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, 2000
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
AIRPORT OFFICE PARK, BUILDING 3, 420 ROUSER ROAD, CORAOPOLIS, PA 15108
---------------------------------------------------------------- -----
(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.
AS OF JUNE 30, 2000:
-------------------
Common Stock 6,881,539 shares
Series B Common Stock 1,311,966 shares
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
The condensed consolidated financial statements which follow have been prepared
by Michael Baker Corporation ("the Company"), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. Although
certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations, the
Company believes that the disclosures are adequate to make the information
presented not misleading. The statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for
the periods presented. All such adjustments are of a normal and recurring nature
unless specified otherwise. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, and in particular the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section in Part I, contains forward looking statements concerning future
operations and performance of the Company. Forward looking statements are
subject to market, operating and economic risks and uncertainties that may cause
the Company's actual results in future periods to be materially different from
any future performance suggested herein. Factors that may cause such differences
include, among others: increased competition, increased costs, changes in
general market conditions, changes in anticipated levels of government spending
on infrastructure, and changes in loan relationships or sources of financing.
Such forward looking statements are made pursuant to the Safe Harbor Provisions
of the Private Securities Litigation Reform Act of 1995.
<PAGE>
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
For the three months ended
---------------------------------
JUNE 30, 2000 June 30, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Total contract revenues $ 97,762 $ 134,066
Cost of work performed 83,491 118,181
--------------------------------------------------------------------------------
GROSS PROFIT 14,271 15,885
Selling, general and administrative expenses 10,389 11,971
--------------------------------------------------------------------------------
INCOME FROM OPERATIONS 3,882 3,914
Other income/(expense):
Interest income 51 26
Interest expense (263) (215)
Other, net 1,056 (188)
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 4,726 3,537
Provision for income taxes 2,221 1,662
--------------------------------------------------------------------------------
NET INCOME $ 2,505 $ 1,875
================================================================================
BASIC AND DILUTED NET INCOME PER SHARE $ 0.31 $ 0.23
================================================================================
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
For the six months ended
---------------------------------
JUNE 30, 2000 June 30, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Total contract revenues $ 206,057 $ 249,185
Cost of work performed 176,971 219,840
--------------------------------------------------------------------------------
GROSS PROFIT 29,086 29,345
Selling, general and administrative expenses 21,316 24,690
--------------------------------------------------------------------------------
INCOME FROM OPERATIONS 7,770 4,655
Other income/(expense):
Interest income 71 85
Interest expense (663) (334)
Other, net 856 (89)
--------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 8,034 4,317
Provision for income taxes 3,776 2,029
--------------------------------------------------------------------------------
NET INCOME $ 4,258 $ 2,288
================================================================================
BASIC AND DILUTED NET INCOME PER SHARE $ 0.52 $ 0.28
================================================================================
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
ASSETS JUNE 30, 2000 Dec. 31, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 3,889 $ 3,685
Receivables 67,882 77,964
Cost of contracts in progress and estimated
earnings, less billings 20,196 20,803
Prepaid expenses and other 6,465 7,363
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 98,432 109,815
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 11,908 17,120
--------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 11,456 14,563
Other assets 3,503 7,693
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TOTAL OTHER ASSETS 14,959 22,256
--------------------------------------------------------------------------------
TOTAL ASSETS $125,299 $149,191
================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
--------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,590 $ 3,526
Accounts payable 22,317 28,862
Accrued employee compensation 9,814 10,462
Accrued insurance 6,853 7,884
Other accrued expenses 22,945 19,453
Excess of billings on contracts in progress
over cost and estimated earnings 3,873 13,555
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 68,392 83,742
--------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt 2,264 14,867
Other 5,540 5,783
--------------------------------------------------------------------------------
TOTAL LIABILITIES 76,196 104,392
--------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000
shares, issued 7,184,528 and 7,170,663 shares
at 6/30/00 and 12/31/99, respectively 7,184 7,171
Series B Common Stock, par value $1, authorized
6,000,000 shares, issued 1,311,966 and 1,313,816
shares at 6/30/00 and 12/31/99, respectively 1,312 1,314
<PAGE>
Additional paid-in capital 37,119 37,084
Retained earnings 5,541 1,283
Less 302,989 shares of Common Stock in treasury,
at cost, at 6/30/00 and 12/31/99 (2,053) (2,053)
--------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 49,103 44,799
--------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $125,299 $149,191
================================================================================
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
For the six months ended
------------------------------
JUNE 30, 2000 June 30, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,258 $ 2,288
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 3,090 3,227
Gain on the sale of BSSI (2,002) -
Changes in assets and liabilities:
(Increase)/Decrease in receivables and contracts
in progress (6,279) 2,261
Decrease in accounts payable and accrued expenses (1,342) (12,386)
(Increase)/decrease in other net assets (141) 3,552
--------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (6,674) (3,346)
--------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (2,416) (1,058)
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (1,561) (3,150)
Proceeds from the sale of certain construction assets 748 -
Proceeds from the sale of BSSI 13,500 -
--------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 12,687 (3,150)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt - 553
Repayments of long-term debt (10,110) (250)
Proceeds from exercise of stock options 43 56
--------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES (10,067) 359
--------------------------------------------------------------------------------
NET INCREASE/(DECREASE)IN CASH AND CASH EQUIVALENTS 204 (3,849)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,685 5,014
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,889 $ 1,165
================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA
Interest paid $ 469 $ 157
Income taxes paid $ 436 $ 247
================================================================================
<FN>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2000
(UNAUDITED)
NOTE 1 - SALE OF BAKER SUPPORT SERVICES, INC.
Effective June 1, 2000, the Company completed the sale of its wholly-owned
subsidiary, Baker Support Services, Inc. ("BSSI"), to SKE International LLC
("SKE"). BSSI primarily provided operations and maintenance services on U.S.
military bases worldwide, and represented a separate segment of the Company's
Civil business unit.
In exchange for 100% of the common stock of BSSI, the Company received cash
proceeds of $13.5 million, and another $0.5 million was placed in escrow by SKE
pending resolution of a post-closing purchase price adjustment. The Company
believes that the total purchase price should be approximately $14.0 million,
thereby leaving an additional payment due of nearly $0.5 million; however,
management is currently engaged in discussions with SKE to determine the final
payment that the Company will receive from the escrow. The Company currently
expects to finalize this matter and collect an additional purchase price payment
ranging from $0.2 million to $0.5 million during the third quarter of 2000.
In connection with this sale, BSSI's results of operations for the five months
ended May 31, 2000 were included in the accompanying Condensed Consolidated
Statements of Income for the three and six-month periods ended June 30, 2000. In
addition, the Company recorded a gain totaling $2.0 million associated with this
sale during the second quarter of 2000. This gain was included within the
"Other, net" caption in the aforementioned Statements of Income.
The proceeds received from this sale were used to pay off debt previously
payable to Mellon Bank, N.A. ("Mellon") under the Company's credit agreement
(see Note 6).
NOTE 2 - SALE OF CONSTRUCTION ASSETS
Certain assets held by the Company's Transportation-Construction (heavy and
highway) segment, including substantially all fixed assets and the remaining
contractual rights and obligations associated with eight active construction
projects, were sold to A&L, Inc. ("A&L") in March 2000 in exchange for cash
proceeds of $0.7 million and A&L's assumption of certain debt and lease
obligations. In connection with this sale, charges totaling $1.9 million were
previously recorded during the fourth quarter of 1999. Such charges primarily
reflected writedowns related to fixed asset impairments, lease termination costs
for construction equipment that was idle at December 31, 1999, and lease costs
for certain office space permanently idled by the restructuring. As a result of
the sale, the Company remains responsible for three active heavy and highway
construction projects, all of which are scheduled for completion by the end of
the third quarter of 2000. A&L is managing these remaining projects for the
Company.
<PAGE>
Given the mature status of these remaining projects, during the second quarter
of 2000, the Company recorded the effects of settling lease obligations
associated with certain heavy & highway construction equipment that was no
longer being fully utilized at June 30, 2000. This resulted in a related charge
totaling $1.2 million to the "Other, net" caption in the accompanying Condensed
Consolidated Statements of Income for the three and six-month periods ended June
30, 2000.
NOTE 3 - 1999 RESTRUCTURING CHARGES
During the first quarter of 1999, the Company determined that it would no longer
participate in general construction projects for buildings or transportation
infrastructure. Accordingly, the Company's Buildings unit was restructured, and
the Company recorded related charges totaling $0.8 million during the first
quarter of 1999. Such charges were included entirely within selling, general and
administrative expenses in the accompanying Condensed Consolidated Statements of
Income for the six months ended June 30, 1999, and reflected 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 4 - EARNINGS PER SHARE
Basic net income per share computations are based upon weighted averages of
8,191,159 and 8,173,248 shares outstanding for the three-month periods, and
8,189,974 and 8,170,826 for the six-month periods, ended June 30, 2000 and 1999,
respectively. Diluted net income per share computations are based upon weighted
averages of 8,212,623 and 8,229,316 shares outstanding for the three-month
periods, and 8,211,720 and 8,242,804 for the six-month periods, ended June 30,
2000 and 1999, respectively. The additional shares included in diluted shares
outstanding are entirely attributable to stock options.
NOTE 5 - BUSINESS SEGMENT INFORMATION
The Company has five operating business units. The Buildings, Energy and
Environmental units each represent separate reportable segments, while the
Transportation and Civil units each comprise two reportable segments.
Accordingly, the Company has the following seven reportable segments:
o The Buildings unit has historically provided a variety of services
including design-build, construction management, planning, program
management, general contracting, architectural and interior design,
construction inspection and constructability reviews; however, the unit's
offering of general contracting services was discontinued during 1999.
o The Civil unit includes two reportable segments. The Civil-Engineering
segment provides surveying, mapping, geographic information systems,
planning, design and construction management. The Civil-BSSI segment
principally provides operations and maintenance services on U.S. military
bases; however, this segment was sold effective June 1, 2000 (see Note 1).
o The Energy unit offers services that include operations and maintenance
services for oil and gas production facilities, onsite mechanical services
in connection with turbine overhauls and major power equipment outages, and
training services.
<PAGE>
o The Environmental unit provides a combination of engineering and consulting
services in both the public and private markets.
o The Transportation unit includes two reportable segments. The
Transportation-Engineering segment provides planning, design, program
management and software development capabilities. The
Transportation-Construction segment historically provided general
construction services related to highways, bridges, airports, busways and
other transportation facilities; however, all bidding activity ceased
during 1999 and this segment's operations are currently in the process of
being wound down.
The following tables reflect the required disclosures for the Company's seven
segments (in millions):
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
JUNE 30, 2000 June 30, 1999 JUNE 30, 2000 June 30, 1999
-------------------------------------------------- -----------------------------
<S> <C> <C> <C> <C>
TOTAL CONTRACT REVENUES:
Buildings unit $ 5.6 $ 12.7 $ 11.6 $ 35.0
Civil unit:
Engineering 17.9 18.2 38.8 33.6
BSSI 9.4 13.6 23.5 26.2
Energy unit 28.8 19.9 54.4 39.2
Environmental unit 6.3 6.4 11.9 13.2
Transportation unit:
Engineering 26.5 21.9 52.7 40.2
Construction 3.2 41.0 13.0 61.4
--------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS 97.7 133.7 205.9 248.8
Corporate 0.1 0.4 0.2 0.4
--------------------------------------------------------------------------------
TOTAL $ 97.8 $134.1 $206.1 $249.2
================================================================================
For the Three Months Ended For the Six Months Ended
--------------------------- ---------------------------
JUNE 30, 2000 June 30, 1999 JUNE 30, 2000 June 30, 1999
-------------------------------------------------- -----------------------------
INCOME/(LOSS) BEFORE TAXES:
Buildings unit $ 0.7 $ 0.3 $ 1.4 $ (0.9)
Civil unit:
Engineering 1.2 0.8 2.0 1.3
BSSI 0.2 0.4 0.4 0.4
Energy unit 0.9 (0.7) 1.7 0.6
Environmental unit 0.4 0.5 0.7 0.7
Transportation unit:
Engineering 0.8 1.3 1.9 1.7
Construction (1.6) 0.4 (2.3) (0.1)
--------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS 2.6 3.0 5.8 3.7
Corporate/Insurance 2.1 0.5 2.2 0.6
--------------------------------------------------------------------------------
TOTAL $ 4.7 $ 3.5 $ 8.0 $ 4.3
================================================================================
<PAGE>
JUNE 30, 2000 Dec. 31, 1999
--------------------------------------------------------------------------------
SEGMENT ASSETS:
Buildings unit $ 3.8 $ 7.4
Civil unit:
Engineering 21.9 23.3
BSSI - 15.8
Energy unit 41.3 40.3
Environmental unit 5.9 4.8
Transportation unit:
Engineering 33.2 28.9
Construction 7.4 17.4
--------------------------------------------------------------------------------
SUBTOTAL - SEGMENTS 113.5 137.9
Corporate/Insurance 11.8 11.3
--------------------------------------------------------------------------------
TOTAL $125.3 $149.2
================================================================================
</TABLE>
NOTE 6 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has a secured credit agreement (the "Agreement") with Mellon, which
currently 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, 2000, no borrowings were outstanding; however, letters of credit
totaling $2.2 million had been issued under the Agreement.
The Company is currently negotiating revisions to its Agreement with Mellon,
including reducing the commitment to $20 million. This reduction is expected to
better approximate the Company's needs in the near term. The revised agreement
is expected to be finalized during the third quarter of 2000.
NOTE 7 - CONTINGENCIES
The Company has reviewed the status of contingencies outstanding at June 30,
2000. Except as noted below, management believes that there have been no
significant changes to the information disclosed in its Annual Report on Form
10-K for the year ended December 31, 1999.
With respect to the Company's litigation with Universal City Development
Partners ("UCDP"), on May 1, 2000, the Company and UCDP settled their claims
related to a contact entered into by the Company's subsidiary, Baker Mellon
Stuart Construction, Inc., for the construction of the CityWalk project at the
Universal Studios theme park in Orlando, Florida. This final settlement does not
involve participation by the project policy insurer but does preserve the
Company's rights against Hellmuth, Obata & Kassabaum, Inc. ("HOK"), the company
which designed the project; the project policy insurer; and HOK's other
insurers. The Company also remains responsible for all subcontractor and vendor
claims arising from the project. The largest of these claims involves a suit
brought by ADF International, Inc., BMSCI's subcontractor for structural steel
and miscellaneous metals. Based on its assessment of the information available,
the Company believes it has made adequate provisions for these claims as of June
30, 2000.
<PAGE>
On April 10, 2000, the Company reached a settlement of the arbitration
previously reported between the Company and the former owner of GeoResearch,
Inc. The arbitration arose from the Company's September 30, 1998 purchase of
GeoResearch. Under the terms of the settlement, the parties entered into mutual
releases, and the Company paid the former owner a final payment of purchase
price totaling $0.5 million during the second quarter of 2000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following table reflects a summary of the Company's operating results for
ongoing operations and non-core businesses during the three and six-month
periods ended June 30, 2000 (in millions):
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 2000
-------------------------- --------------------------
TOTAL CONTRACT INCOME FROM TOTAL CONTRACT INCOME FROM
REVENUES OPERATIONS REVENUES OPERATIONS
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineering $ 56.0 $ 3.0 $113.6 $ 5.6
Energy 28.8 0.9 54.4 2.2
Non-Core* 12.9 - 37.9 -
Corporate/Insurance 0.1 - 0.2 -
--------------------------------------------------------------------------------
TOTAL $ 97.8 $ 3.9 $206.1 $ 7.8
================================================================================
<FN>
* Non-core operations are defined as the construction operations that are being
wound down within the Buildings and Transportation units, and the Civil-BSSI
division, which was sold effective June 1, 2000.
</FN>
</TABLE>
Given certain management and internal financial reporting changes that are
currently taking place, the Company expects to change its reporting of segment
information during the third quarter of 2000. The new segments, and the related
discussion of operating results in this Management's Discussion and Analysis
section, will reflect management's changing focus toward the ongoing Engineering
and Energy operations.
TOTAL CONTRACT REVENUES
Total contract revenues were $97.8 million for the second quarter of 2000,
compared to $134.1 million for the second quarter of 1999. An expected
second-quarter 2000 revenue reduction totaling $50.7 million was recorded in the
Company's non-core operations, as the construction divisions were further wound
down and the BSSI division was sold during the quarter. The non-core revenue
reduction was partially offset by revenue growth of $14.4 million from the
Company's ongoing operations (Engineering and Energy). Total contract revenues
for these ongoing operations were $84.9 million for the second quarter of 2000,
20% higher than the corresponding year-ago period. The Company's Engineering
divisions experienced combined top-line revenue growth of 11% for the second
quarter, primarily on the strength of continuing TEA-21 related improvements in
<PAGE>
the Transportation-Engineering division and new work in its
Buildings-Engineering division. The Energy unit posted a second-quarter revenue
increase of 44%, due to acquisition-related growth associated with the third
quarter 1999 purchase of Steen Production Service, Inc. ("Steen") and to an
improvement in domestic business associated with two new contracts to provide
operations and maintenance services to clients in the Gulf of Mexico under its
OPCO(SM) operating model. Energy's international volumes dipped slightly during
the second quarter due to a client which reverted to in-house staffing.
Total contract revenues were $206.1 million for the first six months of 2000,
compared to $249.2 million for the corresponding period in 1999. The revenue
reduction associated with the Company's non-core operations totaled $77.9
million for the first six months of 2000; however, such reduction was partially
offset by revenue growth of $34.8 million from the ongoing operations. Total
contract revenues for these ongoing operations were $168.1 million and $133.3
million for the first six months of 2000 and 1999, respectively. The Engineering
divisions posted revenue growth of 20% during the first six months, with the
largest components originating from the Transportation-Engineering,
Civil-Engineering and Buildings-Engineering operations. Growth in both Civil's
and Buildings' engineering divisions is attributable to several new contracts
and volume increases on existing projects. In Transportation-Engineering, such
growth is again associated with the TEA-21 funding increases in its geographic
markets. The Energy unit improved its revenues by 39% during the first six
months, with the increases again attributable to the Steen purchase and the two
new domestic contracts.
GROSS PROFIT
Gross profit decreased to $14.3 million in the second quarter of 2000 from $15.9
million in the second quarter of 1999. As a percentage of total contract
revenues, the second quarter's gross profit increased to 14.6% in 2000 from
11.9% in 1999. In the non-core businesses, gross margins from the former
construction divisions declined to (1.9)% for the second quarter of 2000 from
4.5% in the second quarter of 1999, while the BSSI division contributed 13.6%
and 11.5% in the second quarters of 2000 and 1999, respectively. Excluding these
non-core operations, the Company's ongoing operations posted gross profit of
$13.1 million (15.4% of total contract revenues) in the second quarter of 2000,
versus $12.1 million (17.2% of total contract revenues) in the comparable period
of 1999. The combined Engineering divisions' gross profit margin was 14.7% for
the second quarter of 2000, down from 17.4% a year ago. This overall Engineering
margin decrease is generally associated with new work on which the Company has
provided services and recognized costs, but for which the contract execution is
uncertain and/or the contract revenue recognition has been delayed until the
related contracts and change orders have been fully documented with the clients.
Satisfactory resolution of these contracts and change orders could contribute to
operating margins in future periods. In the Energy unit, gross margins rose to
16.9% in the second quarter of 2000 from 14.3% in 1999. Charges resulting from
nonrecurring project-related difficulties and the writeoff of unrecoverable
assets reduced Energy's second quarter 1999 gross profit.
Gross profit decreased to $29.1 million for the first six months of 2000 from
$29.3 million in the first six months of 1999. As a percentage of total contract
revenues, the gross profit for the first six months of 2000 increased to 14.1%
from 11.8% for the corresponding period in 1999. In the non-core operations,
gross margins from the former construction divisions declined to 2.6% for the
first half of 2000 from 4.0% in the first half of 1999, while the BSSI division
<PAGE>
contributed 12.8% and 10.6% in the first six months of 2000 and 1999,
respectively. Excluding these non-core operations, the Company's gross profit
from ongoing operations was $25.7 million (15.3% of total contract revenues) for
the first six months of 2000, versus $23.0 million (17.2% of total contact
revenues) in the comparable period of 1999. The combined Engineering divisions'
gross profit margin was 14.6% for the first half of 2000, again down from 16.9%
in the corresponding period of 1999. The reasons for this variance for the six-
month period are the same as those discussed in the preceding paragraph. The
Energy unit posted gross margins of 17.0% and 17.1% for the first six months of
2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased to $10.4 million
in the second quarter of 2000 from $12.0 million in the second quarter of 1999.
Expressed as a percentage of total contract revenues, SG&A expenses increased to
10.6% for the second quarter of 2000, as compared with 8.9% for the second
quarter of 1999. SG&A expenses for the second quarter of 2000 benefitted from
the effect of a favorable adjustment for incentive compensation based on a
change in the plan; however, such benefit was largely offset by severance
payments and abnormally high relocation expenses during the quarter. The second
quarter of 1999 also benefitted from the resolution of an outstanding corporate
employee benefits issue that had been accrued for in a prior period.
SG&A expenses decreased to $21.3 million for the first six months of 2000 from
$24.7 million for the same period in 1999. Expressed as a percentage of total
contract revenues, SG&A expenses increased to 10.3% for the first six months of
2000, as compared with 9.9% for the same period in 1999. Excluding the
restructuring charges of $0.8 million recorded in the first quarter of 1999 (see
Note 3), SG&A expenses would have been 9.6% of total contract revenues for the
first six months of 1999.
The overall decreases in SG&A dollars for the three and six month periods of
2000 are primarily attributable to the discontinuance of the Company's general
construction operations (see Notes 2 and 3). The increases in the SG&A
percentages stem from the effects of discontinuing the construction businesses,
as associated overheads have not yet been fully adjusted to reflect the lower
business volumes.
OTHER INCOME
Interest income was slightly higher for the second quarter of 2000 due to the
Company's investment of excess cash from the BSSI proceeds after paying off its
revolving credit debt due to Mellon in early June. Interest expense was also
slightly higher for the second quarter of 2000 due primarily to the increased
borrowings through May 2000 under its credit agreement with Mellon, and debt
associated with the Company's third quarter 1999 acquisition of Steen. Other
income was $1,056,000 for the second quarter of 2000, compared to other expense
of $188,000 for the second quarter of 1999. The 2000 amount reflects the
Company's $2.0 million gain on the sale of BSSI (see Note 1), as offset by the
charges totaling $1.2 million related to leased construction equipment (see Note
2).
Interest expense was higher for the first six months of 2000 due primarily to
the Company's increased borrowings under its credit agreement with Mellon, and
<PAGE>
debt associated with the Company's third quarter 1999 acquisition of Steen.
Other income was $856,000 for the first six months of 2000, compared to other
expense of $89,000 for the same period in 1999. The primary composition of the
2000 amount is discussed in the preceding paragraph.
INCOME TAXES
The Company had provisions for income taxes of 47% for the three and six-month
periods ended June 30, 2000 and 1999.
CONTRACT BACKLOG
The following table reflects a summary of the Company's backlog related to
ongoing operations and non-core businesses as of June 30, 2000 and December 31,
1999 (in millions):
<TABLE>
<CAPTION>
AS OF JUNE 30, 2000 AS OF DECEMBER 31, 1999
--------------------- ------------------------
FUNDED TOTAL FUNDED TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineering $196.6 $320.2 $204.0 $315.0
Energy 37.8 137.4 63.2 102.2
Non-Core 2.5 2.5 98.1 240.1
--------------------------------------------------------------------------------
TOTAL $236.9 $460.1 $365.3 $657.3
================================================================================
</TABLE>
The funded backlog of work to be performed was $237 million as of June 30, 2000,
compared to funded backlog of $365 million at December 31, 1999. 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 $460
million at June 30, 2000, from $657 million as of December 31, 1999.
Effective June 1, 2000, the Company sold its BSSI division and all related
funded and total backlog which totaled $26.5 million and $175.1 million,
respectively, as of May 31, 2000. In addition, during the first quarter of 2000,
the Company sold funded and total backlog totaling $32 million associated with
certain heavy and highway construction projects to A&L. Otherwise, the most
significant backlog additions during the second quarter of 2000 related to a new
three-year, $60 million contract to provide offshore operations and maintenance
services in the Energy unit, several new design contracts and change orders
totaling $36 million in the Transportation unit, and a new Civil-Engineering
project with the Federal Emergency Management Agency (FEMA) totaling $7 million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
During the quarter ended June 30, 2000, the Company received cash sale proceeds
of $13.5 million from the stock sale of its BSSI subsidiary (see Note 1). These
proceeds were first applied to totally repay the Company's borrowings totaling
$10.1 million under its credit agreement with Mellon, and the balance of $3.4
million was invested in short-term cash equivalents.
Net cash used in operating activities increased to $2.4 million for the first
six months of 2000 from $1.1 million used for the corresponding period in 1999.
A significant component of this increase resulted from a reduction in the
Company's liability to customers for amounts billed in excess of revenues earned
to date on heavy and highway construction contracts. Certain of these contracts
were sold to A&L during the first quarter of 2000.
Net cash provided by investing activities increased to $12.7 million for the
first six months of 2000, compared to net cash used in investing activities of
$3.2 million for the corresponding period of 1999. As discussed above, the
Company received $13.5 million from the June 2000 sale of BSSI, and an
additional $0.7 million from the first quarter sale of certain construction
assets to A&L (see Note 2). The lower capital expenditures in the first half of
2000 primarily reflect a decrease in spending on computer equipment within the
Engineering divisions. In addition, the 1999 capital expenditures amount
reflected nonrecurring leasehold improvement costs associated with new offices.
Net cash used in financing activities totaled $10.1 million for the first half
of 2000, compared to cash provided by financing activities of $0.4 million for
the first half of 1999. As discussed above, the Company repaid its borrowings to
Mellon totaling $10.1 million during the first half of 2000, versus having
received net proceeds from long-term debt totaling $0.3 million during the first
half of 1999.
Working capital increased to $30.0 million at June 30, 2000 from $26.1 million
at December 31, 1999. The current ratio was 1.44:1 at the end of the second
quarter of 2000, compared to 1.31:1 at year-end 1999. These improvements are
predominantly the result of the wind-down of the Company's construction
divisions and the sale of its BSSI division.
The Company has a secured credit agreement, which expires on May 31, 2001, with
Mellon. This agreement provides for a commitment of $25 million, which covers
borrowings and letters of credit. As of June 30, 2000, no borrowings were
outstanding; however, letters of credit totaling $2.2 million had been issued
under the Agreement. The Company is currently negotiating revisions to its
Agreement with Mellon, including reducing the commitment to $20 million and
extending the expiration of the facility. The commitment reduction is expected
to better approximate the Company's needs in the near term. The revised
agreement is expected to be finalized during the third quarter of 2000.
Management believes that the credit agreement will be adequate to meet its
borrowing and letter of credit requirements for at least the next year.
<PAGE>
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 significant increases in funding for
transportation infrastructure projects during the remainder of 2000 and beyond.
At this time, management believes that its funds 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.
The Company has historically been required to provide bid and performance
bonding on certain construction contracts, and continues to have a $500 million
bonding line available through Travelers Casualty & Surety Company of America.
As a result of its 1999 restructuring, the Company will become increasingly less
reliant on its bonding line during the remainder of 2000. Accordingly,
management believes that its bonding line will be sufficient to meet its bid and
performance needs for at least the next year.
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 June 30, 2000 and December 31, 1999, the Company had total
long-term debt obligations, including the current portion of those obligations,
totaling $4.9 million and $18.4 million, respectively. Of these amounts, fixed
rate obligations totaled $0.1 million and $2.7 million, and variable rate
obligations totaled $4.8 million and $15.7 million as of June 30, 2000 and
December 31, 1999, respectively. The 2000 decrease in the fixed rate obligation
amount relates primarily to the March 2000 sale of certain assets of the
Company's Transportation-Construction segment to A&L, while the reduction in the
variable rate obligations reflects the second quarter repayment of the Mellon
borrowings. 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 9.50% as of June 30, 2000, to a weighted average interest rate of
10.45%), annual interest expense would be approximately $45,000 higher in 2000
based on the outstanding balance of variable rate obligations as of June 30,
2000. 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 June 30, 2000 and 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.
<PAGE>
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, 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.
With reference to Item 3 of the Company's 1999 Annual Report on Form 10-K, the
Company had previously reported litigation with Universal City Development
Partners ("UCDP"). On May 1, 2000, the Company and UCDP settled their claims
related to a contact entered into by the Company's subsidiary, Baker Mellon
Stuart Construction, Inc. ("BMSCI"), for the construction of the CityWalk
project at the Universal Studios theme park in Orlando, Florida. This final
settlement does not involve participation by the project policy insurer but does
preserve the Company's rights against Hellmuth, Obata & Kassabaum, Inc. ("HOK"),
the company which designed the project; the project policy insurer; and HOK's
other insurers. The Company also remains responsible for all subcontractor and
vendor claims arising from the project. The most material of these claims
involves a suit brought by ADF International, Inc. ("ADF"), BMSCI's
subcontractor for structural steel and miscellaneous metals.
On November 24, 1998, ADF filed suit in the Federal District Court in the Middle
District of Florida against BMSCI and Travelers Casualty and Surety Company of
America ("Travelers"), which provided performance and payment bonds on behalf of
BMSCI, seeking damages for alleged breaches of contract relating to the project.
BMSCI and Travelers answered the complaint (and amended complaint) and BMSCI
filed a counterclaim. BMSCI and its counsel believe it has valid claims against
ADF and defenses to claims by ADF. BMSCI intends to pursue and defend these
claims vigorously. BMSCI further intends to engage in negotiations to settle all
other subcontractor and vendor claims. The Company believes it has made adequate
provisions for all subcontractor and vendor claims, including ADF, in its
consolidated financial statements as of and for the period ended June 30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
(a) The Company's annual meeting of shareholders was held on May 24, 2000.
(b) Each of management's nominees to the board of directors, as listed in
Item 4(c) below, was elected. There was no solicitation in opposition
to management's nominees.
<PAGE>
(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:
<TABLE>
<CAPTION>
NAME OF DIRECTOR VOTES FOR VOTES WITHHELD
---------------- --------- --------------
<S> <C> <C>
Robert N. Bontempo 17,051,488 1,577,379
Nicholas P. Constantakis 17,098,903 1,529,964
Thomas D. Larson 15,670,562 2,958,305
John E. Murray, Jr. 15,893,974 2,734,893
Richard L. Shaw 15,701,829 2,927,038
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 5,680,277 608,950
Roy V. Gavert, Jr. 5,684,042 605,185
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 2000, the Company filed a Form 8-K
dated June 15, 2000, and reported in Item 2 its sale, which became
effective on June 1, 2000, of a wholly-owned subsidiary, Baker Support
Services, Inc., to SKE International LLC. The financial information
required by Item 7 and the Stock Purchase Agreement by and among SKE,
the Company, and BSSI (represented as Exhibit 10.1) was also included
with this filing.
<PAGE>
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: August 9, 2000
----------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ CRAIG O. STUVER Dated: August 9, 2000
----------------------------------
Craig O. Stuver
Senior Vice President, Corporate
Controller and Treasurer
(Principal Accounting Officer)
