UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
Commission file number 1-6627
MICHAEL BAKER CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airside Business Park, 100 Airside Drive, Moon Township, PA 15108
----------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(412) 269-6300
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 30, 2004:
Common Stock 8,408,655 shares
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements have been prepared by
Michael Baker Corporation ("the Company"), 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 accounting principles generally accepted in the United States of
America have been condensed or omitted pursuant to such rules and regulations,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The statements reflect all adjustments which are, in
the opinion of management, necessary for a fair presentation of the results for
the periods presented. All such adjustments are of a normal and recurring nature
unless specified otherwise. These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's latest Annual Report on Form 10-K.
This Quarterly Report on Form 10-Q, particularly the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section in Part
I, contains forward-looking statements concerning future operations and
performance of the Company. Forward-looking statements are subject to market,
operating and economic risks and uncertainties that may cause the Company's
actual results in future periods to be materially different from any future
performance suggested herein. Factors that may cause such differences include,
among others: increased competition, increased costs, changes in general market
conditions, changes in industry trends, changes in the regulatory environment,
changes in anticipated levels of government spending on infrastructure, changes
in loan relationships or sources of financing, changes in management, changes in
information systems, and costs to comply with the requirements of the
Sarbanes-Oxley Act of 2002. Such forward-looking statements are made pursuant to
the Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995.
-2-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
--------------------------
JUNE 30, 2004 June 30, 2003
-----------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Total contract revenues $ 130,603 $ 104,799
Cost of work performed 106,613 89,780
---------------------------------------------------------------------------------------
Gross profit 23,990 15,019
Selling, general and administrative expenses 17,856 13,869
---------------------------------------------------------------------------------------
Income from operations 6,134 1,150
Other income/(expense):
Interest income 28 12
Interest expense (52) (228)
Other, net 232 (812)
---------------------------------------------------------------------------------------
Income before income taxes 6,342 122
Provision for income taxes 2,737 54
---------------------------------------------------------------------------------------
NET INCOME $ 3,605 $ 68
=======================================================================================
BASIC NET INCOME PER SHARE $ 0.43 $ 0.01
DILUTED NET INCOME PER SHARE $ 0.42 $ 0.01
=======================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-3-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the six months ended
------------------------
JUNE 30, 2004 June 30, 2003
-----------------------------------------------------------------------------------------
(In thousands, except
per share amounts)
Total contract revenues $ 255,607 $ 204,098
Cost of work performed 210,676 175,633
---------------------------------------------------------------------------------------
Gross profit 44,931 28,465
Selling, general and administrative expenses 33,412 27,426
---------------------------------------------------------------------------------------
Income from operations 11,519 1,039
Other income/(expense):
Interest income 33 16
Interest expense (170) (314)
Other, net 805 (798)
---------------------------------------------------------------------------------------
Income/(loss) before income taxes 12,187 (57)
Provision for/(benefit from) income taxes 5,484 (28)
---------------------------------------------------------------------------------------
NET INCOME/(LOSS) $ 6,703 $ (29)
=======================================================================================
BASIC NET INCOME PER SHARE $ 0.80 $ 0.00
DILUTED NET INCOME PER SHARE $ 0.79 $ 0.00
=======================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004
ASSETS (UNAUDITED) Dec. 31, 2003
------------------------------------------------------------------------------------------------------------------
(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 11,039 $ 9,274
Receivables, net 82,666 74,940
Cost of contracts in progress and estimated earnings, less billings 49,053 51,620
Prepaid expenses and other 4,704 9,899
------------------------------------------------------------------------------------------------------------------
Total current assets 147,462 145,733
------------------------------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 16,694 17,402
OTHER ASSETS
Goodwill and other intangible assets, net 9,090 9,233
Other assets 7,120 7,205
------------------------------------------------------------------------------------------------------------------
Total other assets 16,210 16,438
------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 180,366 $ 179,573
==================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Short-term debt $ 1,079 $ --
Accounts payable 33,395 28,279
Accrued employee compensation 24,513 15,394
Accrued insurance 8,942 10,224
Other accrued expenses 18,611 20,464
Excess of billings on contracts in progress over cost and estimated
earnings 11,132 16,611
------------------------------------------------------------------------------------------------------------------
Total current liabilities 97,672 90,972
------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Long-term debt -- 13,481
Other liabilities 2,460 2,539
Commitments and contingencies -- --
------------------------------------------------------------------------------------------------------------------
Total liabilities 100,132 106,992
------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,799,892 and 8,711,235 shares at 6/30/04 and 12/31/03, respectively 8,800 8,711
Additional paid-in-capital 39,204 38,298
Retained earnings 36,180 29,477
Accumulated other comprehensive loss (895) (912)
Unearned compensation expense (102) (40)
Less - 391,237 shares of Common Stock in treasury, at cost, at
6/30/04 and 12/31/03 (2,953) (2,953)
------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 80,234 72,581
------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 180,366 $ 179,573
==================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-5-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended
------------------------
JUNE 30, 2004 June 30, 2003
-----------------------------------------------------------------------------------------------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 6,703 $ (29)
Adjustments to reconcile net income/(loss) to net
cash provided by/(used in) operating activities:
Depreciation and amortization 2,269 2,553
Impairment of Energy Virtual Partners -- 800
Changes in assets and liabilities:
Increase in receivables and contracts in progress (10,646) (34,801)
Increase in accounts payable and accrued expenses 11,018 1,761
Decrease in other net assets 5,403 92
----------------------------------------------------------------------------------------------------
Total adjustments 8,044 (29,595)
----------------------------------------------------------------------------------------------------
Net cash provided by/(used in) operating activities 14,747 (29,624)
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (1,405) (3,417)
----------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,405) (3,417)
----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
(Repayments of)/proceeds from long-term debt (12,402) 33,257
Payments to acquire treasury stock -- (690)
Proceeds from the exercise of stock options 825 49
----------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (11,577) 32,616
----------------------------------------------------------------------------------------------------
Net increase/(decrease) in cash and cash equivalents 1,765 (425)
Cash and cash equivalents, beginning of year 9,274 9,885
----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,039 $ 9,460
====================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 213 $ 306
Income taxes paid $ 479 $ 3,357
====================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-6-
MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIODS ENDED JUNE 30, 2004
(UNAUDITED)
NOTE 1 - EARNINGS PER SHARE
The following table summarizes the Company's weighted average shares outstanding
for the three and six-month periods ended June 30, 2004 and 2003. The additional
shares included in diluted shares outstanding are entirely attributable to stock
options.
For the three months ended For the six months ended
-------------------------- ------------------------
Weighted average shares outstanding 2004 2003 2004 2003
---------------------------------------------------------------------------------------------------------
Basic 8,402,482 8,312,003 8,361,449 8,328,837
Diluted 8,518,361 8,360,555 8,471,186 8,328,837
---------------------------------------------------------------------------------------------------------
As of June 30, 2004 and 2003, the Company had 199,404 and 328,790 stock options
outstanding, respectively, which were not included in the computations of
diluted shares outstanding for the respective six-month periods because the
option exercise prices were greater than the average market prices of the common
shares. Such options could potentially dilute basic earnings per share in future
periods. If the Company would have earned a profit during the six months ended
June 30, 2003, 48,357 common equivalent shares would have been added to basic
weighted average shares outstanding to compute diluted weighted average shares
outstanding.
NOTE 2 - CAPITAL STOCK
During 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of the Company's Common Stock in the open market. In the first quarter of
2003, the Company reactivated this share repurchase program and repurchased
80,400 treasury shares at market prices ranging from $7.90 to $8.81 per share,
for a total price of $690,000. As of June 30, 2004, treasury shares totaling
414,689 had been repurchased under this program. In February 2003, the Board of
Directors authorized the Company to repurchase up to 500,000 additional shares.
As of June 30, 2004, no shares had been repurchased under the February 2003
authorization. The Company intends to use its treasury shares to fund future
employer contributions to its 401(k) benefit plan and/or in connection with
future business acquisitions.
NOTE 3 - BUSINESS SEGMENT INFORMATION
The Company's business segments reflect how management makes resource decisions
and assesses its performance. The Company has the following three reportable
segments:
o The Engineering segment provides a variety of design and related consulting
services. Such services include program management, design-build,
construction management, consulting, planning, surveying, mapping,
geographic information systems, architectural and interior design,
construction inspection, constructability reviews, software development,
site assessment and restoration, strategic regulatory analysis, regulatory
compliance, and advanced management systems.
o The Energy segment provides a full range of Total Asset Management services
for operating energy production facilities worldwide. These services range
from complete outsourcing solutions to specific services such as training,
personnel recruitment, pre-operations engineering, maintenance management
systems, field operations and maintenance, procurement, and supply chain
management. Many of
-7-
these service offerings are enhanced by the utilization of this segment's
Managed Services (which includes services formerly known as OPCO(R))
operating model as a service delivery method.
o The Non-Core segment includes activity associated with the former buildings
and transportation construction operations that are being wound down.
The following table reflects the required disclosures for the Company's
reportable segments (in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
-------------------------------------------------------------------------------
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2004 June 30, 2003 JUNE 30, 2004 June 30, 2003
-----------------------------------------------------------------------------------------------------------------------
ENGINEERING
Revenue $ 81.1 $ 61.6 $ 156.0 $ 120.3
Income from operations before Corporate
overhead 7.8 3.5 14.9 6.4
Less: Corporate overhead (2.8) (3.0) (5.5) (6.0)
-----------------------------------------------------------------------------------------------------------------------
Income from operations 5.0 0.5 9.4 0.4
-----------------------------------------------------------------------------------------------------------------------
ENERGY
Revenue 49.5 43.2 99.6 83.8
Income from operations before Corporate
overhead 2.1 2.3 4.6 3.5
Less: Corporate overhead (1.2) (1.0) (2.4) (2.1)
-----------------------------------------------------------------------------------------------------------------------
Income from operations 0.9 1.3 2.2 1.4
-----------------------------------------------------------------------------------------------------------------------
NON-CORE
Revenue -- -- -- --
Income/(loss) from operations before
Corporate overhead -- (0.1) 0.2 0.2
Less: Corporate overhead -- -- -- --
-----------------------------------------------------------------------------------------------------------------------
Income/(loss) from operations -- (0.1) 0.2 0.2
-----------------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Revenues 130.6 104.8 255.6 204.1
Income from operations before Corporate
overhead 9.9 5.7 19.7 10.1
Less: Corporate overhead (4.0) (4.0) (7.9) (8.1)
-----------------------------------------------------------------------------------------------------------------------
Income from operations 5.9 1.7 11.8 2.0
-----------------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance income/(expense) 0.2 (0.5) (0.3) (1.0)
-----------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 6.1 $ 1.2 $ 11.5 $ 1.0
=======================================================================================================================
-8-
JUNE 30, 2004 Dec. 31, 2003
----------------------------------------------------------------------------
Segment assets:
Engineering $ 96.2 $ 99.9
Energy 72.9 63.9
Non-Core 0.9 0.9
----------------------------------------------------------------------------
Subtotal - segments 170.0 164.7
Corporate/Insurance 10.4 14.9
----------------------------------------------------------------------------
Total $ 180.4 $ 179.6
============================================================================
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through June 30, 2005. The commitment includes the sum of the
principal amount of revolving credit loans outstanding and the aggregate face
value of outstanding letters of credit. As of June 30, 2004, borrowings totaling
$1.1 million were outstanding under the Agreement, along with outstanding
letters of credit totaling $7.0 million. The borrowings were classified as a
current liability at June 30, 2004 since the maturity date of the Agreement was
within one year of the balance sheet date.
NOTE 5 - CONTINGENCIES
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. The Company requires its insurers to
meet certain minimum financial ratings at the time the coverages are placed;
however, insurance recoveries remain subject to the risk that the insurer will
be financially able to pay the claims as they arise. The Company is insured with
respect to its workers' compensation and general liability exposures subject to
deductibles or self-insured retentions. Loss provisions for these exposures are
recorded based upon the Company's estimates of the aggregate liability for
claims incurred. Such estimates utilize certain actuarial assumptions followed
in the insurance industry.
The Company is self-insured for its primary layer of professional liability
insurance through a wholly-owned captive insurance subsidiary. The secondary
layer of the professional liability insurance continues to be provided,
consistent with industry practice, under a "claims-made" insurance policy placed
with an independent insurance company. Under claims-made policies, coverage must
be in effect when a claim is made. This insurance is subject to standard
exclusions.
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. In October 2001, the Pennsylvania Insurance
Commissioner placed Reliance into liquidation. The Company remains uncertain at
this time what effect this action will have on any claim the Company or its
subsidiaries may have for insurance coverage under policies issued by Reliance
with respect to past years. A wholly-owned subsidiary of the Company was subject
to one substantial claim which fell within the Reliance coverage period. This
claim was settled in the amount of $2.5 million, and payment was made by the
Company in April 2003. Due to the liquidation of Reliance, the Company is
currently uncertain what amounts paid to settle this claim will be recoverable
under the insurance policy with Reliance. The Company is pursuing a claim in the
Reliance liquidation and believes that some recovery will result from the
liquidation, but the amount of such recovery cannot currently be estimated. The
Company had no related receivables recorded from Reliance as of June 30, 2004.
-9-
In July 2001, the Company announced that it had become aware that certain
activities related to the operations of a 53% owned Nigerian subsidiary engaged
in energy-related operations are the subject of an inquiry by the U.S.
Department of Justice. The Company acquired the Nigerian subsidiary as part of
its acquisition of the Overseas Technical Services companies in 1993. The
inquiry appears to be focused upon payments made to certain individuals in
connection with the subsidiary's operations in Nigeria as they relate to
potential violations of the Foreign Corrupt Practices Act and other relevant
statutes. The Company retained legal counsel to represent it in this matter and
initiated an internal investigation of these issues. The Company has cooperated
fully with the government's inquiry; however, there has been no recent activity
in this matter. At this time, the Company is uncertain but does not expect the
costs of its investigation, its cooperation with the government's inquiry or the
outcome thereof, to have a material adverse financial impact on its future
financial results. However, the government's inquiry has not been concluded and
the Company's assessment of the outcome may vary if the matter proceeds.
The Company is aware of an unasserted claim to recover alleged preference
payments made to the Company within 90 days prior to a customer's 2002 Chapter
11 bankruptcy filing. Such claims are not unusual in the bankruptcy context. The
potential claim against the Company has been identified in lists of such claims
included in several reorganization plans submitted to the bankruptcy court.
Management believes that the Company has valid defenses for this potential
claim, and intends to vigorously contest such claim if asserted. No amounts
pertaining to this potential claim are considered probable or reasonably
estimable; accordingly, the Company has not recorded any related accrual as of
June 30, 2004.
The Company has been named as a defendant or co-defendant in other legal
proceedings wherein substantial damages are claimed. Such proceedings are not
uncommon to the Company's business. After consultations with counsel, management
believes that the Company has recognized adequate provisions for probable and
reasonably estimable liabilities associated with these proceedings, and that
their ultimate resolutions will not have a material adverse effect on the
consolidated financial position or annual results of operations of the Company.
At June 30, 2004, the Company had certain guarantees and indemnifications
outstanding which could result in future payments to third parties. These
guarantees generally result from the conduct of the Company's business in the
normal course. The Company's outstanding guarantees were as follows at June 30,
2004:
(Dollars in millions) Maximum Related liability
undiscounted balance recorded
future payments at 6/30/04
------------------------------------------------------------------------------------
Standby letters of credit:
Insurance related $ 6.8 $ 6.8
Other 0.2 -
Performance and payment bonds 0.1 -
Sale of certain construction assets Unlimited -
Sale of BSSI 2.0 -
------------------------------------------------------------------------------------
The Company's banks issue standby letters of credit ("LOCs") on behalf of the
Company under the Agreement discussed above. As of June 30, 2004, most of these
LOCs were issued to an insurance company to serve as collateral for payments the
insurer is required to make under certain of the Company's self-insurance
programs. These LOCs may be drawn upon in the event that the Company does not
reimburse the insurance company for claims payments made on behalf of the
Company. Such LOCs renew automatically on an annual basis unless either the LOCs
are returned to the bank by the beneficiary or the Company's banks elect not to
renew them.
-10-
Bonds are provided on behalf of the Company by Travelers Casualty and Surety
Company of America ("Travelers"). The beneficiaries under these performance and
payment bonds may request payment from Travelers in the event that the Company
does not perform under the project or if subcontractors are not paid. The
Company does not currently expect any amounts to be paid by Travelers under its
bonds outstanding at June 30, 2004.
During 2000, the Company sold certain assets associated with its former heavy &
highway construction business to A&L, Inc., and all of the outstanding stock of
its former BSSI subsidiary to SKE International LLC. These sale agreements
provided indemnifications to the buyers for breaches of certain obligations by
the Company. For the sale of heavy & highway assets, there was no dollar limit
on the indemnifications, and the terms of these indemnifications vary but will
ultimately be governed by the statutes of limitations. In October 2003, A&L
filed a lawsuit against the Company and a subsidiary alleging misrepresentation
and breach of warranty in connection with the asset sale. The Company believes
that A&L's claims are without merit and is vigorously contesting this lawsuit.
Maximum payments for indemnifications under the BSSI sale were limited to $2.0
million, and the terms are based on the varying statutes of limitations plus 90
days. The Company does not currently expect to make any future payments under
the indemnifications in connection with the BSSI sale.
NOTE 6 - STOCK BASED COMPENSATION
During the first quarter of 2003, the Company adopted the prospective method of
applying Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure." Under the
prospective method, the Company began expensing the fair value of all stock
options granted, modified or settled effective January 1, 2003.
Prior to January 1, 2003, the Company utilized the intrinsic value method of
accounting for stock-based compensation, as originally promulgated by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
as permitted under SFAS 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost was recognized for stock options granted prior
to January 1, 2003. If compensation costs for the Company's stock incentive
plans had been determined based on the fair value at the grant dates for awards
under those plans, consistent with the method prescribed by SFAS 123, the
Company's pro forma net income and net income per share amounts would have been
as follows:
For the three months ended For the six months ended
-------------------------- ------------------------
(In thousands) JUNE 30, 2004 June 30, 2003 JUNE 30, 2004 June 30, 2003
----------------------------------------------------------------------------------------------------------------
Net income/(loss), as reported $ 3,605 $ 68 $ 6,703 $ (29)
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 54 34 58 34
Deduct: Total stock-based employee
compensation expense determined
under fair value method, net of
related tax effects (80) (41) (114) (128)
----------------------------------------------------------------------------------------------------------------
Pro forma net income/(loss) $ 3,579 $ 61 $ 6,647 $ (123)
----------------------------------------------------------------------------------------------------------------
-11-
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2004 June 30, 2003 JUNE 30, 2004 June 30, 2003
----------------------------------------------------------------------------------------------------------------
Reported earnings per share:
Basic $ 0.43 $ 0.01 $ 0.80 $ 0.00
Diluted 0.42 0.01 0.79 0.00
Pro forma earnings/(loss) per share:
Basic 0.43 0.01 0.79 (0.01)
Diluted $ 0.42 $ 0.01 $ 0.78 $ (0.01)
================================================================================================================
NOTE 7 - COMPREHENSIVE INCOME
A reconciliation of the Company's net income and comprehensive income is as
follows (in thousands):
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2004 June 30, 2003 JUNE 30, 2004 June 30, 2003
-----------------------------------------------------------------------------------------------------------------
Net income/(loss) $ 3,605 $ 68 $ 6,703 $ (29)
Other comprehensive income:
Foreign currency translation
adjustment, net of tax 26 58 17 37
-----------------------------------------------------------------------------------------------------------------
Comprehensive income $ 3,631 $ 126 $ 6,720 $ 8
=================================================================================================================
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
JUNE 30, 2004 Dec. 31, 2003
--------------------------------------------------------------------------------------------------------
Goodwill:
Engineering $ 1,006 $ 1,006
Energy 7,465 7,465
--------------------------------------------------------------------------------------------------------
Total goodwill 8,471 8,471
--------------------------------------------------------------------------------------------------------
Other intangible assets, net of accumulated amortization
of $1,381 and $1,238, respectively 619 762
--------------------------------------------------------------------------------------------------------
Goodwill and other intangible assets, net $ 9,090 $ 9,233
--------------------------------------------------------------------------------------------------------
Under SFAS 142, the Company's goodwill balance is not being amortized and
goodwill impairment tests are being performed at least annually. The Company
completed its most recent annual impairment review during the second quarter of
2004, and no impairment charge was required.
The Company's other intangible assets balance solely comprises a non-compete
agreement from the Company's 1998 purchase of an energy business. Future
amortization expense on the other intangible assets balance is currently
estimated to be $286,000 for the years ending December 31, 2004 and 2005, with
the remaining balance of $190,000 being amortized in 2006.
-12-
NOTE 9 - RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the Financial Accounting Standards Board issued Interpretation
No. 46, "Consolidation of Variable Interest Entities" ("FIN 46"), which was
subsequently revised in December 2003 ("FIN 46R"). FIN 46 clarifies Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," and requires that
unconsolidated variable interest entities be consolidated by their primary
beneficiaries. The primary beneficiary is the party that absorbs a majority of
the entity's expected losses or returns as a result of holding the variable
interest. The requirements of FIN 46 were required to be applied immediately to
variable interest entities in which an enterprise obtains an interest, or which
an enterprise creates, after January 31, 2003. For variable interest entities
considered to be special purpose entities (SPEs) in which an enterprise holds a
variable interest that it acquired prior to February 1, 2003, FIN 46 is required
to be adopted for the first fiscal year or interim period ending after December
15, 2003. For non-SPE variable interest entities acquired prior to February 1,
2003, FIN 46 must be adopted no later than the first fiscal year or interim
period ending after March 15, 2004. The Company adopted this interpretation
during the first quarter of 2004; such adoption had no impact on the Company's
financial statements.
NOTE 10 - RECLASSIFICATIONS
Certain reclassifications have been made to the prior year balance sheet amounts
in order to conform to the current year presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
The Company provides engineering and energy expertise for public and private
sector clients worldwide. The firm's primary services include engineering design
for the transportation and civil infrastructure markets, operation and
maintenance of oil and gas production facilities, architectural and
environmental services, and construction management services for buildings and
transportation projects. The Company views its short and long-term liquidity as
being dependent upon its results of operations, changes in working capital and
its borrowing capacity.
BUSINESS ENVIRONMENT
The Company's operations are affected by appropriations of public funds for
infrastructure and other government-funded projects, capital spending levels in
the private sector, and the demand for the Company's services in the engineering
and energy markets. Additional external factors such as price fluctuations in
the energy industry could affect the Company.
The Federal government's TEA-21 legislation has made significant transportation
infrastructure funding available to the various state agencies since its
approval in 1998. Prior to the expiration of TEA-21 on September 30, 2003, the
U.S. Congress and President Bush signed a five-month extension of the program at
current funding levels. This initial extension expired on February 29, 2004 and
has since been extended four times at current funding levels. The most recent
extension occurred on July 22, 2004 and lasts through the end
-13-
of September 2004 at the same previously extended funding levels. During the
current extension period, a long-term reauthorization of the original TEA-21
program is expected to receive significant Congressional attention. Prior to the
extensions, certain state agencies were limited in their abilities to apply for
Federal transportation funding during 2003, as they were unable to commit the
required matching funds due to budget constraints. The Company is currently
seeing limited funding of new transportation projects and expects this to
continue until any reauthorization of TEA-21 occurs. Significant further delays
in the reauthorization of TEA-21 could impact the Company's transportation
design business activity for 2005 and beyond. From 2002 through the second
quarter of 2004, the Company has observed increased Federal spending activity on
Departments of Defense and Homeland Security activities, including the Federal
Emergency Management Agency (FEMA). To mitigate the effect of the state
transportation budget constraints on the Company's business, management has
focused more marketing and sales activity on these agencies of the Federal
government. Additional government spending in these areas, or on transportation
infrastructure, could result in profitability and liquidity improvements for the
Company. Significant contractions in any of these areas could unfavorably impact
the Company's profitability and liquidity. In March 2004, the Company announced
that it had been awarded a five-year contract with FEMA for up to $750 million
to serve as the Program Manager to develop, plan, manage, implement, and monitor
the Multi-Hazard Flood Map Modernization (MHFMM) Program for flood hazard
mitigation across the United States and its territories. Approximately $730
million of this contract value was included in the Company's backlog as of June
30, 2004. In addition, during the first half of 2004, the Company was selected
for several indefinite delivery/indefinite quantity task order contracts by the
U.S. Army Corps of Engineers and U.S. Air Force. During the first six months of
2004, the Company was also selected for several contracts with the Mineral
Management Service, agencies within the U.S. Departments of Transportation and
Homeland Security, the Department of Energy, and the Federal Bureau of
Investigation.
The Company's Energy business benefited significantly in 2001 and 2002 from the
adoption of its Managed Services (which includes services formerly known as
OPCO(R)) business model by several oil and gas producers in the Gulf of Mexico.
Energy services provided via this innovative model generated higher margins than
the Company's traditional service delivery methods. During the second half of
2002, many of the properties serviced under this model were sold by their
owners, and while the Company continues to provide operations and maintenance
services to the properties' new owners, such services reflect lower margin
manpower and logistics work. Presently, there is uncertainty in the oil and gas
marketplace regarding capital investment and outsourcing decisions in the Gulf
of Mexico, the Company's primary market for its Energy business. As a result,
the Company has continued to provide manpower services to its clients in this
region. Recently, however, the Company executed a long-term, multi-million
dollar Managed Services contract with Anglo-Suisse Offshore Partners, LLC
("ASOP") to operate, maintain and optimize the performance of ASOP's offshore
oil and gas producing properties in the Gulf. The Company has also expanded its
Managed Services offerings to onshore U.S. oil and gas producers, as
demonstrated by the two four-year contracts totaling $144 million received from
Huber Energy during 2003. In addition, the Company has been able to increase its
penetration into the deepwater Gulf of Mexico and international markets, where
oil and gas producers are currently investing significant amounts of capital for
new projects.
After giving effect to the foregoing, management believes that the combination
of cash generated from operations and its existing credit facility will be
sufficient to meet its operating and capital expenditure requirements for at
least the next year.
-14-
RESULTS OF OPERATIONS
The following table reflects a summary of the Company's operating results
(excluding intercompany transactions) for ongoing operations and non-core
businesses for the periods ended June 30, 2004 and 2003 (dollars in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
------------------------------------------------------------------------------
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2004 June 30, 2003 JUNE 30, 2004 June 30, 2003
---------------------------------------------------------------------------------------------------------------
ENGINEERING
Revenues $ 81.1 $ 61.6 $156.0 $120.3
Income from operations before
Corporate overhead 7.8 3.5 14.9 6.4
Percentage of Engineering revenues 9.6% 5.7% 9.5% 5.3%
Less: Corporate overhead (2.8) (3.0) (5.5) (6.0)
Percentage of Engineering revenues (3.4)% (4.9)% (3.5)% (5.0)%
---------------------------------------------------------------------------------------------------------------
Income from operations 5.0 0.5 9.4 0.4
Percentage of Engineering revenues 6.2% 0.1% 6.0% 0.3%
---------------------------------------------------------------------------------------------------------------
ENERGY
Revenues 49.5 43.2 99.6 83.8
Income from operations before
Corporate overhead 2.1 2.3 4.6 3.5
Percentage of Energy revenues 4.2% 5.3% 4.6% 4.2%
Less: Corporate overhead (1.2) (1.0) (2.4) (2.1)
Percentage of Energy revenues (2.4)% (2.3)% (2.4)% (2.5)%
---------------------------------------------------------------------------------------------------------------
Income from operations 0.9 1.3 2.2 1.4
Percentage of Energy revenues 1.8% 3.0% 2.2% 1.7%
---------------------------------------------------------------------------------------------------------------
NON-CORE*
Revenues - - - -
Income/(loss) from operations before
Corporate overhead - (0.1) 0.2 0.2
Less: Corporate overhead - - - -
---------------------------------------------------------------------------------------------------------------
Income/(loss) from operations - (0.1) 0.2 0.2
---------------------------------------------------------------------------------------------------------------
-15-
For the three months ended For the six months ended
-------------------------- ------------------------
JUNE 30, 2004 June 30, 2003 JUNE 30, 2004 June 30, 2003
---------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Revenues 130.6 104.8 255.6 204.1
Income from operations before
Corporate overhead 9.9 5.7 19.7 10.1
Percentage of total reportable
segment revenues 7.6% 5.4% 7.7% 4.9%
Less: Corporate overhead (4.0) (4.0) (7.9) (8.1)
Percentage of total reportable
segment revenues (3.1)% (3.8)% (3.1)% (4.0)%
---------------------------------------------------------------------------------------------------------------
Income from operations 5.9 1.7 11.8 2.0
Percentage of total reportable
segment revenues 4.5% 1.6% 4.6% 0.9%
---------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance
income/(expense) 0.2 (0.5) (0.3) (1.0)
---------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME/(LOSS) FROM
OPERATIONS $ 6.1 $ 1.2 $ 11.5 $ 1.0
Percentage of total Company
revenues 4.7% 1.1% 4.5% 0.5%
===============================================================================================================
* The Non-Core segment includes activity associated with the former buildings
and transportation construction operations that are being wound down.
TOTAL CONTRACT REVENUES
Total contract revenues increased 25% in the second quarter of 2004 relative to
the second quarter of 2003. Engineering revenues for the second quarter of 2004
increased 32% from the second quarter of 2003. Engineering's revenues were
positively impacted by the Company's above mentioned map modernization program
management project with FEMA, which commenced near the end of the first quarter
of 2004. Also positively impacting Engineering revenues for the second quarter
of 2004 were improved labor utilization rates over the second quarter of 2003 as
a result of new work added since 2003. These labor utilization rates have a
direct impact on revenues. By contrast, Engineering's labor utilization for the
second quarter of 2003 was lower as a result of delays in the commencement of
certain public sector projects due to state budget constraints and slowness in
its private sector contract activity. In the Energy segment, revenues for the
second quarter of 2004 increased 15% over the second quarter of 2003. This
increase is primarily the result of the two onshore Managed Services contracts
that commenced during 2003, as well as the addition of several new overseas
contracts and additions to existing contracts during 2003. Revenues from Managed
Services contracts composed 20% and 3% of Baker Energy's total contract revenues
for the second quarters of 2004 and 2003, respectively. The Company's Non-Core
segment posted no revenues for the second quarters of 2004 or 2003.
For the first six months of 2004, total contract revenues increased 25% over the
corresponding period in 2003. In the Engineering segment, revenues increased 30%
in the first half of 2004 as compared to the first six months of 2003. Again,
the increase in revenues over the first six months of 2003 reflects the addition
of the Company's map modernization program management project with FEMA and
improved labor utilization rates over the first six months of 2003.
Engineering's labor utilization rates were lower during the first six months
-16-
of 2003 due to delays in the commencement of certain public sector projects due
to state budget constraints, slowness in its private sector contract activity
and the January 2003 relocation of the Company's largest Engineering office to
Moon Township, PA. In the Energy segment, revenues for the first six months of
2004 increased 19% over the first six months of 2003. Again, this increase is
primarily the result of the two new onshore Managed Services contracts, the
additional new overseas contracts and the additions to existing contracts that
commenced during 2003. Revenues from Managed Services contracts composed 17% and
3% of Baker Energy's total contract revenues for the first six months of 2004
and 2003, respectively. The Company's Non-Core segment posted no revenues for
the first six months of 2004 or 2003.
GROSS PROFIT
Gross profit expressed as a percentage of revenues increased to 18.4% for the
second quarter of 2004 from 14.3% in the second quarter of 2003. Overall, the
Company's gross profit expressed as a percentage of revenues benefited from cost
reduction measures implemented by management relative to the Company's medical
and 401(k) retirement benefit plans. The Engineering segment's gross profit
percentage increased to 21.4% in the second quarter of 2004 from 16.9% in the
second quarter of 2003. This increase is primarily attributable to the increase
in labor utilization rates as compared to the second quarter of 2003 and the
cost reduction measures discussed above. The Energy segment's gross profit
percentage increased to 13.0% in the second quarter of 2004 from 12.2% in the
second quarter of 2003. This 2004 increase in gross profit as a percentage of
revenues is the direct result of the performance of the previously mentioned two
onshore Managed Services contracts and performance-based incentive bonuses
totaling approximately $0.6 million earned during the second quarter of 2004.
Also benefiting Energy's gross profit margin were the previously mentioned cost
reduction measures put in place by management at the beginning of 2004 and
favorable developments related to self-insured workers' compensation and general
liability claims. Energy's Managed Services business posted gross profit of
10.2% for the second quarter of 2004 versus a loss in the second quarter of
2003. The Non-Core segment posted negligible losses in the second quarters of
both 2004 and 2003.
For the first six months of 2004, gross profit expressed as a percentage of
revenues increased to 17.6% from 13.9% in 2003. As stated in the previous
paragraph, the Company's gross profit expressed as a percentage of revenues
benefited from cost reduction measures implemented by management relative to the
Company's medical and 401(k) retirement benefit plans. The Engineering segment's
gross profit percentage increased to 20.9% in the first six months of 2004 from
16.8% in the first six months of 2003. Again, the Engineering segment benefited
from an increase in labor utilization rates as compared to the first six months
of 2003 and the aforementioned cost reduction measures. The Energy segment's
gross profit percentage increased to 12.3% in the first six months of 2004 from
10.8% in the first six months of 2003. This increase in gross profit as a
percentage of revenues is the direct result of the previously mentioned
performance of the Managed Services contracts, cost reduction measures
implemented by management, the achievement of the incentive bonuses and
favorable developments related to self-insured workers' compensation and general
liability claims, as offset by the effect of a reserve related to a customer
billing rate dispute in the first quarter of 2004. Energy's Managed Services
business posted gross profit of 7.3% for the first six months of 2004 versus a
loss in the first six months of 2003. In the Non-Core segment, gross profit was
$0.2 million for the six-month periods of both 2004 and 2003. These favorable
results were primarily attributable to favorable developments in certain
casualty insurance claims related to the Company's former construction
operations during both six-month periods.
-17-
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses, including Corporate
overhead, expressed as a percentage of total contract revenues increased
slightly to 13.7% in the second quarter of 2004 from 13.2% in the second quarter
of 2003. This overall increase in SG&A expenses expressed as a percentage of
revenues primarily reflects the additional effects (in this case, related to
overhead personnel) of management's aforementioned cost reduction measures
related to the medical and 401(k) retirement benefit plans, as offset by an
increase in accruals related to the Company's 2004 short-term and recently
enacted long-term incentive compensation programs at maximum levels. In
addition, allocated Corporate overhead costs for the second quarter of 2004
decreased versus the second quarter of 2003 as a result of a reduction in costs
associated with the Company's new information systems which were implemented
effective January 1, 2003, as partially offset by costs incurred in connection
with the Company's compliance with Section 404 of the Sarbanes-Oxley Act of 2002
("SOX"). In the Engineering segment, SG&A expenses expressed as a percentage of
revenues decreased to 15.2% in the second quarter of 2004 from 15.9% in the
second quarter of 2003. In the Energy segment, SG&A expenses expressed as a
percentage of revenues increased to 11.1% in the second quarter of 2004 as
compared to 9.3% in the second quarter of 2003. Energy's benefits from the cost
reduction measures were offset by the higher incentive compensation expense. The
Company's Non-Core operations incurred no SG&A expenses in either second quarter
period.
For the first six months of 2004, SG&A expenses, including Corporate overhead,
expressed as a percentage of total contract revenues decreased to 13.1% from
13.4% in the first six months of 2003. As mentioned previously, this overall
decrease in SG&A expenses expressed as a percentage of revenues reflect the
additional effects of management's cost reduction measures as offset by an
increase in incentive compensation expense, in combination with the relatively
significant increase in revenues for the first six months of 2004. Also,
allocated Corporate overhead costs for the first six months of 2004 decreased
versus the first six months of 2003 as a result of a reduction in costs
associated with the Company's new information systems partially offset by costs
incurred in connection with the Company's compliance with SOX. In the
Engineering segment, SG&A expenses expressed as a percentage of revenues
decreased to 14.9% in the first six months of 2004 from 16.4% in the first six
months of 2003. In addition to the aforementioned effects of the cost reduction
measures, lower Corporate overhead allocation, higher incentive compensation
expense, and the relatively significant revenue increase, the Engineering
segment incurred nonrecurring costs associated with its Moon Township office
relocation during the first quarter of 2003. In the Energy segment, SG&A
expenses expressed as a percentage of revenues increased to 10.8% in the first
six months of 2004 from 9.1% in the first six months of 2003. As mentioned
above, Energy's benefits from the cost reduction measures were offset by the
higher compensation expense. The Company's Non-Core operations incurred no SG&A
expenses in either six month period.
OTHER INCOME
Interest income was slightly higher and interest expense was lower for both the
second quarter and first half of 2004 as a result of the Company's average net
borrowings being higher for the second quarter and first half of 2003. The
Company's borrowing rates were similar for all periods mentioned above. Other
income for the second quarter of 2004 primarily resulted from currency-related
gains, while other income for the first half of 2004 also was the result of the
aforementioned gains, along with the sale of an investment that resulted in a
gain of $352,000 and minority interest related to the income of two consolidated
subsidiaries. Other expense for the second quarter and first half of 2003
primarily related to a $0.8 million impairment of an investment in Energy
Virtual Partners, an Energy services business that discontinued operations and
was liquidated.
-18-
INCOME TAXES
During the second quarter of 2004, the Company reduced its year-to-date
effective income tax rate from 47% to 45%. This reduction reflects the Company's
higher estimated taxable income for the year ending December 31, 2004 based on
year-to-date performance, as well as a more favorable mix of the domestic and
foreign components of such estimated income. The Company had a benefit from
income taxes of 50% for the first half of 2003. The lower effective tax rate for
the first half of 2004 compared to the benefit rate used for the first half of
2003 primarily reflects the higher full-year taxable income that is expected for
2004.
CONTRACT BACKLOG
(In millions) JUNE 30, 2004 Dec. 31, 2003
----------------------------------------------------------------------------------
Engineering $ 1,191.8 $ 470.7
Energy 285.6 250.0
----------------------------------------------------------------------------------
Total $ 1,477.4 $ 720.7
==================================================================================
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of the Company's contracts with the
Federal government and other clients may be terminated at will, or option years
may not be exercised; therefore, no assurance can be given that all backlog will
be realized.
Among the more significant new work added during the first half of 2004 was a
new $750 million contract in the Engineering segment to serve as Program Manager
to develop, plan, manage, implement, and monitor FEMA's Multi-Hazard Flood Map
Modernization (MHFMM) Program for flood hazard mitigation across the United
States and its territories.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $14.7 million for the first six
months of 2004 as compared to net cash used in operating activities of $29.6
million for the same period in 2003. This increase in cash provided by operating
activities was the direct result of increased net income and the Company
becoming more efficient with its new billing system and the related process
changes that were implemented effective January 1, 2003. The cash used in
operating activities for the first six months of 2003 was negatively affected by
the implementation of the new billing system and related changes to its billing
process. As a result of these billing system and process changes, the Company
experienced certain data conversion and training issues, which caused delays in
producing client invoices during the first quarter of 2003. Since the new system
was first used to invoice clients in February 2003, the Company has undertaken
various corrective improvement measures, and is invoicing on a current basis
through its new software.
Net cash used in investing activities was $1.4 million and $3.4 million for the
first six months of 2004 and 2003, respectively. These amounts reflect only
capital expenditures for both periods. The 2004 amount primarily relates to
office and field equipment purchases totaling $0.6 million and computer software
and equipment purchases totaling $0.6 million, while the 2003 amount relates to
leasehold improvements of $2.4 million associated with the Company's new
headquarters and $0.8 million of computer software and equipment purchases.
During the first six months of 2004 and 2003, the Company procured additional
computer software and equipment under the terms of operating leases. The Company
utilizes operating leases to acquire assets used in its daily business
activities. These assets include office space, computer and related equipment,
and motor vehicles.
-19-
Net cash used in financing activities was $11.6 million for the first six months
of 2004 versus net cash provided by financing activities of $32.6 million for
the same period in 2003. The cash usage for financing activities during the
first six months of 2004 resulted primarily from repayments of long-term debt
totaling $12.4 million, as partially offset by proceeds from the exercise of
stock options totaling $0.8 million. The cash provided by financing activities
for the first six months of 2003 reflects the proceeds from long-term debt
totaling $33.3 million, which was used to fund the aforementioned working
capital needs in conjunction with changes in the Company's billing process and
system and the resultant billing and collection delays. During the first quarter
of 2003, pursuant to the Company's stock repurchase program, the Company also
paid $0.7 million to acquire 80,400 additional treasury shares.
The Company has an unsecured credit agreement ("the Agreement") with a
consortium of financial institutions. The Agreement provides for a commitment of
$40 million through June 30, 2005. The commitment includes the sum of the
principal amount of revolving credit loans outstanding and the aggregate face
value of outstanding letters of credit. As of June 30, 2004, borrowings totaling
$1.1 million were outstanding under the Agreement, along with outstanding
letters of credit totaling $7.0 million. The Company experienced increased cash
collections during the first half of 2004, and as a result, utilized a portion
of these collections to reduce the borrowings under its credit facility. These
borrowings were classified as a current liability at June 30, 2004 since the
maturity date of the Agreement was within one year of the balance sheet date.
The Company expects to extend the maturity date of the Agreement by three years
and increase the commitment amount to $60 million during the third quarter of
2004 to accommodate additional working capital and/or acquisition needs.
The Company currently has a bonding line available through Travelers Casualty
and Surety Company of America ("Travelers"). At June 30, 2004, performance and
payment bonds totaling $0.1 million were outstanding under this line. Management
believes that this bonding line will be sufficient to meet its bid and
performance bonding needs for at least the next year.
The Company's professional liability insurance coverage had been placed on a
claims-made basis with Reliance Insurance Group ("Reliance") for the period July
1, 1994 through June 30, 1999. In October 2001, the Pennsylvania Insurance
Commissioner placed Reliance into liquidation. The Company remains uncertain at
this time what effect this action will have on any claim the Company or its
subsidiaries may have for insurance coverage under policies issued by Reliance
with respect to past years. A wholly-owned subsidiary of the Company was subject
to one substantial claim which fell within the Reliance coverage period. This
claim was settled in the amount of $2.5 million, and payment was made by the
Company in April 2003. Due to the liquidation of Reliance, the Company is
currently uncertain what amounts paid to settle this claim will be recoverable
under the insurance policy with Reliance. The Company is pursuing a claim in the
Reliance liquidation and believes that some recovery will result from the
liquidation, but the amount of such recovery cannot currently be estimated. The
Company had no related receivables recorded from Reliance as of June 30, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, the Company's primary interest rate risk relates to its variable-rate
debt obligations, which totaled $1.1 million as of June 30, 2004. Assuming a 10%
increase in interest rates on these variable-rate debt obligations (i.e., an
increase from the actual weighted average interest rate of 2.61% as of June 30,
2004, to a weighted average interest rate of 2.87%), the increase in annual
interest expense would be negligible based on the outstanding balance of
variable-rate obligations as of June 30, 2004. Accordingly, the Company has no
material exposure to interest rate risk, nor does it have any interest rate swap
or exchange agreements.
-20-
The Company has several foreign subsidiaries that transact portions of their
local activities in currencies other than the U.S. Dollar. In assessing its
exposure to foreign currency exchange rate risk, the Company recognizes that the
majority of its foreign subsidiaries' assets and liabilities reflect ordinary
accounts receivable and payable balances. These receivable and payable balances
are substantially settled in the same currencies as the functional currencies of
the related foreign subsidiaries, thereby not exposing the Company to material
transaction gains and losses. Assuming that foreign currency exchange rates
could change unfavorably by 10%, the Company would have no material exposure to
foreign currency exchange rate risk. The Company has no foreign currency
exchange contracts.
Based on the nature of the Company's business, it has no direct exposure to
commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Company's principal executive officer and principal financial officer have
evaluated the effectiveness of the Company's "disclosure controls and
procedures," as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), as of June 30, 2004.
Based upon their evaluation, the principal executive officer and principal
financial officer concluded that the Company's disclosure controls and
procedures are effective to provide reasonable assurance that information
required to be disclosed by the Company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms, and to provide
reasonable assurance that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company's management,
including its principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls
There was no change in the Company's "internal control over financial reporting"
(as such term is defined in Rule 13a-15(f) under the Exchange Act) that occurred
during the quarter ended June 30, 2004, and that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 5 to the accompanying financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Company's annual meeting of shareholders was held on April 22,
2004.
(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.
-21-
(c) The Shareholders elected each of the Company's directors listed below
to one-year terms or until their respective successors have been
elected. The votes cast by holders of the Company's Common Stock in
approving the following directors were:
Name of Director Votes for Votes withheld
----------------------------------------------------------------------
Robert N. Bontempo 7,098,912 438,467
Nicholas P. Constantakis 7,049,106 488,273
William Copeland 5,839,116 1,698,263
Donald P. Fusilli, Jr. 6,800,713 736,666
Roy V. Gavert, Jr. 6,823,767 713,612
Thomas D. Larson 6,655,099 882,280
John E. Murray, Jr. 6,790,569 746,810
Richard L. Shaw 5,992,705 1,544,674
----------------------------------------------------------------------
(d) The Shareholders voted to approve the amendment to the 1996
Non-Employee Directors Stock Incentive Plan by the votes listed below:
-----------------------------------------------------
Votes for Votes withheld Abstentions
-----------------------------------------------------
4,818,307 2,426,664 292,408
-----------------------------------------------------
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
-----------
31.1 Certification of the Chief Executive Officer pursuant
to Rule 13a-14(a)
31.2 Certification of the Chief Financial Officer pursuant
to Rule 13a-14(a)
32.1 Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed or furnished the following Current Reports on Form
8-K during the quarter ended June 30, 2004, including the dates filed,
the items reported and listing any financial statements filed:
o Form 8-K dated May 7, 2004, to furnish information required by
Item 12, "Results of Operations and Financial Condition."
-22-
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, 2004
--------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: August 9, 2004
--------------------------------
Craig O. Stuver
Senior Vice President, Corporate Controller
and Treasurer (Chief Accounting Officer)
-23-