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 JUNE 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 June 30, 1999:
--------------------
<S> <C>
Common Stock 6,858,891 shares
Series B Common Stock 1,315,864 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, and changes in anticipated levels of government
spending on infrastructure. 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
----------------------------
JUNE 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Total contract revenues $ 134,066 $ 127,118
Cost of work performed 118,181 111,376
- --------------------------------------------------------------------------------
Gross profit 15,885 15,742
Selling, general and administrative expenses 11,971 12,828
- --------------------------------------------------------------------------------
Income from operations 3,914 2,914
Other income/(expense):
Interest income 26 147
Interest expense (215) (7)
Other, net (188) 69
- --------------------------------------------------------------------------------
Income before income taxes 3,537 3,123
Provision for income taxes 1,662 1,468
- --------------------------------------------------------------------------------
NET INCOME $ 1,875 $ 1,655
================================================================================
BASIC AND DILUTED NET INCOME PER SHARE $ 0.23 $ 0.20
================================================================================
<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 SIX MONTHS ENDED
----------------------------
JUNE 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C>
Total contract revenues $ 249,185 $ 238,215
Cost of work performed 219,840 210,229
- --------------------------------------------------------------------------------
Gross profit 29,345 27,986
Selling, general and administrative expenses 24,690 24,016
- --------------------------------------------------------------------------------
Income from operations 4,655 3,970
Other income/(expense):
Interest income 85 326
Interest expense (334) (17)
Other, net (89) 222
- --------------------------------------------------------------------------------
Income before income taxes 4,317 4,501
Provision for income taxes 2,029 2,116
- --------------------------------------------------------------------------------
NET INCOME $ 2,288 $ 2,385
================================================================================
BASIC AND DILUTED NET INCOME PER SHARE $ 0.28 $ 0.29
================================================================================
<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 JUNE 30, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CURRENT ASSETS
Cash $ 1,165 $ 5,014
Receivables 75,802 82,672
Cost of contracts in progress and estimated
earnings, less billings 23,833 22,407
Prepaid expenses and other 5,958 10,192
- --------------------------------------------------------------------------------
Total current assets 106,758 120,285
- --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 17,462 17,458
- --------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 6,965 7,507
Other assets 6,695 6,611
- --------------------------------------------------------------------------------
Total other assets 13,660 14,118
- --------------------------------------------------------------------------------
TOTAL ASSETS $137,880 $151,861
================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- --------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 28,015 $ 43,356
Accrued employee compensation 10,380 9,141
Accrued insurance 8,476 6,155
Other accrued expenses 17,868 20,210
Excess of billings on contracts in progress
over cost and estimated earnings 6,388 9,568
- --------------------------------------------------------------------------------
Total current liabilities 71,127 88,430
- --------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt 3,478 3,138
Other 8,068 7,431
- --------------------------------------------------------------------------------
Total liabilities 82,673 98,999
- --------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized
44,000,000 shares, issued 7,162,030
and 7,150,179 shares at June 30, 1999
and December 31, 1998, respectively 7,162 7,150
Series B Common Stock, par value $1, authorized
6,000,000 shares, issued 1,315,864
and 1,319,114 shares at June 30, 1999
and December 31, 1998, respectively 1,316 1,319
Additional paid-in capital 37,048 37,002
Retained earnings 11,735 9,447
Less 303,139 and 303,359 shares of Common Stock
in treasury, at cost, at June 30, 1999 and
December 31, 1998, respectively (2,054) (2,056)
- --------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 55,207 52,862
- --------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $137,880 $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 SIX MONTHS ENDED
----------------------------
JUNE 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,288 $ 2,385
Adjustments to reconcile net income to net cash
provided by/(used in) operating activities:
Depreciation and amortization 3,227 2,300
Changes in assets and liabilities:
Decrease/(increase) in receivables and
contracts in progress 2,261 (3,691)
Decrease in accounts payable and accrued expenses (12,386) (7,871)
Decrease in other net assets 3,552 2,361
- --------------------------------------------------------------------------------
Total adjustments (3,346) (6,901)
- --------------------------------------------------------------------------------
Net cash used in operating activities (1,058) (4,516)
- --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (3,150) (3,679)
- --------------------------------------------------------------------------------
Net cash used in investing activities (3,150) (3,679)
- --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt 553 --
Repayments of long-term debt (250) --
Proceeds from exercise of stock options 56 34
Payments to acquire treasury stock -- (444)
- --------------------------------------------------------------------------------
Net cash provided by/(used in) financing activities 359 (410)
- --------------------------------------------------------------------------------
Net decrease in cash (3,849) (8,605)
Cash at beginning of year 5,014 17,302
- --------------------------------------------------------------------------------
CASH AT END OF PERIOD $ 1,165 $ 8,697
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Interest paid $ 157 $ 36
Income taxes paid $ 247 $ 419
================================================================================
<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 JUNE 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 will 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 have been restructured, and the Company's
Transportation Construction (heavy and highway) business is currently being
offered for sale. Existing low-bid, high-risk construction projects in the
Buildings unit will be completed or sold, while normal construction bidding
activity will continue in the Transportation unit during the period through the
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. 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.
NOTE 2 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,173,248 and 8,178,792 shares outstanding for the three-month periods, and
8,170,826 and 8,184,727 for the six-month periods, ended June 30, 1999 and 1998,
respectively. Diluted net income per share computations are based upon weighted
averages of 8,229,316 and 8,322,090 shares outstanding for the three-month
periods, and 8,242,804 and 8,320,373 for the six-month periods, ended June 30,
1999 and 1998, respectively. The additional shares included in diluted shares
outstanding are entirely attributable to stock options.
NOTE 3 - 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 7
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, 1999 June 30, 1998 JUNE 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total contract revenues:
Buildings unit $ 12.7 $ 36.7 $ 35.0 $ 64.4
Civil unit:
Engineering 18.2 18.2 33.6 35.6
BSSI 13.6 15.3 26.2 30.1
Energy unit 19.9 15.3 39.2 30.0
Environmental unit 6.4 5.5 13.2 11.4
Transportation unit:
Engineering 21.9 17.8 40.2 34.6
Construction 41.0 18.3 61.4 32.1
- --------------------------------------------------------------------------------
Subtotal - Segments 133.7 127.1 248.8 238.2
Corporate/Insurance 0.4 -- 0.4 --
- --------------------------------------------------------------------------------
TOTAL $134.1 $127.1 $249.2 $238.2
================================================================================
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 30, 1999 June 30, 1998 JUNE 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------
Income/(loss) before taxes:
Buildings unit $ 0.3 $ 0.2 $ (0.9) $ 0.1
Civil unit:
Engineering 0.8 0.9 1.3 1.7
BSSI 0.4 (0.1) 0.4 (0.4)
Energy unit (0.7) 1.1 0.6 1.9
Environmental unit 0.5 0.3 0.7 0.1
Transportation unit:
Engineering 1.3 0.5 1.7 0.9
Construction 0.4 0.2 (0.1) 0.1
- --------------------------------------------------------------------------------
Subtotal - Segments 3.0 3.1 3.7 4.4
Corporate/Insurance 0.5 -- 0.6 0.1
- --------------------------------------------------------------------------------
TOTAL $ 3.5 $ 3.1 $ 4.3 $ 4.5
================================================================================
JUNE 30, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------
Segment assets:
Buildings unit $ 12.9 $ 30.5
Civil unit:
Engineering 18.8 18.7
BSSI 14.9 15.6
Energy unit 30.2 27.9
Environmental unit 4.4 5.1
Transportation unit:
Engineering 25.5 21.7
Construction 21.2 20.6
- --------------------------------------------------------------------------------
Subtotal - Segments 127.9 140.1
Corporate/Insurance 10.0 11.8
- --------------------------------------------------------------------------------
TOTAL $137.9 $151.9
================================================================================
<PAGE>
FORM 10-Q
PART I
PAGE 8
</TABLE>
The Company has determined that intersegment revenues are immaterial for further
disclosure in these financial statements.
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has an unsecured credit agreement (the "Agreement") with Mellon
Bank, N.A. 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 June 30, 1999, borrowings totaling $0.6 million were outstanding
under the Agreement (and included in long-term debt in the accompanying
Condensed Consolidated Balance Sheet), along with outstanding letters of credit
totaling $1.5 million.
NOTE 5 - CONTINGENCIES
The Company has reviewed the status of contingencies outstanding at June 30,
1999. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
RESULTS OF OPERATIONS
TOTAL CONTRACT REVENUES
Total contract revenues were $134.1 million for the second quarter of 1999,
compared to $127.1 million for the second quarter of 1998. Revenue increases in
the Company's Transportation, Energy and Environmental units were partially
offset by decreases in the Buildings and Civil units. The Transportation unit
continued to post improvements 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. 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 decrease in the Buildings unit's revenues is
directly attributable to a subsidiary's March 1999 termination from its most
significant construction contract at the Universal Studios theme park, and the
Company's subsequent restructuring, as discussed in Note 1 to the financial
statements as of and for the periods ended June 30, 1999 (included herein).
Total contract revenues were $249.2 million for the first six months of 1999,
compared to $238.2 million for the same period in 1998. For the first half of
1999, the Transportation, Energy and Environmental units again recorded revenue
increases while the Buildings and Civil units registered decreases. The reasons
<PAGE>
FORM 10-Q
PART I
PAGE 9
for the Transportation and Energy increases in revenues, as well as the
Buildings decrease, for the first six months of 1999 are the same as those
stated in the preceding paragraph. The Civil unit's revenue decrease was more
significant for the six-month period, and resulted primarily 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 that is nearing completion.
GROSS PROFIT
Gross profit increased to $15.9 million in the second quarter of 1999 from $15.7
million in the second quarter of 1998. As a percentage of total contract
revenues, the second quarter's gross profit decreased slightly to 11.8% in 1999
from 12.4% in 1998. In the 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. The Transportation unit's significant revenue growth in both
of its divisions pushed its gross profit in dollars higher than its second
quarter of 1998; however, its gross profit percentage declined due to its
construction division having completed a project on which significant
profitability was recorded during the second quarter of 1998. The Buildings
unit's improved profit percentage resulted from profitable growth in its
engineering division and improved margins on the remaining construction projects
that are being completed, despite the much lower construction-related revenues
in 1999. The Energy unit registered second quarter decreases in both gross
profit dollars and percentage due to charges resulting from nonrecurring
project-related difficulties and the writeoff of unrecoverable assets.
The Company's gross profit increased to $29.3 million for the first six months
of 1999 from $28.0 million for the same period in 1998; however, as a percentage
of total contract revenues, gross profit remained constant at 11.8% in the first
half of both years. The most significant overall improvements were registered in
the Civil and Environmental units. Despite its lower 1999 revenues, the Civil
unit benefitted at the gross profit line from the fact that its aforementioned
two major contracts, which are completed or nearly so, had lower than normal
margins associated with them during the first half of 1998. 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, Buildings and Energy
units in the preceding paragraph are also applicable to the 1999 and 1998
six-month periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased to $12.0 million
in the second quarter of 1999 from $12.8 million in the second quarter of 1998.
Expressed as a percentage of total contract revenues, SG&A expenses were 8.9%
for the second quarter of 1999 and 10.1% for the comparable 1998 period. The
second quarter of 1999 benefitted from the resolution of an outstanding
<PAGE>
FORM 10-Q
PART I
PAGE 10
corporate employee benefits issue that had been accrued for in a prior period.
In addition, lower employee and office lease costs were incurred during the
second quarter of 1999 as a result of the Company's first quarter 1999
restructuring.
SG&A expenses increased to $24.7 million for the first six months of 1999 from
$24.0 million for the same period in 1998. Expressed as a percentage of total
contract revenues, G&A expenses decreased slightly to 9.9% for the first half of
1999 from 10.1% for the same period in 1998. In addition to the second 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.
OTHER INCOME
Interest income was lower and interest expense was higher for the three and
six-month periods ended June 30, 1999, due partially 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 the
acquisition of GeoResearch, Inc. during the second half of 1998.
INCOME TAXES
The Company had provisions for income taxes of 47% for the three and six-month
periods ended June 30, 1999 and 1998.
CONTRACT BACKLOG
The funded backlog of work to be performed was $416 million as of June 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), increased to $753
million at June 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 $291 million as of June 30,
1999, as compared with $285 million as of December 31, 1998. Total backlog for
these businesses was $629 million and $572 million as of June 30, 1999 and
December 31, 1998, respectively.
During the second quarter of 1999, the Company added to its funded and total
backlog in the Environmental and Buildings units, while the Civil, Energy 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 11
design projects totaling $9.0 million in the Transportation Engineering division
and two heavy and highway construction projects totaling $6.5 million in the
Transportation Construction division.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $1.1 million for the first six months
of 1999, compared to $4.5 million for the same period in 1998. The 1999
improvement is primarily attributable to improved results before depreciation
and amortization expense, and a lower 1999 net investment in contracts (i.e.,
receivables, under/overbillings, payables) of $10.1 million versus $11.6 million
in 1998. Of this 1999 amount, approximately $9.0 million related to the
terminated construction project at the Universal Studios theme park and other
construction contracts which are nearing completion in the Buildings unit.
Net cash used in investing activities was $3.2 million for the first six months
of 1999 and $3.7 million for the same period in 1998. These amounts solely
comprise capital expenditures for both periods. Fewer personal computers and
less other computer equipment were purchased during the first half of 1999 than
in the comparable period of 1998.
Net cash provided by financing activities totaled $0.4 million for the first six
months of 1999, compared with cash used in financing activities of $0.4 million
for the same period in 1998. During the first six months of 1999, the Company
received net proceeds of $0.6 million from borrowings under its credit agreement
with Mellon. In addition, the Transportation unit paid $0.3 million to reduce
its long-term debt that resulted from 1998 purchases of heavy and highway
construction equipment. Pursuant to a stock repurchase program announced in late
1996, the Company paid $0.4 million to acquire approximately 50,000 treasury
shares during the first half of 1998.
Working capital increased to $35.6 million at June 30, 1999 from $31.9 million
at December 31, 1998. The current ratio was 1.50:1 at the end of the second
quarter of 1999, compared to 1.36:1 at year-end 1998. The working capital and
current ratio improvements were primarily attributable to significant reductions
in the Buildings unit's trade receivables and payables that resulted from the
lower revenue volumes in its restructured construction operations.
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 June 30,
1999, borrowings totaling $0.6 million were outstanding under the agreement,
along with outstanding letters of credit totaling $1.5 million. Management
believes that the Company's borrowing capacity will be adequate to meet its cash
and letter of credit requirements for at least the next year.
<PAGE>
FORM 10-Q
PART I
PAGE 12
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.
Short and long-term liquidity is 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.
At this time, management believes that its funds generated from operations and
its borrowing capacity will be sufficient to meet its operating and capital
expenditure requirements 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 one
of two such systems in the Energy unit are Year 2000 compliant. The other Energy
unit system is currently being assessed and scheduled to be compliant early in
the fourth quarter of 1999. 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 Company's financial, project management and human
resources systems is expected to be completed during the third quarter of 1999.
The Company's interrelated systems (e.g., e-mail, file sharing) are linked by a
network of servers. Upgrades to compliant versions are already in place for
approximately 95% of the network. The remaining two servers are scheduled to be
upgraded to compliant versions or merged with existing compliant servers during
the third quarter of 1999. The Company is in the process of evaluating 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. Any
related issues are scheduled for resolution early in the fourth quarter 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 by the end of 1999.
<PAGE>
FORM 10-Q
PART I
PAGE 13
The Company is a service-based organization and, as such, has little reliance on
embedded technology (e.g., microcontrollers) 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
undertook 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. The majority of responses were
received by the end of the second quarter of 1999. The Company will continue to
evaluate the readiness of its key suppliers and customers with follow-up
requests to non-respondents and respondents that are not yet compliant; such
requests will continue 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 borrowing
capacity will be adequate to cover any payment delays that could result, and
that internal documentation will sufficiently support receivable balances owed
to the Company at December 31, 1999.
Based on the customer survey results, 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 have been or
will be material to the Company's consolidated results of operations or
financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Based upon the nature and amount of the Company's current and long-term debt
balances at June 30, 1999, Baker has no material exposure to interest rate risk.
Less than 1% of the Company's total assets and total contract revenues as of and
for the periods ended June 30, 1999 were denominated in currencies other than
the U.S. Dollar; accordingly, the Company has no material exposure to foreign
currency exchange risk. These materiality assessments are based on the
assumption that either the interest rates or the foreign currency exchange rates
could change unfavorably by 10%. Based on the nature of the Company's business,
it has no direct exposure to commodity price risk. In accordance with the
foregoing, the Company has no interest rate swap or exchange agreements, nor
does it have any foreign currency exchange contracts.
<PAGE>
FORM 10-Q
PART II
PAGE 14
PART II. OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The Company's annual meeting of shareholders was held on July 1,
1999.
(b) Each of management's nominees to the board of directors, as listed
in the Company's proxy statement, was elected. There was no
solicitation in opposition to management's nominees.
(c) The only matter voted upon at the meeting was the election of the
Company's directors to one-year terms or until their respective
successors have been elected. The votes cast by holders of the
Company's Common Stock and Series B Common Stock in approving the
following directors were:
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD
---------------- --------- --------------
Robert N. Bontempo 17,605,043 2,107,763
Charles I. Homan 16,712,964 2,699,842
Thomas D. Larson 17,470,264 1,942,542
Richard L. Shaw 17,048,992 2,363,814
Konrad M. Weis 17,187,366 2,225,440
J. Robert White 17,029,813 2,382,993
The votes cast by holders of the Company's Common Stock in
approving the following directors were:
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD
---------------- --------- --------------
William J. Copeland 6,231,115 465,121
Roy V. Gavert, Jr. 6,236,483 459,753
John E. Murray 6,256,911 439,325
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(b) Reports on Form 8-K
During the quarter ended June 30, 1999, the Company filed no
reports on Form 8-K.
<PAGE>
FORM 10-Q
PART II
PAGE 15
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: August 13, 1999 By: /s/ J. ROBERT WHITE
--------------------------------------
J. Robert White
Executive Vice President, Chief
Financial Officer and Treasurer
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