FORM 10-Q
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, 1999
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airport Office Park, Building 3, 420 Rouser Road, Coraopolis, PA 15108
- ---------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(412) 269-6300
--------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
As of September 30, 1999:
-------------------------
<S> <C>
Common Stock 6,867,085 shares
Series B Common Stock 1,314,255 shares
</TABLE>
<PAGE>
FORM 10-Q
PART I
PAGE 1
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 and 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 anticipated levels of government spending
on infrastructure, unanticipated impacts resulting from Year 2000 compliance
issues, 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.
<PAGE>
FORM 10-Q
PART I
PAGE 2
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
For the three months ended
--------------------------
SEPT. 30, 1999 Sept. 30, 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Total contract revenues $129,790 $135,803
Cost of work performed 123,632 120,039
- --------------------------------------------------------------------------------
Gross profit 6,158 15,764
Selling, general and administrative expenses 11,592 11,898
- --------------------------------------------------------------------------------
Income/(loss) from operations (5,434) 3,866
Other income/(expense):
Interest income 35 74
Interest expense (197) (14)
Other, net 158 21
- --------------------------------------------------------------------------------
Income/(loss) before income taxes (5,438) 3,947
Provision for/(benefit from) income taxes (1,421) 1,854
- --------------------------------------------------------------------------------
NET INCOME/(LOSS) $ (4,017) $ 2,093
================================================================================
BASIC NET INCOME/(LOSS) PER SHARE $ (0.49) $ 0.26
DILUTED NET INCOME/(LOSS) PER SHARE $ (0.49) $ 0.25
================================================================================
<FN>
The accompanying notes are an integral part of this financial statement.
</FN>
</TABLE>
<PAGE>
FORM 10-Q
PART I
PAGE 3
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
<CAPTION>
For the nine months ended
-------------------------
SEPT. 30, 1999 Sept. 30, 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Total contract revenues $378,974 $374,018
Cost of work performed 343,472 330,268
- --------------------------------------------------------------------------------
Gross profit 35,502 43,750
Selling, general and administrative expenses 36,283 35,914
- --------------------------------------------------------------------------------
Income/(loss) from operations (781) 7,836
Other income/(expense):
Interest income 119 400
Interest expense (531) (31)
Other, net 72 243
- --------------------------------------------------------------------------------
Income/(loss) before income taxes (1,121) 8,448
Provision for income taxes 608 3,970
- --------------------------------------------------------------------------------
NET INCOME/(LOSS) $ (1,729) $ 4,478
================================================================================
BASIC NET INCOME/(LOSS) PER SHARE $ (0.21) $ 0.55
DILUTED NET INCOME/(LOSS) PER SHARE $ (0.21) $ 0.54
================================================================================
<FN>
The accompanying notes are an integral part of this financial statement.
</FN>
</TABLE>
<PAGE>
FORM 10-Q
PART I
PAGE 4
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<CAPTION>
ASSETS SEPT. 30, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,887 $ 5,014
Receivables 76,101 82,672
Cost of contracts in progress and estimated
earnings, less billings 22,042 22,407
Prepaid expenses and other 8,767 10,192
- --------------------------------------------------------------------------------
Total current assets 109,797 120,285
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 18,394 17,458
- --------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 14,918 7,507
Other assets 7,070 6,611
- --------------------------------------------------------------------------------
Total other assets 21,988 14,118
- --------------------------------------------------------------------------------
TOTAL ASSETS $150,179 $151,861
================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 11,233 $ 823
Accounts payable 26,606 43,356
Accrued employee compensation 10,120 9,141
Accrued insurance 8,577 6,155
Other accrued expenses 22,967 19,387
Excess of billings on contracts in
progress over cost and est. earnings 6,751 9,568
- --------------------------------------------------------------------------------
Total current liabilities 86,254 88,430
- --------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt 4,903 3,138
Other 7,789 7,431
- --------------------------------------------------------------------------------
Total liabilities 98,946 98,999
- --------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized
44,000,000 shares, issued 7,170,224 and
7,150,179 shares at Sept. 30, 1999
and December 31, 1998, respectively 7,170 7,150
Series B Common Stock, par value $1,
authorized 6,000,000 shares, issued 1,314,255
and 1,319,114 shares at Sept. 30, 1999
and December 31, 1998, respectively 1,314 1,319
Additional paid-in capital 37,085 37,002
Retained earnings 7,718 9,447
Less 303,139 and 303,359 shares of Common
Stock in treasury, at cost, at Sept. 30,
1999 and December 31, 1998, respectively (2,054) (2,056)
- --------------------------------------------------------------------------------
Total shareholders' investment 51,233 52,862
- --------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $150,179 $151,861
================================================================================
<FN>
The accompanying notes are an integral part of this financial statement.
</FN>
</TABLE>
<PAGE>
FORM 10-Q
PART I
PAGE 5
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended
-------------------------
SEPT. 30, 1999 Sept. 30, 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ (1,729) $ 4,478
Adjustments to reconcile net income/(loss)to net
cash provided by (used in)/operating activities:
Depreciation and amortization 5,696 3,553
Changes in assets and liabilities:
(Increase)/decrease in receivables and
contracts in progress 6,604 (3,502)
(Decrease)in accounts payable and
accrued expenses (11,892) (10,862)
Decrease in other net assets 2,997 1,265
- --------------------------------------------------------------------------------
Total adjustments 3,405 (9,546)
- --------------------------------------------------------------------------------
Net cash provided by/(used in)
operating activities 1,676 (5,068)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (4,242) (7,990)
Investment in Steen Production Service, Inc.,
net of cash acquired (4,918) -
- --------------------------------------------------------------------------------
Net cash used in investing activities (9,160) (7,990)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 7,548 2,366
Repayments of long-term debt (2,261) -
Proceeds from exercise of stock options 70 89
Payments to acquire treasury stock - (728)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 5,357 1,727
- --------------------------------------------------------------------------------
Net decrease in cash (2,127) (11,331)
Cash at beginning of year 5,014 17,302
- --------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 2,887 $ 5,971
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Interest paid $ 130 $ 46
Income taxes paid $ 60 $ 728
================================================================================
<FN>
The accompanying notes are an integral part of this financial statement.
</FN>
</TABLE>
<PAGE>
FORM 10-Q
PART I
PAGE 6
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED SEPTEMBER 30, 1999
(Unaudited)
NOTE 1 - RESTRUCTURING CHARGES
In connection with the construction losses recorded during the fourth quarter of
1998, the Company determined during the first quarter of 1999 that it would no
longer participate in low-bid, high-risk construction projects for buildings or
transportation infrastructure. Accordingly, the general construction activities
of the Company's Buildings unit were restructured, and the Company's
Transportation Construction (heavy and highway) business is currently being
offered for sale.
During the first quarter of 1999, the Company recorded restructuring charges
totaling $0.8 million, which were included entirely within selling, general and
administrative expenses in the accompanying Condensed Consolidated Income
Statement for the nine-month period ended September 30, 1999. Such charges
reflect severance costs associated with employee terminations, writedowns
related to fixed asset impairments, and lease costs for certain office space
permanently idled by the restructuring.
Certain low-bid, high-risk construction projects in the Buildings unit were sold
during the second quarter of 1999; the remaining construction projects in the
Buildings unit are expected to be completed by the end of the second quarter of
2000. Construction bidding activity in the Transportation unit was discontinued
during the fourth quarter of 1999. If a sale of this business is not consummated
by the end of the fourth quarter of 1999, existing contracts will be completed
or subcontracted to a third party.
NOTE 2 - THIRD QUARTER CHARGES
During the third quarter of 1999, the Company recorded pre-tax charges totaling
$11.6 million, primarily related to its construction operations which are in the
process of being discontinued. Such charges included $5.8 million related to the
Buildings unit's construction project at the Universal Studios ("Universal")
theme park in Orlando, FL, from which it was terminated by the owner during the
first quarter of 1999. During the third quarter of 1999, management and its
counsel determined that the Company was obligated to pay amounts totaling $5.8
million to certain subcontractors for work performed on this project and for
which they had not been paid. Additional third quarter charges totaling $4.4
million emanated from three heavy and highway construction projects in the
Company's Transportation unit. As these projects approached completion, project
costs were determined to be in excess of earlier estimates.
<PAGE>
FORM 10-Q
PART I
PAGE 7
The remainder of the third quarter net charges comprise the following:
o the writeoff of certain intangible assets associated with the Company's
1998 GeoResearch acquisition;
o severance costs related to the departure of certain former officers and
employees;
o charges against earnings on Engineering projects in the Buildings, Civil
and Transportation units; and
o certain favorable adjustments related to the Company's normal and recurring
process of adjusting accrued liability balances, primarily for self-insured
casualty insurance, to be in line with its exposures, and related to the
reversal of incentive compensation expense recorded during the first six
months of 1999 and which is not expected to be paid based on the third
quarter charges.
After considering the netting of favorable and unfavorable adjustments, the
foregoing net charges had the effect of reducing gross profit by $11.7 million,
and also reducing selling, general and administrative expenses by $0.1 million,
in the accompanying Condensed Consolidated Income Statements for the three and
nine-month periods ended September 30, 1999.
NOTE 3 - ACQUISITION
On September 1, 1999, Baker/MO Services, Inc. ("Baker/MO"), a wholly-owned
subsidiary of the Company, purchased all of the outstanding shares of capital
stock of Steen Production Service, Inc. ("Steen"), a Louisiana corporation, from
its shareholders (the "Sellers"). Steen is an operations and maintenance company
which provides pumping and gauging services to oil and gas facilities in the
Gulf of Mexico.
The purchase price for the shares of Steen was $10,951,063, including promissory
notes totaling $4,380,425, which will be repaid to the Sellers in two equal
annual installments, and including certain non-competition covenants valued at
$2,000,000. Interest on the promissory notes will accrue from September 1, 1999
at the prime rate as announced by Mellon Bank, N.A. ("Mellon"), and also will be
paid in two annual installments. The Company has guaranteed Baker/MO's
obligation to repay all principal and interest under the promissory notes. In
addition, the Company, through its Baker/MO subsidiary, entered into five-year
employment agreements with each of the two Sellers.
This acquisition has been accounted for as a purchase. Accordingly, the
operating results of Steen have been included in the accompanying Condensed
Consolidated Income Statements since September 1, 1999. As required under the
purchase method of accounting, the acquisition costs have been allocated to the
net assets acquired based upon the fair market value to the Company as of the
acquisition date. A purchase price adjustment based on a recently completed
audited balance sheet for Steen as of August 31, 1999, is expected to be
finalized, and its effects recorded in the Company's financial statements,
during the fourth quarter of 1999. The excess of acquisition costs over the fair
market value of the acquired assets and liabilities is being amortized on a
straight-line basis over 20 years.
<PAGE>
FORM 10-Q
PART I
PAGE 8
The Company's operating results for the first nine months of 1999 and 1998 are
required to be presented on a pro forma basis assuming that the acquisition of
Steen had been effective at the beginning of each respective period. The pro
forma information which follows is not necessarily indicative of the results of
operations as they may be in the future or as they might have been in the
periods indicated, if the acquisition had been consummated at the beginning of
each respective period. The pro forma information gives effect to, among other
things, depreciation and amortization expense on revalued assets acquired;
incremental employee benefit costs; additional interest expense that would have
been incurred in borrowing the initial amounts paid for the acquisition (and
corresponding adjustments of interest income earned); additional interest
expense associated with the notes payable to the Sellers; and the income tax
benefit associated with the foregoing pro forma adjustments.
Assuming that Steen had been acquired on January 1, 1999, the unaudited pro
forma operating results of the Company for the first nine months of 1999 would
have approximated the following: Total contract revenues of $389,969,000; Net
loss of $(2,144,000); and Basic and diluted net loss per share of $(0.26).
Assuming that Steen had been acquired on January 1, 1998, the unaudited pro
forma operating results of the Company for the first nine months of 1998 would
have approximated the following: Total contract revenues of $386,585,000; Net
income of $3,742,000; and Basic net income per share of $0.46; and Diluted net
income per share of $0.45.
NOTE 4 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,177,177 and 8,181,605 shares outstanding for the three-month periods, and
8,172,966 and 8,183,798 for the nine-month periods, ended September 30, 1999 and
1998, respectively. Diluted net income per share computations are based upon
weighted averages of 8,220,267 and 8,284,173 shares outstanding for the
three-month periods, and 8,235,689 and 8,308,306 for the nine-month periods,
ended September 30, 1999 and 1998, respectively. The additional shares included
in diluted shares outstanding are entirely attributable to stock options.
NOTE 5 - BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted Statement of Financial Accounting Standards No.
("SFAS") 131, "Disclosures about Segments of an Enterprise and Related
Information." SFAS 131 requires the following quarterly disclosure of revenues,
profitability and assets for each of the Company's seven reportable segments (in
millions):
<PAGE>
FORM 10-Q
PART I
PAGE 9
<TABLE>
<CAPTION>
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
SEPT. 30, 1999 Sept. 30, 1998 SEPT. 30, 1999 Sept. 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total contract revenues:
Buildings unit $ 10.7 $ 43.8 $ 45.7 $108.3
Civil unit:
Engineering 16.7 15.7 50.2 51.4
BSSI 14.0 17.5 40.2 47.6
Energy unit 17.5 16.0 56.7 45.9
Environmental unit 8.1 5.4 21.3 16.8
Transportation unit:
Engineering 22.9 17.7 63.1 52.3
Construction 39.6 19.6 101.0 51.7
- --------------------------------------------------------------------------------
Subtotal - Segments 129.5 135.7 378.2 374.0
Corporate/Insurance 0.3 0.1 0.8 --
- --------------------------------------------------------------------------------
TOTAL $129.8 $135.8 $379.0 $374.0
================================================================================
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
SEPT. 30, 1999 Sept. 30, 1998 SEPT. 30, 1999 Sept. 30, 1998
- --------------------------------------------------------------------------------
Income/(loss) before taxes:
Buildings unit $ (5.2) $ 0.5 $ (6.1) $ 0.6
Civil unit:
Engineering (0.3) 0.8 1.0 2.5
BSSI 0.9 0.1 1.3 (0.3)
Energy unit 1.0 1.1 1.6 3.0
Environmental unit 0.5 0.4 1.2 0.4
Transportation unit:
Engineering 1.1 0.7 2.9 1.6
Construction (3.5) 0.4 (3.7) 0.5
- --------------------------------------------------------------------------------
Subtotal - Segments (5.5) 4.0 (1.8) 8.3
Corporate/Insurance 0.1 (0.1) 0.7 0.1
- --------------------------------------------------------------------------------
TOTAL $ (5.4) $ 3.9 $ (1.1) $ 8.4
================================================================================
SEPT. 30, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------
Segment assets:
Buildings unit $ 11.1 $ 30.5
Civil unit:
Engineering 18.4 18.7
BSSI 15.1 15.6
Energy unit 44.7 27.9
Environmental unit 4.9 5.1
Transportation unit:
Engineering 25.5 21.7
Construction 21.0 20.6
- --------------------------------------------------------------------------------
Subtotal - Segments 140.7 140.1
Corporate/Insurance 9.5 11.8
- --------------------------------------------------------------------------------
TOTAL $150.2 $151.9
================================================================================
<PAGE>
FORM 10-Q
PART I
PAGE 10
</TABLE>
The Company has determined that intersegment revenues are immaterial for further
disclosure in these financial statements.
NOTE 6 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has an unsecured credit agreement (the "Agreement") with Mellon. The
Agreement provides for a commitment of $25 million through May 31, 2001. 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, 1999, borrowings totaling $7.5 million were outstanding under the
Agreement, along with outstanding letters of credit totaling $1.3 million.
Certain financial covenants under the Agreement were not achieved as a result of
the third quarter charges described in Note 2 above. Mellon has waived its
rights related to these violations through the end of 1999; however, because the
quarterly covenant computations are required to be based on operating results
for the previous four quarters, further violations are currently expected for
the fourth quarter of 1999 under the existing Agreement. Accordingly, the
Company's borrowings under the Agreement as of September 30, 1999 have been
classified within current portion of long-term debt in the accompanying
Condensed Consolidated Balance Sheet. Mellon has stated that it expects to
formally amend the Agreement during the fourth quarter of 1999 or early in the
first quarter of 2000.
NOTE 7 - CONTINGENCIES
The Company has reviewed the status of contingencies outstanding at September
30, 1999. Except as noted below with respect to the Universal matter, 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,
1998.
As mentioned above, additional charges totaling $5.8 million related to the
Universal matter were recorded during the third quarter of 1999. These charges
resulted from consultations with counsel and negotiations with several major
subcontractors in an effort to align them with the Company to recover amounts
due from Universal. Pursuant to a court order, non-binding mediation with a
mutually accepted mediator has been scheduled for the first quarter of 2000.
Pending the outcome of the mediation, the parties are continuing to move forward
with discovery and other actions related to the underlying litigation.
NOTE 8 - RECLASSIFICATIONS
Certain 1998 balance sheet amounts have been reclassified to conform with 1999
classifications.
<PAGE>
FORM 10-Q
PART I
PAGE 11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
TOTAL CONTRACT REVENUES
Total contract revenues were $129.8 million for the third quarter of 1999,
compared to $135.8 million for the third quarter of 1998. Revenue increases in
the Company's Transportation, Environmental and Energy units were offset by
decreases in the Buildings and Civil units. The Transportation unit continued to
post significant revenue increases in both its engineering and construction
divisions as a direct result of state transportation funding increases
associated with the U.S. government's 1998 TEA-21 legislation. In the
Environmental unit, the third quarter 1999 increase resulted primarily from a
new project that was awarded in late 1998 by an existing customer. International
growth, including that from two consolidated joint ventures which provide
operations and maintenance ("O&M") services in Venezuela and Thailand, continued
to fuel the Energy Unit. The notable decrease in the Buildings unit's
construction division revenues is directly attributable to a subsidiary's March
1999 termination from its most significant construction contract at the
Universal Studios ("Universal") theme park, and the Company's subsequent
restructuring, as discussed in Note 1 to the financial statements as of and for
the periods ended September 30, 1999 (included herein). In the Civil unit, the
decrease resulted from its Baker Support Services, Inc. ("BSSI") division having
completed its most significant O&M contract during the fourth quarter of 1998,
and its engineering division experiencing lower revenues from a project in
Alaska which is nearing completion.
Total contract revenues were $379.0 million for the first nine months of 1999,
compared to $374.0 million for the same period in 1998. For the first nine
months of 1999, the Transportation, Energy and Environmental units again
recorded revenue increases while the Buildings and Civil units registered
decreases. Each of the reasons related to the revenue increases and decreases by
business unit for the third quarter, which were stated in the preceding
paragraph, are equally applicable to the nine-month periods ended September 30,
1999 and 1998.
GROSS PROFIT
Gross profit decreased to $6.2 million in the third quarter of 1999 from $15.8
million in the third quarter of 1998. As a percentage of total contract
revenues, gross profit for the third quarter declined to 4.7% in 1999 compared
to 11.6% in the comparable period of 1998. Both overall decreases are directly
attributable to the third quarter charges, which as discussed in Note 2 to the
financial statements, had the effect of reducing gross profit by $11.7 million.
In the Transportation unit's engineering division, significant revenue growth
pushed its gross profit in dollars higher than the comparable third quarter
results from 1998, while the detrimental effect of the third quarter 1999 heavy
and highway construction project losses totaling $4.4 million significantly
<PAGE>
FORM 10-Q
PART I
PAGE 12
impacted this unit's construction division. In the Company's Civil unit, the
BSSI division posted both dollar and percentage improvements in gross profit due
to an overall change in the mix of its projects following the aforementioned
completion of its most significant contract in 1998, while the engineering
division's results were unfavorably impacted by certain third quarter
project-related charges. The Buildings unit was also unfavorably affected by
project charges on engineering contracts, in addition to bearing the third
quarter charge of $5.8 million related to the Universal construction project.
The Company's gross profit decreased to $35.5 million for the first nine months
of 1999 from $43.8 million for the same period in 1998. As a percentage of total
contract revenues, gross profit decreased to 9.4% in the first nine months of
1999 from 11.7% for the same period in 1998. Again, both decreases are directly
attributable to the aforementioned third quarter 1999 charges. The most
significant improvements in gross profit dollars were registered by the Civil
and Environmental units and by the Company's Transportation Engineering
division. The Civil unit's improvement for the first nine months of 1999
resulted from the same reasons discussed in the preceding paragraph, while the
Environmental unit's improvement resulted from the combination of its profitable
1999 revenue growth and a project loss recorded during the first quarter of
1998. The gross profit variance explanations stated for the Transportation and
Buildings units in the preceding paragraph are also applicable to the 1999 and
1998 nine-month periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased to $11.6 million
in the third quarter of 1999 from $11.9 million in the third quarter of 1998.
Expressed as a percentage of total contract revenues, SG&A expenses increased
slightly to 8.9% for the third quarter of 1999 from 8.8% in the third quarter of
1998. This percentage increase results primarily from the decrease in revenues
for the third quarter of 1999. Lower employee and office lease costs were
incurred during the third quarter of 1999 as a result of the Company's first
quarter 1999 restructuring. While the aforementioned third quarter charges had a
negligible net effect on overall SG&A expenses for the third quarter of 1999,
the Civil unit's engineering division was most significantly impacted by the
writeoff of certain intangible assets associated with the Company's 1998
GeoResearch acquisition.
SG&A expenses increased slightly to $36.3 million for the first nine months of
1999 from $35.9 million for the same period in 1998. Expressed as a percentage
of total contract revenues, G&A expenses remained constant at 9.6% for the third
quarters of 1999 and 1998. In addition to the third quarter 1999 variances
discussed above, the Buildings unit recorded restructuring charges totaling $0.8
million as SG&A expenses during the first quarter of 1999.
<PAGE>
FORM 10-Q
PART I
PAGE 13
OTHER INCOME
Interest income was lower and interest expense was higher for the three and
nine-month periods ended September 30, 1999, mainly due to the Company's higher
average 1999 borrowings under its credit agreement with Mellon Bank, N.A.
("Mellon"). During the respective 1998 periods, the Company had no borrowings
under this agreement, and was in a net invested position with Mellon. In
addition, interest expense was higher in 1999 as the result of debt associated
with the purchase of certain heavy and highway construction equipment, and notes
payable to the former owners of GeoResearch, Inc. and Steen Production Service,
Inc., which were purchased in October 1998 and September 1999, respectively.
INCOME TAXES
The Company had a benefit from income taxes of 26% for the third quarter of 1999
versus a provision for income taxes of 47% for the third quarter of 1998. The
third quarter tax benefit reflects amounts necessary to adjust year-to-date
amounts to the current estimate of 1999 income tax expense, and is lower than
the annual effective tax rate principally because the third quaarter charge for
the Universal contract was tax effected at the federal staturtory rate of 34%.
For the nine-month periods ended September 30, 1999 and 1998, the Company had
provisions for income taxes that resulted in effective tax rates of (54%) and
47%, respectively. The income tax expense for the first nine months of 1999
results from certain foreign and state taxes that more than offset the federal
tax benefits derived from the Company's consolidated pre-tax loss.
CONTRACT BACKLOG
The funded backlog of work to be performed was $383 million as of September 30,
1999, compared to funded backlog of $448 million at December 31, 1998. Funded
backlog represents that portion of work supported by signed contracts and for
which the procuring agency has appropriated and allocated the funds to pay for
the work. Total backlog, which incrementally includes that portion of contract
value for which options are still to be exercised (unfunded backlog), decreased
to $690 million at September 30, 1999, as compared to $735 million as of
December 31, 1998.
With reference to the Company's restructuring, funded backlog related to the
businesses that will be continued by the Company was $318 million as of
September 30, 1999, as compared with $285 million as of December 31, 1998. Total
backlog for these businesses was $625 million and $572 million as of September
30, 1999 and December 31, 1998, respectively.
During the third quarter of 1999, the Company added to its funded and total
backlog only in the Civil unit, while the Buildings, Energy, Environmental and
Transportation units experienced reductions in funded and total backlog. The
most significant new contracts added during the second quarter included two
<PAGE>
FORM 10-Q
PART I
PAGE 14
engineering projects totaling $10.5 million as well as additional O&M work
totaling $8.7 million in the Civil unit, two design projects totaling $5.8
million in the Transportation Engineering division, and two heavy and highway
construction projects totaling $9.3 million in the Transportation Construction
division.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1.7 million for the first nine
months of 1999, compared to net cash used in operating activities of $5.1
million for the same period in 1998. Despite the Company's net loss for the
first nine months of 1999, the 1999 cash flow improvement is primarily
attributable to the Company's reduction in receivables relative to the previous
year. Such reduction in receivables was mainly driven by the decision to wind
down the Company's construction operations in the Buildings unit .
Net cash used in investing activities was $9.2 million for the first nine months
of 1999 and $8.0 million for the same period in 1998. The 1999 amount comprises
both capital expenditures totaling $4.2 million and the net amount paid by the
Company during the third quarter to acquire Steen Production Service, Inc.
("Steen," as discussed in Note 3 to the financial statements), while the 1998
amount represents only capital expenditures. Fewer personal computers and less
other computer equipment were purchased during the first nine months of 1999
than in the comparable period of 1998.
Net cash provided by financing activities totaled $5.4 million for the first
nine months of 1999, compared to $1.7 million for the same period in 1998.
During the first nine months of 1999, the Company received net proceeds of $7.5
million from borrowings under its credit agreement with Mellon to finance the
initial cash payments associated with the acquisition of Steen, while the 1998
proceeds of $2.4 million related to the financing of certain heavy and highway
construction equipment purchases in the Transportation unit. During the first
nine months of 1999, the Company repaid $0.5 million of this construction
equipment debt, and further repaid certain Steen debt totaling $1.8 million,
which existed as of the acquisition date. Pursuant to a stock repurchase program
announced in late 1996, the Company paid $0.7 million to acquire approximately
87,000 additional treasury shares during the first nine months of 1998.
Working capital decreased to $23.5 million at September 30, 1999 from $31.9
million at December 31, 1998. The current ratio was 1.27:1 at the end of the
third quarter of 1999, compared to 1.36:1 at year-end 1998. The decreases in
working capital and in the current ratio are the result of the third quarter
construction-related charges discussed in Note 2 to the financial statements, as
well as the classification of the revolving credit debt payable to Mellon as a
current liability.
<PAGE>
FORM 10-Q
PART I
PAGE 15
In 1998, the Company extended the term of its unsecured credit agreement with
Mellon Bank, N.A. through May 31, 2001. This agreement provides for a commitment
of $25 million, which covers borrowings and letters of credit. As of September
30, 1999, borrowings totaling $7.5 million were outstanding under the agreement,
along with outstanding letters of credit totaling $1.3 million. As disclosed in
Note 6 to the third quarter financial statements, Mellon has waived, through the
end of 1999, its rights related to the third quarter loan covenant violations.
However, under the calculation mechanics of the current loan agreement,
management anticipates further violations for the fourth quarter. Mellon has
stated that it expects to formally amend the Agreement during the fourth quarter
of 1999 or early in the first quarter of 2000. Such an amendment should reduce
the risk of further covenant violations and limitations on borrowing
availability. During the fourth quarter, the Company will continue to negotiate
with Mellon and develop contingency plans for alternative financing.
Short and long-term liquidity is 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
oil and gas markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company. The current federal transportation
legislation (TEA-21) will provide a significant increase in funding for
transportation infrastructure projects during the remainder of 1999 and beyond.
The Company is required to provide bid and performance bonding on certain
construction contracts, and has a $500 million bonding line available through
Travelers Casualty & Surety Company of America. Management believes that its
bonding line will be sufficient to meet its bid and performance needs for at
least the next year.
YEAR 2000 COMPLIANCE
The Company has completed an assessment of its information systems relative to
the arrival of the 21st century. For internal systems, the Company generally
utilizes modern technologies supplied and supported by leading hardware and
software providers suited to Baker's areas of business. Year 2000 compliance is
primarily being achieved through the normal and recurring process of system
upgrades, the software costs of which are covered under related maintenance
agreements.
Vendors have asserted that the financial and project management systems for the
Company's engineering and construction businesses, its BSSI subsidiary, and both
systems in the Energy unit are Year 2000 compliant. Over 90% of the Company is
served by a human resources system which the vendor has stated to be Year 2000
compliant. Validation testing of the vendors' assertions for the Company's
financial, project management and human resources systems has been completed,
except for the BSSI subsidiary which is expected to be completed during the
fourth quarter of 1999.
<PAGE>
FORM 10-Q
PART I
PAGE 16
The Company's interrelated systems (e.g., e-mail, file sharing) are linked by a
network of servers. Upgrades to compliant versions are in place for the network.
The Company has evaluated other less critical operational support systems being
used in all business units (e.g., mapping, CADD, cost estimating, databases,
spreadsheets, and specialized and customized software) to identify any remaining
issues for resolution. All identified issues will be completed by the end of
1999. Normal end-user computing needs were addressed with BIOS testing of all
personal computers and a review of the operating systems and software packages.
Patches and upgrade needs have been identified and are being applied with a
scheduled completion date during the fourth quarter of 1999.
The Company is a service-based organization and, as such, has little reliance on
embedded technology (e.g., micro-controllers) for its key business processes.
The relevance of embedded technology is limited to such items as elevators,
HVAC, security, etc., which are components of the Company's leased facilities.
Embedded technology is also integral to some client facilities which the Company
operates and maintains under customer contracts. Responsibility for the Year
2000 compliance of such facilities rests with the landlords or the clients.
To assess the Year 2000 compliance of significant third parties, the Company
initiated a survey process to gather and evaluate information from significant
business customers, vendors and subcontractors. Mailing of the survey was
completed during the first quarter of 1999. Despite its follow-up efforts
throughout 1999, the Company experienced a response rate of only approximately
25% to this survey; however, no companies which responded indicated that they
expected any problems in achieving their own Year 2000 compliance. The Company
will continue to monitor the readiness of its key suppliers and customers
through the end of 1999.
Management currently believes that its "most reasonably likely worst case Year
2000 scenario" poses the potential for payment delays from some customers,
including agencies of the U.S. federal government, due to their lack of
readiness for the new century. Management believes that the Company's internal
documentation will sufficiently support receivable balances owed to the Company
as of December 31, 1999.
The Company will also enhance its existing disaster recovery plans to include
assessments of potential Year 2000 impacts. These contingency plans will address
both internal factors related to staff, computer systems and facilities, as well
as external factors related to suppliers, customers and service providers. The
Company expects to have all necessary contingency plans in place by the end of
1999.
Based upon information currently available, management does not believe that the
estimated incremental costs associated with Year 2000 compliance will be
material to the Company's consolidated results of operations or financial
position.
<PAGE>
FORM 10-Q
PART I
PAGE 17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
The Company's primary interest rate risk relates to its long-term debt
obligations. As of September 30, 1999, the Company had total long-term debt
obligations, including the current portion of those obligations, totaling $16.1
million. Of this amount, fixed rate obligations totaled $2.8 million and
variable rate obligations totaled $13.3 million. 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 8.25% as of September 30,
1999, to a weighted average interest rate of 9.08%), annual interest expense
would be approximately $110,000 higher based on the outstanding balance of
variable rate obligations as of September 30, 1999. 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, 1999 were denominated in currencies other
than the U.S. Dollar; accordingly, the Company has no material exposure to
foreign currency exchange risk. This materiality assessment is based on the
assumption that the foreign currency exchange rates could change unfavorably by
10%. 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 1. LEGAL PROCEEDINGS
-----------------
The Company has been named as a defendant or co-defendant in legal proceedings
wherein substantial damages are claimed. Such proceedings are not uncommon to
the Company's business. After consultations with counsel, except as discussed
below, management believes that the Company has recognized adequate provisions
for these proceedings and their ultimate resolutions will not have a material
adverse effect on the consolidated financial position or annual results of
operations of the Company.
The Company currently has two significant legal proceedings outstanding. The
more significant one relates to a contract for the construction of the CityWalk
project at the Universal Studios theme park in Orlando, Florida, between Baker
Mellon Stuart Construction, Inc. ("BMSCI"), a wholly-owned subsidiary of the
Company, and Universal City Development Partners ("UCDP"). BMSCI was providing
project-related construction services to UCDP under the contract. During BMSCI's
performance under the contract, which began in 1997, the project suffered delays
due to substantial changes in the design of the project and the related
drawings.
On March 5, 1999, UCDP terminated BMSCI's right to proceed with the project work
by alleging default. UCDP has also notified BMSCI of UCDP claims for damages
resulting from the alleged default, including the cost to complete or correct
<PAGE>
FORM 10-Q
PART II
PAGE 18
the work, additional maintenance or operation costs, and alleged lost revenues
or other damages. UCDP simultaneously filed a lawsuit against BMSCI for breach
of contract in the Federal District Court in the Middle District of Florida
("Federal Court"). On October 26, 1999, the Court granted UCDP's Motion to add
the Company and its bonding company as additional defendants. The Company was
not a party to the contract underlying the lawsuit and contends it cannot be
held liable for any conduct of the subsidiary. BMSCI and the Company are
vigorously defending this action. On March 8, 1999, BMSCI filed a lawsuit
against UCDP in the Circuit Court for the Ninth Judicial Circuit in and for
Orange County, Florida ("State Court") alleging breach of contract, wrongful
termination and other counts and seeking damages, interest, court costs and
other relief, including potential counterclaims. This action was voluntarily
dismissed on July 6, 1999, and BMSCI is pursuing its claims against UCDP by way
of counterclaims filed in UCDP's Federal Court action. While the Federal Court
action is proceeding, on September 27, 1999, the Court ordered non-binding
mediation of this matter to occur by February 1, 2000. BMSCI, UCDP and other
parties with significant interests will participate in the mediation.
In addition, several BMSCI subcontractors and vendors have also filed suit
against BMSCI in connection with the project. The most significant subcontractor
suits were brought by ADF International, Inc. ("ADF"), BMSCI's subcontractor for
structural steel/miscellaneous metals, and Martin K. Eby Construction, Inc.
("Eby"), BMSCI's subcontractor for foundations. On November 24, 1998, ADF filed
suit in Federal Court against BMSCI and its surety seeking damages for breach of
contract relating to the project. BMSCI and its surety answered the complaint
(and amended complaint) and BMSCI filed a counterclaim. On November 17, 1999,
BMSCI and ADF entered into agreements to jointly defend and pursue their claims
against UCDP. On February 10, 1999, Eby also filed suit in Federal Court against
BMSCI and its surety seeking damages for breach of contract relating to the
project. BMSCI and its surety answered the complaint. On November 9, 1999, BMSCI
and Eby settled this matter, and Eby has agreed to cooperate with BMSCI in its
defense and pursuit of claims against UCDP.
Additional claims may be filed in connection with this matter. Baker and its
counsel believe that BMSCI has valid defenses and claims against UCDP, its
consultants and subcontractors, and BMSCI's subcontractors and vendors. BMSCI
intends to defend and pursue these claims vigorously. However, an unfavorable
resolution of these matters could have a material adverse effect on the
Registrant's consolidated financial position, results of operations and cash
flow.
The other proceeding relates to a lawsuit brought in 1987 in the Supreme Court
of the State of New York, Bronx County, by the Dormitory Authority of the State
of New York against a number of parties, including the Registrant and one of its
wholly-owned subsidiaries, that asserts breach of contract and alleges damages
of $13 million. The Registrant, which was not a party to the contract underlying
the lawsuit, contends that there is no jurisdiction with respect to the
Registrant and that it cannot be held liable for any conduct of the subsidiary.
Both the Registrant and the subsidiary are contesting liability issues and have
filed cross-claims and third-party claims against the other entities involved in
the project.
<PAGE>
FORM 10-Q
PART II
PAGE 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Reports on Form 8-K
- -------------------
During the quarter ended September 30, 1999, the Company filed a Form 8-K dated
September 15, 1999, and reported in Item 2 its acquisition of Steen Production
Service, Inc. ("Steen"), which became effective September 1, 1999. The financial
information required by Item 7 was not included with this filing.
On November 15, 1999, the Company also filed a Form 8-K/A amendment to the above
Form 8-K filing. Such Form 8-K/A contained the financial information required by
Item 7 in connection with the acquisition of Steen, as discussed in Note 3 to
the unaudited condensed consolidated financial statements included in this
Report on Form 10-Q.
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
Dated: November 22, 1999 By: /s/ J. Robert White
--------------------------------------
J. Robert White
Executive Vice President, Chief
Financial Officer and Treasurer
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