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 MARCH 31, 2002
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Office Park, Building 3, 420 Rouser Road, Coraopolis, PA 15108
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(Address of principal executive offices) (Zip Code)
(412) 269-6300
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of April 30, 2002:
---------------------
Common Stock 8,349,273 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
--------------------------
MARCH 31, 2002 March 31, 2001
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(In thousands, except
per share amounts)
Total contract revenues $ 95,922 $ 94,950
Cost of work performed 80,650 79,601
--------------------------------------------------------------------------------
Gross profit 15,272 15,349
Selling, general and administrative expenses 12,112 10,884
--------------------------------------------------------------------------------
Income from operations 3,160 4,465
Other income/(expense):
Interest income 92 259
Interest expense (21) (174)
Other, net (85) 38
--------------------------------------------------------------------------------
Income before income taxes 3,146 4,588
Provision for income taxes 1,432 2,100
--------------------------------------------------------------------------------
NET INCOME $ 1,714 $ 2,488
================================================================================
BASIC NET INCOME PER SHARE $ 0.21 $ 0.30
DILUTED NET INCOME PER SHARE $ 0.20 $ 0.30
================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-2-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MARCH 31, 2002 Dec. 31, 2001
=============================================================================================================
(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 16,220 $ 18,482
Receivables 61,783 67,594
Cost of contracts in progress and estimated earnings, less billings 27,236 25,341
Litigation escrow 12,710 12,710
Prepaid expenses and other 4,541 4,673
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Total current assets 122,490 128,800
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PROPERTY, PLANT AND EQUIPMENT, NET 11,945 10,278
-------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 9,733 9,804
Other assets 3,788 2,748
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Total other assets 13,521 12,552
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TOTAL ASSETS $ 147,956 $ 151,630
=============================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 20,160 $ 21,885
Accrued employee compensation 10,081 14,060
Accrued insurance 5,208 5,359
Accrued litigation reserve 11,770 11,770
Income taxes payable 6,573 6,424
Other accrued expenses 24,237 22,263
Excess of billings on contracts in progress over cost and estimated
Earnings 4,383 6,085
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Total current liabilities 82,412 87,846
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OTHER LIABILITIES 2,329 2,291
Commitments and contingencies - -
-------------------------------------------------------------------------------------------------------------
Total liabilities 84,741 90,137
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SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,612,090 and 7,315,894 shares at 3/31/02 and 12/31/01, respectively 8,612 7,316
Series B Common Stock, par value $1, authorized 6,000,000 shares,
issued 0 and 1,296,696 shares at 3/31/02 and 12/31/01, respectively - 1,297
Additional paid-in-capital 37,560 37,734
Retained earnings 19,559 17,845
Other comprehensive loss (253) (266)
Less - 310,837 and 334,289 shares of Common Stock in treasury,
at cost, at 3/31/02 and 12/31/01, respectively (2,263) (2,433)
-------------------------------------------------------------------------------------------------------------
Total shareholders' investment 63,215 61,493
-------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 147,956 $ 151,630
=============================================================================================================
The accompanying notes are an integral part of the consolidated financial
statements.
-3-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
--------------------------
MARCH 31, 2002 March 31, 2001
================================================================================================
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,714 $ 2,488
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,155 1,355
Changes in assets and liabilities:
Decrease in receivables and contracts in progress 2,214 10
Decrease in accounts payable and accrued expenses (3,691) (268)
Decrease/(increase) in other net assets 168 (658)
------------------------------------------------------------------------------------------------
Total adjustments (154) 439
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,560 2,927
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,818) (1,129)
Investment in Energy Virtual Partners (1,000) -
Proceeds from sale of short-term investments - 8,999
Funding of litigation escrow - (11,329)
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Net cash used in investing activities (3,818) (3,459)
------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (4) (5)
Proceeds from exercise of stock options - 127
------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (4) 122
------------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (2,262) (410)
Cash and cash equivalents, beginning of year 18,482 9,122
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,220 $ 8,712
================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 12 $ 15
Income taxes paid $ 797 $ 1,138
================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDED MARCH 31, 2002
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,286,107 and 8,277,281 shares outstanding for the three-month periods ended
March 31, 2002 and 2001, respectively. Diluted net income per share computations
are based upon weighted averages of 8,503,002 and 8,328,965 shares outstanding
for the three-month periods ended March 31, 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:
o 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.
o 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.
o The Non-Core segment consists of the former buildings and transportation
construction operations that are being wound down.
-5-
The following tables reflect the required disclosures for the Company's
reportable segments (in millions):
For the three months ended
--------------------------
MARCH 31, 2002 March 31, 2001
================================================================================
Total contract revenues:
Engineering $58.3 $57.0
Energy 37.6 37.5
Non-Core - 0.5
--------------------------------------------------------------------------------
Total $95.9 $95.0
================================================================================
For the three months ended
--------------------------
MARCH 31, 2002 March 31, 2001
================================================================================
Income/(loss) from operations without
Corporate expenses allocated:
Engineering $ 4.2 $ 3.6
Energy 1.7 2.8
Non-Core - 0.4
--------------------------------------------------------------------------------
Subtotal - segments 5.9 6.8
Corporate/Insurance (2.7) (2.3)
--------------------------------------------------------------------------------
Total $ 3.2 $ 4.5
================================================================================
MARCH 31, 2002 Dec. 31, 2001
================================================================================
Segment assets:
Engineering $ 68.8 $ 72.4
Energy 55.2 49.8
Non-Core 13.6 14.6
--------------------------------------------------------------------------------
Subtotal - segments 137.6 136.8
Corporate/Insurance 10.4 14.8
--------------------------------------------------------------------------------
Total $148.0 $151.6
================================================================================
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 March 31, 2002, no borrowings were
outstanding under the Agreement; however; letters of credit totaling $2.3
million were outstanding as of this date.
-6-
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 March 31, 2002.
On July 24, 2001, the Company announced that it had become aware that certain
activities related to the operations of a 53% owned Nigerian subsidiary engaged
in energy-related operations are the subject of an inquiry by the U.S.
Department of Justice. The Company acquired the Nigerian subsidiary as part of
its acquisition of 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 has conducted 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 March
31, 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. The
-7-
Company's related accrued liability balance totaling $11.8 million at March 31,
2002 has not been adjusted because the litigation and the Company's liability
thereunder, if any, remain unresolved. Based upon the decisions of the Court of
Appeals, BMSCI is currently pursuing the release of the escrow amount.
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 will
complete its initial impairment test during the second quarter. The Company does
not expect that any impairment charge will result from 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
--------------------------
MARCH 31, 2002 March 31, 2001
================================================================================
Reported net income $1,714 $2,488
Add back: Goodwill amortization, net of tax - 94
--------------------------------------------------------------------------------
Adjusted net income $1,714 $2,582
================================================================================
For the three months ended
--------------------------
MARCH 31, 2002 March 31, 2001
================================================================================
Reported earnings per share:
Basic $0.21 $0.30
Diluted $0.20 $0.30
Adjusted earnings per share:
Basic $0.21 $0.31
Diluted $0.20 $0.31
================================================================================
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 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
-8-
was adopted effective January 1, 2002. Such adoption did not have a material
effect on the Company's financial position as of March 31, 2002 or its results
of operations for the three months then ended.
NOTE 8 - CONSOLIDATION OF FOREIGN OPERATIONS
The differences between the amounts reported in the accompanying Condensed
Consolidated Statement of Income for the period ended March 31, 2001 and those
reported in the Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 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.
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 quarters ended March 31, 2002 and 2001 (in millions):
For the three months ended
MARCH 31, 2002 March 31, 2001
-------------------------------------------------------------------------------
Total contract revenues:
Engineering $58.3 $57.0
Energy 37.6 37.5
Non-Core* - 0.5
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Total $95.9 $95.0
===============================================================================
For the three months ended
MARCH 31, 2002 March 31, 2001
-------------------------------------------------------------------------------
Income/(loss) from operations with Corporate
expenses allocated:
Engineering $ 2.8 $ 2.3
Energy 0.9 2.2
Non-Core* (0.3) 0.2
-------------------------------------------------------------------------------
Subtotal - segments 3.4 4.7
Corporate/Insurance (0.2) (0.2)
-------------------------------------------------------------------------------
Total $ 3.2 $ 4.5
===============================================================================
* The Non-Core segment consists of the former Buildings and Transportation
construction divisions, which are currently in the process of being wound down.
-9-
TOTAL CONTRACT REVENUES
Total contract revenues from the Company's ongoing operations (defined as
consolidated revenues less Non-Core revenues) increased only slightly in the
first quarter of 2002 relative to the first quarter of 2001. In the Energy
segment, revenues for the first quarter of 2002 were relatively unchanged from
the first quarter of 2001. This resulted from the expiration of several older
international contracts that were not renewed, and weaker than normal sales in
both the domestic and international markets. OPCO revenues composed 30% of Baker
Energy's total contract revenues for the first quarters of both 2002 and 2001.
Engineering revenues increased 2% for the first quarter of 2002 as compared to
the first quarter of 2001. This slight increase was adversely impacted by
several transportation projects that were delayed due to uncertainties in
Federal and state funding. As expected, the Company's Non-Core segment posted no
revenues for the first quarter of 2002 as compared to $0.5 million in the first
quarter of 2001. This decline in activity reflects the continuing wind-down of
the Company's former construction operations.
GROSS PROFIT
For the Company's ongoing operations, gross profit expressed as a percentage of
revenues increased slightly to 15.9% for the first quarter of 2002 from 15.8% in
the first quarter of 2001. The Energy segment's gross profit percentage
decreased to 14.1% in the first quarter of 2002 from 18.2% in the first quarter
of 2001, primarily due to the expiration of several higher margin international
contracts that were either not renewed or renewed at lower margins, and the
commencement of several new lower margin domestic contracts. Energy's OPCO
operations posted a gross profit margin percentage of 25% in the first quarter
of 2002 as compared to 24% in the comparable period of 2001. The Engineering
segment's gross profit percentage was 17.6% for the first quarter of 2002
compared to 14.6% in the comparable period of 2001. Contributing to this
increase were an overall favorable mix of higher margin engineering contracts in
the first quarter of 2002, as well as favorable adjustments on one project that
has been completed and another that is nearing completion.
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
12.4% in the first quarter of 2002 from 11.3% in the first quarter of 2001. This
overall increase in SG&A expenses expressed as a percentage of total contract
revenues was primarily the result of higher medical benefit and workers
compensation insurance costs, 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 total revenues
decreased to 11.6% in the first quarter of 2002 from 12.3% in 2001. This
decrease resulted from the combination of unchanged Energy revenues and lower
international personnel costs in the first quarter of 2002. In the Engineering
segment, SG&A expenses increased to 12.8% as a percentage of revenues for the
first quarter of 2002 from
-10-
10.6% in 2001. This percentage increase is attributable to the relatively
unchanged Engineering revenues coupled with the aforementioned increases in
medical benefit and workers compensation insurance costs, ERP-related expenses
and the payroll taxes related to the incentive compensation payments. For the
Company's Non-Core operations, SG&A expenses approximated $0.2 million for the
first quarters of both 2001 and 2002. These SG&A expenses related entirely to
legal costs associated with the ADF and HOK litigation.
OTHER INCOME
Interest income was lower for the first quarter of 2002 predominantly due to the
significant reduction in interest rates that occurred during 2001. Interest
expense was also lower for the first quarter of 2002 as compared to the first
quarter of 2001. This decrease in interest expense results 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 expenses for the first quarter of 2002 result almost
entirely from minority interest related to the income of two consolidated
subsidiaries in the Energy segment.
INCOME TAXES
The Company had provisions for income taxes of 45.5% and 45.8% for the first
quarters of 2002 and 2001, respectively. The slightly lower rate for 2002 is
consistent with Company's full year rate for 2001 and reflects the Company's
current best estimates of domestic and foreign taxable income for the year
ending December 31, 2002.
CONTRACT BACKLOG
(In millions) MARCH 31, 2002 Dec. 31, 2001
================================================================================
Engineering $385.9 $378.9
Energy 147.6 130.7
--------------------------------------------------------------------------------
Total $533.5 $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 during the first quarter of 2002 were
an Engineering contract to provide GIS and support services in the amount of
$8.5 million and a transportation-related contract to provide construction
management support services and supplementary construction inspection and
documentation services in the amount of $12.4 million. In the Energy segment,
backlog increased during the first quarter of 2002 primarily due to the renewal
of certain annual contracts that were completed during the fourth quarter of
2001.
-11-
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.6 million for the first quarter
of 2002 as compared to $2.9 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 quarter of 2002, as well as the aforementioned payment of 2001
incentive compensation bonuses during the first quarter of 2002.
Net cash used in investing activities was $3.8 million for the first quarter of
2002, compared to $3.5 million for the first quarter of 2001. The net cash used
in investing activities for the first quarter of 2002 reflects capital
expenditures of $2.8 million and a $1.0 million investment in Energy Virtual
Partners ("EVP"), a new 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 quarter of 2001 reflected the
funding of $11.3 million into an escrow account stipulated in connection with
the Company's appeal of the ADF judgment and capital expenditures of $1.1
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
quarter of 2002 resulted from the Company's purchase of computer software
totaling $1.9 million related to the implementation of a new ERP system.
Net cash used in financing activities was negligible for the first quarter of
2002 as compared to net cash provided by financing activities totaling $0.1
million for the first quarter of 2001. The net cash provided by financing
activities for the first quarter of 2001 reflects proceeds from the exercise of
stock options.
Working capital decreased slightly to $40.1 million at March 31, 2002 from $41.0
million at December 31, 2001. The Company's current ratio was 1.49:1 at the end
of the first quarter of 2002, compared to 1.47:1 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 March 31, 2002, no borrowings were
outstanding under the Agreement; however; letters of credit totaling $2.3
million were outstanding as of this date.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America. At March 31, 2002, bonds totaling approximately
$82.7 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.
-12-
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 March 31, 2002.
The Company views its short and long-term liquidity as being dependent upon its
results of operations, changes in working capital and its borrowing capacity.
These factors are further dependent upon appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for the Company's services in the engineering
and energy markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The Federal government's TEA-21
legislation has 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 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 $15.6 million as of March 31, 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.
-13-
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.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND THE USE OF PROCEEDS
---------------------------------------------
During the fourth quarter of 2001, the Company announced that all of its Series
B Common Stock would be exchanged into Common Stock. Under this program, each
Series B share held by the Company's Employee Stock Ownership Plan ("ESOP") was
exchanged for approximately 1.018 shares of Common Stock during February 2002.
Immediately following that exchange, the remaining Series B shares were
automatically converted into Common equivalents in accordance with provisions of
the Company's Articles of Incorporation. This exchange resulted in 23,452 shares
of Common Stock being withdrawn from the Company's treasury stock, and a
reduction in the voting rights related to the former Series B shares from ten
votes per share to one. The financial effects of this exchange have been
reflected in the Company's balance sheet as of March 31, 2002. This transaction
did not impact the Company's net income for the first quarter of 2002 nor will
it affect its net income in any future period. The utilization of the treasury
shares will have no material effect on the Company's earnings per share
computations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(b) Reports on Form 8-K
During the quarter ended March 31, 2002, the Company filed no reports on Form
8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAEL BAKER CORPORATION
/s/ William P. Mooney Dated: May 7, 2002
-------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: May 7, 2002
-----------------------------------------
Craig O Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
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