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, 2003
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 31, 2003:
-----------------------
Common Stock 8,319,998 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, 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 anticipated levels of government spending on infrastructure,
management changes, the successful implementation of information systems, 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, 2003 Sept. 30, 2002
-----------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Total contract revenues $ 106,338 $ 102,200
Cost of work performed 90,056 78,713
-----------------------------------------------------------------------------------
Gross profit 16,282 23,487
Selling, general and administrative expenses 13,605 12,644
-----------------------------------------------------------------------------------
Income from operations 2,677 10,843
Other income/(expense):
Interest income 2 77
Interest expense (270) (21)
Other, net 99 (137)
-----------------------------------------------------------------------------------
Income before income taxes 2,508 10,762
Provision for income taxes 1,303 4,386
-----------------------------------------------------------------------------------
NET INCOME $ 1,205 $ 6,376
===================================================================================
BASIC NET INCOME PER SHARE $ 0.14 $ 0.76
DILUTED NET INCOME PER SHARE $ 0.14 $ 0.75
===================================================================================
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, 2003 Sept. 30, 2002
-----------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Total contract revenues $ 310,436 $ 302,881
Cost of work performed 265,689 246,771
-----------------------------------------------------------------------------------
Gross profit 44,747 56,110
Selling, general and administrative expenses 41,031 35,951
-----------------------------------------------------------------------------------
Income from operations 3,716 20,159
Other income/(expense):
Interest income 17 249
Interest expense (584) (61)
Other, net (698) (215)
-----------------------------------------------------------------------------------
Income before income taxes 2,451 20,132
Provision for income taxes 1,275 8,556
-----------------------------------------------------------------------------------
NET INCOME $ 1,176 $ 11,576
===================================================================================
BASIC NET INCOME PER SHARE $ 0.14 $ 1.39
DILUTED NET INCOME PER SHARE $ 0.14 $ 1.36
===================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
SEPT. 30, 2003
ASSETS (UNAUDITED) Dec. 31, 2002
--------------------------------------------------------------------------------------------------------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 7,080 $ 9,885
Receivables, net 79,702 65,742
Cost of contracts in progress and estimated earnings, less billings 46,169 29,723
Prepaid expenses and other 5,978 6,220
--------------------------------------------------------------------------------------------------------------
Total current assets 138,929 111,570
--------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 17,702 17,459
OTHER ASSETS
Goodwill and other intangible assets, net 9,304 9,519
Other assets 7,365 6,549
--------------------------------------------------------------------------------------------------------------
Total other assets 16,669 16,068
--------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 173,300 $ 145,097
==============================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 22,756 $ 20,373
Accrued employee compensation 17,493 11,290
Accrued insurance 8,671 9,687
Income taxes payable - 2,801
Other accrued expenses 17,648 22,208
Excess of billings on contracts in progress over cost and estimated
earnings 11,092 4,191
--------------------------------------------------------------------------------------------------------------
Total current liabilities 77,660 70,550
--------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES 3,231 3,128
Long-term debt 20,461 -
Commitments and contingencies - -
--------------------------------------------------------------------------------------------------------------
Total liabilities 101,352 73,678
--------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,711,235 and 8,694,360 shares at 9/30/03 and 12/31/02, respectively 8,711 8,694
Additional paid-in-capital 38,301 38,146
Retained earnings 28,587 27,411
Other comprehensive loss (651) (569)
Unearned compensation expense (47) -
Less - 391,237 and 310,837 shares of Common Stock in treasury,
at cost, at 9/30/03 and 12/31/02, respectively (2,953) (2,263)
--------------------------------------------------------------------------------------------------------------
Total shareholders' investment 71,948 71,419
--------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 173,300 $ 145,097
==============================================================================================================
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, 2003 Sept. 30, 2002
------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,176 $ 11,576
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 3,727 3,056
Impairment of investment in Energy Virtual Partners 800 -
Changes in assets and liabilities:
Increase in receivables and contracts in progress (23,513) (8,503)
Increase/(decrease) in accounts payable and accrued
expenses 321 (4,162)
Increase in other net assets (1,236) (2,140)
------------------------------------------------------------------------------------------------
Total adjustments (19,901) (11,749)
------------------------------------------------------------------------------------------------
Net cash used in operating activities (18,725) (173)
------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (3,900) (7,836)
Investment in Energy Virtual Partners - (1,000)
Receipt of litigation escrow - 12,335
------------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities (3,900) 3,499
------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from/(repayments of) long-term debt 20,461 (2)
Payments to acquire treasury stock (690) -
Proceeds from the exercise of stock options 49 573
------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,820 571
------------------------------------------------------------------------------------------------
Net (decrease)/increase in cash and cash equivalents (2,805) 3,897
Cash and cash equivalents, beginning of year 9,885 18,482
------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,080 $ 22,379
================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 571 $ 42
Income taxes paid $ 3,921 $ 2,992
================================================================================================
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, 2003
(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, 2003 and 2002. 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: SEPT. 30, 2003 Sept. 30, 2002 SEPT. 30, 2003 Sept. 30, 2002
===================================================================================================================
Basic 8,319,998 8,385,523 8,325,858 8,339,732
Diluted 8,391,466 8,540,121 8,381,883 8,527,885
===================================================================================================================
As of September 30, 2003 and 2002, the Company had 321,806 and 160,057 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, 2003, 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.
NOTE 3 - BUSINESS SEGMENT INFORMATION
The Company has the following three reportable segments:
- The Engineering segment provides a variety of design and related consulting
services. Such services include design-build, construction management,
consulting, planning, program management, surveying, mapping, geographic
information systems, architectural and interior design, construction
inspection, constructability reviews, software development, site assessment
and restoration, strategic regulatory analysis, regulatory compliance, and
advanced management systems.
- The Energy segment provides a full range of Total Asset Management services
for operating energy production facilities worldwide. These services range
from complete outsourcing
-6-
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 OPCO(R) and managed services operating models as service delivery
methods.
- The Non-Core segment includes activity associated with the former buildings
and transportation construction operations that are being wound down, and
the former BSSI subsidiary, which was sold in June 2000.
The following tables reflect the required disclosures for the Company's
reportable segments (in millions):
For the three months ended For the nine months ended
-------------------------- -------------------------
SEPT. 30, 2003 Sept. 30, 2002 SEPT. 30, 2003 Sept. 30, 2002
-------------------------------------------------------------------------------------------------------------------------
Total contract revenues:
Engineering $ 62.6 $ 61.4 $ 182.9 $ 181.6
Energy 43.7 40.8 127.5 121.3
Non-Core - - - -
-------------------------------------------------------------------------------------------------------------------------
Total $ 106.3 $ 102.2 $ 310.4 $ 302.9
=========================================================================================================================
For the three months ended For the nine months ended
-------------------------- -------------------------
SEPT. 30, 2003 Sept. 30, 2002 SEPT. 30, 2003 Sept. 30, 2002
-------------------------------------------------------------------------------------------------------------------------
Income/(loss) from operations
without Corporate expenses
allocated:
Engineering $ 4.6 $ 6.6 $ 11.0 $ 17.0
Energy 2.0 3.8 5.5 8.8
Non-Core - 4.6 0.2 4.0
-------------------------------------------------------------------------------------------------------------------------
Subtotal - segments 6.6 15.0 16.7 29.8
Corporate/Insurance (3.9) (4.2) (13.0) (9.6)
-------------------------------------------------------------------------------------------------------------------------
Total $ 2.7 $ 10.8 $ 3.7 $ 20.2
=========================================================================================================================
SEPT. 30, 2003 Dec. 31, 2002
-------------------------------------------------------------------------------------------------------------------------
Segment assets:
Engineering $ 91.8 $ 76.8
Energy 69.6 52.6
Non-Core 0.8 1.0
-------------------------------------------------------------------------------------------------------------------------
Subtotal - segments 162.2 130.4
Corporate/Insurance 11.1 14.7
-------------------------------------------------------------------------------------------------------------------------
Total $ 173.3 $ 145.1
=========================================================================================================================
-7-
NOTE 4 - 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 June 30, 2005. 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, 2003, borrowings
totaling $20.5 million were outstanding under the Agreement, along with
outstanding letters of credit totaling $7.1 million.
A combination of lower year-to-date 2003 earnings and its borrowed position at
quarter end required the Company to seek and obtain a waiver of several of its
financial ratio covenants for the third quarter, most notably its leverage
ratio. In doing so, the Company requested and received a nine-month extension of
the maturity date for the Agreement through June 30, 2005. In addition, the
minimum owners' equity and leverage ratio financial covenants were amended
effective with the fourth quarter 2003 computations, and the cost in excess of
billings covenant was eliminated. Based on the amendments to these covenants,
the Company currently expects to be in compliance with the revised covenants for
at least the next year. Accordingly, the Company's bank borrowings have been
reflected as a long-term liability in its balance sheet as of September 30,
2003.
On May 8, 2003, the Company entered into an agreement with its bank to provide a
Revolving Credit Note ("the Note") in the amount of $5 million through August 6,
2003. The Note provided the Company with additional liquidity that was needed in
conjunction with changes in its billing process and system which caused
temporary delays in both client billings and cash collections during the first
nine months of 2003. All borrowings were repaid and the Note matured during the
third quarter of 2003.
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. As a result of adverse market conditions
in the insurance industry, several of these deductibles were either required to
be increased by the Company because expiring coverages were no longer available,
or were voluntarily increased to avoid additional premium cost increases, in
connection with the Company's insurance coverage renewals effective July 1, 2002
and 2003. 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.
-8-
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation, and on October 3, 2001,
Reliance was placed into liquidation. The Company is uncertain at this time what
effect these actions will have on any claim the Company or its subsidiaries may
have for insurance coverage under policies issued by Reliance with respect to
past years. Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary of the
Company, was subject to one substantial claim which fell within the Reliance
coverage period. This claim reflected an action by LTV Steel Company ("LTV")
against BEI, resulting from the failure of a landfill for which BEI provided
services. In December 2002, after a hearing in the U.S. District Court for the
Western District of Pennsylvania, out-of-court settlement discussions between
LTV and BEI commenced. In February 2003, LTV and BEI reached an out-of-court
settlement that provided for a payment to LTV in the amount of $2.5 million, the
effect of which was recorded during the fourth quarter of 2002. This settlement
was approved by the bankruptcy court and payment was made in April 2003. Due to
the liquidation of Reliance, the Company is currently uncertain what amounts
paid to LTV will be recoverable under the insurance policy with Reliance. The
Company is pursuing a claim in the Reliance liquidation, and had recorded an
outstanding receivable balance from Reliance of $100,000 at September 30, 2003.
Management believes that this balance will be recovered through the liquidation,
along with other potential amounts which cannot currently be determined.
On July 24, 2001, the Company announced that it had become aware that certain
activities related to the operations of a 53% owned Nigerian subsidiary engaged
in energy-related operations are the subject of an inquiry by the U.S.
Department of Justice. The Company acquired the Nigerian subsidiary as part of
its acquisition of the Overseas Technical Services companies in 1993. The
inquiry appears to be focused upon payments made to certain individuals in
connection with the subsidiary's operations in Nigeria as they relate to
potential violations of the Foreign Corrupt Practices Act and other relevant
statutes. The Company has retained legal counsel to represent it in this matter
and has initiated an internal investigation of these issues. The Company has
been cooperating fully with the government's inquiry; however, there has been no
recent activity in this matter. At this time, the Company is uncertain but does
not expect the costs of its investigation, its cooperation with the government's
inquiry or the outcome thereof, to have a material adverse financial impact on
its future financial results. However, the government's inquiry has not been
concluded and the Company's assessment of the outcome may vary as the matter
proceeds.
The Company has been named as a defendant or co-defendant in other legal
proceedings wherein substantial damages are claimed. Such proceedings are not
uncommon to the Company's business. After consultations with counsel, management
believes that the Company has recognized adequate provisions for probable and
reasonably estimable liabilities associated with these proceedings, and that
their ultimate resolutions will not have a material adverse effect on the
consolidated financial position or annual results of operations of the Company.
-9-
At September 30, 2003, 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, 2003:
Related
Maximum liability
undiscounted balance recorded
(Dollars in millions) future payments at 9/30/03
-------------------------------------------------------------------------------------------------------------------
Standby letters of credit:
Insurance related $ 6.9 $ 6.9
Other 0.2 -
Performance and payment bonds 1.6 -
Sale of certain construction assets Unlimited -
Sale of BSSI 2.0 -
===================================================================================================================
The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Agreement discussed above. As of September 30, 2003, most of
these LOCs had been issued to insurance companies to serve as collateral for
payments the insurers are required to make under the Company's self-insurance
programs. These LOCs may be drawn upon in the event that the Company does not
reimburse the insurance companies for claims payments made on behalf of the
Company. Such LOCs renew automatically on an annual basis unless either the LOCs
are returned to the bank by the beneficiary or the Company's banks elect not to
renew them.
Bonds are provided on behalf of the Company by Travelers Casualty and Surety
Company of America ("Travelers"). The beneficiaries under these performance and
payment bonds may request payment from Travelers in the event that the Company
does not perform under the project or if subcontractors are not paid. The
Company does not currently expect any amounts to be paid by Travelers under its
bonds outstanding at September 30, 2003.
During 2000, the Company sold certain assets associated with its former heavy &
highway construction business to A&L, Inc., and all of the outstanding stock of
its former BSSI subsidiary to SKE International LLC. These sale agreements
provided indemnifications to the buyers for breaches of certain obligations by
the Company. For the sale of heavy & highway assets, there was no dollar limit
on the indemnifications, and the terms of these indemnifications vary but will
ultimately be governed by the statutes of limitations. A&L has asserted claims
against the Company; however, the Company does not expect to make any material
payments with respect to these claims. Maximum payments for indemnifications
under the BSSI sale were limited to $2.0 million, and the terms are based on the
varying statutes of limitations plus 90 days. The Company does not currently
expect to make any future payments under the indemnifications in connection
with the BSSI sale.
-10-
NOTE 6 - STOCK OPTIONS
In January 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure." SFAS 148 amended SFAS 123
to provide alternative methods of transition for companies that voluntarily
change to the fair value based method of accounting for stock-based employee
compensation. In addition, SFAS 148 amended the disclosure requirements of SFAS
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The Company subsequently
adopted the prospective method of applying SFAS 148. Under the prospective
method, the Company began expensing the fair value of all stock options granted,
modified or settled effective January 1, 2003. During the second quarter of
2003, the Company granted 14,000 options to members of its board of directors
and recognized related compensation expense in the amount of $58,000. The
exercise price associated with this option grant was equal to the market price
on the date of grant. No related stock compensation expense was recorded during
2002 or during the first or third quarters of 2003. The fair value of these
options granted was estimated on the date of grant using the Black-Scholes
option-pricing model with an expected volatility of 40.6%, a risk-free interest
rate of 5.5% and an expected life of 6 years. The Company currently pays no
dividends.
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 For the nine months
-------------------- -------------------
ended Sept. 30, ended Sept. 30,
--------------- ---------------
(In thousands) 2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
Net income, as reported $ 1,205 $ 6,376 $ 1,176 $11,576
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects - - 28 -
Deduct: Total stock-based employee
compensation expense determined under
fair value method for all awards, net of
related tax effects (43) (147) (162) (281)
--------------------------------------------------------------------------------------------------------------------
Pro forma net income $ 1,162 $ 6,229 $ 1,042 $ 11,295
====================================================================================================================
-11-
For the three months For the nine months
-------------------- -------------------
ended Sept. 30, ended Sept. 30,
--------------- ---------------
2003 2002 2003 2002
--------------------------------------------------------------------------------------------------------------------
Reported earnings per share:
Basic $ 0.14 $ 0.76 $ 0.14 $ 1.39
Diluted 0.14 0.75 0.14 1.36
Pro forma earnings per share:
Basic 0.14 0.74 0.13 1.35
Diluted $ 0.14 $ 0.73 $ 0.12 $ 1.32
====================================================================================================================
NOTE 7 - COMPREHENSIVE INCOME
A reconciliation of the Company's net income and comprehensive income is as
follows:
For the three months ended For the nine months ended
-------------------------- -------------------------
SEPT. 30, 2003 Sept. 30, 2002 SEPT. 30, 2003 Sept. 30, 2002
---------------------------------------------------------------------------------------------------------------------
Net income $ 1,205 $ 6,376 $ 1,176 $ 11,576
Other comprehensive loss:
Foreign currency translation
adjustment (156) (71) (82) (92)
---------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 1,049 $ 6,305 $ 1,094 $ 11,484
=====================================================================================================================
NOTE 8 - GOODWILL
Goodwill and other intangible assets consist of the following (in thousands):
SEPT. 30, 2003 Dec. 31, 2002
--------------------------------------------------------------------------------------------------------------------
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 $1,167 and $952, respectively 833 1,048
--------------------------------------------------------------------------------------------------------------------
Goodwill and other intangible assets, net $ 9,304 $ 9,519
====================================================================================================================
Under SFAS 142, the Company's goodwill balance is no longer being amortized and
goodwill impairment tests are being performed at least annually. The Company
completed its annual impairment review during the second quarter of 2003, and no
impairment charge was required.
The Company's other intangible assets balance solely comprises a non-compete
agreement from the Company's 1998 purchase of Steen Production Services, Inc.
Future amortization expense on the other intangible assets balance is currently
estimated to be $286,000 for the years ending December 31, 2003 through 2005,
with the remaining balance of $190,000 being amortized in 2006.
-12-
NOTE 9 - OTHER RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS 143, "Accounting for Asset Retirement
Obligations," which requires that obligations associated with retirements of
tangible long-lived assets be recorded as liabilities when those obligations are
incurred. The Company adopted this standard as of January 1, 2003, and as a
result, has had no material impact on its financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Exit or Disposal
Activities," which addresses issues associated with exit or disposal activities
initiated after December 31, 2002. The Company adopted this statement as of
January 1, 2003, and as a result, has had no material impact on its financial
statements.
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This statement clarifies and
amends financial accounting and reporting requirements originally established in
SFAS 133. SFAS 149 provides greater clarification by requiring contracts with
comparable characteristics to be accounted for similarly. This statement is
effective for contracts entered into or modified after June 30, 2003, as well as
for hedging relationships designated after June 30, 2003. The Company adopted
this statement as of July 1, 2003, and as a result, has had no material impact
on its financial statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires issuers to classify financial instruments within its scope as
liabilities (or assets in some circumstances). SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The Company adopted this statement as of July 1, 2003, and as a
result, has had no material impact on its financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 clarifies the requirements of SFAS 5,
"Accounting for Contingencies," relating to the guarantor's accounting for and
disclosures of certain guarantees issued. The disclosure requirements of this
interpretation were effective for financial statements of interim or annual
periods ending after December 15, 2002. The Company adopted such disclosure
requirements in connection with the issuance of its 2002 financial statements.
The initial recognition and measurement provisions of this interpretation are
applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The Company adopted the recognition and measurement
provisions of FIN 45 effective January 1, 2003. Such adoption has not had a
material impact on its financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). FIN 46 clarifies Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries. The
-13-
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
created before February 1, 2003, the interpretation shall be applied for the
first interim or annual reporting period ending after December 15, 2003. The
Company plans to adopt this interpretation during the fourth quarter of 2003.
The Company does not believe that such adoption will have a material impact on
its financial statements.
In February 2002, the Emerging Issues Task Force ("EITF") issued Consensus No.
00-21, "Revenue Arrangements with Multiple Deliverables." Certain revisions to
the scope of this guidance were made and finalized in May 2003. EITF 00-21
addresses the accounting for multiple element revenue arrangements, which
involve more than one deliverable or unit of accounting in circumstances where
the delivery of those units takes place in different accounting periods. EITF
00-21 requires disclosure of the accounting policy for recognition of revenue
from multiple-deliverable arrangements and description and nature of such
arrangements. The accounting and disclosure requirements are effective for
revenue arrangements entered into in fiscal periods beginning after June 15,
2003. The Company adopted this statement during the third quarter of 2003, and
such adoption has not had a material impact on its financial statements.
NOTE 10 - RECLASSIFICATIONS
Certain reclassifications have been made to prior year income statement and
balance sheet amounts in order to conform to the current year presentation.
-14-
-1-
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, 2003 and 2002 (in millions):
For the three months ended For the nine months ended
-------------------------- -------------------------
SEPT. 30, 2003 Sept. 30, 2002 SEPT. 30, 2003 Sept. 30, 2002
-----------------------------------------------------------------------------------------------------------------
Total contract revenues:
Engineering $ 62.6 $ 61.4 $ 182.9 $ 181.6
Energy 43.7 40.8 127.5 121.3
Non-Core* -- -- -- --
-----------------------------------------------------------------------------------------------------------------
Total $ 106.3 $ 102.2 $ 310.4 $ 302.9
=================================================================================================================
For the three months ended For the nine months ended
-------------------------- -------------------------
SEPT. 30, 2003 Sept. 30, 2002 SEPT. 30, 2003 Sept. 30, 2002
-----------------------------------------------------------------------------------------------------------------
Income/(loss) from operations
with Corporate expenses
allocated:
Engineering $ 1.8 $ 5.1 $ 2.2 $ 12.5
Energy 1.0 3.0 2.4 6.5
Non-Core* 0.1 2.5 0.3 1.6
-----------------------------------------------------------------------------------------------------------------
Subtotal - segments 2.9 10.6 4.9 20.6
Corporate/Insurance (0.2) 0.2 (1.2) (0.4)
-----------------------------------------------------------------------------------------------------------------
Total $ 2.7 $ 10.8 $ 3.7 $ 20.2
=================================================================================================================
* The Non-Core segment includes activity associated with the former buildings
and transportation construction operations that are being wound down, and
the former BSSI subsidiary, which was sold in June 2000.
TOTAL CONTRACT REVENUES
Total contract revenues increased 4% in the third quarter of 2003 relative to
the third quarter of 2002. In the Energy segment, revenues for the third quarter
of 2003 increased 7% as compared to the third quarter of 2002. The revenue
benefit of two new overseas contracts that commenced during the second half of
2002, as well as a new OPCO contract to provide onshore operations and
maintenance services that commenced during the second quarter of 2003,
contributed to this increase. OPCO(R)
-15-
revenues composed 10% and 22% of Baker Energy's total contract revenues for the
third quarters of 2003 and 2002, respectively. This OPCO decrease as a
percentage of Energy revenues was the result of OPCO contract attrition due to
client property sales. Most of these former OPCO properties are still being
serviced by Baker Energy, but are being serviced as lower margin labor and
logistics work outside the OPCO model. Engineering revenues for the third
quarter of 2003 increased 2% from the third quarter of 2002. Engineering's
revenue growth was adversely impacted in the third quarter of 2003 by continuing
slowness in its private sector contract activity. As expected, the Company's
Non-Core segment posted no revenues for the third quarters of 2003 or 2002.
For the first nine months of 2003, total contract revenues increased 2% over the
corresponding period in 2002. In the Energy segment, revenues increased 5% in
the first nine months of 2003 as compared to the first nine months of 2002. As
stated in the previous paragraph, the additional overseas contracts that
commenced during the second half of 2002 and the new onshore OPCO contract that
commenced during the second quarter of 2003 were the main contributors to the
increase in Energy revenues. The increases associated with these new contracts
were partially offset by the Company exiting a portion of its maintenance
business. OPCO composed 5% and 27% of Baker Energy's total contract revenues for
the first nine months of 2003 and 2002, respectively. The increase in
Engineering revenues was negligible during the first nine months of 2003 as
compared to the first nine months of 2002. As mentioned in the previous
paragraph, Engineering revenues were adversely impacted in the first nine months
of 2003 by continuing slowness in its private sector contract activity, and by
delays in the commencement of certain public sector projects due to state budget
constraints during the first six months of 2003. The Company's Non-Core segment
posted no revenues for the first nine months of 2003 or 2002.
GROSS PROFIT
Gross profit expressed as a percentage of revenues decreased to 15.3% for the
third quarter of 2003 from 23.0% in the third quarter of 2002. The Energy
segment's gross profit percentage decreased to 11.0% in the third quarter of
2003 from 15.9% in the third quarter of 2002. This decrease is primarily
attributable to a less favorable mix of project work and higher medical and
insurance costs in 2003. Specifically, revenues from the Energy segment's
traditionally higher margin OPCO operations declined by 49%. The Engineering
segment's gross profit percentage was 18.5% for the third quarter of 2003
compared to 20.0% in the comparable period of 2002. The Engineering segment also
experienced higher medical and insurance costs, as well as increased occupancy
costs in the third quarter of 2003, which contributed to the lower margins. In
the Non-Core segment, gross profit was negligible for the third quarter of 2003.
In the third quarter of 2002, the Non-Core segment posted gross profit of $4.6
million resulting from the favorable settlement of the ADF litigation as
partially offset by adverse developments in casualty insurance claims related to
the Company's former construction and Baker Support Services, Inc. ("BSSI")
operations and by the unfavorable impact of an offer to settle project claims
related to the sale of a business.
Gross profit expressed as a percentage of revenues decreased to 14.4% for the
first nine months of 2003 from 18.5% in the first nine months of 2002. The
Energy
-16-
segment's gross profit percentage decreased to 10.9% in the first nine months of
2003 from 14.6% in the first nine months of 2002. This decrease is primarily
attributable to a less favorable mix of project work and higher medical and
insurance costs, as discussed in the previous paragraph. Specifically, the
Energy segment's traditionally higher margin OPCO operations posted a gross
profit margin that was negligible in first nine months of 2003 and the related
OPCO revenues were lower by 80%. Also contributing to Energy's gross margin
percentage decrease was an overseas contract for the implementation of a
computerized maintenance management system, which has performed below
expectations to date. The Engineering segment's gross profit percentage was
17.4% for the first nine months of 2003 compared to 19.1% in the comparable
period of 2002. Again, higher medical, insurance and occupancy costs contributed
to the lower Engineering margins. To a lesser extent, final legal costs
associated with the settlement of the LTV matter (discussed in Note 5 to the
accompanying financial statements) resulted in first quarter 2003 costs. In the
Non-Core segment, gross profit of $0.3 million resulted from favorable
developments in certain casualty insurance claims related to the Company's
former construction operations, as slightly offset by charges associated with
the settlement of a construction-related claim. The Non-Core segment posted
gross profit of $4.0 million for the first nine months of 2002 as a result from
the favorable settlement of the ADF litigation, as partially offset by adverse
developments in casualty insurance claims related to the Company's former
construction and BSSI operations and by the unfavorable impact of an offer to
settle project claims related to the sale of a business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses expressed as a percentage
of total contract revenues increased to 12.8% in the third quarter of 2003 from
12.4% in the third quarter of 2002. This overall increase in SG&A expenses
expressed as a percentage of total contract revenues results principally from
costs associated with the infrastructure, amortization and continued consulting
and data conversion related to the Company's new information systems, which were
implemented effective January 1, 2003. The Company continues to incur consulting
expenses and expects such expenses, as well as certain additional data
conversion costs, to continue throughout 2003. Approximately $0.3 million of
related consulting costs were incurred during the third quarter of 2003. In the
Energy segment, SG&A expenses expressed as a percentage of total revenues
increased to 8.7% in the third quarter of 2003 from 8.5% in 2002. In the
Engineering segment, SG&A expenses expressed as a percentage of revenue
increased to 15.6% for the third quarter of 2003 from 11.7% in 2002. This
percentage increase is primarily attributable to the relatively minor growth in
Engineering revenues coupled with costs associated with the aforementioned new
information systems. The Company's Non-Core operations incurred no SG&A expenses
in the third quarter of 2003 and $2.0 million in the third quarter of 2002. The
2002 Non-Core SG&A expenses related entirely to legal costs associated with
litigation that has been resolved and the writedown of a non-trade receivable
balance in connection with an offer to settle a dispute related to the sale of a
business.
SG&A expenses expressed as a percentage of revenues increased to 13.2% in the
first nine months of 2003 from 11.9% in the first nine months of 2002. This
overall increase is again attributable to the previously mentioned costs
associated with
-17-
the infrastructure, amortization and continued consulting and data conversion
related to the Company's new information systems. Approximately $1.6 million of
related consulting costs were incurred during the first nine months of 2003. In
the Energy segment, SG&A expenses expressed as a percentage of revenues
decreased to 9.0% in the first nine months of 2003 from 9.2% in 2002. In the
Engineering segment, SG&A expenses expressed as a percentage of revenues
increased to 16.1% in the first nine months of 2003 from 12.3% in 2002. This
percentage increase is attributable to the relatively unchanged Engineering
revenues coupled with costs associated with the aforementioned new information
systems and an Engineering office relocation that occurred during the first
quarter of 2003. Moving costs totaling $0.4 million associated with the first
quarter 2003 office relocation will not recur in future periods. For the
Non-Core operations, no SG&A expenses were incurred during the first nine months
of 2003 and $2.4 million was incurred during the first nine months of 2002.
Again, these SG&A expenses in 2002 relate entirely to previously disclosed
litigation that has been resolved and the writedown of a non-trade receivable
balance.
OTHER INCOME
Interest income was lower and interest expense was higher for the third quarter
and first nine months of 2003 as a result of the Company being in a net borrowed
position with its banks during the majority of the first nine months of 2003.
The Company was in an invested position with its bank during the first nine
months of 2002. The change in the Company's invested/borrowed position resulted
from changes in the Company's billing process and system, which caused temporary
delays in both client billings and cash collections during the first nine months
of 2003. (See additional discussion under the Liquidity and Capital Resources
section below.) Other expense for the first nine months of 2003 primarily
consisted of an $0.8 million impairment of an investment in Energy Virtual
Partners ("EVP"), an Energy services business, whose board voted to discontinue
operations and liquidate the business. During the three and nine-month periods
ended September 30, 2002, other expense resulted almost entirely from minority
interest related to the income of two consolidated subsidiaries, partially
offset by income from an unconsolidated joint venture in the Energy segment.
INCOME TAXES
The Company had a provision for income taxes of 52.0% for the first nine months
of 2003, versus 42.5% for the first nine months of 2002. The higher rate for
2003 reflects the Company's best estimate of domestic and foreign taxable income
for the year ending December 31, 2003. As the Company's full year estimate of
income before taxes was lowered and a less favorable mix of domestic and foreign
taxable income resulted, the Company's estimated non-deductible costs for tax
purposes also became proportionately more significant, thereby increasing the
effective tax rate during the third quarter of 2003.
-18-
CONTRACT BACKLOG
(In millions) SEPT. 30, 2003 Dec. 31, 2002
------------------------------------------------------------------------------
Engineering $ 452.6 $ 448.8
Energy 291.5 96.4
------------------------------------------------------------------------------
Total $ 744.1 $ 545.2
==============================================================================
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 third quarter of 2003 was a
new $5 million contract to provide planning, field investigation and design
related services and $9 million contract extension to provide floodplain mapping
services to FEMA in the Engineering segment. In the Energy segment, backlog
increased during the third quarter of 2003 due to the addition of a new
four-year OPCO contract with an estimated value of $95 million to operate and
maintain onshore oil and gas producing properties.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $18.7 million for the first nine
months of 2003 as compared to $0.2 million for the same period in 2002. This
increase in cash used was the direct result of increases in receivables and
unbilled revenues of $14.0 million and $16.4 million, respectively. These
increases are the result of changes in the Company's billing process and system,
which caused temporary delays in both billings and cash collections during the
first nine months of 2003.
Effective January 1, 2003, the Company implemented a new billing system and made
certain related changes to its billing process. As a result of these billing
system and process changes, the Company experienced certain data conversion
problems and training issues, which caused delays in producing client invoices
during the first quarter of 2003. Since the new system was first used to invoice
clients in February 2003, the Company has undertaken various corrective
improvement measures, and has invoiced in excess of $268 million through its new
software. A secondary effect of the billing delays has been a slower rate of
cash collections, which created a 2003 cash requirement that has been funded by
utilization of the Company's credit facilities. The delays in billing and
resultant delays in cash collections have impacted both the Energy and
Engineering segments. As of September 30, 2003, the Company had total borrowings
under its remaining credit facility of $20.5 million.
While client billings improved during the second and third quarters of 2003,
management attention continues to be focused on further improvements to this
critical process. The receivables balance is expected to decrease during the
fourth quarter of 2003 due to higher levels of cash collections. As the
receivables balance decreases, the cash collected will be used to reduce current
liabilities,
-19-
including the bank borrowings. Bank borrowings were reduced by $12.8 million
during the third quarter of 2003, and management expects the borrowings to be
further reduced during the fourth quarter.
Net cash used in investing activities was $3.9 million for the first nine months
of 2003, compared to net cash provided by investing activities of $3.5 million
for the first nine months of 2002. The net cash used in investing activities for
the first nine months of 2003 is entirely related to capital expenditures. The
net cash provided by investing activities for the first nine months of 2002
reflected the receipt of $12.3 million of the funds placed in escrow during 2001
in connection with the ADF litigation, as reduced by capital expenditures of
$7.8 million and the $1.0 million investment in EVP. The capital expenditures
for the first nine months of 2003 comprise leasehold improvements totaling $2.5
million for the Company's largest Engineering office and $0.8 million relating
to the new information systems, while the 2002 capital expenditures reflect the
Company's purchase and development of computer software totaling $5.8 million
related to the implementation of the new information systems.
Net cash provided by financing activities was $19.8 million for the first nine
months of 2003 versus $0.6 million for the same period in 2002. The net cash
provided by financing activities for the first nine months of 2003 reflects
proceeds from long-term debt 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. The Company's borrowings totaled $20.5
million as of September 30, 2003. In addition, pursuant to the Company's stock
repurchase program, the Company paid $0.7 million to acquire 80,400 additional
treasury shares during the first quarter of 2003.
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 June 30, 2005. 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, 2003, borrowings
totaling $20.5 million were outstanding under the Agreement, along with
outstanding letters of credit totaling $7.1 million. The Company's cash
collections increased during the third quarter of 2003, and as a result, the
Company utilized a portion of these collections to reduce the borrowings under
its credit facility. A combination of lower year-to-date 2003 earnings and its
borrowed position at quarter end required the Company to seek and obtain a
waiver of several of its financial ratio covenants for the third quarter, most
notably its leverage ratio. In doing so, the Company requested and received a
nine-month extension of the maturity date for the Agreement through June 30,
2005. In addition, the minimum owners' equity and leverage ratio financial
covenants were amended effective with the fourth quarter 2003 computations, and
the cost in excess of billings covenant was eliminated. Based on the amendments
to these covenants, the Company currently expects to be in compliance with the
revised covenants for at least the next year. Accordingly, the Company's bank
borrowings have been reflected as a long-term liability in its balance sheet as
of September 30, 2003.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America ("Travelers"). At September 30, 2003, performance
and payment bonds totaling $1.6 million were outstanding under this line.
Management believes that this bonding line will be sufficient to meet its bid
and performance bonding needs for at least the next year.
-20-
The Company utilizes operating leases to acquire assets used in its daily
business activities. These assets include office space, computer and related
equipment, and motor vehicles. The lease payments for use of these assets are
recorded as expenses, but do not appear as liabilities on the Company's
consolidated balance sheets.
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. On May 29, 2001, the Pennsylvania Insurance
Commissioner placed Reliance into rehabilitation; and on October 3, 2001,
Reliance was placed into liquidation. The Company is uncertain at this time what
effect these actions will have on any claim the Company or its subsidiaries may
have for insurance coverage under policies issued by Reliance with respect to
past years. Baker Environmental, Inc. ("BEI"), a wholly-owned subsidiary of the
Company, was subject to one substantial claim which fell within the Reliance
coverage period. This claim reflected an action by LTV against BEI, resulting
from the failure of a landfill for which BEI provided services. In December
2002, after a hearing in the U.S. District Court for the Western District of
Pennsylvania, out-of-court settlement discussions between LTV and BEI commenced.
In February 2003, LTV and BEI reached an out-of-court settlement that provided
for a payment to LTV in the amount of $2.5 million. This settlement was approved
by the bankruptcy court and payment was made in April 2003. Due to the
liquidation of Reliance, the Company is currently uncertain what amounts paid to
LTV will be recoverable under the insurance policy with Reliance. The Company is
pursuing a claim in the Reliance liquidation, and had recorded an outstanding
receivable balance from Reliance of $100,000 at September 30, 2003. Management
believes that this balance will be recovered through the liquidation, along with
other potential amounts which cannot currently be determined.
The Company views its short and long-term liquidity as being dependent upon its
results of operations, changes in working capital and its borrowing capacity.
These factors are further dependent upon appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for the Company's services in the engineering
and energy markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The Federal government's TEA-21
legislation has made significant transportation funding available to the various
state agencies since its approval in 1998. 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 extension will expire
on February 29, 2004, and a long-term reauthorization of the original TEA-21
program will receive significant attention over the next few months. Prior to
the extension, certain state agencies were limited in their ability to apply for
Federal transportation funding during 2003 as they were unable to commit the
required matching funds due to budget constraints. During 2002 and the first
nine months of 2003, the Company observed increased Federal spending activity on
Departments of Defense and Homeland Security activities, including the Federal
Emergency Management Agency (FEMA). 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
early September, the Company announced that it had been selected by FEMA as the
preferred firm to negotiate a five-year contract up to $750 million to serve as
the Program Manager to develop, plan, manage, implement, and monitor the
Multi-Hazard Flood Map Modernization (MHFMM) Program
-21-
for flood hazard mitigation across the United States and its territories. Such
contract is currently being negotiated and has not been included in the
Company's backlog as of September 30, 2003. The impact of this contract on the
Company's future results of operations, liquidity and working capital will not
be determinable until the contract has been finalized. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company's primary interest rate risk relates to its variable rate
debt obligations, which totaled $20.5 million as of September 30, 2003. Assuming
a 10% increase in interest rates on the Company's variable rate obligations
(i.e., an increase from the actual weighted average interest rate of 3.49% as of
September 30, 2003, to a weighted average interest rate of 3.84%), annual
interest expense would be approximately $71,000 higher based on the outstanding
balance of variable rate obligations as of September 30, 2003. In addition, the
Company has no 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, 2003.
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.
-22-
(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, 2003, and that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 5 to the accompanying financial statements.
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
----------- -----------
10.4(f) Fifth Amendment to Loan Agreement dated October 27, 2003,
by and between the Company and Citizens Bank of
Pennsylvania, National City Bank of Pennsylvania and Fifth
Third Bank.
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.
(b) Reports on Form 8-K
The Company filed or furnished the following Current Reports on Form
8-K during the quarter ended September 30, 2003, including the dates
filed, the items reported and listing any financial statements filed:
o dated August 15, 2003, to furnish information required by
Item 12 of Form 8-K, "Results of Operations and Financial
Condition."
-23-
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 14, 2003
--------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: November 14, 2003
--------------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
-24-