uncertainty associated with
BEI's liability for this claim, and with Reliance's ability to fund such
liability, if any, the Company has not accrued any amounts for this matter in
its consolidated financial statements as of June 30, 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 London-based Overseas Technical Services, Inc. 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 reviewed the status of other contingencies outstanding at June
30, 2002. Management believes that there have been no significant changes to the
information disclosed in its Annual Report on Form 10-K for the year ended
December 31, 2001.
NOTE 5 - NON-CORE OPERATIONS
As further discussed in Note 4 to the Company's consolidated financial
statements for the year ended December 31, 2001, in separate rulings during
February 2002, the 11th Circuit Court of Appeals reversed both of the U.S.
District Court's prior judgments for liability and attorney's fees and costs on
behalf of Baker Mellon Stuart Construction, Inc. ("BMSCI"), a wholly-owned
subsidiary of the Company, and remanded the ADF matters back to the District
Court for further proceedings.
-8-
Based on the decisions of the Court of Appeals, on August 2, 2002, the Company
received approximately $12.3 million of the $12.7 million previously being held
in escrow as a result of this litigation. The amount received has been
reclassified from the "litigation escrow" balance to "cash and cash equivalents"
in the Company's balance sheet at June 30, 2002. The remaining escrow amount of
approximately $0.4 million, relating to an aspect of the litigation that was not
contested by BMSCI, will be disbursed by the escrow agent to ADF. This liability
was included in the "accrued litigation reserve" balance of $11.8 million shown
on the Company's balance sheet at June 30, 2002. This liability balance has not
been adjusted because the ADF litigation, and any additional liability of the
Company thereunder, remain unresolved.
NOTE 6 - GOODWILL
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS 142"). Under SFAS 142, the Company's goodwill balance will no
longer be amortized, and goodwill impairment tests are required at least
annually. The Company adopted this standard effective January 1, 2002, and
completed its initial impairment test during the second quarter. No impairment
charge was recorded as a result of this initial impairment test.
The Company's net income and earnings per share results related to the adoption
of SFAS 142 are as follows (in thousands, except per share information):
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2002 June 30, 2001 JUNE 30, 2002 June 30, 2001
==========================================================================================================================
Reported net income $ 3,486 $ 3,092 $ 5,200 $ 5,580
Add back: Goodwill
amortization, net of tax - 94 - 188
- --------------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 3,486 $ 3,186 $ 5,200 $ 5,768
==========================================================================================================================
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2002 June 30, 2001 JUNE 30, 2002 June 30, 2001
===========================================================================================================================
Reported earnings per share:
Basic $ 0.42 $ 0.37 $ 0.63 $ 0.67
Diluted $ 0.41 $ 0.37 $ 0.61 $ 0.67
Adjusted earnings per share:
Basic $ 0.42 $ 0.38 $ 0.63 $ 0.70
Diluted $ 0.41 $ 0.38 $ 0.61 $ 0.69
===========================================================================================================================
NOTE 7 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001 and October 2001, the FASB issued Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143") and No. 144, "Accounting for the
-9-
Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), respectively. SFAS
143 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 adoption of this statement will have a material impact on
its financial statements. SFAS 144 requires that long-lived assets that are to
be disposed of by sale must be measured at the lower of book value or fair
value, less cost to sell. This standard was adopted effective January 1, 2002.
Such adoption did not have a material effect on the Company's financial position
as of June 30, 2002 or its results of operations for the three or six-month
periods then ended.
In April 2002 and July 2002, the FASB issued Statements of Financial Accounting
Standard No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of
FASB Statement No. 13, and Technical Corrections" ("SFAS 145"), and No. 146,
"Accounting for Exit or Disposal Activities" ("SFAS 146"). SFAS 145 prescribes
amendments to existing pronouncements on accounting for early retirements of
debt and modifications of capital leases to operating leases. The provisions of
this statement are effective for financial statements issued on or after May 15,
2002. SFAS 146 addresses issues associated with exit or disposal activities
initiated after December 31, 2002. The Company does not believe that the
adoption of these statements will have a material impact on its financial
statements.
NOTE 8 - CONSOLIDATION OF FOREIGN OPERATIONS
The differences between the amounts reported in the accompanying Condensed
Consolidated Statements of Income for the three and six-month periods ended June
30, 2001 and those reported in the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2001 are entirely attributable to the consolidation
of local currency activities for two less-than-wholly-owned subsidiaries in
Nigeria and Thailand. These subsidiaries' local currency results of operations
were consolidated for the first time in the fourth quarter of 2001, and
retroactively adjusted in the Company's results of operations for the first
three quarters of 2001. These adjustments had no impact on net income for the
first three quarters of 2001.
NOTE 9 - RECLASSIFICATIONS
Certain reclassification have been made to prior year balance sheet amounts in
order to conform to the current year presentation.
-10-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following tables reflect a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended June 30, 2002 and 2001 (in millions):
For the three months ended For the six months eneded
-------------------------- -------------------------
JUNE 30, 2002 June 30, 2001 JUNE 30, 2002 June 30, 2001
========================================================================================================================
Total contract revenues:
Engineering $ 61.9 $ 61.3 $ 120.2 $ 118.3
Energy 42.9 41.4 80.5 78.8
Non-Core* - - - 0.5
- ------------------------------------------------------------------------------------------------------------------------
Total $ 104.8 $ 102.7 $ 200.7 $ 197.6
========================================================================================================================
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2002 June 30, 2001 JUNE 30, 2002 June 30, 2001
========================================================================================================================
Income/(loss) from operations
with Corporate expenses
allocated:
Engineering $ 4.6 $ 4.1 $ 7.4 $ 6.3
Energy 2.6 2.9 3.5 5.1
Non-Core* (0.7) (1.0) (1.0) (0.7)
- ------------------------------------------------------------------------------------------------------------------------
Subtotal - segments 6.5 6.0 9.9 10.7
Corporate/Insurance (0.3) (0.3) (0.6) (0.5)
- ------------------------------------------------------------------------------------------------------------------------
Total $ 6.2 $ 5.7 $ 9.3 $ 10.2
========================================================================================================================
* The Non-Core segment consists of the former Buildings and Transportation
construction divisions, which are currently in the process of being wound
down.
TOTAL CONTRACT REVENUES
Total contract revenues from the Company's ongoing operations (defined as
consolidated revenues less Non-Core revenues) increased slightly in the second
quarter of 2002 relative to the second quarter of 2001. In the Energy segment,
revenues for the second quarter of 2002 increased 4% from the second quarter of
2001. This lower than normal growth was the direct result of the expiration of
several older international contracts that were not renewed in late 2001 and
early 2002, and weaker than normal sales in both the domestic and international
markets. OPCO(SM) revenues composed 28% and 29% of Baker Energy's total contract
revenues for the second quarter of 2002 and 2001, respectively. Engineering
revenues increased only slightly for the second quarter of 2002 as compared to
the second quarter of 2001. This slight increase is mostly attributable to a
slowdown in pipeline and telecommunications projects in the Western U.S., which
offset a 12% revenue gain in
-11-
the transportation-related sector. As expected, the Company's Non-Core segment
posted no revenues for the second quarter of either 2002 or 2001. This absence
of activity reflects the continuing wind-down of the Company's former
construction operations.
For the first six months of 2002, total contract revenues from the Company's
ongoing operations increased 2% over the corresponding period in 2001. In the
Energy segment, revenues increased 2% in the first six months of 2002 as
compared to the first six months of 2001. This lower than normal growth is again
attributable to the expiration of several older international contracts that
were not renewed and weaker than normal sales in both the domestic and
international markets. OPCO composed 29% and 30% of Baker Energy's total
contract revenues for the first six months of 2002 and 2001, respectively.
Engineering revenues also increased 2% in the first six months of 2002 as
compared to the first six months of 2001 due to an 11% revenue gain in the
transportation-related sector, which was partially offset by the weaker results
in the Western U.S. The 100% reduction in revenues for the Company's Non-Core
operations during the first half of 2002 again reflects the continuing wind-down
of the Company's construction operations.
GROSS PROFIT
For the Company's ongoing operations, gross profit expressed as a percentage of
revenues increased to 17.5% for the second quarter of 2002 from 17.0% in the
second quarter of 2001. The Energy segment's gross profit percentage decreased
to 14.9% in the second quarter of 2002 from 16.8% in the second quarter of 2001.
This decrease was the result of the expiration of several higher margin
international contracts that were either not renewed or renewed at lower margins
in late 2001 and early 2002, as well as a write-down on a significant
international project that was terminated during the second quarter of 2002.
Also affecting gross profit were several new lower margin domestic contracts
that commenced during the first quarter of 2002. Energy's OPCO operations posted
a gross profit margin percentage of 31% in the second quarter of 2002 as
compared to 16% in the comparable period of 2001. The above average OPCO gross
profit margin for 2002 is related to a second quarter performance bonus, while
the below average gross profit margin for 2001 related to fluctuations in
certain costs incurred in connection with the transition of several OPCO
contracts to Phase II of the OPCO model. During Phase I of a typical OPCO
contract, only labor and logistics services are provided by the Energy segment;
Phase II incrementally includes the provision of turnkey operations and
maintenance services. The Engineering segment's gross profit percentage was
19.7% for the second quarter of 2002 compared to 17.6% in the comparable period
of 2001. Contributing to this increase was an overall more favorable mix of
higher margin engineering contracts (complimented by more self-performed work
and less usage of subcontractors) that extended into the second quarter of 2002,
and the receipt of a performance-based bonus for the early completion of a
transportation project. The Company's Non-Core segment posted gross profit of
$0.1 million for the second quarter of 2001, versus a loss of $0.5 million in
2002. The second quarter 2002 loss resulted from adverse developments in
casualty insurance claims related to the Company's former construction
operations.
Gross profit expressed as a percentage of revenues for the Company's ongoing
operations increased to 16.8% in the first six months of 2002 from 16.4% in the
first six months of 2001. The Energy
-12-
segment's gross profit percentage decreased to 14.5% in the first six months of
2002 from 17.5% in the first six months of 2001. The reasons for this percentage
decrease are consistent with those discussed in the preceding paragraph. OPCO
posted a gross profit margin percentage of 28% and 20% in the first six months
of 2002 and 2001, respectively. As previously stated, the below average gross
profit margin in 2001 is due to fluctuations in certain costs incurred in
connection with the transition of several OPCO contracts to Phase II of the OPCO
model. The Engineering segment posted a gross profit percentage increase to
18.7% in the first six months of 2002 from 16.1% in the comparable period of
2001. Contributing to this increase was the previously mentioned more favorable
overall mix of higher margin self-performed engineering work and the receipt of
the performance-based bonus, as well as several favorable adjustments on
projects that were completed during the first six months of 2002. For the first
six months of 2001, the Company's Non-Core operations posted gross profit of
$0.5 million versus a loss of $0.6 million for the comparable period of 2002.
The 2002 loss was discussed in the preceding paragraph.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses expressed as a percentage
of total contract revenues for the Company's ongoing operations increased to
10.9% in the second quarter of 2002 from 10.5% in the second quarter of 2001.
This overall increase in SG&A expenses as a percentage of total contract
revenues primarily resulted from higher medical benefit and workers compensation
insurance costs, and bad debt expense associated with two customers' bankruptcy
filings during the second quarter of 2002. In the Energy segment, SG&A expenses
expressed as a percentage of total revenues decreased to 9.0% in the second
quarter of 2002 from 9.8% in 2001. This decrease resulted from the relatively
minor increase in Energy revenues, lower personnel costs and the lack of
goodwill amortization expense during the second quarter of 2002, which were
partially offset by higher bad debt expense. In the Engineering segment, SG&A
expenses expressed as a percentage of total revenues increased to 12.3% in the
second quarter of 2002 from 10.9% in 2001. This percentage increase is
attributable to the relatively unchanged Engineering revenues coupled with
higher personnel costs including the aforementioned increases in medical benefit
and workers compensation insurance costs. For the Company's Non-Core operations,
SG&A expenses were $0.2 million and $1.0 million for the second quarters of 2002
and 2001, respectively. These SG&A expenses related entirely to legal costs
associated with the ADF and HOK litigation.
Selling, general and administrative expenses expressed as a percentage of total
contract revenues for the Company's ongoing operations increased to 11.6% in the
first six months of 2002 from 10.9% in the first six months of 2001. This
overall increase is again attributable to the previously mentioned increases in
medical benefit and workers compensation insurance costs, as well as
pre-implementation expenses associated with a new Enterprise Resource Planning
("ERP") system and higher payroll taxes associated with 2001 incentive
compensation payments made during the first quarter of 2002. In the Energy
segment, SG&A expenses expressed as a percentage of revenues decreased to 10.2%
in the first six months of 2002 from 11.0% in 2001. The reasons for this
variance are the same as those discussed in the preceding paragraph. In the
Engineering segment, selling, general and administrative expenses expressed as a
percentage of revenues increased to 12.5% in the first six months of 2002 from
10.8% in 2001. This increase is attributable to the higher
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personnel costs mentioned in the previous paragraph, plus the first quarter 2002
ERP costs. For the Non-Core operations, selling, general and administrative
expenses decreased to $0.5 million in the first six months of 2002 from $1.2
million in the first six months of 2001. Again, these SG&A expenses related
entirely to legal costs associated with the ADF and HOK litigation.
OTHER INCOME
Interest income was lower for the second quarter and first half of 2002
predominantly due to the significant reduction in interest rates that occurred
during 2001. Interest expense also was lower for these periods of 2002 as
compared to the same periods in 2001. These decreases in interest expense
resulted from the Company's third quarter 2001 repayment of all remaining
seller-financed debt related to the 1999 Steen acquisition, and from the
favorable February 2002 rulings on the ADF matters which made the further
recording of interest expense on the ADF escrow unnecessary. Other expense for
the first six months of 2002 resulted almost entirely from minority interest
related to the income of two consolidated subsidiaries partially offset by
income from an unconsolidated joint venture in the Energy segment.
INCOME TAXES
During the second quarter of 2002, the Company reduced its year-to-date
effective rate for income taxes from 45.5% to 44.5%. This reduction represents a
more favorable mix of estimated domestic and foreign taxable income for the year
ending December 31, 2002. The Company's effective income tax rate for the first
six months of 2001 was 45.6%. The lower effective rate of 44.5% for the first
six months of 2002 primarily results from the Company's 2002 adoption of SFAS
142 under which no goodwill amortization expense is reflected in the Company's
pre-tax income.
CONTRACT BACKLOG
(In millions) JUNE 30, 2002 Dec. 31, 2001
=====================================================================================================================
Engineering $ 395.1 $ 378.9
Energy 120.9 130.7
- --------------------------------------------------------------------------------------------------------------------
Total $ 516.0 $ 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.
Among the more significant new work added in the Engineering segment during the
second quarter of 2002 were two new GIS contracts totaling $13.3 million and
four new transportation-related contracts totaling $14.7 million. In the Energy
segment, backlog decreased during the second quarter of 2002 due to expected
reductions associated with certain OPCO properties in the Gulf of Mexico. These
Energy reductions were partially offset by a $7.9 million international project
to develop a
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computerized maintenance management system for an oil and gas facility in
Kazakhstan and a $5.0 million addition to an existing international project
to provide competency assessment services in Nigeria.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $2.5 million for the first six months
of 2002 as compared to net cash provided by operating activities of $4.1 million
for the same period in 2001. This decrease in cash provided by operating
activities was the result of the lower net income for the first six months of
2002, the first quarter payment of 2001 incentive compensation bonuses, and
increases in receivables and net contract-related assets.
Net cash provided by investing activities was $6.6 million for the first six
months of 2002 compared to cash used in investing activities of $5.8 million for
the same period of 2001. The cash provided by investing activities for the first
six months of 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 $4.8 million and a $1.0 million investment in Energy
Virtual Partners ("EVP"), a management service business that offers a high-value
alternative to selling mature, under-resourced oil and gas properties. The net
cash used in investing activities for the first six months of 2001 reflected the
funding of $12.7 million into the previously mentioned escrow account and
capital expenditures of $2.1 million, as partially offset by proceeds from the
sale of short-term investments totaling $9.0 million. The increase in capital
expenditures for the first six months of 2002 resulted from the Company's
purchase and development of computer software totaling $3.5 million related to
the implementation of a new ERP system.
Net cash provided by financing activities was $0.6 million and $0.2 million for
the first six months of 2002 and 2001, respectively. The net cash provided by
financing activities for both years' six-month periods primarily reflects
proceeds from the exercise of stock options.
Working capital increased to $43.5 million at June 30, 2002 from $41.0 million
at December 31, 2001. The Company's current ratio was 1.55:1 at the end of the
second quarter of 2002, compared to 1.48:1 at year-end 2001.
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through September 30, 2003. 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 June 30, 2002, no borrowings were
outstanding under the Agreement; however; letters of credit totaling $6.3
million were outstanding as of this date. During the second quarter of 2002, the
Company was required to increase its letter-of-credit collateral as a result its
renewal of casualty insurance coverages effective July 1, 2002.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America. At June 30, 2002, bonds totaling $77.8 million
were outstanding under this line. Of this outstanding amount, $73.9 million
related to the Company's former construction operations. Management believes
that this bonding line will be sufficient to meet its bid and performance
bonding needs for at least the next year.
-15-
The Company's professional liability errors and omissions 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. Currently, Baker Environmental, Inc. ("BEI"), a
wholly-owned subsidiary of the Company, is subject to one substantial claim
which, if decided adversely to the Company, would be within the scope of an
insurance policy issued by Reliance. This claim reflects an action by LTV Steel
Company ("LTV") against BEI, which is pending in the U.S. District Court for the
Western District of Pennsylvania, and resulted from the failure of a landfill
for which BEI provided services. Although LTV claims damages of $10-11 million,
the litigation is in progress and, at this time, it is uncertain whether BEI
will have any liability with respect to this claim and, if so, whether any such
liability will be funded by Reliance. Based on the uncertainty associated with
BEI's liability for this claim, and with Reliance's ability to fund such
liability, if any, the Company has not accrued any amounts for this matter in
its consolidated financial statements as of June 30, 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 provided significant transportation funding increases to the
various state agencies since its approval in 1998; however, the current Federal
budget for 2003 reflects lower transportation funding than will be available for
2002. As a result, the Company has recently seen this market slowing due to
Federal and state budget constraints. Management expects that transportation
funding will receive significant attention during the Federal budget approval
process this year, but cannot predict the outcome. Potentially offsetting any
transportation budget reduction, the Company has recently seen increased Federal
spending activity on FEMA, Department of Defense and Homeland Security
activities. Additional government spending in these areas 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. As the Company commits to funding future
acquisitions, it may need to adjust its financing strategies by lengthening
existing debt maturities or seeking alternative debt instruments. At this time,
management 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company's primary interest rate risk relates to its variable-rate
investments, which totaled $15.1 million as of June 30, 2002. If interest rates
on investments were to change unfavorably by 10%, the Company would have no
material exposure to interest rate risk. In addition, the Company has no
interest rate swap or exchange agreements.
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The Company has several foreign subsidiaries that transact portions of their
local activities in currencies other than the U.S. Dollar. In assessing its
exposure to foreign currency exchange rate risk, the Company recognizes that the
majority of its foreign subsidiaries' assets and liabilities reflect ordinary
accounts receivable and payable balances. These receivable and payable balances
are substantially settled in the same currencies as the functional currencies of
the related foreign subsidiaries, thereby not exposing the Company to material
transaction gains and losses. Assuming that foreign currency exchange rates
could change unfavorably by 10%, the Company would have no material exposure to
foreign currency exchange rate risk. The Company has no foreign currency
exchange contracts.
Based on the nature of the Company's business, it has no direct exposure to
commodity price risk.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of shareholders was held on April 25, 2002.
(b) Each of management's nominees to the board of directors, as listed in Item
4(c) below, was elected. There was no solicitation in opposition to
management's nominees.
(c) The only matter voted upon at the meeting was the election of the Company's
directors to one-year terms or until their respective successors have been
elected. The votes cast by holders of the Company's Common Stock in
approving the following directors were:
Name of Director Votes for Votes withheld
- ---------------------------------------------------------------------------------------------------------------------
Robert N. Bontempo 5,839,348 79,149
Nicholas P. Constantakis 5,829,633 88,864
William Copeland 5,796,836 121,661
Donald P. Fusilli, Jr. 5,803,265 115,232
Roy V. Gavert, Jr. 5,821,766 96,731
Thomas D. Larson 5,829,489 89,008
John E. Murray, Jr. 5,838,576 79,921
Pamela S. Pierce 5,839,088 79,409
Richard L. Shaw 5,810,075 108,422
- ---------------------------------------------------------------------------------------------------------------------
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibit is included herewith as a part of this Report:
Exhibit No. Description
----------- -----------
10.4(b) Second Amendment to Loan Agreement dated April 25,
2002, by and between the Company and Citizens Bank
of Pennsylvania, National City Bank of
Pennsylvania and Fifth Third Bank, filed herewith.
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 2002, the Company filed no reports on
Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAEL BAKER CORPORATION
/s/ William P. Mooney Dated: August 8, 2002
- -------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: August 8, 2002
- -------------------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
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CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Michael Baker
Corporation (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ Donald P. Fusilli, Jr. Dated: August 8, 2002
- ----------------------------------------
Donald P. Fusilli, Jr.
President and Chief Executive Officer
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350, the undersigned officer of Michael Baker
Corporation (the "Company"), hereby certifies that the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002 (the "Report") fully
complies with the requirements of Section 13(a) or 15(d), as applicable, of the
Securities Exchange Act of 1934 and that the information contained in the Report
fairly presents, in all material respects, the financial condition and results
of operations of the Company.
/s/ William P. Mooney Dated: August 8, 2002
- ------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
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