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, 2005
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 No X
----- -----
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Act.)
Large accelerated filer Accelerated filer X Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes No X
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of June 30, 2006:
Common Stock 8,499,988 shares
EXPLANATORY NOTE
In this Form 10-Q, the terms "we," "us," or "our" refer to Michael Baker
Corporation and its subsidiaries.
As discussed in Note 1 to the accompanying condensed consolidated financial
statements, this Quarterly Report on Form 10-Q includes the restatements of our
condensed consolidated statements of income for the three and six-month periods
ended June 30, 2004, our condensed consolidated balance sheet at December 31,
2004, our condensed consolidated statement of cash flows for the six months
ended June 30, 2004, and the related notes to these financial statements.
-1-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In this Form 10-Q, the terms "we," "us," or "our" refer to Michael Baker
Corporation and its subsidiaries.
We have prepared the condensed consolidated financial statements which follow,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). 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, we
believe 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, except those described in Note 1 resulting from the restatement. All
such adjustments are of a normal and recurring nature unless specified
otherwise. These condensed consolidated financial statements should be read in
conjunction with our annual consolidated financial statements and the notes
thereto.
-2-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
------------------------------
June 30, 2004
(As Restated -
JUNE 30, 2005 See Note 1)
------------- --------------
(In thousands, except
per share amounts)
Total contract revenues $142,765 $130,926
Cost of work performed 124,120 106,930
-------- --------
Gross profit 18,645 23,996
Selling, general and administrative expenses 16,494 18,718
-------- --------
Income from operations 2,151 5,278
Other income/(expense):
Interest income 90 28
Interest expense (400) (370)
Other, net 77 209
-------- --------
Income before income taxes 1,918 5,145
Provision for income taxes 1,876 2,781
-------- --------
NET INCOME $ 42 $ 2,364
Other comprehensive income, net of tax -
Foreign currency translation adjustments 318 48
-------- --------
COMPREHENSIVE INCOME $ 360 $ 2,412
======== ========
BASIC EARNINGS PER SHARE $ 0.00 $ 0.28
DILUTED EARNINGS PER SHARE $ 0.00 $ 0.28
======== ========
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
(As Restated -
JUNE 30, 2005 See Note 1)
------------- --------------
(In thousands, except
per share amounts)
Total contract revenues $286,961 $256,255
Cost of work performed 245,942 211,482
-------- --------
Gross profit 41,019 44,773
Selling, general and administrative expenses 32,013 34,948
-------- --------
Income from operations 9,006 9,825
Other income/(expense):
Interest income 135 33
Interest expense (767) (783)
Other, net 176 500
-------- --------
Income before income taxes 8,550 9,575
Provision for income taxes 5,654 5,376
-------- --------
NET INCOME $ 2,896 $ 4,199
Other comprehensive income/(loss), net of
tax:
Reclassification of accumulated
unrealized gain on sale of
marketable securities included in net
income -- (109)
Foreign currency translation adjustments 284 31
-------- --------
COMPREHENSIVE INCOME $ 3,180 $ 4,121
======== ========
BASIC EARNINGS PER SHARE $ 0.34 $ 0.50
DILUTED EARNINGS PER SHARE $ 0.33 $ 0.49
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
-4-
MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
June 31, 2004
(As Restated -
JUNE 30, 2005 See Note 1)
------------- --------------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,402 $ 15,471
Receivables, net 76,018 79,559
Unbilled revenues on contracts in progress 88,447 73,852
Prepaid expenses and other 2,398 11,893
-------- --------
Total current assets 179,265 180,775
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 19,395 19,013
OTHER ASSETS
Goodwill and other intangible assets, net 8,804 8,947
Other assets 6,131 6,278
-------- --------
Total other assets 14,935 15,225
-------- --------
TOTAL ASSETS $213,595 $215,013
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 45,822 $ 48,723
Accrued employee compensation 29,947 31,596
Accrued insurance 10,284 9,758
Other accrued expenses 20,690 20,949
Billings in excess of revenues on contracts in progress 9,454 9,704
Income taxes payable 6,031 4,464
Deferred tax liability 11,812 11,957
-------- --------
Total current liabilities 134,040 137,151
-------- --------
OTHER LIABILITIES
Other liabilities 2,350 3,081
-------- --------
Total liabilities 136,390 140,232
-------- --------
SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,956,611 and 8,910,371 shares at 6/30/05 and 12/31/04, respectively 8,957 8,910
Additional paid-in-capital 41,646 40,730
Retained earnings 32,184 29,288
Accumulated other comprehensive loss (845) (1,129)
Unearned compensation expense (255) (65)
Less - 480,337 and 391,237 shares of Common Stock in treasury,
At cost, at 6/30/05 and 12/31/04, respectively (4,482) (2,953)
-------- --------
Total shareholders' investment 77,205 74,781
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $213,595 $215,013
======== ========
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
(As Restated -
JUNE 30, 2005 See Note 1)
------------- --------------
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,896 $ 4,199
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,432 2,408
Changes in assets and liabilities:
Increase in receivables and contracts in progress (11,313) (11,295)
(Decrease)/increase in accounts payable and accrued expenses (3,598) 15,181
Decrease in other net assets 10,349 5,665
-------- --------
Total adjustments (2,130) 11,959
-------- --------
Net cash provided by operating activities 766 16,158
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (2,212) (1,290)
-------- --------
Net cash used in investing activities (2,212) (1,290)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments to acquire treasury stock (1,529) --
Payments for capital lease obligations (289) (148)
Proceeds from the exercise of stock options 195 825
Repayments of long-term debt -- (12,402)
Decrease in book overdrafts -- (1,230)
-------- --------
Net cash used in financing activities (1,623) (12,955)
-------- --------
Net (decrease)/increase in cash and cash equivalents (3,069) 1,913
Cash and cash equivalents, beginning of year 15,471 9,126
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,402 $ 11,039
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 58 $ 237
Income taxes paid $ 829 $ 479
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Vehicles and equipment acquired through capital lease obligations $ 439 $ 408
Equipment acquired on credit $ 11 $ 50
======== ========
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, 2005
(UNAUDITED)
NOTE 1 - RESTATEMENT OF FINANCIAL STATEMENTS
Subsequent to the issuance of our condensed consolidated financial statements
for the quarter ended March 31, 2005, we determined that accounting errors, as
described below, were included in our previously issued consolidated financial
statements. As a result, we have restated the accompanying condensed
consolidated financial statements to correct the accounting errors described
below. The following table presents the impact of the restatement on our net
income and diluted earnings per share for the three and six-month periods ended
June 30, 2004 (amounts in thousands, except earnings per share). For ease of
comparison, the items in the following table are presented in the order in which
they will appear in our 2005 consolidated financial statements.
For the periods ended June 30, 2004
---------------------------------------------
Three months ended Six months ended
--------------------- ---------------------
Amount Diluted EPS Amount Diluted EPS
------- ----------- ------- -----------
Net income as originally reported $ 3,605 $0.42 $ 6,703 $0.79
------- ----- ------- -----
Restatement items, pre-tax:
Penalties and interest on taxes (1) (575) (979)
Domestic sales and use taxes (2) (472) (807)
International payroll taxes (3) (318) (803)
International value added taxes (4) (134) (365)
Minority interest adjustments (5) (23) (161)
Sale of marketable securities (6) -- (145)
Professional liability IBNR (7) 4 4
Unrecorded capital leases (8) (2) (4)
Revenue for reimbursable taxes (9) 323 648
------- -------
Subtotal pre-tax adjustments (1,197) (2,612)
------- -------
Income tax adjustments:
International income taxes (10) (282) (636)
Income tax effects on the above (11) 238 744
------- ----- ------- -----
Net income as restated $ 2,364 $0.28 $ 4,199 $0.49
======= ===== ======= =====
Our accompanying condensed consolidated financial statements for the three and
six-month periods ended June 30, 2004 are being restated to correct the
following errors:
(1) The underaccrual of estimated penalties and interest related to the
underpayment of international income, payroll, and value added taxes and
domestic sales and use taxes by certain wholly-owned Energy segment
subsidiaries, as noted in items (2)-(4) and (10) below.
(2) The underaccrual of domestic sales and use taxes by one of our wholly-owned
Energy segment subsidiaries.
(3) The underaccrual of international payroll taxes by a wholly-owned Energy
subsidiary related to employees working on international projects.
(4) The underaccrual of international value added taxes by certain wholly-owned
Energy segment subsidiaries.
(5) Adjustments related to minority interest balances recorded by our
majority-owned Nigerian subsidiary. These adjustments are primarily related
to the valuation allowances recorded against prepaid income tax asset
balances that are referred to in item (10) below.
-7-
(6) Failure to record an adjustment related to the demutualization of an
insurance company (which had previously provided us with coverage), from
which shares of stock were received and subsequently sold. The shares were
not valued and recorded as an asset when received in 2000, unrealized gains
and losses were not recorded as other comprehensive income during the
holding period, and the entire amount of sale proceeds was improperly
recorded as a gain when sold in the first quarter of 2004.
(7) Failure to record an immaterial adjustment to a previously unrecorded IBNR
liability for self-insured professional liability insurance losses.
(8) Unrecorded capital lease assets and obligations related to leased equipment
and vehicles.
(9) Adjustments to record additional revenue related to certain income, payroll
and value added taxes (as discussed in items (3) and (4) above and item
(10) below) which are reimbursable by a customer pursuant to terms of the
related contract.
(10) The underaccrual of international income taxes by certain wholly-owned
Energy segment subsidiaries. Additionally, we recorded valuation allowances
against the prepaid income tax asset balances recorded in prior periods by
a majority-owned Nigerian subsidiary, which valuation allowances should
have been previously recorded based on our inability to realize these
assets.
(11) The incremental effects of all foregoing restatement adjustments on the
provision for income taxes in our Consolidated Statements of Income, as
well as certain other adjustments that we determined to be necessary when
the restated income tax provisions were prepared, such as the balance sheet
effect on paid-in capital of the windfall tax benefits associated with
stock option exercises.
-8-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON THE PREVIOUSLY
ISSUED (UNAUDITED) CONDENSED CONSOLIDATED STATEMENTS OF INCOME:
For the periods ended June 30, 2004
---------------------------------------------------------
Three months ended Six months ended
--------------------------- ---------------------------
As Originally As Originally
Reported As Restated Reported As Restated
------------- ----------- ------------- -----------
Total contract revenues $130,603 $130,926 $255,607 $256,255
Cost of work performed 106,613 106,930 210,676 211,482
-------- -------- -------- --------
Gross profit 23,990 23,996 44,931 44,773
Selling, general and administrative
expenses 17,856 18,718 33,412 34,948
-------- -------- -------- --------
Income from operations 6,134 5,278 11,519 9,825
Other income/(expense):
Interest income 28 28 33 33
Interest expense (52) (370) (170) (783)
Other, net 232 209 805 500
-------- -------- -------- --------
Income before income taxes 6,342 5,145 12,187 9,575
Provision for income taxes 2,737 2,781 5,484 5,376
-------- -------- -------- --------
NET INCOME $ 3,605 $ 2,364 $ 6,703 $ 4,199
-------- -------- -------- --------
Other comprehensive income/(loss), net of tax:
Reclassification of accumulated unrealized
gain on sale of marketable securities
included in net income -- -- -- (109)
Foreign currency translation adjustments 26 48 17 31
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 3,631 $ 2,412 $ 6,720 $ 4,121
======== ======== ======== ========
BASIC EARNINGS PER SHARE $ 0.43 $ 0.28 $ 0.80 $ 0.50
DILUTED EARNINGS PER SHARE $ 0.42 $ 0.28 $ 0.79 $ 0.49
-------- -------- -------- --------
-9-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON THE PREVIOUSLY
ISSUED CONDENSED CONSOLIDATED BALANCE SHEET:
December 31, 2004
---------------------------
As Originally
Reported As Restated
------------- -----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 15,471 $ 15,471
Receivables, net 79,559 79,559
Unbilled revenues on contracts in progress 71,280 73,852
Prepaid expenses and other 12,941 11,893
-------- --------
Total current assets 179,251 180,775
-------- --------
PROPERTY, PLANT AND EQUIPMENT, NET 17,879 19,013
OTHER ASSETS
Goodwill and other intangible assets, net 8,947 8,947
Other assets 5,667 6,278
-------- --------
Total other assets 14,614 15,225
-------- --------
TOTAL ASSETS $211,744 $215,013
======== ========
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 48,326 $ 48,723
Accrued employee compensation 27,278 31,596
Accrued insurance 9,180 9,758
Other accrued expenses 13,484 25,413
Billings in excess of revenues on contracts in progress 9,705 9,704
Deferred tax liability 11,145 11,957
-------- --------
Total current liabilities 119,118 137,151
-------- --------
OTHER LIABILITIES
Other liabilities 6,094 3,081
-------- --------
Total liabilities 125,212 140,232
-------- --------
SHAREHOLDERS' INVESTMENT
Common stock 8,910 8,910
Additional paid-in-capital 40,000 40,730
Retained earnings 41,769 29,288
Accumulated other comprehensive loss (1,129) (1,129)
Unearned compensation (65) (65)
Less - Treasury stock (2,953) (2,953)
-------- --------
Total shareholders' investment 86,532 74,781
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $211,744 $215,013
======== ========
-10-
THE FOLLOWING TABLE PRESENTS THE EFFECTS OF THE ADJUSTMENTS ON THE PREVIOUSLY
ISSUED (UNAUDITED) CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS:
For the six months ended
June 30, 2004
---------------------------
(In thousands)
As Originally
Reported As Restated
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 6,703 $ 4,199
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,269 2,408
Changes in assets and liabilities:
Increase in receivables and contracts in progress (10,646) (11,295)
Increase in accounts payable and accrued expenses 11,018 15,181
Decrease in other net assets 5,403 5,665
-------- --------
Total adjustments 8,044 11,959
-------- --------
Net cash provided by operating activities 14,747 16,158
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (1,405) (1,290)
-------- --------
Net cash used in investing activities (1,405) (1,290)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments for capital lease obligations -- (148)
Proceeds from the exercise of stock options 825 825
Repayments of long-term debt (12,402) (12,402)
Decrease in book overdrafts -- (1,230)
-------- --------
Net cash used in financing activities (11,577) (12,955)
-------- --------
Net increase in cash and cash equivalents 1,765 1,913
Cash and cash equivalents, beginning of year 9,274 9,126
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,039 $ 11,039
======== ========
These restatement adjustments had the following effects on our opening balances
within shareholders' investment as of January 1, 2004:
As Previously
Reported Adjustments As Restated
------------- ----------- -----------
Additional paid-in capital $38,298 $ 236 $38,534
Retained earnings $29,477 $(8,583) $20,894
Accumulated other comprehensive loss $ (912) $ 109 $ (803)
Total shareholders' investment $72,581 $(8,238) $64,343
======= ======= =======
-11-
NOTE 2 - EARNINGS PER SHARE
The following table summarizes our weighted average shares outstanding for the
three and six-month periods ended June 30, 2005 and 2004. The additional shares
included in diluted shares outstanding are entirely attributable to the dilutive
effect of stock options.
For the For the
three months ended six months ended
--------------------- ---------------------
Weighted average shares outstanding 2005 2004 2005 2004
----------------------------------- --------- --------- --------- ---------
Basic 8,543,956 8,402,482 8,534,053 8,361,449
Diluted 8,716,802 8,546,838 8,722,187 8,497,567
Basic and diluted earnings per share are computed based on our net income of
$42,000 and $2,364,000 for the three-month periods ended June 30, 2005 and 2004,
and $2,896,000 and $4,199,000 for the six-month periods ended June 30, 2005 and
2004, respectively.
As of June 30, 2005 and 2004, the Company had approximately 6,000 and 199,000
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.
NOTE 3 - BUSINESS SEGMENT INFORMATION
Our business segments reflect how management makes resource decisions and
assesses its performance. Effective January 1, 2005, we have the following two
reportable segments:
- 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, site assessment and
restoration, strategic regulatory analysis, regulatory compliance, and
advanced management systems.
- The Energy segment provides a full range of 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 these service offerings are enhanced by the utilization of this
segment's Managed Services operating model as a service delivery method.
Our Energy segment serves both major and smaller independent oil and gas
producing companies, but does not pursue exploration opportunities for our
own benefit or own any oil or natural gas reserves.
We evaluate the performance of our segments primarily based on operating income
before Corporate overhead allocations. Corporate overhead includes functional
unit costs related to finance, legal, human resources, information technology
and communications, and is allocated between our Engineering and Energy segments
based on a three-part formula comprising revenues, assets and payroll.
-12-
The following table reflects the required disclosures for our reportable
segments (in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
For the three months ended For the six months ended
----------------------------- -----------------------------
Restated Restated
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
ENGINEERING
Total contract revenues $ 92.1 $ 81.1 $185.9 $156.0
Income from operations before
Corporate overhead 11.2 7.7 22.6 14.9
Less: Corporate overhead (3.5) (2.8) (6.4) (5.5)
------ ------ ------ ------
Income from operations 7.7 4.9 16.2 9.4
------ ------ ------ ------
ENERGY
Total contract revenues 50.7 49.8 101.1 100.3
Income/(loss) from operations before
Corporate overhead (2.0) 1.3 (2.1) 2.8
Less: Corporate overhead (1.4) (1.2) (2.4) (2.4)
------ ------ ------ ------
Income/(loss) from operations (3.4) 0.1 (4.5) 0.4
------ ------ ------ ------
TOTAL REPORTABLE SEGMENTS
Total contract revenues 142.8 130.9 287.0 256.3
Income from operations before
Corporate overhead 9.2 9.0 20.5 17.7
Less: Corporate overhead (4.9) (4.0) (8.8) (7.9)
------ ------ ------ ------
Income from operations 4.3 5.0 11.7 9.8
------ ------ ------ ------
Other Corporate/Insurance
income/(expense) (2.1) 0.3 (2.7) --
------ ------ ------ ------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 2.2 $ 5.3 $ 9.0 $ 9.8
====== ====== ====== ======
Restated
JUNE 30, 2005 Dec. 31, 2004
------------- -------------
SEGMENT ASSETS:
Engineering $117.1 $113.7
Energy 79.6 71.8
------ ------
Subtotal - segments 196.7 185.5
Corporate/Insurance 16.9 29.5
------ ------
Total $213.6 $215.0
====== ======
NOTE 4 - LONG-TERM DEBT AND BORROWING ARRANGEMENTS
We have an unsecured credit agreement ("the Agreement") with a consortium of
financial institutions. The Agreement provides for a commitment of $60 million
through September 17, 2008. The commitment
-13-
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,
2005, no borrowings were outstanding under the Agreement; however, outstanding
letters of credit totaled $7.0 million as of this date.
The Agreement requires us to meet minimum equity, leverage, interest and rent
coverage, and current ratio covenants. If any of these financial covenants or
certain other conditions of borrowing are not achieved, under certain
circumstances, after a cure period, the banks may demand the repayment of all
borrowings outstanding and/or require deposits to cover the outstanding letters
of credit.
We did not timely file our quarterly reports on Form 10-Q for the second and
third quarters of 2005 and the first quarter of 2006, or our annual report on
Form 10-K for the year ended December 31, 2005. As a result, several covenant
violations related to the timing of our financial reporting occurred under the
Agreement. The lenders have waived these violations by allowing us to file our
Forms 10-Q for the quarters ended June 30, 2005 and September 30, 2005, our Form
10-K for the year ended December 31, 2005, and our Form 10-Q for the quarter
ended March 31, 2006, with the SEC by August 15, 2006. We expect to complete all
of these past due filings by August 15, 2006.
Furthermore, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, our lenders have also waived the
resulting covenant violation related to the timing of this filing by allowing us
to file such Form 10-Q by September 30, 2006. We currently expect to be able to
file our Form 10-Q for the second quarter of 2006 by September 30, 2006.
Beginning with our Form 10-Q filing for the third quarter of 2006, we currently
expect to complete our quarterly and annual SEC filings within the SEC's filing
deadlines.
NOTE 5 - CONTINGENCIES
We currently believe that amounts recorded for certain tax exposures identified
through our restatement process may ultimately either be recoverable from
clients or may otherwise be reduced. Actual payments could differ from amounts
estimated due to the assessment of certain indirect tax obligations by tax
authorities to our clients in situations where we had the obligation to charge
the client for these taxes, collect the tax and remit it to the tax authorities,
or our successful negotiation of tax penalties and interest at less than full
statutory rates in situations where such penalty and interest obligations have
been estimated and accrued at full statutory rates based on the best information
currently available. Based on information currently available, these exposures
have been determined to reflect probable liabilities. However, depending on the
outcome of future negotiations and discussions with clients and tax authorities,
subsequent conclusions may be reached which indicate that portions of these
additional tax exposures may not require payment and therefore changes in our
estimates could be necessary in future periods. This could result in favorable
effects on our income statements in future periods.
Insurance coverage is obtained for catastrophic exposures as well as those risks
required to be insured by law or contract. We require our 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. We are insured with respect to
our workers' compensation and general liability exposures subject to deductibles
or self-insured retentions. Loss provisions for these exposures are recorded
based upon our estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
-14-
We are self-insured for our 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.
Our 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 2001, the Pennsylvania Insurance Commissioner placed
Reliance into liquidation. We remain uncertain at this time what effect this
action will have on our recoveries with respect to claims made against us or our
subsidiaries when Reliance coverage was in effect. A wholly-owned subsidiary of
ours 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 us in 2003. Due to the liquidation of Reliance, we are
currently uncertain what amounts paid to settle this claim will be recoverable
under the insurance policy with Reliance. We are pursuing a claim in the
Reliance liquidation and believe that some recovery will result from the
liquidation, but the amount of such recovery cannot currently be estimated. We
had no related receivables recorded from Reliance as of June 30, 2005.
In July 2001, we announced that we had become aware that certain activities
related to the operations of a 53% owned Nigerian subsidiary acquired in 1993
were the subject of an inquiry by the U.S. Department of Justice. There has been
no activity in this matter since 2002. At this time, we do not expect that any
remaining costs associated with this matter will have a material impact on our
consolidated financial statements.
We have been named as a defendant or co-defendant in other legal proceedings
wherein substantial damages are claimed. Such proceedings are not uncommon to
our business. After consultations with counsel, management believes that we have
recognized adequate provisions for probable and reasonably estimable liabilities
associated with these proceedings, and that their ultimate resolutions will not
have a material impact on our consolidated financial position or results of
operations.
At June 30, 2005, we had certain guarantees and indemnifications outstanding
which could result in future payments to third parties. These guarantees
generally result from the conduct of our business in the normal course. Our
outstanding guarantees were as follows at June 30, 2005:
Maximum Related liability
undiscounted balance recorded
(Dollars in millions) future payments at 6/30/05
--------------- -----------------
Standby letters of credit:
Insurance related $6.8 $6.8
Other 0.2 --
Sale of certain construction assets (see Note 11) $0.6 $0.6
Our banks issue standby letters of credit ("LOCs") on our behalf under the
Agreement discussed in Note 4. As of June 30, 2005, most of these LOCs had been
issued to insurance companies to serve as collateral for payments the insurers
are required to make under our self-insurance programs. These LOCs may be drawn
upon in the event that we do not reimburse the insurance companies for claims
payments made on our behalf. Such LOCs renew automatically on an annual basis
unless either the LOCs are returned to the bank by the
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beneficiary or our banks elect not to renew them.
The liability associated with the insurance-related letters of credit reflects
the claims payments for which we expect to reimburse the insurance company
(subsequent to their payments of these claims) in order to avoid the insurance
company's need to draw on the letter of credit. This liability is included as
accrued insurance in our Condensed Consolidated Balance Sheet.
NOTE 6 - INCOME TAXES
We account for income taxes under the asset and liability method pursuant to
SFAS 109, "Accounting for Income Taxes." We base our consolidated effective
income tax rate for interim periods on our estimated annual consolidated
effective income tax rate, which includes estimates of the taxable income and
revenue for jurisdictions in which we operate. In certain foreign jurisdictions,
our subsidiaries are subject to a deemed profits tax that is assessed based on
revenue. In other jurisdictions or situations, our subsidiaries are subject to
income taxes based on taxable income. In these situations, our estimated income
tax payments during the year (which are withheld from client invoices at
statutory rates) may significantly exceed the tax due per the income tax returns
when filed; however, no practical method of refund can be effected. As a result,
related income tax assets are routinely assessed for realizability, and
valuation allowances against these tax assets are recorded in the event that it
is more likely than not that such tax assets will not be realized. Certain
foreign subsidiaries do not have earnings and profits for U.S. tax purposes,
which prevents us from taking U.S. tax benefits on these foreign losses. In
addition, valuation allowances against tax benefits of foreign net operating
losses may be recorded as a result of our inability to generate sufficient
taxable income in certain foreign jurisdictions.
As a result of the foregoing, depending upon revenues and relative
profitability, we may report very high effective income tax rates on foreign
income. The amount of these taxes, when proportioned with U.S. tax rates and
income amounts, can cause our consolidated effective income tax rate to
fluctuate significantly.
During the first six months of 2005, our effective income tax was 66% as
compared to 56% for the same period in 2004. The increase is attributable to the
lower level of profitability for foreign jurisdictions due to taxes based on
deemed profits and the inability to deduct losses generated by certain foreign
subsidiaries. Our higher income tax provision for the second quarter of 2005
resulted from our estimated full year 2005 effective tax rate increasing from
57% in the first quarter of 2005 to 66% in the second quarter.
NOTE 7 - STOCK-BASED COMPENSATION
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. ("SFAS") 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure," which amended SFAS 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for companies that voluntarily change to the fair value based method
of accounting for stock-based employee compensation. Under the prospective
method, we began expensing the fair value of all stock options granted, modified
or settled effective January 1, 2003.
Prior to January 1, 2003, we 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. Accordingly, no compensation cost was recognized for
stock options granted prior to January 1, 2003. If compensation costs for our
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, our pro forma net income and earnings per share amounts would have
been as follows:
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For the three months ended For the six months ended
----------------------------- -----------------------------
Restated Restated
(In thousands) JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Net income, as reported $ 42 $2,364 $2,896 $4,199
Add: Stock-based employee compensation
expense included in reported net
income, net of related tax effects 95 55 105 59
Deduct: Stock-based employee
compensation expense determined
under fair value method, net of
related tax effects (97) (74) (120) (120)
---- ------ ------ ------
Pro forma net income $ 40 $2,345 $2,881 $4,138
==== ====== ====== ======
For the three months ended For the six months ended
----------------------------- -----------------------------
Restated Restated
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Reported earnings per share:
Basic $0.00 $0.28 $0.34 $0.50
Diluted 0.00 0.28 0.33 0.49
Pro forma earnings per share:
Basic 0.00 0.28 0.34 0.49
Diluted $0.00 $0.27 $0.33 $0.49
NOTE 8 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
JUNE 30, 2005 Dec. 31, 2004
------------- -------------
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 $1,667 and $1,524, respectively 333 476
------ ------
Goodwill and other intangible assets, net $8,804 $8,947
====== ======
Under SFAS 142, our goodwill balance is not being amortized and goodwill
impairment tests are being performed at least annually. We completed our most
recent annual impairment review during the second quarter of 2005, and no
impairment charge was required. Similarly, no goodwill impairment charge was
recorded in 2004.
Our other intangible assets balance solely comprises a non-compete agreement
from our 1998 purchase of Steen Production Services, Inc. Amortization expense
was $143,000 for the six months ended June 30, 2005
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and 2004. Future amortization expense on the other intangible assets balance is
currently estimated to be $143,000 for the six months ending December 31, 2005
with the remaining balance of $190,000 being amortized in 2006.
NOTE 9 - CAPITAL STOCK
During 1996, the Board of Directors authorized the repurchase of up to 500,000
shares of our Common Stock in the open market. In 2003, the Board of Directors
authorized an additional repurchase of up to 500,000 shares for a total
authorization of 1,000,000 shares. During the second quarter of 2005, we
reactivated this share repurchase program and repurchased 89,100 treasury shares
at market prices ranging from $16.35 to $18.21 per share, for a total price of
$1.5 million. As of June 30, 2005, treasury shares totaling 505,119 had been
repurchased under our Board's authorizations.
Our monthly share repurchases for the six months ended June 30, 2005 were as
follows:
(d) Maximum Number (or
(c) Total Number of Shares Approximate Dollar Value)
Purchased as Part of of Shares that May Yet
(a) Total Number of (b) Average Price Publicly Announced Plans Be Purchased Under the
Period Shares Purchased Paid per Share or Programs Plans or Programs
------ ------------------- ----------------- -------------------------- --------------------------
June 1, 2005-
June 30, 2005 89,100 17.11 89,100 494,881
As of June 30, 2005, the difference between the number of treasury shares
repurchased under these authorizations and the number of treasury shares listed
on the balance sheet relates to an exchange of Series B Common Stock for 23,452
Common shares which occurred during the first quarter of 2002. The remaining
difference relates to 1,330 shares issued to employees as bonus share awards in
the late 1990s.
NOTE 10 - RECENT ACCOUNTING PRONOUNCEMENTS
In March 2005, the FASB issued Interpretation No. 47, "Accounting for
Conditional Asset Retirement Obligations" ("FIN 47"). FIN 47 clarifies that the
term "conditional asset retirement obligation" as used in SFAS 143, "Accounting
for Asset Retirement Obligations," refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are
conditional on a future event that may or may not be within the control of the
entity. Accordingly, FIN 47 clarifies that an entity is required to recognize a
liability for the fair value of a conditional asset retirement obligation when
incurred if the fair value of the liability can be reasonably estimated. This
interpretation is effective no later than the end of fiscal years ending after
December 15, 2005. We will adopt this statement during the fourth quarter of
2005, and do not expect any significant impact on our consolidated financial
statements.
In December 2004, the FASB issued SFAS 123R, which replaces SFAS 123 and
supersedes Accounting Principles Board Opinion No. ("APB 25"), "Accounting for
Stock Issued to Employees." SFAS 123R also amends Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows," to require reporting of
excess tax benefits from the exercises of stock-based compensation awards as a
financing cash inflow rather than as an operating cash inflow. The Securities
and Exchange Commission ("SEC") subsequently amended
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the effective date of SFAS 123R to be effective for the first interim period
after December 31, 2005 for calendar year companies. SFAS 123R requires that the
expense resulting from all share-based payment transactions be recognized in the
financial statements. This statement applies to all awards granted after the
required effective date, and shall not apply to awards granted in periods before
the required effective date, except if prior awards are modified, repurchased or
cancelled after the effective date. In March 2005, the SEC released Staff
Accounting Bulletin No. ("SAB") 107 to assist registrants in implementing SFAS
123R while enhancing the information that investors receive. The FASB has also
issued interpretative guidance. We will adopt the provisions of SFAS 123R on
January 1, 2006 and expect to use the modified prospective application method in
our adoption of SFAS 123R. SFAS 123R will not have a material impact on our
consolidated financial statements since we have been recording our stock-based
compensation expense under the fair value method in accordance with SFAS 123
since January 1, 2003.
In December 2004, the FASB issued SFAS 153 "Exchanges of Nonmonetary Assets-an
Amendment of APB No. 29." APB 29, "Accounting for Nonmonetary Transactions," is
based on the principle that exchanges of nonmonetary assets should be measured
based on the fair value of assets exchanged. The guidance in APB 29, however,
included certain exceptions to that principle. SFAS 153 amends APB 29 to
eliminate the exception for nonmonetary exchanges of similar productive assets
and replaces it with a general exception for exchanges of nonmonetary assets
that do not have commercial substance. The provisions of this statement are
effective for nonmonetary asset exchanges occurring in fiscal periods beginning
after June 15, 2005. We adopted the provisions of this statement effective July
1, 2005, and as a result, do not expect any impact on our consolidated financial
statements.
In December 2004, the FASB issued Staff Position No. ("FSP") 109-1, "Application
of FASB Statement 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of
2004," and 109-2, "Accounting and Disclosure Guidance for the Foreign Earnings
Repatriation Provision within the American Jobs Creation Act of 2004." FSP 109-1
provides guidance on the application of SFAS 109, "Accounting for Income Taxes,"
to the provision within the American Jobs Creation Act of 2004 ("the Act") that
provides a tax deduction on qualified production activities. FSP 109-2 provides
for a special one-time tax benefit on the repatriation of certain foreign
earnings to a U.S. taxpayer, provided certain criteria are met. Both FSP 109-1
and 109-2 were effective upon issuance. We have evaluated both provisions of the
Act and the related FASB guidance, and determined that neither provision will
have an effect on our 2005 consolidated financial statements.
In May 2005, the FASB issued SFAS 154, "Accounting Changes and Error
Corrections, a replacement of APB No. 20 and FASB Statement No. 3." SFAS 154
requires, among other things, retrospective application, unless impracticable,
to prior period financial statements for voluntary changes in accounting
principles and changes required by an accounting pronouncement in the unusual
circumstances in which the pronouncement does not include specific transition
provisions. SFAS 154 also requires that a change in depreciation, amortization,
or depletion method for long-lived, nonfinancial assets should be accounted for
as a change in accounting estimate effected by a change in accounting principle.
The guidance for reporting the correction of an error in previously issued
financial statements and the change of an accounting estimate will not change
from APB 20. SFAS 154 is effective for us beginning January 1, 2006. We do not
expect the adoption of this standard will have a material impact on our
consolidated financial statements.
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In July 2006, the FASB issued FIN 48, "Accounting for Uncertainty in Income
Taxes." FIN 48 provides guidance on the measurement, recognition, classification
and disclosure of, as well as the interim period accounting for, uncertain tax
positions. We will be required to adopt the provisions of FIN 48 effective
January 1, 2007. We are currently evaluating the impact that FIN 48 will have on
our consolidated financial statements.
NOTE 11 - SUBSEQUENT EVENTS
During the fourth quarter of 2005, we became aware of new information related to
a partially self-insured general liability insurance claim. After consideration
of this new information, we determined that our self-insurance reserve related
to this claim should be increased by $0.5 million as of June 30, 2005. This
adjustment reduced our Energy segment's pre-tax income by $0.5 million for the
three and six-month periods ended June 30, 2005.
During 2000, we sold certain assets associated with our former heavy & highway
construction business to A&L, Inc. In October 2003, A&L filed a lawsuit against
us alleging misrepresentation and breach of warranty in connection with the
asset sale. In March 2006, a settlement was reached under which all claims were
released by both parties. The settlement required our payment of $625,000 to
A&L, as well as our forgiveness of certain receivables totaling $850,000, for
which we had previously recorded reserves totaling $600,000. The resultant
effects of this settlement were recorded during the second quarter of 2005.
These adjustments increased our Corporate overhead expense (which is allocated
between the Engineering and Energy segments) and reduced pre-tax income by $0.9
million for the three and six-month periods ended June 30, 2005.
During the second quarter of 2006, we became aware of new information related to
a partially insured professional liability insurance claim. After consideration
of this new information, we determined that our self-insurance reserve related
to this claim should be increased by $1.25 million as of June 30, 2005. This
adjustment reduced our pre-tax income by $1.25 million for the three and
six-month periods ended June 30, 2005.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESTATEMENT
As discussed more fully in the Explanatory Note of this Form 10-Q and in Note 1
to the condensed consolidated financial statements in Item 1, Part I, we have
restated our 2004 condensed consolidated financial statements in this Form 10-Q
as a result of certain accounting errors that were determined subsequent to the
issuance of our condensed consolidated financial statements for the quarter
ended March 31, 2005. All amounts and commentary included in this Management's
Discussion and Analysis of Financial Condition and Results of Operations section
give effect to the restatement.
As a result of these errors, we have not timely filed our quarterly reports on
Form 10-Q for the periods ended June 30, 2005, September 30, 2005, and March 31,
2006, or our annual report on Form 10-K for the year ended December 31, 2005,
with the SEC. These failures to file timely SEC reports have caused us to be out
of compliance relative to our listing agreement with the American Stock
Exchange. The American Stock Exchange has indicated that we must file the above
referenced SEC Forms no later than August 15, 2006 in order to regain
compliance.
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In addition, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, we will remain out of compliance
relative to our listing agreement with the American Stock Exchange until our
Form 10-Q for the second quarter of 2006 is filed. We have requested an
extension of time from the American Stock Exchange to regain compliance with our
listing agreement.
RESULTS OF OPERATIONS
BUSINESS OVERVIEW
We provide engineering and energy expertise for public and private sector
clients worldwide. Our 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. We
view our short and long-term liquidity as being dependent upon our results of
operations, changes in working capital and our borrowing capacity.
BUSINESS ENVIRONMENT
Our 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 our services in the engineering and energy markets.
We could also be affected by additional external factors such as price
fluctuations and capital expenditures in the energy industry.
Since its approval in 1998, the Federal government's TEA-21 legislation has made
significant transportation infrastructure funding available to the various state
agencies. TEA-21 expired on September 30, 2003, but was extended 11 times at
previous funding levels. During the most recent extension period which ended in
May 2005, the U.S. Congress approved a new, six-year $286 billion measure
entitled SAFETEA-LU, the Safe, Accountable, Flexible, Efficient Transportation
Equity Act-A Legacy for Users. This new level of guaranteed funding reflects an
increase of approximately 46% over the TEA-21 levels. The most significant
impact of the numerous extensions of TEA-21 was that many states were unable or
unwilling to make sizeable long-term investments in major transportation
infrastructure projects. This, in turn, has had a marginally adverse impact on
our transportation planning, design and construction management activity to date
in 2005. However, with the new bill now enacted, we expect to see increasing
activity occurring in the second half of 2006 and into 2007. From 2002 through
the first half of 2005, we have observed increased Federal spending activity on
Departments of Defense ("DoD") and Homeland Security ("DHS") activities,
including the Federal Emergency Management Agency ("FEMA"). To mitigate the
effect of the state transportation budget constraints on our business,
management has focused more marketing and sales activity on these agencies (DoD
and DHS) of the Federal government. As a result of this strategy, we increased
our revenues from U.S. Federal government contracting activity in excess of 100
percent since 2002. Additional government spending in these areas, or on
transportation infrastructure, could result in profitability and liquidity
improvements for us. Significant contractions in any of these areas could
unfavorably impact our profitability and liquidity. In March 2004, we announced
that we 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 Program for flood hazard mitigation
across the United States and its territories. Approximately $619 million of this
contract value was included in the Company's backlog as of June 30, 2005. In
addition, during 2004, we were selected for several indefinite
delivery/indefinite quantity task order contracts by the U.S. Army Corps of
Engineers, U.S. Air Force and the U.S. National Guard. During 2004, we were also
selected for several contracts with the Mineral Management Service, agencies
within the U.S. Department of Transportation, DHS (which includes FEMA, US-VISIT
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and the U.S. Coast Guard), the Department of Energy, and the Federal Bureau of
Investigation. In the first quarter of 2005, we were selected for a five-year
indefinite delivery/indefinite quantity contract with a potential maximum value
of $30 million by the U.S. Army Corp of Engineers, Transatlantic Programs
Center.
In 2003, our Energy business broadened its offshore Managed Services offering to
include onshore U.S. oil and gas producers, as demonstrated by two new four-year
contracts totaling $144 million received during 2003 from Huber Energy. During
the first quarter of 2005, we received an additional $1.0 million per year
onshore Managed Services contract in the Powder River Basin of Wyoming from
Storm Cat Energy, to operate and maintain its coal bed methane production
facilities, which are adjacent to the Huber properties. With regard to offshore
Managed Services, during the third quarter of 2004, we 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 of Mexico.
Internationally, we recently received a multi-million dollar contract to provide
operations assurance services for the Agbami Floating Production Storage and
Offloading Project in deepwater offshore Nigeria.
RESULTS OF OPERATIONS
The following table reflects a summary of our operating results (excluding
intercompany transactions) for ongoing operations for the periods ended June 30,
2005 and 2004 (dollars in millions). We evaluate the performance of our segments
primarily based on income from operations before Corporate overhead allocations.
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
For the three months ended For the six months ended
----------------------------- -----------------------------
Restated Restated
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
ENGINEERING
Total contract revenues $92.1 $81.1 $185.9 $156.0
Income from operations before
Corporate overhead 11.2 7.7 22.6 14.9
Percentage of Engineering revenues 12.2% 9.5% 12.2% 9.5%
Less: Corporate overhead (3.5) (2.8) (6.4) (5.5)
Percentage of Engineering revenues (3.8)% (3.5)% (3.4)% (3.5)%
------ ------ ------ ------
Income from operations 7.7 4.9 16.2 9.4
Percentage of Engineering revenues 8.4% 6.0% 8.7% 6.0%
----- ----- ------ ------
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For the three months ended For the six months ended
----------------------------- -----------------------------
Restated Restated
JUNE 30, 2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
ENERGY
Total contract revenues 50.7 49.8 101.1 100.3
Income/(loss) from operations before
Corporate overhead (2.0) 1.3 (2.1) 2.8
Percentage of Energy revenues (3.9)% 2.6% (2.1)% 2.8%
Less: Corporate overhead (1.4) (1.2) (2.4) (2.4)
Percentage of Energy revenues (2.8)% (2.4)% (2.4)% (2.4)%
------ ------ ------ ------
Income/(loss) from operations (3.4) 0.1 (4.5) 0.4
Percentage of Energy revenues (6.7)% 0.2% (4.5)% 0.4%
====== ====== ====== ======
TOTAL REPORTABLE SEGMENTS
Total contract revenues 142.8 130.9 287.0 256.3
Income from operations before
Corporate overhead 9.2 9.0 20.5 17.7
Percentage of total reportable
segment revenues 6.4% 6.9% 7.1% 6.9%
Less: Corporate overhead (4.9) (4.0) (8.8) (7.9)
Percentage of total reportable
segment revenues (3.4)% (3.1)% (3.1)% (3.1)%
------ ------ ------ ------
Income from operations 4.3 5.0 11.7 9.8
Percentage of total reportable
segment revenues 3.0% 3.8% 4.1% 3.8%
------ ------ ------ ------
Other Corporate/Insurance
income/(expense) (2.1) 0.3 (2.7) --
------ ------ ------ ------
TOTAL COMPANY - INCOME FROM
OPERATIONS $ 2.2 $ 5.3 $ 9.0 $ 9.8
Percentage of total Company
revenues 1.5% 4.0% 3.1% 3.8%
====== ====== ====== ======
TOTAL CONTRACT REVENUES
Total contract revenues increased 9% in the second quarter of 2005 relative to
the second quarter of 2004. Engineering revenues for the second quarter of 2005
increased 14% from the second quarter of 2004. Engineering's revenues were
positively impacted by the previously mentioned map modernization program
management project with FEMA, which commenced near the end of the first quarter
of 2004. In addition, as a result of achieving certain performance levels on
this FEMA project during the fourth quarter of 2004, the Engineering segment
recognized revenue totaling $0.7 million during the second quarter of 2005.
Total revenue from FEMA was $25 million in the second quarter of 2005 versus $14
million in the second quarter of 2004. Much of the FEMA revenue growth was
associated with the cost of building the information infrastructure required for
the project. In the Energy segment, revenues for the second quarter of 2005
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increased 2% from the same period in 2004. Revenue increases were primarily
associated with the addition of the aforementioned ASOP Managed Services and
Storm Cat Energy contracts, as partially offset by lower revenues on certain
contracts in Energy's computerized maintenance management and operations
assurance ("CMMS") business. The lower second quarter 2005 revenues associated
with these contracts were due to the wind down of several contracts during 2004
and the first half of 2005.
For the first six months of 2005, total contract revenues increased 12% over the
corresponding period in 2004. In the Engineering segment, revenues increased 19%
in the first half of 2005 as compared to the first half of 2004. Again,
Engineering revenues for the first half of 2005 were positively impacted by the
map modernization program management project with FEMA. During the first half of
2005, the Engineering segment recognized revenue totaling $2.9 million related
to incentive awards earned on the FEMA project. Total revenue from FEMA was $59
million in the first six months of 2005 versus $26 million in the first six
months of 2004. Much of the FEMA revenue growth was associated with the cost of
building the information infrastructure required for the project. In the Energy
segment, revenues for the first six months of 2005 increased 1% over the first
six months of 2004. Consistent with the increase in the second quarter of 2005,
Energy's slight revenue increase was primarily associated with the ASOP Managed
Services and Storm Cat Energy contracts, as partially offset by lower revenues
on certain contracts in its CMMS business. The lower second quarter 2005
revenues associated with these contracts were due to the wind-down of several
contracts during 2004 and the first half of 2005.
GROSS PROFIT
Gross profit expressed as a percentage of revenues decreased to 13.1% for the
second quarter of 2005 from 18.3% in the second quarter of 2004. The Engineering
segment's gross profit percentage decreased slightly to 20.4% in the second
quarter of 2005 from 21.4% in the second quarter of 2004. With respect to FEMA,
the positive effect of the aforementioned incentive award (which had no
associated costs) was offset by a higher use of subcontractors (at lower
margins) in the second quarter of 2005. The Energy segment's gross profit
percentage decreased to 3.9% in the second quarter of 2005 from 13.0% in the
second quarter of 2004. Negatively impacting Energy's gross profit expressed as
a percentage of revenues in the second quarter of 2005 was our loss of certain
offshore projects in the Gulf of Mexico, where the properties were sold and we
were not able to retain the contracts with the new owners. Gross profit as a
percentage of revenues for our Energy segment was also affected by delays and
cancellations of certain contracts in our CMMS business. In connection with a
review of medical insurance claims, we also increased our related claims
reserves by $0.7 million during the second quarter of 2005. The majority of this
expense was allocated to cost of work performed (thereby reducing gross profit
for both the Engineering and Energy segments), while the remainder was allocated
to selling, general and administrative expenses. Finally, our gross profit for
the second quarter of 2005 was unfavorably affected by $1.75 million as a result
of the two subsequent events relating to insurance claims that are further
discussed in Note 11 to the accompanying financial statements. By comparison,
our Energy segment's gross profit for second quarter of 2004 was favorably
impacted by developments associated with certain general liability claims.
For the first six months of 2005, gross profit expressed as a percentage of
revenues decreased to 14.3% from 17.5% in 2004. The Engineering segment's gross
profit percentage decreased to 20.5% in the first six months of 2005 from 20.9%
in the first six months of 2004. With respect to FEMA, the positive effect of
the aforementioned incentive awards (which had no associated costs) was again
offset by a higher use of subcontractors (at lower margins) in the first half of
2005. The Energy segment's gross profit percentage decreased to 5.6% in the
first six months of 2005 from 12.1% in the first six months of 2004. Energy's
gross profit expressed as a percentage of revenues in the first six months of
2005 was adversely affected by the previously mentioned loss of certain offshore
projects in the Gulf of Mexico and the resulting change in our
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contract mix toward lower margin labor-based contracts, and the delays and
cancellations of certain contracts in our CMMS business. As also stated above,
we increased our reserve for medical insurance claims by $0.7 million during the
first half of 2005 and the majority of this expense was allocated to cost of
work performed, thereby reducing gross profit for both the Engineering and
Energy segments. Again, our gross profit for the first six months of 2005 was
unfavorably impacted by $1.75 million as a result of the two subsequent events
relating to insurance claims that are further discussed in Note 11 to the
accompanying financial statements. As a comparison, our Energy segment's gross
profit was favorably impacted by developments associated with certain general
liability claims in the first six months of 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses, including Corporate
overhead, decreased by $2.2 million in the second quarter of 2005 as compared to
the second quarter of 2004. Likewise, SG&A expenses expressed as a percentage of
total contract revenues decreased to 11.6% in the second quarter of 2005 from
14.3% in the second quarter of 2004. In the Engineering segment, SG&A expenses
expressed as a percentage of revenues decreased to 12.1% in the second quarter
of 2005 from 15.2% in the second quarter of 2004. In the Energy segment, SG&A
expenses expressed as a percentage of revenues decreased to 10.5% in the second
quarter of 2005 from 12.8% in the second quarter of 2004. These decreases in
SG&A expenses expressed as a percentage of revenues primarily reflect the
combination of significantly lower incentive compensation expense in both
segments for the second quarter of 2005 and the 9% increase in revenues. In
addition to an absence of incentive compensation expense being recorded in the
second quarter of 2005 due to our 2005 financial performance, amounts previously
accrued at March 31, 2005 under our long-term incentive compensation plan and
totaling $0.5 million were reversed in the second quarter of 2005 when such
amounts were no longer considered to be payable under the plan. Offsetting these
decreases in SG&A expenses expressed as a percentage of revenues was the effect
of our settling the A&L litigation. As discussed in Note 11 to the accompanying
financial statements, this settlement had the effect of increasing our SG&A
expenses (specifically Corporate overhead expense) by $0.9 million in the second
quarter of 2005. Aside from the effect of this litigation settlement, Corporate
overhead was flat for the second quarters of 2005 and 2004.
SG&A expenses, including Corporate overhead, decreased by $2.9 million in the
first half of 2005 as compared to the first half of 2004. Similarly, SG&A
expenses expressed as a percentage of total contract revenues decreased to 11.2%
in the first half of 2005 from 13.6% in the first half of 2004. In the
Engineering segment, SG&A expenses expressed as a percentage of revenues
decreased to 11.7% in the first half of 2005 from 14.9% in the first half of
2004. In the Energy segment, SG&A expenses expressed as a percentage of revenues
decreased to 10.0% in the first half of 2005 from 11.6% in the first half of
2004. These decreases in SG&A expenses expressed as a percentage of revenues
primarily reflect the combination of significantly lower incentive compensation
expense in both segments for the first half of 2005 and the 12% increase in
revenues. Offsetting these decreases in SG&A expenses expressed as a percentage
of revenues was the effect of our settling the A&L litigation. As discussed in
Note 11 to the accompanying financial statements, this settlement had the effect
of increasing our SG&A expenses (specifically Corporate overhead expense) by
$0.9 million in the first half of 2005. Aside from the effect of this litigation
settlement, Corporate overhead was flat for the six-month periods ended June 30,
2005 and 2004.
OTHER INCOME
Interest income was slightly higher for both the second quarter and first half
of 2005 as compared to the second quarter and first half of 2004, respectively.
We were in a net borrowed position during the second quarter and first half of
2004 versus a net invested position during the second quarter and first half of
2005. Interest expense was $0.4 million for the second quarters of both 2005 and
2004, and $0.8 million for the first
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six months of both 2005 and 2004. Interest expense consists primarily of
accruals related to our underpayment of income, payroll, value added, and sales
and use taxes in our Energy segment (see further discussion in Note 1 to the
accompanying financial statements). Other income for the second quarter and
first half of 2005 was negligible. Other income for the second quarter of 2004
primarily resulted from currency-related gains, while other income for the first
half of 2004 was also attributable to a gain on the sale of an investment.
INCOME TAXES
We had a provision for income taxes of 66% for the first half of 2005 up from
56% in the first half of 2004. The effective rate of 66% reflects our forecasted
effective rate for the year ending December 31, 2005. The variance between the
United States ("U.S.") federal statutory rate and the effective rate for these
periods is due primarily to taxes on foreign income, which we are not able to
offset with U.S. foreign tax credits. Our effective rate is also negatively
impacted by state income taxes, permanent items that are not deductible for U.S.
tax purposes, and Nigerian income taxes that are levied on a deemed income
basis.
CONTRACT BACKLOG
(In millions) JUNE 30, 2005 Dec. 31, 2004
------------- -------------
Engineering $1,162.8 $1,115.2
Energy 293.3 284.3
-------- --------
Total $1,456.1 $1,399.5
======== ========
Backlog consists of that portion of uncompleted work that is represented by
signed or executed contracts. Certain of our 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.
As of June 30, 2005 and December 31, 2004, $619 million and $678 million of our
backlog, respectively, related to a $750 million contract in the Engineering
segment to assist FEMA in conducting a large-scale overhaul of the nation's
flood hazard maps, which commenced late in the first quarter of 2004. This
contract includes data collection and analysis, map production, product
delivery, and effective program management; and seeks to produce digital flood
hazard data, provide access to flood hazard data and maps via the Internet, and
implement a nationwide state-of-the-art infrastructure that enables all-hazard
mapping. Due to the task order structure of the contract, realization of the
timing and amount of the original contract value of $750 million remains
difficult to predict. For Year 1 program objectives, FEMA awarded us Core Task
Order 001 with a total cost-plus-award fee value of $107 million and a
performance period of March 11, 2004 to March 31, 2005. We have submitted both:
(1) a Core Task Order 001 modification proposal to request additional funding
for a revised scope of work and extend the performance period from April 1, 2005
to September 30, 2005 and (2) a proposal for a new Core Task Order for Year 2
program objectives (Core Task Order 2). Pending negotiation of the Core Task
Order 001 proposal, FEMA increased the total estimated cost by $11 million, from
$95 million to $106 million for costs incurred from April 1, 2005 to June 30,
2005. Additionally, pending definitization of Baker's Core Task Order 2
proposal, on June 30, 2005, FEMA issued Baker a letter contract task order at a
not-to-exceed value of $38 million and incrementally-funded $23 million for
performance costs through September 30, 2005. FEMA has identified specific
program objectives and priorities which it intends to accomplish under this
program. As the initial task orders are completed and progress against
objectives is measured, we will become better able to predict realization of
this contract award. We may at a time in the future reduce the backlog
accordingly.
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In our Energy segment, we also consider purchase orders from clients for labor
services as backlog. These purchase orders typically have a twelve-month term
and amounts recorded as revenues on a periodic basis are reduced from backlog.
Most purchase orders have cancellation clauses with thirty-day notice
provisions.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.8 million and $16.2 million for
the six months of 2005 and 2004, respectively. The decrease in cash provided by
operating activities for the first six months of 2005 resulted primarily from
decreases in our accounts payable and other accrued expense balances due to
higher FEMA-related payables at year-end 2004 and the payment of incentive
compensation during the first quarter of 2005.
Net cash used in investing activities was $2.2 million and $1.3 million for the
first half of 2005 and 2004, respectively. These amounts reflect only capital
expenditures for both periods. We expect that our full-year 2005 capital
expenditures will approximate $7.1 million. The 2005 and 2004 amounts primarily
relate to computer software and equipment purchases totaling $1.5 million and
$0.5 million and office and field equipment purchases totaling $0.5 million and
$0.6 million, respectively. In addition to capital expenditures, we acquire
computer equipment, including software, as well as office space, furniture and
fixtures, motor vehicles, and other equipment through operating leases. The use
of operating leases reduces the level of capital expenditures that would
otherwise be necessary to operate both segments of our business.
Net cash used in financing activities was $1.6 million and $13.0 million for the
first half of 2005 and 2004, respectively. The cash used in financing activities
for the first half of 2005 primarily relates to the payment of $1.5 million for
the repurchase of common stock under our stock repurchase program. The cash
usage for the first half of 2004 primarily relates to the repayment of long-term
debt totaling $12.4 million and a decrease in book overdrafts of $1.2 million.
The difference between the aforementioned activity and the net cash usage in
both six-month periods, relates to proceeds from the exercise of stock options
and payments on capital lease obligations.
Working capital increased to $45.2 million at June 30, 2005 from $43.6 million
at December 31, 2004. Our current ratios were 1.34:1 at the end of the second
quarter of 2005 and 1.32:1 as of year-end 2004.
We have an unsecured credit agreement (the "Agreement") with a consortium of
financial institutions. The Agreement provides for a commitment of $60 million
through September 17, 2008. 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, 2005, only letters of credit
totaling $7.0 million were outstanding under the Agreement. The Agreement
requires us to meet minimum equity, leverage, interest and rent coverage, and
current ratio covenants. If any of these financial covenants or certain other
conditions of borrowing are not achieved, under certain circumstances, after a
cure period, the banks may demand the repayment of all borrowings outstanding
and/or require deposits to cover the outstanding letters of credit. We expect to
be in compliance with these financial covenants for at least the next year.
In connection with the restatement of our consolidated financial statements
through March 31, 2005, we did not timely file our quarterly reports on Form
10-Q for the second and third quarters of 2005 and the first quarter of 2006, or
our annual report on Form 10-K for the year ended December 31, 2005. As a
result, several covenant violations related to the timing of our financial
reporting occurred under the Agreement. The lenders have waived these violations
by allowing us to file our Forms 10-Q for the quarters ended June 30, 2005 and
September 30, 2005, our Form 10-K for the year ended December 31, 2005, and our
Form 10-Q for the quarter ended March 31, 2006, with the SEC by August 15, 2006.
We expect to complete all of these
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past due filings by August 15, 2006.
Furthermore, we did not meet the SEC's filing deadline related to our Form 10-Q
for the second quarter of 2006. Accordingly, our lenders have also waived our
resulting covenant violation related to the timing of this filing by allowing us
to file such Form 10-Q by September 30, 2006. We currently expect to be able to
file our Form 10-Q for the second quarter of 2006 by September 30, 2006.
Beginning with our Form 10-Q filing for the third quarter of 2006, we currently
expect to complete our quarterly and annual SEC filings within the SEC's filing
deadlines.
Our borrowing capacity under the Agreement is available for short-term working
capital needs, to support strategic opportunities that management identifies,
and to make our past due tax payments. Our strategy is to better position
ourselves for growth in our Engineering and Energy segments through selected
opportunistic acquisitions that compliment our experience, skill and geographic
presence. We consider acquisitions and investments as components of our growth
strategy and intend to use both existing cash and the Agreement to fund such
endeavors. If we commit to funding future acquisitions, we may need to adjust
our credit facilities to reflect a longer repayment period on borrowings used
for acquisitions. Our failure to file timely financial reports adversely affects
our ability to raise additional equity until the filings are completed.
After giving effect to the foregoing, management believes that the combination
of cash generated from operations and our existing credit facility will be
sufficient to meet our operating and capital expenditure requirements for at
least the next year.
This "Management's Discussion and Analysis of Financial Condition and Results of
Operations" section contains forward-looking statements concerning our future
operations and performance. Forward-looking statements are subject to market,
operating and economic risks and uncertainties that may cause our 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
our relationships and/or contracts with FEMA, changes in anticipated levels of
government spending on infrastructure, including SAFETEA-LU, changes in loan
relationships or sources of financing, changes in management, and changes in
information systems. Such forward-looking statements are made pursuant to the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, our primary interest rate risk relates to our variable-rate
investments (included in cash and cash equivalents), which totaled $8.6 million
as of June 30, 2005. Assuming a 10% decrease in interest rates on these
variable-rate investments (i.e., a decrease from the actual weighted average
interest rate of 1.99% as of June 30, 2005, to a weighted average interest rate
of 1.79%), annual interest income would be approximately $17,000 lower in 2005
based on the outstanding balance of variable-rate investments as of June 30,
2005. Accordingly, we have no material exposure to interest rate risk, nor do we
have any interest rate swap or exchange agreements.
We have several foreign subsidiaries that transact minor portions of their local
activities in currencies other than the U.S. Dollar. In assessing our exposure
to foreign currency exchange rate risk, we recognize that the majority of our
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 us to material transaction
gains and losses. Assuming that foreign currency exchange rates could change
unfavorably by 10%, we would
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have no material exposure to foreign currency exchange rate risk. We have no
foreign currency exchange contracts.
Based on the nature of our business, we have no direct exposure to commodity
price risk.
ITEM 4. CONTROLS AND PROCEDURES
CONCLUSIONS REGARDING THE EFFECTIVENESS OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with participation of
our management, including our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of our disclosure controls and procedures, as such
term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), as of June 30, 2005. This
evaluation considered our various procedures designed to ensure that information
required to be disclosed by us in reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the Securities and Exchange
Commission and that such information is accumulated and communicated to
management, including our CEO and CFO, as appropriate to allow timely decisions
regarding required disclosure. Based upon that evaluation, which included the
matters discussed below, our CEO and CFO concluded that our disclosure controls
and procedures were not effective as of June 30, 2005. Notwithstanding these
material weaknesses, our management has concluded that the financial statements
included in this Form 10-Q fairly present in all material respects our financial
position, results of operations and cash flows for the periods presented in
conformity with generally accepted accounting principles in the United States
("GAAP").
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of a company's annual or interim financial statements would not be
prevented or detected. The following material weaknesses were identified by
management as of June 30, 2005:
1. We did not maintain effective controls, including monitoring, over the
accounting for and disclosure of our income tax and other tax related
accounts. Specifically, we did not maintain a sufficient complement of
personnel within its tax accounting function with the appropriate
level of knowledge, experience and training in the application of GAAP
related to income and other taxes, resulting in us not maintaining
effective controls over the completeness, valuation, existence and
presentation of our deferred income tax assets and liabilities,
including the related valuation allowance; foreign income taxes
payable, foreign payroll and value added taxes payable; state sales
taxes payable; prepaid tax accounts and the related income tax
provision and various tax expense accounts. This control deficiency
resulted in the restatement of our consolidated financial statements
for fiscal years 2001, 2002, 2003 and 2004, and our related interim
consolidated financial statements for each of the quarters of 2004 and
the first quarter of fiscal year 2005. Additionally, this control
deficiency could result in a misstatement in the aforementioned
accounts that would result in a material misstatement to the annual or
interim consolidated financial statements that would not be prevented
or detected. Accordingly, we have determined that this control
deficiency constitutes a material weakness.
2. We did not maintain effective controls over the accounting for our
contract revenue and related unbilled revenue, other accrued expenses
and cost of work performed accounts. Specifically, we did not maintain
effective controls to ensure the completeness and accuracy of change
orders related to a specific contract. This control deficiency
resulted in immaterial misstatements to our consolidated financial
statements for the fourth quarter and fiscal year of 2004, and the
first quarter of fiscal year
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2005. Additionally, this control deficiency could result in a
misstatement in the aforementioned accounts that would result in a
material misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected. Accordingly, we
have determined that this control deficiency constitutes a material
weakness.
3. We did not maintain effective controls over the accounting for our
incurred but not reported (IBNR) liabilities as required under GAAP.
Specifically, we did not properly account for adjustments and
increased activity in evaluating the liability. This control
deficiency resulted in an adjustment to our condensed consolidated
financial statements for the second quarter of fiscal year 2005. This
control deficiency could result in a misstatement in the
aforementioned accounts that would result in a material misstatement
to the annual or interim consolidated financial statements that would
not be prevented or detected. Accordingly, we have determined that
this control deficiency constitutes a material weakness.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were changes, as discussed below, in our "internal control over financial
reporting" (as such term is defined in Rule 13a-15(f) and 15d-15(f) under the
Exchange Act) that occurred during the quarter ended June 30, 2005, and that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PLAN FOR REMEDIATION
We believe the steps described below, some of which we have already taken as
noted herein, together with others that are ongoing or that we plan to take,
will remediate the material weaknesses discussed above:
(1) We established a tax function with a qualified tax director supported
by internal and external resources (began in July 2005).
(2) We have supplemented our existing accounting and finance staff with
additional internal and external resources as appropriate. We will
continue to add financial personnel as necessary to provide adequate
resources with appropriate levels of experience and knowledge of GAAP
(began in July 2005).
(3) We have enhanced our review and documentation of accounting estimates.
This includes but is not limited to estimates of realizability of tax
assets, potential loss contracts and insurance reserves (commenced in
October 2005).
In addition, we have implemented the following procedures to improve our
internal control over financial reporting:
(1) We have emphasized certain key controls in an effort to mitigate
significant risks and strengthen our control environment. In this
regard, we have elevated within the company the awareness and
communication of tax-related contingencies and financial reporting
risks associated with contract accounting and insurance reserves
(began in June 2005).
(2) We have enhanced our monitoring of accounts by deploying account
reconciliation software that facilitates access and review of
reconciliations (deployment began in August 2005).
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 5 to the accompanying condensed consolidated 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 21, 2005.
(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.
(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 7,699,170 430,638
Nicholas P. Constantakis 7,746,716 383,092
William J. Copeland 7,582,855 546,953
Donald P. Fusilli, Jr. 7,739,645 390,163
Roy V. Gavert, Jr. 7,706,881 422,927
Thomas D. Larson 7,668,005 461,803
John E. Murray, Jr. 7,883,922 245,886
Pamela S. Pierce 7,754,213 375,595
Richard L. Shaw 7,618,397 511,411
ITEM 6. EXHIBITS
(a) The following exhibits are included herewith as a part of this Report:
Exhibit No. Description
----------- -----------
10.2(b) Second Amendment to Consulting Agreement dated April 26, 2005, by
and between us and Richard L. Shaw, filed herewith.
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.
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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 15, 2006
-------------------------------------
William P. Mooney
Executive Vice President and
Chief Financial Officer
/s/ Craig O. Stuver Dated: August 15, 2006
-------------------------------------
Craig O. Stuver
Senior Vice President, Corporate
Controller and Treasurer
(Chief Accounting Officer)
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