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 MARCH 31, 2006
Commission file number 1-6627
MICHAEL BAKER CORPORATION
-------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-0927646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Airside Business Park, 100 Airside Drive, Moon Township, PA 15108
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(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]
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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]
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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 8,499,998 shares
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. 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.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
For the three months ended
---------------------------------
MARCH 31, 2006 March 31, 2005
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(In thousands, except
per share amounts)
Total contract revenues $ 145,547 $ 144,195
Cost of work performed 124,780 121,820
--------------------------------------------------------------------------------------------------
Gross profit 20,767 22,375
Selling, general and administrative expenses 17,916 15,520
--------------------------------------------------------------------------------------------------
Income from operations 2,851 6,855
Other income/(expense):
Interest income 318 45
Interest expense (157) (367)
Other, net 212 99
--------------------------------------------------------------------------------------------------
Income before income taxes 3,224 6,632
Provision for income taxes 1,504 3,777
--------------------------------------------------------------------------------------------------
NET INCOME $ 1,720 $ 2,855
Other comprehensive income/(loss)-
Foreign currency translation adjustments - net of tax of
$13 and $0, respectively 116 (34)
--------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 1,836 $ 2,821
==================================================================================================
BASIC EARNINGS PER SHARE $ 0.20 $ 0. 33
DILUTED EARNINGS PER SHARE $ 0.20 $ 0. 33
==================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS MAR. 31, 2006 Dec. 31, 2005
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(In thousands)
CURRENT ASSETS
Cash and cash equivalents $ 13,131 $ 19,041
Receivables, net 82,884 79,177
Unbilled revenues on contracts in progress 92,742 84,654
Prepaid expenses and other 9,895 8,373
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Total current assets 198,652 191,245
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PROPERTY, PLANT AND EQUIPMENT, NET 21,713 21,805
OTHER ASSETS
Goodwill and other intangible assets, net 8,590 8,661
Other assets 4,731 3,750
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Total other assets 13,321 12,411
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TOTAL ASSETS $ 233,686 $ 225,461
===================================================================================================================
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES
Accounts payable $ 46,273 $ 45,570
Accrued employee compensation 27,133 25,475
Accrued insurance 12,458 11,544
Other accrued expenses and current liabilities 23,694 23,308
Income taxes payable 11,321 9,827
Billings in excess of revenues on contracts in progress 13,252 13,060
Current deferred tax liability 13,198 13,197
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Total current liabilities 147,329 141,981
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OTHER LIABILITIES
Long-term debt 620 -
Other long-term liabilities 4,005 3,656
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Total liabilities 151,954 145,637
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SHAREHOLDERS' INVESTMENT
Common Stock, par value $1, authorized 44,000,000 shares, issued
8,991,404 and 8,985,168 shares at 3/31/06 and 12/31/05, respectively 8,991 8,985
Additional paid-in capital 42,162 42,138
Retained earnings 36,059 34,339
Accumulated other comprehensive loss (588) (704)
Unearned compensation (131) (173)
Less - 495,537 shares of Common Stock in treasury, at
cost, at 3/31/06 and 12/31/05 (4,761) (4,761)
-------------------------------------------------------------------------------------------------------------------
Total shareholders' investment 81,732 79,824
-------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 233,686 $ 225,461
===================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the three months ended
--------------------------
MARCH 31, 2006 March 31, 2005
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(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,720 $ 2,855
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 1,270 1,251
Changes in assets and liabilities:
Increase in receivables and contracts in progress (11,601) (12,400)
Decrease in accounts payable and accrued expenses (2,585) (705)
(Decrease)/increase in other net assets (2,266) 3,449
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Total adjustments (15,182) (8,405)
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Net cash used in operating activities (13,462) (5,550)
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CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (679) (715)
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Cash used in investing activities (679) (715)
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CASH FLOWS FROM FINANCING ACTIVITIES
Increase in book overdrafts 7,742 2,086
Payments for capital lease obligations (161) (150)
Proceeds from long-term debt 620 -
Proceeds from the exercise of stock options 30 141
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Net cash provided by financing activities 8,231 2,077
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Net decrease in cash and cash equivalents (5,910) (4,188)
Cash and cash equivalents, beginning of year 19,041 15,471
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,131 $ 11,283
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW DATA
Interest paid $ 17 $ 30
Income taxes paid $ 1,282 $ -
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Vehicles and equipment acquired through capital lease obligations $ - $ 297
Equipment acquired on credit $ 540 $ 13
===================================================================================================================
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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MICHAEL BAKER CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF AND FOR THE PERIOD ENDED MARCH 31, 2006
(UNAUDITED)
NOTE 1 - EARNINGS PER COMMON SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three months ended
March 31, 2006 and 2005. The additional shares included in diluted shares
outstanding are entirely attributable to stock options.
(In thousands except per share data) MARCH 31, 2006 March 31, 2005
---------------------------------------------------------------------------------------------------
Net income $ 1,720 $ 2,855
Basic weighted average shares outstanding 8,493 8,524
Effect of dilutive securities:
Stock options 239 203
Diluted weighted average shares outstanding 8,732 8,727
Basic earnings per share $ 0.20 $ 0.33
Diluted earnings per share $ 0.20 $ 0.33
===================================================================================================
As of March 31, 2006 and 2005, we did not have any stock options which were not
included in the computations of diluted shares outstanding because the option
exercise prices were less than the average market prices of our common shares.
NOTE 2 - BUSINESS SEGMENT INFORMATION
Our business segments reflect how management makes resource decisions and
assesses our performance. We have the following two reportable segments:
o Our 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.
o Our 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 account or own any oil or
natural gas reserves.
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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.
The following table reflects the required disclosures for our reportable
segments (in millions):
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
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For the three months ended
--------------------------
MARCH 31, 2006 March 31, 2005
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ENGINEERING
Total contract revenues $ 86.6 $ 93.9
Income from operations before Corporate overhead 7.7 11.3
Less: Corporate overhead (4.2) (2.8)
---------------------------------------------------------------------------------------------------------
Income from operations 3.5 8.5
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ENERGY
Total contract revenues 58.9 50.3
Income from operations before Corporate overhead 1.5 -
Less: Corporate overhead (1.5) (1.1)
---------------------------------------------------------------------------------------------------------
Income/(loss) from operations - (1.1)
---------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Total contract revenues 145.5 144.2
Income from operations before Corporate overhead 9.2 11.3
Less: Corporate overhead (5.7) (3.9)
---------------------------------------------------------------------------------------------------------
Income from operations 3.5 7.4
---------------------------------------------------------------------------------------------------------
Other Corporate/Insurance expense (0.6) (0.5)
---------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 2.9 $ 6.9
=========================================================================================================
MARCH 31, 2006 Dec. 31, 2005
-----------------------------------------------------------------------------------------------------------
Segment assets:
Engineering $ 122.9 $ 116.6
Energy 98.8 80.4
-----------------------------------------------------------------------------------------------------------
Subtotal - segments 221.7 197.0
Corporate/Insurance 12.0 28.5
-----------------------------------------------------------------------------------------------------------
Total $ 233.7 $ 225.5
===========================================================================================================
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NOTE 3 - 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 includes the sum of the principal
amount of revolving credit loans outstanding and the aggregate face value of
outstanding letters of credit. As of March 31, 2006, borrowings totaling
$620,000 and standby letters of credit ("LOCs") 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 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. These documents were
filed within the specified time period.
Furthermore, we did not meet the SEC's filing deadline for 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 4 - CONTINGENCIES
We currently believe that amounts recorded as liabilities for certain tax
exposures 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
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based upon our estimates of the aggregate liability for claims incurred. Such
estimates utilize certain actuarial assumptions followed in the insurance
industry.
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.
We rely on qualified actuaries to assist us in determining the level of reserves
to establish for both insurance-related claims that are known and have been
asserted against us as well as for insurance-related claims that are believed to
have been incurred based on actuarial analysis, but have not yet been reported
to our claims administrators as of the respective balance sheet dates. We
include any adjustments to such insurance reserves in our consolidated results
of operations.
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 March 31, 2006.
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 statements.
At March 31, 2006, 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 March 31, 2006:
Maximum Related liability
undiscounted balance recorded
(Dollars in millions) future payments at 3/31/06
------------------------------------------------------------------------------
Standby letters of credit:
Insurance related $ 6.8 $ -
Other 0.2 -
------------------------------------------------------------------------------
Our banks issue LOCs on our behalf under the Agreement as discussed more fully
in Note 3. As of March 31, 2006, most of our outstanding LOC amount was issued
to an insurance company to serve as collateral for payments the insurer is
required to make under certain of our self-insurance
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programs. This LOC may be drawn upon in the event that we do not reimburse the
insurance company for claims payments made on our behalf. Such LOC renews
automatically on an annual basis unless either the LOC is returned to the bank
by the beneficiary or our banks elect not to renew it.
NOTE 5 - INCOME TAXES
We account for income taxes under the asset and liability method pursuant to
Statement of Financial Accounting Standards No. ("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 foreign
jurisdictions or situations, our subsidiaries are subject to income taxes based
on taxable income. In certain of 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 quarter of 2006, our effective income tax rate was 47% as
compared to 57% for the same period in 2005. The lower effective rate for 2006
is attributable to our estimate of higher full-year domestic taxable income.
NOTE 6 - STOCK-BASED COMPENSATION
We adopted SFAS 123R, "Share-Based Payment," on January 1, 2006, using the
modified prospective method. Among other things, SFAS 123R requires us to
expense the fair value of stock options. The expensing of stock options was
previously an optional accounting method that we adopted voluntarily on January
1, 2003, as permitted under SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure." The transitional effects of SFAS 123R
did not have an impact on net income for the first quarter 2006 since we did not
have any remaining unvested portions of options granted prior to January 1,
2003. Prior to our adoption of SFAS 123R, the benefits of tax deductions in
excess of recognized compensation costs were reported as operating cash flows.
SFAS 123R requires such excess tax benefits to be reported as a financing cash
inflow. The adoption of SFAS 123R did not have an impact on our operating or
financing cash flows in the first quarter of 2006 or 2005. We have not yet
elected to adopt the transition method described in Financial Accounting
Standards Board Staff Position 123R-3 and are currently evaluating our
alternatives.
If compensation expense for our stock incentive plans had been determined based
on the fair value at the grant dates for awards under those plans for the three
months ended March 31, 2005, consistent with the method prescribed by SFAS 123R,
our pro forma net income and earnings per share amounts would have been as
follows:
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For the three months
(In thousands) ended March 31, 2005
----------------------------------------------------------------------------------------------------
Net income, as reported $ 2,855
Add: Stock-based employee compensation expense included
in reported net income, net of related tax effects 53
Deduct: Total stock-based employee compensation expense
determined under fair value method, net of related
tax effects (66)
----------------------------------------------------------------------------------------------------
Pro forma net income $ 2,842
====================================================================================================
For the three months
ended March 31, 2005
----------------------------------------------------------------------------------------------------
Reported earnings per share:
Basic $ 0.33
Diluted 0.33
Pro forma earnings per share:
Basic 0.33
Diluted $ 0.33
====================================================================================================
Our share-based compensation expense recognized in net income was $76,000 and
$94,000 in the first quarter of 2006 and 2005, respectively. The total income
tax benefit recognized in net income for all share-based compensation
arrangements was $33,000 and $41,000 in the first quarter of 2006 and 2005,
respectively.
As of December 31, 2005, we had two fixed stock option plans. Under the 1995
Stock Incentive Plan (the "Plan"), we were authorized to grant options for an
aggregate of 1,500,000 shares of Common Stock to key employees through December
14, 2004. Under the amended 1996 Non-employee Directors' Stock Incentive Plan
(the "Directors' Plan"), we may grant options and restricted shares for an
aggregate of 400,000 shares of Common Stock to non-employee board members
through February 18, 2014. Under both plans, the exercise price of each option
equals the average market price of our stock on the date of grant. Unless
otherwise established, one-fourth of the options granted to key employees became
immediately vested and the remaining three-fourths vested in equal annual
increments over three years under the now expired Plan, while the options under
the Directors' Plan become fully vested on the date of grant. Vested options
remain exercisable for a period of ten years from the grant date under both
plans.
The following table summarizes all stock option activity for both plans during
the three months ended March 31, 2006.
Weighted average
Shares subject exercise price
to option per share
----------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005 419,130 $ 11.57
----------------------------------------------------------------------------------------------------
Options granted - -
Options exercised (6,236) 4.85
Options forfeited or expired - -
----------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31, 2006 412,894 $ 11.67
====================================================================================================
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The following table summarizes information about stock options outstanding under
both plans as of March 31, 2006:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------------
Number of Average Weighted average Number of Weighted average
Range of exercise prices options life* exercise price options exercise price
--------------------------------------------------------------------------------------------------------------------
$ 4.8125 - $ 9.0000 114,079 4.1 $ 7.05 114,079 $ 7.05
$ 9.5313 - $ 12.850 137,549 3.0 10.40 53,210 10.84
$ 15.035 - $ 20.160 161,266 6.2 16.02 161,266 16.02
--------------------------------------------------------------------------------------------------------------------
TOTAL 412,894 4.6 $ 11.67 328,555 $ 12.01
====================================================================================================================
*Average life remaining in years
NOTE 7 - GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consist of the following (in thousands):
MARCH 31, 2006 Dec. 31, 2005
-----------------------------------------------------------------------------------------------------------------
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 $1,881 and $1,810, respectively 119 190
-----------------------------------------------------------------------------------------------------------------
Goodwill and other intangible assets, net $ 8,590 $ 8,661
=================================================================================================================
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.
Our other intangible assets balance solely comprises a non-compete agreement
from our 1998 purchase of Steen Production Services, Inc. Amortization expense
on the other intangible assets balance was $71,000 for the three months ended
March 31, 2006 and is currently estimated to be $119,000 for the nine months
ending December 31, 2006.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS
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 SFAS 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 SEC subsequently amended 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
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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 adopted
the provisions of SFAS 123R on January 1, 2006 using the modified prospective
application method. SFAS 123R did 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 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. We adopted SFAS 154 on January 1, 2006; such adoption had no impact
on our consolidated financial statements.
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 9 - SUBSEQUENT EVENT
On April 6, 2006, we purchased the stock of Buck Engineering, P.C. ("Buck"), a
North Carolina-based planning and environmental engineering firm. Buck had 2005
revenues of approximately $13 million and approximately 60 employees at the time
of our acquisition. Buck's assets consisted primarily of receivables and fixed
assets totaling $2.9 million and $0.6 million, respectively, as of this date.
The acquisition was accounted for under the purchase method in accordance with
SFAS 141, "Business Combinations," and in accordance therewith, the total
purchase price of approximately $10.6 million was allocated to the assets
acquired and liabilities assumed based upon their estimated fair values. This
acquisition had no effect on our condensed consolidated financial statements as
of and for the quarter ended March 31, 2006.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
In 2005, the U.S. Congress approved a new, six-year $286.5 billion
transportation infrastructure bill 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 its
predecessor, TEA-21. With this new bill enacted, we began to see a slight
increase in state spending on transportation infrastructure projects in the
first quarter of 2006, and we expect this activity to increase at a more
significant rate in the second half of 2006 and into 2007. For example, during
the first quarter, we were selected as the lead designer for a $183 million
design/build highway reconstruction project on Interstate 15 in Ogden, Utah. In
addition, we received a multi-million dollar, multi-year contract to provide
engineering design services for the new Interstate 90/Central Viaduct bridge in
Cleveland, Ohio. For the past several years,, we have observed increased federal
spending activity on Departments of Defense ("DoD") and Homeland Security
("DHS") activities, including the Federal Emergency Management Agency ("FEMA")
and have, in turn, 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 $542 million of this
contract value was included in our backlog as of March 31, 2006. During the
first quarter of 2006, we continued to be awarded new work from DOD and DHS,
including contracts with the Baltimore and New Orleans Districts of the U.S.
Army Corp of Engineers. In addition, we were awarded a five-year, $2 million
contract by the National Park Service to provide a comprehensive array of
environmental services.
In 2003, our Energy business refocused 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
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. Offshore in the Gulf of
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Mexico, we were awarded during the first quarter of 2006 a two-year,
multi-million dollar contract by Stone Energy to provide operations and
maintenance labor services. We have also continued to increase our presence into
the deepwater Gulf of Mexico and international markets, where oil and gas
producers are currently investing significant amounts of capital for new
projects. Internationally during the first quarter of 2006, we received a
contract from the West African Gas Pipeline Company to provide training services
for operations and maintenance of the West African Gas Pipeline System.
RESULTS OF OPERATIONS
The following table reflects a summary of our operating results (excluding
intercompany transactions) for the periods ended March 31, 2006 and 2005
(dollars in millions). We evaluate the performance of our segments primarily
based on income from operations before Corporate overhead allocations. Corporate
overhead is allocated between our Engineering and Energy segments based on a
three-part formula comprising revenues, assets and payroll.
TOTAL CONTRACT REVENUES/INCOME FROM OPERATIONS
-------------------------------------------------------------------------------
For the three months ended
--------------------------
MARCH 31, 2006 March 31, 2005
--------------------------------------------------------------------------------------------------------------------
ENGINEERING
Total contract revenues $ 86.6 $ 93.9
Income from operations before Corporate overhead 7.7 11.3
Percentage of Engineering revenues 8.9% 12.0%
Less: Corporate overhead (4.2) (2.8)
Percentage of Engineering revenues (4.9)% (3.0)%
--------------------------------------------------------------------------------------------------------------------
Income from operations 3.5 8.5
Percentage of Engineering revenues 4.0% 9.1%
--------------------------------------------------------------------------------------------------------------------
ENERGY
Total contract revenues 58.9 50.3
Income from operations before Corporate overhead 1.5 -
Percentage of Energy revenues 2.5% -%
Less: Corporate overhead (1.5) (1.1)
Percentage of Energy revenues (2.5)% (2.2)%
--------------------------------------------------------------------------------------------------------------------
Income/(loss) from operations - (1.1)
Percentage of Energy revenues -% (2.2)%
--------------------------------------------------------------------------------------------------------------------
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For the three months ended
--------------------------
MARCH 31, 2006 March 31, 2005
--------------------------------------------------------------------------------------------------------------------
TOTAL REPORTABLE SEGMENTS
Total contract revenues 145.5 144.2
Income from operations before Corporate overhead 9.2 11.3
Percentage of total reportable segment revenues 6.3% 7.8%
Less: Corporate overhead (5.7) (3.9)
Percentage of total reportable segment revenues (3.9)% (2.7)%
--------------------------------------------------------------------------------------------------------------------
Income from operations 3.5 7.4
Percentage of total reportable segment revenues 2.4% 5.1%
--------------------------------------------------------------------------------------------------------------------
Other Corporate/Insurance expense (0.6) (0.5)
--------------------------------------------------------------------------------------------------------------------
TOTAL COMPANY - INCOME FROM OPERATIONS $ 2.9 $ 6.9
Percentage of total Company revenues 1.9% 4.8%
====================================================================================================================
TOTAL CONTRACT REVENUES
Total contract revenues increased 1% in the first quarter of 2006 relative to
the first quarter of 2005. Engineering revenues for the first quarter of 2006
decreased 8% from the first quarter of 2005. Engineering's revenues were
negatively impacted by a reduction in subcontractor costs related to the
previously mentioned map modernization program management project with FEMA.
Total revenue from FEMA was $24 million and $35 million in the first quarter of
2006 and 2005, respectively. The higher FEMA revenue in the first quarter of
2005 is associated with the cost of building the information infrastructure
required for the project. As a result of achieving certain performance levels on
this FEMA project during the fourth quarter of 2005, the Engineering segment
recognized revenue associated with incentive awards totaling $0.7 million during
the first quarter of 2006. As a comparison, the Engineering segment recognized
revenue of $2.2 million in the first quarter of 2005 related to incentive awards
on the FEMA project. In the first quarter of 2006, the new SAFETEA-LU
legislation helped to fuel a 6% increase in Engineering's transportation-related
revenues, which was more than offset by the decrease in the aforementioned FEMA
revenues. In the Energy segment, revenues for the first quarter of 2006
increased 17% from the first quarter of 2005. Revenue increases were associated
with additional contracts in the Gulf of Mexico and the onshore Storm Cat Energy
Managed Services contract to operate and maintain its coal bed methane
production facilities in the Powder River Basin of Wyoming. Energy's revenues
for the first quarter of 2006 also benefited from the scheduled shut down of
liquefied natural gas facilities in Nigeria, for which we provided operations
and maintenance services.
GROSS PROFIT
Gross profit expressed as a percentage of revenues decreased to 14.3% for the
first quarter of 2006 from 15.5% in the first quarter of 2005. The Engineering
segment's gross profit percentage decreased to 18.9% in the first quarter of
2006 from 20.5% for the first quarter of 2005. This decrease in gross profit
expressed as a percentage of revenues was impacted by the aforementioned lower
revenues associated with the incentive awards on the FEMA project. Additionally,
labor utilization rates during the first quarter of 2006 were lower by 4% than
the first quarter of 2005 and negatively impacted Engineering's gross profit
percentage expressed as a percentage of revenues. These lower Engineering labor
utilization rates in the first quarter of 2006 are attributable to a higher
level of Baker labor worked in the first quarter of 2005 in connection with the
FEMA map modernization contract combined with a higher level of proposal
activity in the first quarter of 2006,
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including our successful effort to acquire the FEMA Housing Inspection Services
contract, which was subsequently protested. The Energy segment's gross profit
percentage increased to 8.4% in the first quarter of 2006 from 7.3% in the first
quarter of 2005. This increase in gross profit as a percentage of revenues is
the direct result of the turnaround of our Energy segment's computerized
maintenance management and operations assurance ("CMMS") business where delays
and cancellations of contracts unfavorably impacted the first quarter of 2005.
Management began closely monitoring this business in the first quarter of 2005
and implemented cost reduction measures by reducing headcount in the first,
second and third quarters of 2005. As a comparison, this business contributed
$0.4 million of gross profit in the first quarter of 2006 versus a gross loss of
$0.6 million in the first quarter of 2005.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative ("SG&A") expenses, including Corporate
overhead, expressed as a percentage of total contract revenues increased to
12.3% in the first quarter of 2006 from 10.8% in the first quarter of 2005. This
overall increase in SG&A expenses expressed as a percentage of revenues reflects
increased Corporate overhead costs related to increased headcount, as well as
first quarter 2006 professional fees of $0.5 million associated with the
restatement of our consolidated financial statements for the periods 2001
through the first quarter of 2005. In the Engineering segment, SG&A expenses
expressed as a percentage of revenues increased to 14.8% in the first quarter of
2006 from 11.4% in the first quarter of 2005. In addition to the increase in
allocated corporate overhead expenses, the Engineering segment was impacted by
lower revenue and increased personnel related costs. In the Energy segment, SG&A
expenses expressed as a percentage of revenues decreased to 8.5% in the first
quarter of 2006 from 9.5% in the first quarter of 2005. This decrease in SG&A
expenses expressed as a percentage of revenues is attributable to the 17%
increase in revenues offsetting the increase in allocated corporate overhead
expenses and first quarter 2006 professional fees of $0.1 million for audit and
tax services related to our payment of past due taxes.
OTHER INCOME
Interest income was higher for the first quarter of 2006 as compared to the
first quarter of 2005 due to interest income of $0.1 million collected in
connection with a favorable claim settlement and higher interest rates during
the first quarter of 2006 on our net invested position. Interest expense for the
first quarter of 2006 was lower than the first quarter of 2005 due to our
payments of certain previously underpaid international payroll taxes in the
fourth quarter of 2005. The payments of these taxes resulted in no related
interest expense accrual in the first quarter of 2006. Other income for the
first quarter of 2006 related to the aforementioned settlement and equity
earnings from two unconsolidated minority-owned ventures. As a comparison, other
income for the first quarter of 2005 primarily related to equity earnings from
two unconsolidated minority-owned ventures and minority interest related to a
consolidated subsidiary, as partially offset by the write-off of an investment.
INCOME TAXES
We had a provision for income taxes of 47% for the first quarter of 2006, which
reflects our forecasted effective tax rate for the year ending December 31,
2006. For the first quarter of 2005, we had a provision for income taxes of 57%.
The lower forecasted effective rate for 2006 is based on higher forecasted
domestic income before taxes as compared to 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.
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CONTRACT BACKLOG
(In millions) MARCH 31, 2006 Dec. 31, 2005
--------------------------------------------------------------------------------
Engineering $ 1,127.5 $ 1,109.2
Energy 230.0 212.6
--------------------------------------------------------------------------------
Total $ 1,357.5 $ 1,321.8
================================================================================
In both the Engineering and Energy segments, backlog consists of that portion of
uncompleted work that is represented by signed or executed contracts. As
contract revenue is recognized, backlog is reduced. 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 March 31, 2006 and December 31, 2005, $542 million and $566 million
relates 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. 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
related FEMA backlog accordingly.
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.
Most purchase orders have cancellation clauses with thirty-day notice
provisions.
In the first quarter of 2006, our Engineering segment was awarded transportation
related projects on Interstate 90 in Cleveland, Ohio, as well as for Interstate
15 in Ogden, Utah. Our Energy segment was awarded an additional operations and
maintenance contract in the Gulf of Mexico by Stone Energy and was also awarded
a training contract for the West Africa Gas Pipeline System which runs through
parts of Nigeria, Benin, Togo and Ghana.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $13.5 million for the first quarter of
2006, as compared to net cash used by operating activities of $5.6 million for
the same period in 2005. The first quarter 2006 increase in cash used in
operating activities resulted from lower net income, a first quarter 2006
federal income tax payment of $2.3 million and a decrease in both of our
segments' accounts payable balances.
Net cash used in investing activities was $0.7 million for both first quarters
of 2006 and 2005, respectively. These amounts reflect only capital expenditures
for both periods. The 2006 and 2005 amounts primarily relate to computer
software and equipment purchases totaling $0.5 and $0.7 million, respectively.
Cash provided by financing activities was $8.2 million for the first quarter of
2006 as compared to $2.1 million for the first quarter of 2005. The cash
provided by financing activities for both periods primarily relates to increases
in book overdrafts in the amounts of $7.7 million and $2.1 million for the first
quarter of
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2006 and 2005, respectively. Payments on capital lease obligations totaled $0.2
million in both periods and proceeds from the exercise of stock options totaled
$0.1 million in the first quarter of 2005 and were negligible in the first
quarter of 2006. The first quarter of 2006 was also impacted by borrowings under
our credit facility in an amount of $0.6 million that were used to finance
short-term working capital needs.
Working capital increased to $51.3 million at March 31, 2006 from $49.3 million
at December 31, 2005. Our current ratio was 1.35:1 at the end of both the first
quarter of 2006 and year-end 2005.
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 March 31, 2006, borrowings totaling
$620,000 and 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.
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. These documents were
filed within the specified time period.
Furthermore, we did not meet the SEC's filing deadline for 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 deadline.
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.
We acquire computer equipment and 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.
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.
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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 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 debt
obligations, which totaled $0.6 million as of March 31, 2006. Assuming a 10%
increase in interest rates on these variable-rate debt obligations (i.e., a
increase from the actual weighted average interest rate of 7.68% as of March 31,
2006, to a weighted average interest rate of 8.45%), annual interest expense
would be approximately $5,000 higher in 2006 based on the outstanding balance of
variable-rate debt obligations as of March 31, 2006. 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 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 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 March 31, 2006. 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 March 31, 2006. 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").
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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 March 31, 2006:
1. We did not maintain effective controls, including monitoring, over the
accounting for our sales and use taxes. Specifically, we did not have
a complement of operations and accounting personnel aware of the tax
ramifications of entering a new jurisdiction which resulted in
misstating accrued sales and use taxes. Additionally, this control
deficiency could result in a misstatement in the aforementioned
account 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
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 IBNR liabilities 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
Except as discussed below, there was no change 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 March 31, 2006,
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 our sales and use tax
liabilities, potential loss contracts, insurance reserves, and the
realizability of tax assets (commenced in October 2005).
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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).
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion in Note 4 to the accompanying condensed consolidated financial
statements.
ITEM 6. EXHIBITS
(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.
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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