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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 SEPTEMBER 30, 2004
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airside Business Park, 100 Airside Drive, Moon Township, PA 15108
- ----------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(412) 269-6300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
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 October 29, 2004:
Common Stock 8,424,706 shares
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements have been prepared by
Michael Baker Corporation ("the Company"), pursuant to the rules and regulations
of the Securities and Exchange Commission. Although certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
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, particularly 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 the Company's relationship and/or contracts with FEMA; changes in
anticipated levels of government spending on infrastructure, including TEA-21;
changes in loan relationships or sources of financing; changes in management;
changes in information systems; and costs to comply with the requirements of the
Sarbanes-Oxley Act of 2002. Such forward-looking statements are made pursuant to
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995.
-1-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
--------------------------------
SEPT. 30, 2004 Sept. 30, 2003
- ------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Total contract revenues $ 140,652 $ 106,338
Cost of work performed 118,666 90,056
- ------------------------------------------------------------------------------------------------------
Gross profit 21,986 16,282
Selling, general and administrative expenses 15,992 13,605
- ------------------------------------------------------------------------------------------------------
Income from operations 5,994 2,677
Other income/(expense):
Interest income 18 2
Interest expense (19) (270)
Other, net (24) 99
- ------------------------------------------------------------------------------------------------------
Income before income taxes 5,969 2,508
Provision for income taxes 2,686 1,303
- ------------------------------------------------------------------------------------------------------
NET INCOME 3,283 1,205
Other comprehensive income/(loss) -
Foreign currency translation adjustments, net of tax (19) (75)
- ------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 3,264 $ 1,130
======================================================================================================
BASIC NET INCOME PER SHARE $ 0.39 $ 0.14
DILUTED NET INCOME PER SHARE $ 0.38 $ 0.14
======================================================================================================
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 nine months ended
--------------------------------
SEPT. 30, 2004 Sept. 30, 2003
- ------------------------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Total contract revenues $ 396,259 $ 310,436
Cost of work performed 329,342 265,689
- ------------------------------------------------------------------------------------------------------
Gross profit 66,917 44,747
Selling, general and administrative expenses 49,405 41,031
- ------------------------------------------------------------------------------------------------------
Income from operations 17,512 3,716
Other income/(expense):
Interest income 52 17
Interest expense (189) (584)
Other, net 782 (698)
- ------------------------------------------------------------------------------------------------------
Income before income taxes 18,157 2,451
Provision for income taxes 8,171 1,275
- ------------------------------------------------------------------------------------------------------
NET INCOME 9,986 1,176
Other comprehensive income/(loss) -
Foreign currency translation adjustments, net of tax (9) (39)
- ------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 9,977 $ 1,137
======================================================================================================
BASIC NET INCOME PER SHARE $ 1.19 $ 0.14
DILUTED NET INCOME PER SHARE $ 1.18 $ 0.14
======================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPT. 30, 2004
(UNAUDITED) Dec. 31, 2003
- ------------------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 11,396 $ 9,274
Receivables, net 84,393 74,940
Cost of contracts in progress and estimated earnings, less billings 61,295 51,620
Prepaid expenses and other 10,655 9,899
- ------------------------------------------------------------------------------------------------------------
Total current assets 167,739 145,733
- ------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 17,063 17,402
OTHER ASSETS
Goodwill and other intangible assets, net 9,019 9,233
Other assets 7,961 7,205
- ------------------------------------------------------------------------------------------------------------
Total other assets 16,980 16,438
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 201,782 $ 179,573
============================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 40,662 $ 28,279
Accrued employee compensation 29,616 15,394
Accrued insurance 9,648 10,224
Other accrued expenses 22,427 20,464
Excess of billings on contracts in progress over cost and estimated
earnings 12,829 16,611
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 115,182 90,972
- ------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt - 13,481
Other liabilities 2,987 2,539
Commitments and contingencies - -
- ------------------------------------------------------------------------------------------------------------
Total liabilities 118,169 106,992
- ------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,815,961 and 8,711,235 shares at 9/30/04 and 12/31/03, respectively 8,816 8,711
Additional paid-in-capital 39,298 38,298
Retained earnings 39,463 29,477
Accumulated other comprehensive loss (929) (912)
Unearned compensation expense (82) (40)
Less - 391,237 shares of Common Stock in treasury, at cost, at
9/30/04 and 12/31/03 (2,953) (2,953)
- ------------------------------------------------------------------------------------------------------------
Total shareholders' investment 83,613 72,581
- ------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 201,782 $ 179,573
============================================================================================================
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 nine months ended
---------------------------------
SEPT. 30, 2004 Sept. 30, 2003
- -------------------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 9,986 $ 1,176
Adjustments to reconcile net income to net
cash provided by/(used in) operating activities:
Depreciation and amortization 3,385 3,727
Impairment of Energy Virtual Partners - 800
Changes in assets and liabilities:
Increase in receivables and contracts in progress (22,919) (23,513)
Increase in accounts payable and accrued expenses 28,450 1,903
Increase in other net assets (1,397) (1,236)
- -------------------------------------------------------------------------------------------------------------
Total adjustments 7,519 (18,319)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by/(used in) operating activities 17,505 (17,143)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,835) (3,900)
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,835) (3,900)
- -------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of)/proceeds from long-term debt (13,481) 20,461
Payments to acquire treasury stock - (690)
Proceeds from the exercise of stock options 933 49
- -------------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (12,548) 19,820
- -------------------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 2,122 (1,223)
Cash and cash equivalents, beginning of year 9,274 9,885
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,396 $ 8,662
=============================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 220 $ 571
Income taxes paid $ 1,331 $ 3,921
=============================================================================================================
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 SEPTEMBER 30, 2004
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
The following table summarizes the Company's weighted average shares outstanding
for the three and nine-month periods ended September 30, 2004 and 2003. The
additional shares included in diluted shares outstanding are entirely
attributable to stock options.
For the three months ended For the nine months ended
-------------------------- ----------------------------
Weighted average shares outstanding 2004 2003 2004 2003
- --------------------------------------------------------------------------------------------------------------------
Basic 8,414,238 8,319,998 8,379,174 8,325,858
Diluted 8,541,332 8,391,466 8,495,716 8,381,883
- --------------------------------------------------------------------------------------------------------------------
As of September 30, 2004 and 2003, the Company had 189,096 and 321,806 stock
options outstanding, respectively, which were not included in the computations
of diluted shares outstanding for the respective nine-month periods because the
option exercise prices were greater than the average market prices of the common
shares. Such options could potentially dilute basic earnings per share in future
periods.
NOTE 2 - CAPITAL STOCK
During 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock in the open market. In the first quarter of
2003, the Company reactivated this share repurchase program and repurchased
80,400 treasury shares at market prices ranging from $7.90 to $8.81 per share,
for a total price of $690,000. As of September 30, 2004, treasury shares
totaling 414,689 had been repurchased under this program. In February 2003, the
Board of Directors authorized the Company to repurchase up to 500,000 additional
shares. As of September 30, 2004, no shares had been repurchased under the
February 2003 authorization. The Company intends to use its treasury shares to
fund future employer contributions to its 401(k) benefit plan and/or in
connection with future business acquisitions.
NOTE 3 - 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 program management,
design-build, construction management, consulting, planning, 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,
procurement, and supply chain management. Many of these service offerings
are enhanced by the utilization of this segment's Managed Services (which
includes services formerly known as OPCO(R)) operating 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.
-6-
The following table reflects the required disclosures for the Company's
reportable segments (in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
For the three months ended For the nine months ended
-------------------------------- --------------------------------
SEPT. 30, 2004 Sept. 30, 2003 SEPT. 30, 2004 Sept. 30, 2003
- --------------------------------------------------------------------------------------------------------------------
ENGINEERING
Revenue $ 86.0 $ 62.6 $ 242.0 $ 182.9
Income from operations before Corporate
overhead 8.3 4.6 23.2 10.9
Less: Corporate overhead (2.9) (2.8) (8.5) (8.7)
- --------------------------------------------------------------------------------------------------------------------
Income from operations 5.4 1.8 14.7 2.2
- --------------------------------------------------------------------------------------------------------------------
ENERGY
Revenue 54.7 43.7 154.2 127.5
Income from operations before Corporate
overhead 2.4 1.9 6.9 5.5
Less: Corporate overhead (1.2) (0.9) (3.5) (3.1)
- --------------------------------------------------------------------------------------------------------------------
Income from operations 1.2 1.0 3.4 2.4
- --------------------------------------------------------------------------------------------------------------------
NON-CORE
Revenue - - - -
Income from operations before Corporate
overhead - 0.1 0.2 0.3
Less: Corporate overhead - - - -
- --------------------------------------------------------------------------------------------------------------------
Income from operations - 0.1 0.2 0.3
- --------------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Revenues 140.7 106.3 396.2 310.4
Income from operations before Corporate
overhead 10.7 6.6 30.3 16.7
Less: Corporate overhead (4.1) (3.7) (12.0) (11.8)
- --------------------------------------------------------------------------------------------------------------------
Income from operations 6.6 2.9 18.3 4.9
- --------------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance expense (0.6) (0.2) (0.8) (1.2)
- --------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 6.0 $ 2.7 $ 17.5 $ 3.7
====================================================================================================================
-7-
SEPT. 30, 2004 Dec. 31, 2003
- -------------------------------------------------------------------------------
Segment assets:
Engineering $ 107.1 $ 99.9
Energy 80.0 63.9
Non-Core 0.9 0.9
- -------------------------------------------------------------------------------
Subtotal - segments 188.0 164.7
Corporate/Insurance 13.8 14.9
- -------------------------------------------------------------------------------
Total $ 201.8 $ 179.6
===============================================================================
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
During September 2004, the Company amended and restated its unsecured credit
agreement ("the Amended Agreement") with a consortium of financial institutions.
The Amended Agreement provides for an increased commitment of $60 million
through September 17, 2008. The commitment includes the sum of the principal
amount of revolving credit loans outstanding and the aggregate face value of
outstanding letters of credit. As of September 30, 2004, there were no
borrowings outstanding under the Amended Agreement, however, outstanding letters
of credit totaled $7.0 million as of this date.
All other terms and conditions associated with the Amended Agreement remain
essentially unchanged from the Company's previous credit agreement.
NOTE 5 - 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. 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. In October 2001, the Pennsylvania Insurance
Commissioner placed Reliance into liquidation. The Company remains uncertain at
this time what effect this action 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. A wholly-owned subsidiary of the Company was subject
to one substantial claim which fell within the Reliance coverage period. This
claim was settled in the amount of $2.5 million, and payment was made by the
Company in April 2003. Due to the liquidation of Reliance, the Company is
currently uncertain what amounts paid to settle this claim will be recoverable
under the insurance policy with Reliance. The Company is pursuing a claim in the
Reliance liquidation and believes that some recovery will result from the
liquidation, but the amount of such recovery
-8-
cannot currently be estimated. The Company had no related receivables recorded
from Reliance as of September 30, 2004.
In July 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 were 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 appeared to be focused upon payments made to certain individuals in
connection with the subsidiary's operations in Nigeria as they related to
potential violations of the Foreign Corrupt Practices Act and other relevant
statutes. There has been no activity in this matter since 2002. At this time,
the Company does not expect that any remaining costs associated with this matter
will have a material adverse effect on its consolidated financial statements.
The Company previously disclosed its awareness of an unasserted claim to recover
alleged preference payments made to the Company within 90 days prior to a
customer's 2002 Chapter 11 bankruptcy filing. Such claims are not unusual in the
bankruptcy context. During the third quarter of 2004, this preference claim was
formally asserted against the Company. Subsequently, in late October 2004, an
agreement was reached to dismiss the preference payment action against the
Company in exchange for the Company's vote in favor of the current plan of
reorganization and the Company waiving its entitlement as an unsecured creditor
in the bankruptcy proceeding. This agreement is expected to be documented and
formalized during the fourth quarter of 2004. No amounts pertaining to the
preference claim were previously accrued, and neither this claim nor its
settlement had any effect on the Company's results of operations for the three
or nine-month periods ended September 30, 2004.
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 statements of the Company.
At September 30, 2004, 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 September
30, 2004:
Maximum Related liability
undiscounted balance recorded
(Dollars in millions) future payments at 9/30/04
- ------------------------------------------------------------------------------------------
Standby letters of credit:
Insurance related $ 6.8 $ 6.8
Other 0.2 -
Sale of certain construction assets Unlimited -
- ------------------------------------------------------------------------------------------
The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Amended Agreement discussed in Note 4 above. As of September
30, 2004, most of these LOCs were issued to an insurance company to serve as
collateral for payments the insurer is required to make under certain of the
Company's self-insurance programs. These LOCs may be drawn upon in the event
that the Company does not reimburse the insurance company 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.
-9-
During 2000, the Company sold certain assets associated with its former heavy &
highway construction business to A&L, Inc. This sale agreement provided
indemnifications to the buyer for breaches of certain obligations by the
Company. There was no dollar limit on these indemnifications, and the terms of
the indemnifications vary but will ultimately be governed by the statutes of
limitations. In October 2003, A&L filed a lawsuit against the Company and a
subsidiary alleging misrepresentation and breach of warranty in connection with
the asset sale. The Company believes that A&L's claims are without merit and is
vigorously contesting this lawsuit.
NOTE 6 - STOCK-BASED COMPENSATION
During the first quarter of 2003, the Company adopted the prospective method of
applying Statement of Financial Accounting Standards No. ("SFAS") 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure." Under
the prospective method, the Company began expensing the fair value of all stock
options granted, modified or settled effective January 1, 2003.
Prior to January 1, 2003, the Company utilized the intrinsic value method of
accounting for stock-based compensation, as originally promulgated by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
as permitted under SFAS 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost was recognized for stock options granted prior
to 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 pro forma net income and net income per share amounts would have been
as follows:
For the three months ended For the nine months ended
-------------------------------- --------------------------------
(In thousands) SEPT. 30, 2004 Sept. 30, 2003 SEPT. 30, 2004 Sept. 30, 2003
- --------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 3,283 $ 1,205 $ 9,986 $ 1,176
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 10 4 69 34
Deduct: Total stock-based employee
compensation expense determined
under fair value method, net of
related tax effects (30) (47) (144) (168)
- --------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 3,263 $ 1,162 $ 9,911 $ 1,042
====================================================================================================================
For the three months ended For the nine months ended
-------------------------------- --------------------------------
SEPT. 30, 2004 Sept. 30, 2003 SEPT. 30, 2004 Sept. 30, 2003
- --------------------------------------------------------------------------------------------------------------------
Reported earnings per share:
Basic $ 0.39 $ 0.14 $ 1.19 $ 0.14
Diluted 0.38 0.14 1.18 0.14
Pro forma earnings per share:
Basic 0.39 0.14 1.18 0.12
Diluted $ 0.38 $ 0.14 $ 1.17 $ 0.12
====================================================================================================================
-10-
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
SEPT. 30, 2004 Dec. 31, 2003
- -------------------------------------------------------------------------------------------------
Goodwill:
Engineering $ 1,006 $ 1,006
Energy 7,465 7,465
- -------------------------------------------------------------------------------------------------
Total goodwill 8,471 8,471
- -------------------------------------------------------------------------------------------------
Other intangible assets, net of accumulated amortization
of $1,452 and $1,238, respectively 548 762
- -------------------------------------------------------------------------------------------------
Goodwill and other intangible assets, net $ 9,019 $ 9,233
=================================================================================================
Under SFAS 142, "Goodwill and Intangible Assets," the Company's goodwill balance
is not being amortized and goodwill impairment tests are being performed at
least annually. The Company completed its most recent annual impairment review
during the second quarter of 2004, and no impairment charge was required.
The Company's other intangible assets balance solely comprises a non-compete
agreement from the Company's 1999 purchase of an energy business. Future
amortization expense on the other intangible assets balance is currently
estimated to be $286,000 for the years ending December 31, 2004 and 2005, with
the remaining balance of $190,000 being amortized in 2006.
NOTE 8 - NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was
subsequently revised in December 2003 ("FIN 46R"). FIN 46 clarifies Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," and requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries. 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 requirements of FIN 46 were required to be applied immediately to
variable interest entities in which an enterprise obtains an interest, or which
an enterprise creates, after January 31, 2003. For variable interest entities
considered to be special purpose entities (SPEs) in which an enterprise holds a
variable interest that it acquired prior to February 1, 2003, FIN 46 is required
to be adopted for the first fiscal year or interim period ending after December
15, 2003. For non-SPE variable interest entities acquired prior to February 1,
2003, FIN 46 must be adopted no later than the first fiscal year or interim
period ending after March 15, 2004. The Company adopted this interpretation
during the first quarter of 2004; such adoption had no impact on the Company's
financial statements.
NOTE 9 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior year financial statements
amounts in order to conform to the current year presentation.
-11-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
The Company provides engineering and energy expertise for public and private
sector clients worldwide. The firm's primary services include engineering design
for the transportation and civil infrastructure markets, operation and
maintenance of oil and gas production facilities, architectural and
environmental services, and construction management services for buildings and
transportation projects. 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.
BUSINESS ENVIRONMENT
The Company's operations are affected by appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for 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
infrastructure funding available to the various state agencies since its
approval in 1998. Prior to the expiration of TEA-21 on September 30, 2003, the
U.S. Congress and President Bush signed a five-month extension of the program at
current funding levels. This initial extension expired on February 29, 2004 and
has since been extended five times at current funding levels. The most recent
extension occurred on September 30, 2004 and lasts through the end of May 2005
at the same previously extended funding levels. During the current extension
period, a long-term reauthorization of the original TEA-21 program is expected
to receive significant Congressional attention. Prior to the extensions, certain
state agencies were limited in their abilities to apply for Federal
transportation funding during 2003, as they were unable to commit the required
matching funds due to budget constraints. Although further delays in the
reauthorization of TEA-21 could impact the Company's transportation design
business activity for 2005 and beyond, the Company is currently seeing limited
funding of new transportation projects. For example, the Company was recently
selected by the Kentucky Transportation Cabinet to negotiate a multi-million
dollar, multi-year contract to design a new bridge over the Ohio River
connecting Louisville, Kentucky and Jeffersonville, Indiana. From 2002 through
the third quarter of 2004, the Company has observed increased Federal spending
activity on Departments of Defense and Homeland Security activities, including
the Federal Emergency Management Agency (FEMA). To mitigate the effect of the
state transportation budget constraints on the Company's business, management
has focused more marketing and sales activity on these agencies of the Federal
government. Additional government spending in these areas, or on transportation
infrastructure, could result in profitability and liquidity improvements for the
Company. Significant contractions in any of these areas could unfavorably impact
the Company's profitability and liquidity. In March 2004, the Company announced
that it had been awarded a five-year contract with FEMA for up to $750 million
to serve as the Program Manager to develop, plan, manage, implement, and monitor
the Multi-Hazard Flood Map Modernization Program for flood hazard mitigation
across the United States and its territories. Approximately $713 million of this
contract value was included in the Company's backlog as of September 30, 2004.
In addition, during the first nine months of 2004, the Company was selected for
several indefinite delivery/indefinite quantity task order contracts by the U.S.
Army Corps of Engineers and U.S. Air Force. During the first nine months of
2004, the Company was also selected for several contracts with the Mineral
Management Service, agencies within the U.S. Departments of Transportation and
Homeland Security,
-12-
the Department of Energy, and the Federal Bureau of Investigation.
The Company's Energy business benefited significantly in 2001 and 2002 from the
adoption of its Managed Services (which includes services formerly known as
OPCO(R)) business model by several oil and gas producers in the Gulf of Mexico.
Energy services provided via this innovative model generated higher margins than
the Company's traditional service delivery methods. During the second half of
2002, many of the properties serviced under this model were sold by their
owners, and while the Company continues to provide operations and maintenance
services to the properties' new owners, such services reflect lower margin
manpower and logistics work. Presently, there is uncertainty in the oil and gas
marketplace regarding capital investment and outsourcing decisions in the Gulf
of Mexico, the Company's primary market for its Energy business. As a result,
the Company has continued to provide manpower services to its clients in this
region. During the third quarter of 2004, however, the Company executed a
long-term, multi-million dollar Managed Services contract with Anglo-Suisse
Offshore Partners, LLC ("ASOP") to operate, maintain and optimize the
performance of ASOP's offshore oil and gas producing properties in the Gulf. The
Company has also expanded its Managed Services offerings to onshore U.S. oil and
gas producers, as demonstrated by the two four-year contracts totaling $144
million received from Huber Energy during 2003. In addition, the Company has
been able to increase its penetration into the deepwater Gulf of Mexico and
international markets, where oil and gas producers are currently investing
significant amounts of capital for new projects.
After giving effect to the foregoing, 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.
RESULTS OF OPERATIONS
The following table reflects a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended September 30, 2004 and 2003 (dollars in
millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
For the three months ended For the nine months ended
--------------------------------- --------------------------------
SEPT. 30, 2004 Sept. 30, 2003 SEPT. 30, 2004 Sept. 30, 2003
- -------------------------------------------------------------------------------------------------------------
ENGINEERING
Revenues $ 86.0 $ 62.6 $ 242.0 $ 182.9
Income from operations before
Corporate overhead 8.3 4.6 23.2 10.9
Percentage of Eng. revenues 9.7% 7.3% 9.6% 6.0%
Less: Corporate overhead (2.9) (2.8) (8.5) (8.7)
Percentage of Eng. revenues (3.4)% (4.5)% (3.5)% (4.8)%
- -------------------------------------------------------------------------------------------------------------
Income from operations 5.4 1.8 14.7 2.2
Percentage of Eng. revenues 6.3% 2.9% 6.1% 1.2%
- -------------------------------------------------------------------------------------------------------------
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For the three months ended For the nine months ended
--------------------------------- --------------------------------
SEPT. 30, 2004 Sept. 30, 2003 SEPT. 30, 2004 Sept. 30, 2003
- -------------------------------------------------------------------------------------------------------------
ENERGY
Revenues 54.7 43.7 154.2 127.5
Income from operations before
Corporate overhead 2.4 1.9 6.9 5.5
Percentage of Energy revenues 4.4% 4.3% 4.5% 4.3%
Less: Corporate overhead (1.2) (0.9) (3.5) (3.1)
Percentage of Energy revenues (2.2)% (2.1)% (2.3)% (2.4)%
- -------------------------------------------------------------------------------------------------------------
Income from operations 1.2 1.0 3.4 2.4
Percentage of Energy revenues 2.2% 2.3% 2.2% 1.9%
- -------------------------------------------------------------------------------------------------------------
NON-CORE*
Revenues - - - -
Income/(loss) from operations
before Corporate overhead - (0.1) 0.2 0.3
Less: Corporate overhead - - - -
- -------------------------------------------------------------------------------------------------------------
Income/(loss) from operations - (0.1) 0.2 0.3
- -------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Revenues 140.7 106.3 396.2 310.4
Income from operations before
Corporate overhead 10.7 6.6 30.3 16.7
Percentage of total revenues 7.6% 6.2% 7.6% 5.4%
Less: Corporate overhead (4.1) (3.7) (12.0) (11.8)
Percentage of total revenues (2.9)% (3.5)% (3.0)% (3.8)%
- -------------------------------------------------------------------------------------------------------------
Income from operations 6.6 2.9 18.3 4.9
Percentage of total revenues 4.7% 2.7% 4.6% 1.6%
- -------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance expense (0.6) (0.2) (0.8) (1.2)
- -------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM
OPERATIONS $ 6.0 $ 2.7 $ 17.5 $ 3.7
Percentage of total revenues 4.3% 2.5% 4.4% 1.2%
=============================================================================================================
* The Non-Core segment includes activity associated with the former
buildings and transportation construction operations that are being wound
down.
TOTAL CONTRACT REVENUES
Total contract revenues increased 32% in the third quarter of 2004 relative to
the third quarter of 2003. Engineering revenues for the third quarter of 2004
increased 37% from the third quarter of 2003. Engineering's revenues were
positively impacted by the Company's above mentioned map modernization program
management project with FEMA, which commenced near the end of the first quarter
of 2004. Also positively impacting Engineering revenues for the third quarter of
2004 were improved labor utilization rates over the third quarter of 2003 as a
result of new work added since 2003. These labor utilization rates have a direct
impact on revenues. By contrast, Engineering's labor utilization for the third
quarter of 2003 was lower as a result of a slow down in its private sector
contract activity. In the Energy segment, revenues for the third quarter of 2004
increased 25% over the third quarter of 2003. This increase is primarily the
result of the two
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onshore Managed Services contracts that commenced during 2003, as well as the
addition of several new overseas contracts and additions to existing contracts
that occurred during 2003 and 2004. Revenues from Managed Services contracts
composed 21% and 10% of Baker Energy's total contract revenues for the third
quarters of 2004 and 2003, respectively. The Company's Non-Core segment posted
no revenues for the third quarters of 2004 or 2003.
For the first nine months of 2004, total contract revenues increased 28% over
the corresponding period in 2003. In the Engineering segment, revenues increased
32% in the first nine months of 2004 as compared to the first nine months of
2003. Again, the increase in revenues over the first nine months of 2003
reflects the addition of the Company's map modernization program management
project with FEMA and improved labor utilization rates over the first nine
months of 2003. Engineering's labor utilization rates were lower during the
first nine months of 2003 due to delays in the commencement of certain public
sector projects due to state budget constraints, a slow down in its private
sector contract activity and the January 2003 relocation of the Company's
largest Engineering office to Moon Township, PA. In the Energy segment, revenues
for the first nine months of 2004 increased 21% over the first nine months of
2003. Again, this increase is primarily the result of the two new onshore
Managed Services contracts, and the additional new overseas contracts and
additions to existing contracts that occurred during 2003 and 2004. Revenues
from Managed Services contracts composed 18% and 5% of Baker Energy's total
contract revenues for the first nine months of 2004 and 2003, respectively. The
Company's Non-Core segment posted no revenues for the first nine months of 2004
or 2003.
GROSS PROFIT
Gross profit expressed as a percentage of revenues increased to 15.6% for the
third quarter of 2004 from 15.3% in the third quarter of 2003. Overall, the
Company's third quarter 2004 gross profit expressed as a percentage of revenues
benefited from cost reduction measures implemented by management relative to the
Company's medical and 401(k) retirement benefit plans. The Engineering segment's
gross profit percentage increased to 19.1% in the third quarter of 2004 from
18.5% in the third quarter of 2003. This increase is primarily attributable to
the increase in labor utilization rates as compared to the third quarter of 2003
and the cost reduction measures discussed above. The Energy segment's gross
profit percentage increased slightly to 11.3% in the third quarter of 2004 from
11.0% in the third quarter of 2003. This 2004 increase in gross profit as a
percentage of revenues is the direct result of the performance of the previously
mentioned two onshore Managed Services contracts and performance-based incentive
bonuses totaling approximately $0.3 million earned during the third quarter of
2004. Also benefiting Energy's gross profit margin were the previously mentioned
cost reduction measures put in place by management at the beginning of 2004 and
higher margins on international projects for the third quarter of 2004, as
partially offset by higher insurance costs in the third quarter of 2004.
Energy's Managed Services business posted gross profit of 5.2% for the third
quarter of 2004 versus 1.2% in the third quarter of 2003. The Non-Core segment's
gross profit was negligible in the third quarters of 2004 and 2003.
For the first nine months of 2004, gross profit expressed as a percentage of
revenues increased to 16.9% from 14.4% in 2003. As stated in the previous
paragraph, the Company's 2004 gross profit expressed as a percentage of revenues
benefited from cost reduction measures implemented by management relative to the
Company's medical and 401(k) retirement benefit plans. The Engineering segment's
gross profit percentage increased to 20.3% in the first nine months of 2004 from
17.4% in the first nine months of 2003. Again, the Engineering segment benefited
from an increase in labor utilization rates as compared to the first nine months
of 2003 and the aforementioned cost reduction measures. The Energy segment's
gross profit percentage increased to 11.9% in the first nine months of 2004 from
10.9% in the first nine months of 2003. This increase in gross profit as a
percentage of revenues is the direct result of the previously mentioned
performance of the Managed Services contracts, cost reduction measures
implemented by management, and the achievement of
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the incentive bonuses totaling $0.9 million, as offset by the effect of a
reserve related to a customer billing rate dispute in the first quarter of 2004.
Energy's Managed Services business posted gross profit of 6.4% for the first
nine months of 2004 versus a loss in the first nine months of 2003. In the
Non-Core segment, gross profit was $0.2 million and $0.3 million for the
nine-month periods of 2004 and 2003, respectively. These favorable results were
primarily attributable to favorable developments in certain casualty insurance
claims related to the Company's former construction operations during both
nine-month periods. The 2003 favorable developments were partially offset by
charges associated with the settlement of a construction-related claim.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses, including Corporate
overhead, expressed as a percentage of total contract revenues decreased to
11.4% in the third quarter of 2004 from 12.8% in the third quarter of 2003. This
overall decrease in SG&A expenses expressed as a percentage of revenues
primarily reflects the additional effects (in this case, related to overhead
personnel) of management's aforementioned cost reduction measures related to the
medical and 401(k) retirement benefit plans, as offset by an increase in
accruals related to the Company's 2004 short-term and long-term incentive
compensation programs at maximum levels. Allocated Corporate overhead costs
expressed as a percentage of total contract revenues decreased for the third
quarter of 2004 versus the third quarter of 2003 as a result of cost reductions
associated with the Company's new information systems which were implemented
effective January 1, 2003, as partially offset by external (i.e., third party)
costs incurred during the third quarter of 2004 in connection with the Company's
implementation of Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX"). In the
Engineering segment, SG&A expenses expressed as a percentage of revenues
decreased to 12.8% in the third quarter of 2004 from 15.6% in the third quarter
of 2003. In the Energy segment, SG&A expenses expressed as a percentage of
revenues increased to 9.0% in the third quarter of 2004 from 8.7% in the third
quarter of 2003. Energy's benefits from the cost reduction measures were
primarily offset by the higher incentive compensation expense. The Company's
Non-Core operations incurred no SG&A expenses in either third quarter period.
For the first nine months of 2004, SG&A expenses, including Corporate overhead,
expressed as a percentage of total contract revenues decreased to 12.5% from
13.2% in the first nine months of 2003. As mentioned previously, this overall
decrease in SG&A expenses expressed as a percentage of revenues reflect the
additional effects of management's cost reduction measures as offset by an
increase in incentive compensation expense, in combination with the relatively
significant increase in revenues for the first nine months of 2004. Allocated
Corporate overhead costs expressed as a percentage of total contract revenues
decreased for the first nine months of 2004 versus the first nine months of 2003
as a result of cost reductions associated with the Company's new information
systems, as partially offset by 2004 external SOX costs totaling $1.1 million.
In the Engineering segment, SG&A expenses expressed as a percentage of revenues
decreased to 14.2% in the first nine months of 2004 from 16.1% in the first nine
months of 2003. In addition to the aforementioned effects of the cost reduction
measures, higher incentive compensation expense, and the relatively significant
revenue increase, the Engineering segment incurred nonrecurring costs associated
with its Moon Township office relocation during the first quarter of 2003. In
the Energy segment, SG&A expenses expressed as a percentage of revenues
increased to 9.7% in the first nine months of 2004 from 9.0% in the first nine
months of 2003. As mentioned above, Energy's benefits from the cost reduction
measures were primarily offset by the higher incentive compensation expense. The
Company's Non-Core operations incurred no SG&A expenses in either nine-month
period.
Project-to-date external SOX costs, which include $0.2 million of costs expensed
in 2003, totaled $1.3 million at September 30, 2004. In addition to costs
associated with the use of internal resources, management currently estimates
its total external SOX costs related to 2004 Section 404 compliance will be in
the range of $1.8 million to $2.0 million. Certain of these costs are expected
to be incurred during the first quarter of 2005.
-16-
OTHER INCOME
Interest income was higher and interest expense was lower for both the third
quarter and first nine months of 2004 as a result of the Company's average net
borrowings being higher for the third quarter and first nine months of 2003. The
Company's borrowing rates were similar for all periods mentioned above. The
Company had no borrowings under its credit facility at September 30, 2004. Other
expense was negligible for the third quarter of 2004 and primarily resulted from
currency-related losses, while other income for the first nine months of 2004
primarily resulted from the sale of an investment that resulted in a gain of
$352,000 and minority interest related to two consolidated subsidiaries. Other
income for the third quarter of 2003 was the result of currency-related gains,
while other expense for the first nine months of 2003 primarily related to a
$0.8 million impairment of an investment in Energy Virtual Partners, an Energy
services business that discontinued operations and was liquidated.
INCOME TAXES
The Company's year-to-date effective income tax rate for the first nine months
of 2004 remained unchanged at 45% from the first six months of 2004. This rate
reflects the Company's best estimate of taxable income for the year ending
December 31, 2004. The Company had a provision for income taxes of 52% for the
first nine months of 2003. The lower effective tax rate for the first nine
months of 2004 as compared to the first nine months of 2003 primarily reflects
the higher full-year taxable income that is expected for 2004, as well as a more
favorable mix of domestic and foreign components of such estimated taxable
income.
CONTRACT BACKLOG
(In millions) SEPT. 30, 2004 Dec. 31, 2003
- ---------------------------------------------------------------------
Engineering $ 1,176.7 $ 470.7
Energy 345.4 250.0
- ---------------------------------------------------------------------
Total $ 1,522.1 $ 720.7
=====================================================================
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 during the first nine months of 2004
was a new $750 million contract in the Engineering segment to serve as Program
Manager to develop, plan, manage, implement, and monitor FEMA's Multi-Hazard
Flood Map Modernization Program for flood hazard mitigation across the United
States and its territories. In the Energy segment, a new $50 million contract to
operate, maintain and optimize the performance of oil and gas producing
properties in the Gulf of Mexico was added during the third quarter of 2004.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $17.5 million for the first nine
months of 2004 as compared to net cash used in operating activities of $17.1
million for the same period in 2003. This increase in cash provided by operating
activities was the direct result of increased net income and the Company
becoming more efficient with its new billing system and the related process
changes that were implemented effective January 1, 2003. The cash used in
operating activities for the first nine months of 2003 was negatively affected
by the implementation of the new billing system and related changes to its
billing process. As a result of these billing system and process changes, the
Company experienced certain data conversion and training issues, which caused
delays in producing client invoices during the first quarter of 2003. Since the
new system was first used
-17-
to invoice clients in February 2003, the Company has implemented various
corrective improvement measures, and is invoicing on a current basis through its
new software.
Net cash used in investing activities was $2.8 million and $3.9 million for the
first nine months of 2004 and 2003, respectively. These amounts reflect only
capital expenditures for both periods. The 2004 amount primarily relates to
office and field equipment purchases totaling $1.2 million and computer software
and equipment purchases totaling $1.4 million, while the 2003 amount relates to
leasehold improvements of $2.5 million associated with the Company's new
headquarters and $1.2 million of computer software and equipment purchases.
During the first nine months of 2004 and 2003, the Company procured additional
computer software and equipment under the terms of operating leases. 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.
Net cash used in financing activities was $12.5 million for the first nine
months of 2004 versus net cash provided by financing activities of $19.8 million
for the same period in 2003. The cash usage for financing activities during the
first nine months of 2004 resulted primarily from repayments of long-term debt
totaling $13.5 million, as partially offset by proceeds from the exercise of
stock options totaling $0.9 million. The cash provided by financing activities
for the first nine months of 2003 reflects the proceeds from long-term debt
totaling $20.5 million, which was used to fund the aforementioned working
capital needs in conjunction with changes in the Company's billing process and
system and the resultant billing and collection delays. During the first quarter
of 2003, pursuant to the Company's stock repurchase program, the Company also
paid $0.7 million to acquire 80,400 additional treasury shares.
During the third quarter of 2004, the Company successfully negotiated and
extended its unsecured credit agreement ("the Amended Agreement") with a
consortium of financial institutions. The Amended Agreement provides for an
increase in the commitment amount from $40 million to $60 million, as well as a
three-year extension of the maturity date through September 17, 2008. The
commitment includes the sum of the principal amount of revolving credit loans
outstanding and the aggregate face value of outstanding letters of credit. The
Company experienced increased cash collections during the first nine months of
2004, and as a result, utilized a portion of these collections to reduce the
borrowings under its credit facility. Accordingly, as of September 30, 2004, no
borrowings were outstanding under the Amended Agreement, however, outstanding
letters of credit totaled $7.0 million. The Company expects to use the increased
commitment to accommodate additional working capital and/or future acquisition
needs.
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. In October 2001, the Pennsylvania Insurance
Commissioner placed Reliance into liquidation. The Company remains uncertain at
this time what effect this action 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. A wholly-owned subsidiary of the Company was subject
to one substantial claim which fell within the Reliance coverage period. This
claim was settled in the amount of $2.5 million, and payment was made by the
Company in April 2003. Due to the liquidation of Reliance, the Company is
currently uncertain what amounts paid to settle this claim will be recoverable
under the insurance policy with Reliance. The Company is pursuing a claim in the
Reliance liquidation and believes that some recovery will result from the
liquidation, but the amount of such recovery
-18-
cannot currently be estimated. The Company had no related receivables recorded
from Reliance as of September 30, 2004.
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 $1.4 million as of September 30, 2004. Assuming a 10%
decrease in interest rates on these variable-rate investments (i.e., an decrease
from the actual weighted average interest rate of 0.98% as of September 30,
2004, to a weighted average interest rate of 0.88%), the decrease in annual
interest income would be negligible based on the outstanding balance of
variable-rate obligations as of September 30, 2004. Accordingly, the Company has
no material exposure to interest rate risk, nor does it have any interest rate
swap or exchange agreements.
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. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of September 30, 2004.
Based upon their evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in the Company's "internal control over financial reporting"
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarter ended September 30, 2004, and that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
-19-
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 5 to the accompanying financial statements.
ITEM 6. EXHIBITS
The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
- ----------- -----------
10.4(a) First Amended and Restated Loan Agreement dated September 17, 2004 by and between the
Company and Citizens Bank of Pennsylvania, PNC Bank, National Association and Fifth
Third Bank, filed herewith.
31.1 Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)
31.2 Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
32.1 Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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: November 8, 2004
- ----------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: November 8, 2004
- ----------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
-20-