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, 2000
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.
AS OF SEPTEMBER 30, 2000:
------------------------
Common Stock 6,921,010 shares
Series B Common Stock 1,306,495 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
--------------------------
SEPT. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Total contract revenues $ 92,351 $129,790
Cost of work performed 78,830 123,632
--------------------------------------------------------------------------------
GROSS PROFIT 13,521 6,158
Selling, general and administrative expenses 9,515 11,592
--------------------------------------------------------------------------------
INCOME/(LOSS) FROM OPERATIONS 4,006 (5,434)
Other income/(expense):
Interest income 112 35
Interest expense (121) (197)
Other, net 196 158
--------------------------------------------------------------------------------
INCOME/(LOSS) BEFORE INCOME TAXES 4,193 (5,438)
Provision for/(benefit from) income taxes 1,849 (1,421)
--------------------------------------------------------------------------------
NET INCOME/(LOSS) $ 2,344 $ (4,017)
================================================================================
BASIC NET INCOME/(LOSS) PER SHARE $ 0.29 $ (0.49)
DILUTED NET INCOME/(LOSS) PER SHARE $ 0.28 $ (0.49)
================================================================================
<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 nine months ended
-------------------------
SEPT. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Total contract revenues $298,407 $378,974
Cost of work performed 255,800 343,472
--------------------------------------------------------------------------------
GROSS PROFIT 42,607 35,502
Selling, general and administrative expenses 30,830 36,283
--------------------------------------------------------------------------------
INCOME/(LOSS) FROM OPERATIONS 11,777 (781)
Other income/(expense):
Interest income 183 119
Interest expense (784) (531)
Other, net 1,051 72
--------------------------------------------------------------------------------
INCOME/(LOSS) BEFORE INCOME TAXES 12,227 (1,121)
Provision for income taxes 5,624 608
--------------------------------------------------------------------------------
NET INCOME/(LOSS) $ 6,603 $ (1,729)
================================================================================
BASIC NET INCOME/(LOSS) PER SHARE $ 0.81 $ (0.21)
DILUTED NET INCOME/(LOSS) PER SHARE $ 0.80 $ (0.21)
================================================================================
<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 SEPT. 30, 2000 Dec. 31, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents $ 4,085 $ 3,685
Receivables 62,537 77,964
Cost of contracts in progress and estimated
earnings, less billings 28,505 20,803
Prepaid expenses and other 5,910 7,363
--------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 101,037 109,815
--------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 11,589 17,120
--------------------------------------------------------------------------------
OTHER ASSETS
Goodwill and other intangible assets, net 11,151 14,563
Other assets 3,530 7,693
--------------------------------------------------------------------------------
TOTAL OTHER ASSETS 14,681 22,256
--------------------------------------------------------------------------------
TOTAL ASSETS $127,307 $149,191
================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
--------------------------------------------------------------------------------
CURRENT LIABILITIES
Current portion of long-term debt $ 2,242 $ 3,526
Accounts payable 22,103 28,862
Accrued employee compensation 9,647 10,462
Accrued insurance 6,468 7,884
Other accrued expenses 31,438 24,553
Excess of billings on contracts in progress
over cost and estimated earnings 2,848 8,455
--------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 74,746 83,742
--------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt 67 14,867
Other 851 5,783
--------------------------------------------------------------------------------
TOTAL LIABILITIES 75,664 104,392
--------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000
shares, issued 7,223,999 and 7,170,663 shares at
09/30/00 and 12/31/99, respectively 7,224 7,171
Series B Common Stock, par value $1, authorized
6,000,000 shares, issued 1,306,495 and 1,313,816
shares at 09/30/00 and 12/31/99, respectively 1,306 1,314
Additional paid-in capital 37,283 37,084
Retained earnings 7,883 1,283
Less 302,989 shares of Common Stock in treasury,
at cost, at 09/30/00 and 12/31/99 (2,053) (2,053)
--------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' INVESTMENT 51,643 44,799
--------------------------------------------------------------------------------
TOTAL LIABILITIES & SHAREHOLDERS' INVESTMENT $127,307 $149,191
================================================================================
<FN>
The accompanying notes are an integral part of the condensed condolidated
financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
For the nine months ended
-------------------------
SEPT. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 6,603 $ (1,729)
Adjustments to reconcile net income/(loss)to net
cash provided by/(used in) operating activities:
Depreciation and amortization 4,387 5,696
Gain on the sale of BSSI (2,157) -
Changes in assets and liabilities:
(Increase)/decrease in receivables and contracts
in progress (10,477) 6,604
Decrease in accounts payable and accrued expenses (845) (11,892)
Decrease in other net assets 321 2,997
--------------------------------------------------------------------------------
TOTAL ADJUSTMENTS (8,771) 3,405
--------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) OPERATING ACTIVITIES (2,168) 1,676
--------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,154) (4,242)
Investment in Steen Production Service, Inc.,
net of cash acquired - (4,918)
Proceeds from the sale of certain construction assets 748 -
Proceeds from the sale of BSSI 13,867 -
--------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 12,461 (9,160)
--------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt - 7,548
Repayments of long-term debt (10,115) (2,261)
Proceeds from exercise of stock options 222 70
--------------------------------------------------------------------------------
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES (9,893) 5,357
--------------------------------------------------------------------------------
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS 400 (2,127)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,685 5,014
--------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,085 $ 2,887
================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 974 $ 130
Income taxes paid $ 954 $ 60
================================================================================
<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 SEPTEMBER 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. Management's
discussions with SKE during the third quarter of 2000 resulted in an additional
payment of approximately $0.4 million of the $0.5 million escrowed by SKE.
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 nine-month periods ended September 30,
2000. In addition, the Company recorded a gain totaling $2.2 million associated
with this sale. 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 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 two active heavy and highway
construction projects, which are scheduled for completion by the end of the
year. A&L is managing these remaining projects for the Company.
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
<PAGE>
longer being fully utilized at June 30, 2000. The Company recorded a charge
totaling $1.2 million to the "Other, net" caption in the accompanying Condensed
Consolidated Statements of Income for the period ended June 30, 2000. During the
three month period ended September 30, 2000, the Company sold the equipment and
settled the outstanding lease obligations recording other income of $0.2
million.
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 nine months ended September 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
8,202,620 and 8,177,177 shares outstanding for the three-month periods, and
8,194,220 and 8,172,966 for the nine-month periods, ended September 30, 2000 and
1999, respectively. Diluted net income per share computations are based upon
weighted averages of 8,257,712 and 8,220,267 shares outstanding for the
three-month periods, and 8,235,761 and 8,235,689 for the nine-month periods,
ended September 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 Nine Months Ended
----------------------------- -----------------------------
SEPT. 30, 2000 Sept. 30, 1999 SEPT. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL CONTRACT REVENUES:
Buildings unit $ 5.1 $ 10.7 $ 16.7 $ 45.7
Civil unit:
Engineering 19.0 16.7 57.8 50.2
BSSI - 14.0 23.5 40.2
Energy unit 31.7 17.5 86.1 56.7
Environmental unit 5.3 8.1 17.2 21.3
Transportation unit:
Engineering 28.5 22.9 81.2 63.1
Construction 2.6 39.6 15.6 101.0
--------------------------------------------------------------------------------
Subtotal - Segments 92.2 129.5 298.1 378.2
Corporate 0.1 0.3 0.3 0.8
--------------------------------------------------------------------------------
TOTAL $ 92.3 $129.8 $298.4 $379.0
================================================================================
For the Three Months Ended For the Nine Months Ended
----------------------------- -----------------------------
SEPT. 30, 2000 Sept. 30, 1999 SEPT. 30, 2000 Sept. 30, 1999
--------------------------------------------------------------------------------
INCOME/(LOSS) BEFORE TAXES:
Buildings unit $ 1.0 $ (5.2) $ 2.4 $ (6.1)
Civil unit:
Engineering 0.5 (0.3) 2.5 1.0
BSSI - 0.9 0.4 1.3
Energy unit 1.3 1.0 3.0 1.6
Environmental unit 0.1 0.5 0.8 1.2
Transportation unit:
Engineering 1.1 1.1 3.0 2.9
Construction 0.2 (3.5) (2.1) (3.7)
--------------------------------------------------------------------------------
Subtotal - Segments 4.2 (5.5) 10.0 (1.8)
Corporate/Insurance - 0.1 2.2 0.7
--------------------------------------------------------------------------------
TOTAL $ 4.2 $ (5.4) $ 12.2 $ (1.1)
================================================================================
<PAGE>
SEPT. 30, 2000 Dec. 31, 1999
--------------------------------------------------------------------------------
SEGMENT ASSETS:
Buildings unit $ 4.5 $ 7.4
Civil unit:
Engineering 23.1 23.3
BSSI - 15.8
Energy unit 42.6 40.3
Environmental unit 4.8 4.8
Transportation unit:
Engineering 37.6 28.9
Construction 15.6 17.4
--------------------------------------------------------------------------------
Subtotal - Segments 128.2 137.9
Corporate/Insurance (0.9) 11.3
--------------------------------------------------------------------------------
TOTAL $127.3 $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 $20 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, 2000, no borrowings were outstanding; however, letters of credit
totaling $2.2 million had been issued under the Agreement.
NOTE 7 - CONTINGENCIES
The Company has reviewed the status of contingencies outstanding at September
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.("BMSCI"), for the construction of the CityWalk project
at the Universal Studios theme park in Orlando, Florida. This final settlement
preserves 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. BMSCI has engaged in negotiations and reached
settlements with the other subcontractors and vendors who submitted claims
arising from this project. Based on its assessment of the information available,
the Company believes it has made adequate provisions for these claims as of
September 30, 2000.
<PAGE>
NOTE 8 - RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances in order to
conform to the current year presentation.
NOTE 9 - RECENT PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101") which summarizes the SEC's interpretation of revenue recognition. The
Company does not intend to adopt SAB 101 as it currently records revenue in
accordance with Statement of Accounting Position 81-1, "Accounting for
Performance of Construction-Type and Certain Production-Type Contracts," which
is exempt from SAB 101 interpretations.
In June 1998 and June 2000, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities," and
SFAS No. 138, "Accounting for Certain Derivative Instruments...an Amendment of
FAS 133," respectively, which establishes accounting and reporting standards for
derivative instruments and hedging activities. It requires the Company to
recognize all derivatives as either assets or liabilities in the balance sheet
and measure those instruments at fair value. It further provides criteria for
derivative instruments to be designated as fair value, cash flow, or foreign
currency hedges, and establishes accounting standards for reporting changes in
the fair value of the derivative instruments. Upon adoption, the Company will be
required to adjust hedging instruments to fair value in the balance sheet and
recognize the offsetting gains or losses as adjustments to be reported in net
income or other comprehensive income, as appropriate. The Company will adopt
SFAS No. 133 and 138 in fiscal 2001. Management does not believe the adoption of
SFAS No. 133 and 138 will have a material effect on the Company's results of
operations or financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
------------------------------------------------------------------------
RESULTS OF OPERATIONS
The following tables reflect a summary of the Company's operating results for
ongoing operations and non-core businesses during the three and nine-month
periods ended September 30, 2000 (in millions):
Total Contract Revenues
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineering $ 57.9 $ 51.3 $171.5 $145.0
Energy 31.7 17.5 86.1 56.7
Non-Core* 2.6 60.7 40.5 176.5
Corporate/Insurance 0.1 0.3 0.3 0.8
--------------------------------------------------------------------------------
TOTAL $ 92.3 $129.8 $298.4 $379.0
--------------------------------------------------------------------------------
<PAGE>
Income/(Loss) from Operations
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPT. 30, 2000 SEPT. 30, 1999 SEPT. 30, 2000 SEPT. 30, 1999
--------------------------------------------------------------------------------
Engineering $ 2.8 $ 0.8 $ 8.4 $4.1
Energy 1.6 0.9 3.8 1.6
Non-Core* (0.4) (7.1) (0.4) (6.8)
Corporate/Insurance 0.0 0.0 (0.1) 0.3
--------------------------------------------------------------------------------
TOTAL $ 4.0 $ (5.4) $ 11.7 $ (0.8)
--------------------------------------------------------------------------------
<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
anticipated to take place, the Company expects to change its reporting of
segment information for the 2001 year. The expected 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. However, the following discussion also
provides information to explain changes in total contract revenues and income
before taxes for the segments reported in Footnote 5.
TOTAL CONTRACT REVENUES
Total contract revenues were $92.3 million for the third quarter of 2000,
compared to $129.8 million for the third quarter of 1999. An expected
third-quarter 2000 revenue reduction totaling $58.1 million was recorded in the
Company's non-core operations, as the Transportation Construction division and
the construction portion of the Buildings segment were further wound down and
the BSSI unit was sold. The non-core revenue reduction was partially offset by
revenue growth of $20.8 million from the Company's ongoing operations
(Engineering and Energy). Total contract revenues for these ongoing operations
were $89.6 million for the third quarter of 2000, 30% higher than the
corresponding year-ago period. The Company's Engineering divisions experienced
combined top-line revenue growth of 13% for the third quarter, primarily on the
strength of continuing TEA-21 related improvements in the
Transportation-Engineering division and new work in its Building-Engineering
division. The Energy unit posted a third-quarter revenue increase of 81%, 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.
Total contract revenues were $298.4 million for the first nine months of 2000,
compared to $379.0 million for the corresponding period in 1999. The revenue
reduction associated with the Company's non-core operations totaled $136.0
million for the first nine months of 2000 reflecting wind-down of the
Transportation Construction division and the construction portion of the
Buildings segment as well as sale of the BSSI unit; however, such reduction was
partially offset by revenue growth of $55.4 million from the ongoing operations.
Total contract revenues for these ongoing operations were $257.6 million and
$201.7 million for the first nine months of 2000 and 1999, respectively. The
Engineering divisions posted revenue growth of 18% during the first nine months,
with the largest components originating from the Transportation-Engineering,
Civil-Engineering and Buildings-Engineering operations. Growth in both Civil's
<PAGE>
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 52% during the first nine
months, with the increases again attributable to the Steen purchase and the two
new domestic contracts.
GROSS PROFIT
Gross profit increased to $13.5 million in the third quarter of 2000 from $6.2
million in the third quarter of 1999. As a percentage of total contract
revenues, the third quarter's gross profit increased to 14.6% in 2000 from 4.7%
in 1999. In the non-core businesses, gross margins from the former construction
divisions increased to (7.2)% for the third quarter of 2000 from (14.8)% in the
third quarter of 1999, while the BSSI division contributed 0.0% and 14.0% in the
third quarters of 2000 and 1999, respectively. Excluding these non-core
operations, the Company's ongoing operations posted gross profit of $13.7
million (15.3% of total contract revenues) in the third quarter of 2000, versus
$11.1 million (16.1% of total contract revenues) in the comparable period of
1999. The combined Engineering divisions' gross profit margin was 14.0% for the
third quarter of 2000, down from 14.5% 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 decreased
to 18.6% in the third quarter of 2000 from 21.6% in 1999.
Gross profit increased to $42.6 million for the first nine months of 2000 from
$35.5 million in the first nine months of 1999. As a percentage of total
contract revenues, the gross profit for the first nine months of 2000 increased
to 14.3% from 9.4% for the corresponding period in 1999. In the non-core
operations, gross margins from the former construction divisions increased to
2.2% for the first nine months of 2000 from (1.5)% in the first nine months of
1999, while the BSSI division contributed 12.9% and 11.7% in the first nine
months of 2000 and 1999, respectively. Excluding these non-core operations, the
Company's gross profit from ongoing operations was $39.2 million (15.2% of total
contract revenues) for the first nine months of 2000, versus $32.9 million
(16.9% of total contact revenues) in the comparable period of 1999. The combined
Engineering divisions' gross profit margin was 14.2% for the first nine months
of 2000, again down from 15.2% in the corresponding period of 1999. The reasons
for this variance for the nine-month period are the same as those discussed in
the preceding paragraph. The Energy unit posted gross margins of 17.9% and 18.5%
for the first nine months of 2000 and 1999, respectively.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses decreased to $9.5 million
in the third quarter of 2000 from $11.6 million in the third quarter of 1999.
Expressed as a percentage of total contract revenues, SG&A expenses increased to
10.3% for the third quarter of 2000, as compared with 8.9% for the third quarter
of 1999. SG&A expenses for the third quarter of 2000 benefitted from the
favorable effect of an adjustment to employee benefit accruals.
<PAGE>
SG&A expenses decreased to $30.8 million for the first nine months of 2000 from
$36.3 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 nine months of
2000, as compared with 9.6% 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 10.1% of total contract revenues for the
first nine months of 1999.
The overall decreases in SG&A dollars for the three and nine 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 higher and interest expense was lower for the three month
period ended September 30, 2000, mainly due to the Company's investment of
excess cash from the BSSI proceeds and paying off its revolving credit debt due
to Mellon in early June. In addition, almost all of the interest expense during
the third quarter of 2000 was associated with the Company's third quarter 1999
acquisition of Steen. Other income was $196,000 for the third quarter of 2000,
compared to other income of $158,000 for the third quarter of 1999. The 2000
amount reflects a $240,000 gain associated with the sale of certain leased
construction equipment associated with the A&L sale (See Note 2).
Interest expense was higher for the first nine months of 2000 due primarily to
the Company's increased borrowings under its credit agreement with Mellon, and
debt associated with the Company's third quarter 1999 acquisition of Steen.
Other income was $1,051,000 for the first nine months of 2000, compared to other
income of $72,000 for the same period in 1999. The primary composition of the
2000 amount includes a $2.0 million gain on the sale of BSSI (see Note 1), as
offset by the charges totaling $1.0 million related to leased construction
equipment (see Note 2).
INCOME/(LOSS) BEFORE TAXES
Total income before income taxes was $4.2 million for the third quarter of 2000,
compared to a loss of $5.5 million for the third quarter of 1999. In the
non-core businesses, income before tax increased in the
Transportation-Construction and the construction unit of the Buildings segment
because of the absence of 1999 charges to close out projects during wind down.
BSSI was sold during the second quarter. Civil-Engineering income before tax
increased because of a reduction of the goodwill resulting from the purchase
price adjustment and the reduction of operating losses due to the wind down of
the acquired legacy projects associated with the GeoResearch unit in 1999.
Energy unit income before tax increased as a result of increased project volume.
Environmental unit income before tax was lower because of lower volume following
a contract expiration and reduced funding of a government contract.
Total income before income taxes was $10.0 million for the first nine months of
2000, compared to a loss of $1.8 million for the corresponding period in 1999.
In the non-core businesses, income before tax increased in the
Transportation-Construction and the construction unit of the Buildings segment
because of reduced charges in 2000 to close out projects during wind down.
Income before tax at BSSI was lower because reserve adjustments for certain
contracts and because only five months are included in 2000 compared to nine
months in 1999. Civil-Engineering income before tax increased because of a
<PAGE>
reduction of the goodwill resulting from the purchase price adjustment and the
reduction of operating losses due to the wind down of the acquired legacy
projects associated with the GeoResearch unit in 1999. Energy unit income
beforetax increased as a result of increased project volume. Environmental unit
income before tax was lower because of lower volumes following a contract
expiration and reduced funding of a government contract.
INCOME TAXES
The Company reduced its effective rate for income taxes for the nine months
ended September 30, 2000 from 47% to 46%. This reduction was directly
attributable to a change in the mix of where monies were earned within the
different jurisdictions. Additionally, third quarter income tax amounts in 2000
and 1999 have been adjusted to achieve the year to date effective rate
expectations. The Company's effective income tax rate for the first nine months
of 1999 was 47%.
CONTRACT BACKLOG
The following table reflects a summary of the Company's backlog related to
ongoing operations and non-core businesses as of September 30, 2000 and December
31, 1999 (in millions):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 2000 AS OF DECEMBER 31, 1999
-------------------------- ------------------------
FUNDED TOTAL FUNDED TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Engineering $193.7 $316.2 $204.0 $315.0
Energy 32.3 142.5 63.2 102.2
Non-Core .7 .7 98.1 240.1
--------------------------------------------------------------------------------
TOTAL $226.7 $459.4 $365.3 $657.3
--------------------------------------------------------------------------------
</TABLE>
The funded backlog of work to be performed was $226.7 million as of September
30, 2000, compared to funded backlog of $365.3 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 $459.4 million at September 30, 2000, from $657.3 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 third quarter of 2000 related to a new
three-year, $6 million contract to provide offshore operations and maintenance
services in the Energy unit and several new Transportation-Engineering projects
totaling $13.2 million.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company received cash sale proceeds of $13.9 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 $3.8 million was invested in short-term cash
equivalents.
Net cash used in operating activities was $2.2 million for the first nine months
of 2000 compared to net cash provided by operating activities of $1.7 million
for the corresponding period in 1999. A significant component of this change
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 $12.5 million for the
first nine months of 2000, compared to net cash used in investing activities of
$9.2 million for the corresponding period of 1999. As discussed above, the
Company received $13.9 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 nine
months 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 $9.9 million for the first nine
months of 2000, compared to cash provided by financing activities of $5.4
million for the first nine months of 1999. As discussed above, the Company
repaid its borrowings to Mellon totaling $10.1 million during the first nine
months of 2000, versus having received net proceeds from long-term debt totaling
$5.3 million during the first nine months of 1999.
Working capital increased to $26.3 million at September 30, 2000 from $26.1
million at December 31, 1999. The current ratio was 1.35:1 at the end of the
third 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 also made its scheduled principal and interest payment of $3.0
million on a note payable which was given as partial consideration in the Steen
acquisition. Additionally, the sale of the leased assets of the Heavy and
Highway unit for which the Company recorded a provision in the second quarter
used cash of $1.0 million to settle.
The Company amended and restated its secured credit agreement, which expires on
May 31, 2001, with its bank. This amended agreement reduces the committed
facility from $25 million to $20 million. As of September 30, 2000, no
borrowings were outstanding; however, letters of credit totaling $2.2 million
had been issued under the Agreement. The commitment reduction is expected to
better approximate the Company's needs in the near term.
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.
<PAGE>
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 lin e 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 September 30, 2000 and December 31, 1999, the Company had
total long-term debt obligations, including the current portion of those
obligations, totaling $2.3 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 $2.2 million and $15.7 million as of September
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 and a third quarter payment to the former owner's of
Steen Production Services Inc. 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 September 30, 2000, to a weighted average
interest rate of 10.45%), annual interest expense would be approximately $21,000
higher in 2000 based on the outstanding balance of variable rate obligations as
of September 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 September 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 contract 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 preserves 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. Trial in this matter commenced September 12, 2000 and
ended on September 20, 2000. Post-Trial Briefs are to be filed by the parties on
or before November 1, 2000. A decision by the court could occur prior to
year-end. BMSCI has engaged in negotiations and reached settlements with the
other subcontractors and vendors who submitted claims arising from this project.
The Company has previously made what it believes to be an adequate provision for
the ADF claim and this amount has been reclassified to an accrued liability in
its consolidated financial statements as of and for the period ended September
30, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) The following exhibits are included herewith as a part of the Report:
10.3 First Amended and Restated Loan Agreement by and among Michael
Baker Corporation and Subsidiaries and Mellon Bank, N.A. dated
as of September 27, 2000, filed herewith. (Schedules and Exhibits
omitted.)
(b) Reports on Form 8-K - During the third quarter ended September 30, 2000,
the Company filed no reports on Form 8-K.
<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: November 03, 2000
----------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
