FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Office Park, Building 3, 420 Rouser Road, Coraopolis, PA 15108
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(Address of principal executive offices) (Zip Code)
(412) 269-6300
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(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of October 31, 2001:
-----------------------
Common Stock 6,981,521 shares
Series B Common Stock 1,296,780 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 the regulatory environment, changes in
anticipated levels of government spending on infrastructure, and changes in loan
relationships or sources of financing. Such forward-looking statements are made
pursuant to the Safe Harbor Provisions of the Private Securities Litigation
Reform Act of 1995.
-1-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
--------------------------
Sept. 30, 2001 Sept. 30, 2000
====================================================================================================================
(In thousands, except
per share amounts)
Total contract revenues $ 98,387 $ 92,351
Cost of work performed 80,914 78,830
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Gross profit 17,473 13,521
Selling, general and administrative expenses 11,865 9,515
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Income from operations 5,608 4,006
Other income/(expense):
Interest income 143 112
Interest expense (276) (121)
Other, net 26 196
--------------------------------------------------------------------------------------------------------------------
Income before income taxes 5,501 4,193
Provision for income taxes 2,554 1,849
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NET INCOME $ 2,947 $ 2,344
====================================================================================================================
BASIC NET INCOME PER SHARE $ 0.35 $ 0.29
DILUTED NET INCOME PER SHARE $ 0.35 $ 0.28
====================================================================================================================
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, 2001 Sept. 30, 2000
==================================================================================================================
(In thousands, except
per share amounts)
Total contract revenues $ 291,247 $ 298,407
Cost of work performed 241,709 255,800
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Gross profit 49,538 42,607
Selling, general and administrative expenses 33,829 30,830
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Income from operations 15,709 11,777
Other income/(expense):
Interest income 593 183
Interest expense (688) (784)
Other, net 33 1,051
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Income before income taxes 15,647 12,227
Provision for income taxes 7,119 5,624
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NET INCOME $ 8,528 $ 6,603
====================================================================================================================
BASIC NET INCOME PER SHARE $ 1.03 $ 0.81
DILUTED NET INCOME PER SHARE $ 1.01 $ 0.80
====================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS Sept. 30, 2001 Dec. 31, 2000
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(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 9,801 $ 9,122
Short-term investments - 8,999
Receivables 71,849 67,678
Cost of contracts in progress and estimated earnings, less billings 26,531 20,491
Litigation escrow 12,710 -
Prepaid expenses and other 4,107 7,335
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Total current assets 124,998 113,625
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PROPERTY, PLANT AND EQUIPMENT, NET 9,917 10,058
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OTHER ASSETS
Goodwill and other intangible assets, net 10,059 10,846
Other assets 3,838 2,850
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Total other assets 13,897 13,696
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TOTAL ASSETS $148,812 $137,379
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Current portion of long-term debt $ 1 $ 2,244
Accounts payable 22,119 25,670
Accrued employee compensation 13,277 9,697
Accrued insurance 4,730 5,321
Accrued litigation reserve 11,594 11,334
Income taxes payable 6,788 4,443
Other accrued expenses 23,677 20,836
Excess of billings on contracts in progress over cost and
estimated earnings 4,878 4,689
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Total current liabilities 87,064 84,234
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OTHER LIABILITIES
Long-term debt 38 51
Other 2,721 2,765
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Total liabilities 89,823 87,050
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SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
7,315,604 and 7,265,149 shares at 9/30/01 and 12/31/00, respectively 7,316 7,265
Series B Common Stock, par value $1, authorized 6,000,000 shares, issued
1,296,936 and 1,304,927 shares at 9/30/01 and 12/31/00, respectively 1,297 1,305
Additional paid-in-capital 37,727 37,488
Retained earnings 15,187 6,659
Other comprehensive loss (195) (335)
Less 327,289 and 302,989 shares of Common Stock in treasury, at cost,
at 9/30/01 and 12/31/00, respectively (2,343) (2,053)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 58,989 50,329
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $148,812 $137,379
====================================================================================================================
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, 2001 Sept. 30, 2000
====================================================================================================================
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 8,528 $ 6,603
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 3,893 4,387
Gain on sale of BSSI - (2,157)
Changes in assets and liabilities:
Increase in receivables and contracts in progress (10,022) (10,477)
Increase/(decrease) in accounts payable and accrued expenses 4,840 (845)
Decrease in other net assets 2,485 321
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Total adjustments 1,196 (8,771)
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Net cash provided by/(used in) operating activities 9,724 (2,168)
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (3,077) (2,154)
Proceeds from the sale of short-term investments 8,999 -
Funding of litigation escrow (12,710) -
Proceeds from the sale of certain construction assets - 748
Proceeds from the sale of BSSI - 13,867
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Net cash (used in)/provided by investing activities (6,788) 12,461
--------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (2,256) (10,115)
Payments to acquire treasury stock (290) -
Proceeds from exercise of stock options 289 222
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Net cash used in financing activities (2,257) (9,893)
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Net increase in cash and cash equivalents 679 400
Cash and cash equivalents, beginning of year 9,122 3,685
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 9,801 $ 4,085
====================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 251 $ 974
Income taxes paid $ 1,820 $ 954
====================================================================================================================
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, 2001
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,306,399 and 8,202,620 shares outstanding for the three-month periods, and
8,295,121 and 8,194,220 for the nine-month periods, ended September 30, 2001 and
2000, respectively. Diluted net income per share computations are based upon
weighted averages of 8,490,638 and 8,257,712 shares outstanding for the
three-month periods, and 8,405,159 and 8,235,761 for the nine-month periods,
ended September 30, 2001 and 2000, respectively. The additional shares included
in diluted shares outstanding are entirely attributable to stock options.
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 third quarter of
2001, the Company reactivated this share repurchase program and repurchased
24,300 treasury shares at market prices ranging from $11.00 to $12.35 per share,
for a total price of $290,000. As of September 30, 2001, treasury shares
totaling 327,289 had been repurchased since the 1996 authorization of this
program.
NOTE 3 - BUSINESS SEGMENT INFORMATION
The Company has the following three reportable segments:
- The Engineering segment provides a variety of services including
design-build, construction management, consulting, planning, program
management, surveying, mapping, geographic information systems,
architectural and interior design, construction inspection,
constructability reviews and software development capabilities.
- The Energy segment offers services that include training, personnel
recruitment, pre-operations engineering, maintenance management
systems, field operations and maintenance, mechanical equipment
maintenance and logistics management.
- The Non-Core segment consists of the former Buildings and
Transportation construction divisions, which are currently in the
process of being wound down, and the former Baker Support Services,
Inc. division, which was sold effective June 1, 2000. All remaining
construction activity within this segment is expected to be finalized
during 2001.
-6-
The following tables reflect the required disclosures for the Company's segments
(in millions):
For the three months ended For the nine months ended
-------------------------- ------------------------------
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
========================================================================================================================
Total contract revenues:
Engineering $ 60.6 $ 57.9 $ 178.8 $ 171.7
Energy 37.8 31.8 111.9 86.2
Non-Core - 2.6 0.5 40.5
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Subtotal - segments 98.4 92.3 291.2 298.4
Corporate/Insurance - 0.1 - -
-----------------------------------------------------------------------------------------------------------------------
Total $ 98.4 $ 92.4 $ 291.2 $ 298.4
=======================================================================================================================
A reclassification was made to the prior year three- and nine-month segment
revenues in order to conform to the current year presentation.
For the three months ended For the nine months ended
-------------------------- ------------------------------
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
========================================================================================================================
Income/(loss) from operations
without corporate expenses
allocated:
Engineering $ 5.1 $ 3.9 $ 14.2 $ 11.7
Energy 4.1 2.3 10.3 5.2
Non-Core (0.1) (0.3) 0.3 0.5
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Subtotal - segments 9.1 5.9 24.8 17.4
Corporate/Insurance (3.5) (1.9) (9.1) (5.6)
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Total $ 5.6 $ 4.0 $ 15.7 $ 11.8
========================================================================================================================
Sept. 30, 2001 Dec. 31, 2000
========================================================================================================================
Segment assets:
Engineering $ 76.8 $ 70.9
Energy 51.3 43.2
Non-Core 14.3 2.8
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Subtotal - segments 142.4 116.9
Corporate/Insurance 6.4 20.5
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Total $ 148.8 $ 137.4
========================================================================================================================
A reclassification was made to the segment asset balances as of December 31,
2000 in order to conform to the current year presentation.
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
In September 2001, the Company entered into an unsecured credit agreement ("the
Agreement") with a consortium of financial institutions. The Agreement provides
for a commitment of $40 million through September 30, 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 September
30,
-7-
2001, no borrowings were outstanding under the Agreement; however; letters of
credit totaling $2.7 million were outstanding as of this date.
The Agreement provides for the Company to borrow at the bank's prime interest
rate or at LIBOR plus an applicable margin determined by the Company's leverage
ratio. The Agreement also requires the Company to meet certain equity, leverage,
interest and rent coverage, and current ratio requirements. Under the Agreement,
the Company pays the bank commitment fees of 3/8% per year based on the unused
portion of the commitment.
NOTE 5 - CONTINGENCIES
The Company has reviewed the status of contingencies outstanding at September
30, 2001. Except as noted below, management believes that there have been no
significant changes to the information disclosed in its Annual Report on Form
10-K for the year ended December 31, 2000.
The Company's professional liability errors and omissions insurance coverage had
been placed with Reliance Insurance Group ("Reliance") for the period July 1,
1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation; 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 may have for insurance
coverage under policies issued by Reliance with respect to past years.
Currently, the Company is subject to one substantial claim which, if decided
adversely to the Company, would be within the scope of an insurance policy
issued by Reliance. Although the plaintiff in this case claims damages of $10-11
million, the litigation is in progress and, at this time, it is uncertain
whether the Company will have any liability with respect to this claim and, if
so, whether any such liability will be funded by Reliance. Based on the
uncertainty associated with the Company'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 financial statements as of September 30,
2001.
The Company previously reported that the Company and one of its wholly-owned
subsidiaries were defendants in a lawsuit brought in 1987 in the Superior Court
of the State of New York, Bronx County, by the Dormitory Authority of the State
of New York, asserting breach of contract and alleging damages of $13 million.
In September 2001, this litigation was settled for a net payment of $1.1
million. This settlement amount had been accrued in prior years' financial
statements.
NOTE 6 - NON-CORE OPERATIONS
On January 10, 2001, Baker Mellon Stuart Construction, Inc. ("BMSCI"), a
subsidiary of the Company, and Travelers Casualty and Surety Company of America,
BMSCI's surety, filed an appeal of the previously reported judgment by the
United States District Court for the Middle District of Florida (the "Court") in
favor of ADF International, Inc. ("ADF"). As a result of this appeal, the
Company was required by the appellate court to place $11.3 million into an
escrow account (see Note 2 of the Company's consolidated financial statements
for the year ended December 31, 2000). This escrow amount reflected the $10.0
million principal judgment against BMSCI and post-judgment interest expense of
$1.3 million. The Company will continue recording both interest income (at a
-8-
fluctuating market investment rate) and interest expense (at a rate of 6.052%,
as stipulated by the appellate court) on the escrow amount until settlement.
On April 6, 2001, the Court entered a judgment on ADF's claim for attorney's
fees and costs in connection with the foregoing action. The Court awarded ADF
$1.1 million in attorney's fees and costs, but denied ADF's claim for an
additional $0.4 million in expenses. BMSCI, Travelers and ADF subsequently
appealed this judgment. As a result of this appeal, the Company was required by
the appellate court to place $1.2 million into an escrow account. This escrow
amount reflected the $1.1 million fee and cost judgment against BMSCI and
post-judgment interest expense of $0.1 million. As stated above, the Company
will also continue recording both interest income and interest expense on this
escrow amount until settlement.
Pursuant to the terms of the preceding escrow arrangements, interest income on
the escrowed amounts up to pre-established limits will be retained in the escrow
accounts as security for attorney's fees incurred by ADF in pursuing the
appeals. These amounts will be paid to ADF in the event that they prevail and
are awarded such fees. These pre-established limits were met during the third
quarter of 2001 and totaled approximately $0.2 million at September 30, 2001.
The Company's appeals of the principal and attorney's fees judgments were
consolidated and argued on November 6, 2001. The appellate court's decision is
pending. The Company's asset and liability balances related to the ADF judgments
are reflected as current asset and liability accounts, since management believes
that the appellate court's decision will be issued within 12 months.
NOTE 7 - NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statements of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations completed after June 30, 2001 to be
accounted for under the purchase method. This standard also establishes specific
criteria for the recognition of intangible assets separate from goodwill in
conjunction with business combinations completed after June 30, 2001. The
Company has accounted for all past acquisitions under the purchase method, and
will account for all future business combinations in accordance with SFAS 141.
Under SFAS 142, goodwill amortization will no longer be recorded once the new
standard is adopted. The new rules also require an initial goodwill impairment
assessment in the year of adoption and annual impairment tests thereafter. The
Company will be required to adopt this statement effective January 1, 2002. Once
adopted, annual goodwill amortization expense of approximately $0.7 million will
cease, resulting in additional earnings per share of approximately $0.04 to
$0.05. The Company does not expect that any impairment charge will result from
the adoption of this statement.
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.
-9-
SFAS 143 requires obligations associated with the retirement of a tangible
long-lived asset to be recorded as a liability when those obligations are
incurred. The Company will be required to adopt this standard effective January
1, 2003. 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. Adoption of this new standard will be required effective January 1, 2002.
The Company does not believe that adoption of these statements will have a
material impact on its financial statements.
NOTE 8 - RECLASSIFICATIONS
Certain reclassifications have been made to prior year balance sheet amounts in
order to conform to the current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
The following tables reflect a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended September 30, 2001 and 2000 (in millions):
For the three months ended For the nine months ended
-------------------------- -------------------------
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
=====================================================================================================================
Total contract revenues:
Engineering $ 60.6 $ 57.9 $ 178.8 $ 171.7
Energy 37.8 31.8 111.9 86.2
Non-Core* - 2.6 0.5 40.5
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Subtotal - segments 98.4 92.3 291.2 298.4
Corporate/Insurance - 0.1 - -
---------------------------------------------------------------------------------------------------------------------
Total $ 98.4 $ 92.4 $ 291.2 $ 298.4
=====================================================================================================================
A reclassification was made to the prior year three- and nine-month segment
revenues in order to conform to the current year presentation.
For the three months ended For the nine months ended
-------------------------- -------------------------
Sept. 30, 2001 Sept. 30, 2000 Sept. 30, 2001 Sept. 30, 2000
======================================================================================================================
Income/(loss) from operations
with corporate expenses
allocated:
Engineering $ 3.6 $ 2.8 $ 9.9 $ 8.6
Energy 3.4 1.9 8.4 4.2
Non-Core* (1.1) (0.3) (1.8) (0.1)
----------------------------------------------------------------------------------------------------------------------
Subtotal - segments 5.9 4.4 16.5 12.7
Corporate/Insurance (0.3) (0.4) (0.8) (0.9)
----------------------------------------------------------------------------------------------------------------------
Total $ 5.6 $ 4.0 $ 15.7 $ 11.8
======================================================================================================================
-10-
* Non-Core operations are defined as the construction operations that are being
wound down within the Buildings and Transportation units, and the Civil-BSSI
division, which was sold effective June 1, 2000.
TOTAL CONTRACT REVENUES
Total contract revenues from the Company's ongoing operations (consolidated
revenues less non-core) increased 10% in the third quarter of 2001 over the
third quarter of 2000. Energy revenues increased 19% in the third quarter of
2001 as compared to the third quarter of 2000. This increase was driven by
OPCO(SM), Baker Energy's Operations Consolidation Model, which contributed 33%
and 29% of Baker Energy's total contract revenues for the third quarter of 2001
and 2000, respectively, and higher revenues associated with new work in
Energy's operations engineering business. Engineering revenues increased 5% in
the third quarter of 2001 as a result of growth within the civil, transportation
and architectural markets. The absence of revenues for the Company's non-core
operations during the third quarter of 2001 again reflects the wind-down of the
former Buildings and Transportation construction divisions and the sale of Baker
Support Services, Inc. ("BSSI") effective June 1, 2000.
For the first nine months of 2001, total contract revenues from the Company's
ongoing operations increased 13% over the corresponding period in 2000. Energy
revenues increased 30% for the first nine months of 2001 as compared to the
first nine months of 2000. This increase is again primarily attributable to
OPCO, which contributed 32% and 25% of Baker Energy's total contract revenues
for the first nine months of 2001 and 2000, respectively, and new work in
Energy's operations engineering business. In the Engineering segment, revenues
increased 4% during the first nine months of 2001 due primarily to growth in the
civil, transportation and architectural markets, as partially offset by a
decline in environmental revenues due to lower funding levels associated with
the Navy CLEAN program. In addition, delays in client funding slowed the
initiation of certain Engineering projects and lowered revenues for the first
nine months of 2001.
GROSS PROFIT
For the Company's ongoing operations, gross profit expressed as a percentage of
revenues increased to 17.9% in the third quarter of 2001 from 15.3% in the third
quarter of 2000. The Energy segment's gross profit percentage increased to 20.4%
in the third quarter of 2001 from 18.6% in the third quarter of 2000. OPCO
contracts posted a gross profit percentage of 31% in the third quarter of 2001
as compared to 12% in the comparable period of 2000. This increased
profitability resulted from improved cost efficiencies in the OPCO operations,
and was further enhanced by improved profitability on operations engineering
projects within the Energy segment during the third quarter of 2001. The
Engineering segment posted a gross profit percentage of 16.8% in the third
quarter of 2001, up from 14.0% in the comparable period of 2000. This increased
profitability primarily resulted from telecommunications projects which
commenced during the third quarter of 2000, an annual project award fee which
was recognized during the third quarter for 2001 but during the fourth quarter
for 2000, and an overall performance improvement on existing projects for 2001.
Gross profit for the Company's non-core operations was a loss of $0.1 million
for the third quarter of 2001 versus a loss of $0.2 million for the comparable
period of 2000. Both periods' results for non-core operations included only the
two former construction divisions, as the former BSSI division was sold
effective June 1, 2000.
-11-
For the Company's ongoing operations, gross profit expressed as a percentage of
revenues increased to 16.9% for the first nine months of 2001 from 15.2% in the
comparable period of 2000. The Energy segment's gross profit percentage
increased to 18.4% in the first nine months of 2001 from 17.9% in the comparable
period of 2000. Over these same periods, Energy's OPCO-related gross profit
percentage was 23% for the first nine months of 2001 as compared to 19% for the
comparable period of 2000. The Engineering segment's gross profit percentage
improved to 16.4% for the first nine months of 2001 from 14.3% in the same
period of 2000. The reasons for these segments' year-to-date profitability
improvements are consistent with those discussed in the preceding paragraph. For
the first nine months of 2001, the Company's non-core operations posted gross
profit of $0.4 million versus $3.4 million for the comparable period of 2000.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the Company's ongoing operations, selling, general and administrative
expenses expressed as a percentage of total contract revenues increased to 11.1%
in the third quarter of 2001 from 10.5% in the third quarter of 2000. In the
Energy segment, selling, general and administrative expenses expressed as a
percentage of total revenues decreased to 11.4% in the third quarter of 2001
from 12.6% in 2000. This decrease is attributable to the addition of O&M
services to several OPCO contracts during the second half of 2000, which
resulted in a 2001 revenue increase without a corresponding increase in overhead
costs. This percentage decrease was partially offset by the combination of
higher compensation-related expenses and higher corporate overhead allocations
to both the Engineering and Energy segments due to the wind-down of the
construction divisions. In the Engineering segment, selling, general and
administrative expenses expressed as a percentage of total revenues increased to
10.9% in the third quarter of 2001 from 9.2% in 2000. This percentage increase
is primarily attributable to the above mentioned increase in
compensation-related expenses and corporate overhead allocations. For the
non-core operations, selling, general and administrative expenses increased from
$0.1 million in the third quarter of 2000 to $0.9 million in the third quarter
of 2001. The 2001 amount entirely reflects construction-related legal spending
in connection with the Company's ADF appeal and its claim against HOK, both of
which are related to the Universal project. These 2001 legal costs were included
in corporate overhead and allocated entirely to non-core operations.
For the first nine months of 2001, selling, general and administrative expenses
for the Company's ongoing operations expressed as a percentage of related total
contract revenues increased only slightly to 10.9% in the first nine months of
2001 from 10.6% in the first nine months of 2000. In the Energy segment,
selling, general and administrative expenses expressed as a percentage of total
revenues decreased to 10.9% in the first nine months of 2001 from 13.0% in 2000.
The Engineering segment's selling, general and administrative expenses expressed
as a percentage of total revenues increased to 10.8% for the first nine months
of 2001 from 9.3% in the corresponding period of 2000. The reasons for both
segments' percentage variances are discussed in the preceding paragraph. For the
non-core operations, selling, general and administrative expenses decreased from
$3.5 million in the first nine months of 2000 to $2.2 million in the first nine
months of 2001, due to the sale of BSSI and wind-down of the two former
construction divisions. As discussed in the preceding paragraph, these 2001
selling, general and administrative expenses relate entirely to legal costs
included as corporate overhead and allocated to non-core operations.
-12-
OTHER INCOME
Interest income was slightly higher for the third quarter of 2001 as compared to
the third quarter of 2000 due primarily to interest earned on the money placed
in escrow for the appeal of the ADF judgments. Interest expense was higher for
the third quarter of 2001 as compared to the third quarter of 2000 due to the
Company's recording of interest expense associated with the ADF escrow. Other
income was negligible for the third quarter of 2001, compared to other income of
$0.2 million for the third quarter of 2000. The 2000 amount primarily reflected
a non-core gain associated with the sale of certain construction equipment.
Interest income was higher and interest expense was lower for the first nine
months of 2001 as compared to the first nine months of 2000 for the same reasons
as discussed in the preceding paragraph. In addition, during the first five
months of 2000 (i.e., prior to the sale of BSSI), the Company was in a net
borrowed position which resulted in higher interest expense under its credit
agreement during that period. Other income was again negligible for the first
nine months of 2001 versus $1.0 million for the first nine months of 2000. The
more significant components of other income for the first nine months of 2000
were a gain of $2.2 million from the sale of BSSI, as offset by non-core charges
totaling $1.0 million related to the above mentioned sale of certain
construction equipment.
As discussed in Note 6 to the accompanying financial statements, the Company
will record both interest income (at a fluctuating market investment rate) and
interest expense (at a rate of 6.052%, as stipulated by the appellate court) on
the ADF escrow amount until settlement. If investment rates continue to fall
during 2001, the Company's net interest expense on the escrow funds will
continue to increase.
INCOME TAXES
During the third quarter of 2001, the Company increased its year-to-date
effective rate for income taxes from 45% to 45.5%. This increase reflects a
slightly less favorable mix of estimated domestic and foreign taxable income for
the year ending December 31, 2001. During the third quarter of 2000, the Company
reduced its year-to-date effective tax rate from 47% to 46%. This adjustment
reflected a more favorable domestic mix of the estimated 2000 taxable income for
the Company's subsidiaries. The slightly lower year-to-date effective rate of
45.5% for 2001 (versus 46% in 2000) primarily results from the Company's
expectation of higher domestic income before taxes for 2001.
CONTRACT BACKLOG
September 30, 2001 December 31, 2000
=====================================================================================================================
Engineering $ 382.1 $ 318.7
Energy 157.7 183.2
Non-Core - -
---------------------------------------------------------------------------------------------------------------------
Total $ 539.8 $ 501.9
=====================================================================================================================
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of the Company's contracts with the
Federal Government and other clients may be terminated at will, or option years
may not be exercised; therefore, no assurance can be given that all backlog will
be realized.
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Among the more significant new work added during the third quarter of 2001 was a
contract to provide environmental master planning and engineering services for
$25 million in the Engineering segment. The overall decrease in the Energy
segment's backlog results from the loss of a lower margin operations and
maintenance contract and an international manpower contract, changes in the
scope of two other contracts, a client's sale of certain properties, and a
reduction associated with a West African operations and maintenance contract.
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LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities improved to $9.7 million for the first
nine months of 2001 from net cash used in operating activities of $2.2 million
for the same period in 2000. Operating cash flow for the first nine months of
2000 was abnormally and unfavorably impacted by the wind-down of the former
construction divisions and the sale of certain heavy and highway construction
assets and contracts.
Net cash used in investing activities was $6.8 million for the first nine months
of 2001, compared to net cash provided by investing activities of $12.5 million
for the first nine months of 2000. The net cash used in investing activities for
the first nine months of 2001 reflects the funding of $12.7 million into an
escrow account stipulated in connection with the Company's appeal of the ADF
judgment (see Note 6 to the accompanying financial statements) and capital
expenditures of $3.1 million, as partially offset by proceeds from the sale of
short-term investments totaling $9.0 million. The net cash provided by investing
activities for the first nine months of 2000 included proceeds from the sale of
BSSI and certain heavy and highway construction assets totaling $13.9 million
and $0.7 million, respectively, as offset by capital expenditures of $2.2
million. The increase in capital expenditures resulted primarily from the
Company's expansion of certain offices and its related purchases of office
equipment during the first nine months of 2001. In addition, the Company
purchased computer equipment during 2001, but acquired similar computer
equipment under operating leases during 2000.
Net cash used in financing activities totaled $2.3 million for the first nine
months of 2001, compared to net cash used in financing activities of $9.9
million for the same period in 2000. The net cash used in financing activities
for the first nine months of 2001 primarily reflects a final payment of $2.2
million on a seller note associated with the 1999 Steen acquisition. Pursuant to
the Company's stock repurchase program, the Company paid $0.3 million to acquire
24,300 additional treasury shares during the third quarter of 2001. The net cash
used in financing activities for the first nine months of 2000 resulted from the
Company's repayment of its outstanding borrowings under its credit agreement.
Working capital increased to $37.9 million at September 30, 2001 from $29.4
million at December 31, 2000. The current ratio was 1.44:1 at the end of the
third quarter of 2001, compared to 1.35:1 at year-end 2000. These changes are
principally attributable to an increase in unbilled revenues in both the
Engineering and Energy segments. In addition to the Company's higher volumes in
2001, this increase also reflects situations where the Company's Engineering and
Energy segments have provided services and recognized costs, but the contract
execution is pending and/or the contract revenue recognition has been delayed
until the related contracts and change orders have been fully documented with
the clients. The other factor impacting working capital and the current ratio
for the first nine months of 2001 was the reclassification of the Company's
litigation escrow and reserve accounts from long-term to current assets and
liabilities, as discussed in Note 6 to the accompanying financial statements.
This reclassification had the effect of increasing working capital while
slightly reducing the current ratio.
In September 2001, the Company entered into an unsecured credit 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 September 30, 2001, no borrowings
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were outstanding under the agreement; however; letters of credit totaling $2.7
million were outstanding as of this date.
The Company's professional liability errors and omissions insurance coverage had
been placed with Reliance Insurance Group ("Reliance") for the period July 1,
1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation; 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 may have for insurance
coverage under policies issued by Reliance with respect to past years.
Currently, the Company is subject to one substantial claim which, if decided
adversely to the Company, would be within the scope of an insurance policy
issued by Reliance. Although the plaintiff in this case claims damages of $10-11
million, the litigation is in progress and, at this time, it is uncertain
whether the Company will have any liability with respect to this claim and, if
so, whether any such liability will be funded by Reliance. Based on the
uncertainty associated with the Company'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 financial statements as of September 30,
2001.
Short- and long-term liquidity is dependent upon appropriations of public funds
for infrastructure and other government-funded projects, the demand for the
Company's services in the oil and gas markets, and capital spending levels in
the private sector. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The current federal transportation
legislation (TEA-21 and AIR-21) will continue to provide significant increases
in funding for transportation infrastructure projects during the remainder of
2001 and beyond. At this time, management believes that its funds generated from
operations and its new credit facility will be sufficient to meet its operating
and capital expenditure requirements for at least the next year.
The Company has a $500 million bonding line available through Travelers Casualty
& Surety Company of America. Management believes that this line will be
sufficient to meet its bid and performance bonding needs for at least the next
year.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"),
and No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142").
SFAS 141 requires all business combinations completed after June 30, 2001 to be
accounted for under the purchase method. This standard also establishes specific
criteria for the recognition of intangible assets separate from goodwill in
conjunction with business combinations completed after June 30, 2001. The
Company has accounted for all past acquisitions under the purchase method, and
will account for all future business combinations in accordance with SFAS 141.
Under SFAS 142, goodwill amortization will no longer be recorded once the new
standard is adopted. The new rules also require an initial goodwill impairment
assessment in the year of adoption and annual impairment tests thereafter. The
Company will be required to adopt this statement effective January 1, 2002. Once
adopted, annual goodwill amortization expense of approximately $0.7 million will
cease,
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resulting in additional earnings per share of approximately $0.04 to $0.05. The
Company does not expect that any impairment charge will result from the adoption
of this statement.
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 obligations associated with the retirement of a tangible
long-lived asset to be recorded as a liability when those obligations are
incurred. The Company will be required to adopt this standard effective January
1, 2003. 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. Adoption of this new standard will be required effective January 1, 2002.
The Company does not believe that adoption of these statements will have a
material impact on its financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-----------------------------------------------------------
The Company's primary interest rate risk relates to its variable-rate
investments and debt obligations. While its variable-rate debt obligations were
negligible as of September 30, 2001, the Company's litigation escrow
(investment) balance totaled $12.7 million as of this date. If interest rates on
investments or borrowings were to change unfavorably by 10%, the Company would
have no material exposure to interest rate risk. The Company has no interest
rate swap or exchange agreements.
Less than 1% of the Company's total assets and total contract revenues as of and
for the periods ended September 30, 2001 were denominated in currencies other
than the U.S. Dollar. If foreign currency exchange rates were to change
unfavorably by 10%, the Company would have no material exposure to foreign
currency exchange risk. The Company has no foreign currency exchange contracts.
Based on the nature of the Company's business, it has no direct exposure to
commodity price risk.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
----------- -----------
10.3 Loan Agreement dated September 5, 2001, by and between the
Registrant and Mellon Bank, N.A., National City Bank of
Pennsylvania, and Fifth Third Bank (schedules and exhibits
omitted), filed herewith.
(b) Reports on Form 8-K
-------------------
During the quarter ended September 30, 2001, the Company filed no reports on
Form 8-K.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MICHAEL BAKER CORPORATION
/s/ William P. Mooney Dated: November 9, 2001
----------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: November 9, 2001
----------------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Principal Accounting Officer)
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