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BKR > SEC Filings for BKR > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for MICHAEL BAKER CORP

Form 10-Q for MICHAEL BAKER CORP


8-Aug-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with Item 1, "Financial Statements" in Part I of this quarterly report on Form 10-Q. The discussion in this section contains forward-looking statements that involve risks and uncertainties. These forward-looking statements are based on our current expectations about future events. These expectations are subject to risks and uncertainties, many of which are beyond our control. For a discussion of important risk factors that could cause actual results to differ materially from those described or implied by the forward-looking statements contained herein, see the "Note with Respect to Forward-Looking Statements" and "Risk Factors" sections included in our Annual Report on Form 10-K for the year ended December 31, 2012 (the "Form 10-K").

Business Overview and Environment

Through our Transportation and Federal business segments, we provide engineering expertise in a variety of markets for public and private sector clients worldwide. We derive a significant portion of our revenue from United States of America ("U.S.") federal, state and local government contracting, with approximately 82% of our revenue for the six months ended June 30, 2013 originating from these sources. As such, our financial results are heavily impacted by appropriations of public funds for infrastructure and other government-funded projects.

The budgetary uncertainty and constraints at all levels of government have caused a portion of our clients to curtail their spending on new and existing projects, resulting in a significant drag on our revenue. Our key Transportation clients, and in turn our business, rely heavily on the U.S. federal transportation funding legislation for transportation & infrastructure related work. On July 6, 2012, the Moving Ahead for Progress in the 21st Century Act ("MAP-21") was signed into law, after a series of short-term extensions of the previous transportation funding legislation, the Safe, Accountable, Flexible, Efficient Transportation Equity Act - A Legacy for Users ("SAFETEA-LU"). MAP-21 provides funding for surface transportation programs of approximately $105 billion through September 30, 2014. MAP-21 is the first long-term highway authorization enacted since 2005 and is essentially a longer term extension of SAFETEA-LU. While we have yet to observe any significant change in contracting activity as a result of this legislation, we have noted an increase in proposal activity during the first six months of 2013 for several of our major transportation clients. These projects are principally being funded by the respective state Departments of Transportation, with the significant projects primarily being procured via alternative delivery methodologies, such as design-build and public-private partnerships. We are cautiously optimistic that this level of proposal activity will continue at this pace, with a corresponding increase in infrastructure project award activity. However, contracting activities at several of our other major transportation clients continues to be depressed, given current state budgetary concerns.

Portions of our business also rely on funding from the Federal Aviation Administration ("FAA"). On February 14, 2012, the four-year, $63 billion FAA Modernization and Reform Act of 2012 was signed into law which gave the FAA its first long-term operating authority since 2007. The bill authorized $13.4 billion in Airport Improvement Program funding which increases project opportunities at both our existing and future airport clients' facilities. This bill provides the means for the funding of aviation transportation infrastructure projects through 2015. We expect to benefit from work that the Federal, state and local governments as well as airport sponsors will procure as part of this legislation. Passenger traffic has seen a modest increase recently, thus airports are beginning to increase their capital expenditures to satisfy demand for capacity and upgrade improvements. We have observed modest

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increases in contracting activity as a result of this legislation and the increased aviation activity, particularly in the aviation planning & design and construction management phase services.

In addition, our Federal segment relies heavily on contracting activity from the U.S. Federal Government, particularly with the Department of Defense ("DoD") and the Department of Homeland Security ("DHS"). The Budget Control Act of 2011, designed to reduce federal budget deficits by $2.1 trillion over the 2012-2021 period, includes caps on future discretionary appropriations, which may negatively impact portions of our business. On March 1, 2013, a number of automatic budget cuts or sequestrations began. By law, these mandatory reductions in spending are to be split evenly between the federal government's defense and non-defense programs, both of which are markets that we are heavily dependent upon for a significant portion of our business. These reductions in spending may negatively impact those portions of our business that rely on federal funding for defense and other federal programs and projects and may have a material adverse impact on our results of operations and financial condition. We believe that as a result of the Budget Control Act of 2011 going into effect, contracting activity in our U.S. federal market has slowed in the first six months of 2013, which has impacted the revenue of our Federal segment during the period and will likely impact our revenue stream in subsequent quarters.

Due to the aforementioned macroeconomic issues impacting our public sector clients, we are anticipating a year-over-year deterioration in our revenues for 2013 from 2012 levels. In light of these circumstances, we adopted a performance improvement plan in 2012 with the objective of reducing our cost structure in 2013. Additional restructuring expenses of $0.6 million to achieve these cost reductions were incurred for the quarter ended March 31, 2013. We currently do not anticipate any additional restructuring expenses in 2013.

Our Transportation segment provides services for Surface Transportation, Aviation, and Rail & Transit markets and our Federal segment provides services for Defense, Environmental, Architecture, Geospatial Information Technology, Homeland Security, Municipal & Civil, Oil & Gas, Telecom & Utilities, Water and Urban Development markets. Among the services we provide to clients in these markets are program management, design-build (for which we provide only the design portion of services), construction management, consulting, planning, surveying, mapping, geographic information systems, architectural and interior design, construction inspection, constructability reviews, site assessment and restoration, strategic regulatory analysis and regulatory compliance. We view our short and long-term liquidity as being dependent upon our results of operations, changes in working capital and our borrowing capacity. In addition to the aforementioned impact of appropriations of public funds for infrastructure and other government-funded projects, we are also impacted by capital spending levels in the private sector and the demand for our services in the various engineering markets in which we compete.

Some of our significant contracts awarded during 2013 include:

A $6.5 million, 23-month contract with the New Jersey Turnpike Authority to provide supervision of construction services for the first phase of a non-roadway facilities upgrade program.

A $5.7 million, two-year contract with the Kentucky Transportation Cabinet for the Lake Barkley Bridge Crossing for final bridge design services in Trigg County, Kentucky.

A $5.4 million, two-year contract with the Kentucky Transportation Cabinet for design services for the Ohio River Bridges project in Louisville, Kentucky and Jeffersonville Indiana.

A $5.3 million, three-year architecture and engineering contract as a sub-contractor for the DoD to perform petroleum pipeline and tank leak and pressure testing.

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A $4.0 million, two-year contract with the Kentucky Transportation Cabinet for highway and bridge construction projects in multiple counties surrounding Louisville, Kentucky.

A $3.1 million, 15-month contract extension with the Los Angeles County Metropolitan Transportation Authority for continued services on the I-605 Congestion Hot Spots Project.

A $3.0 million, 18-month contract with the County of Riverside for the final design of improvements to the Interstate 10 interchange at the Jefferson Street over-crossing in the City of Indio, California.

A $2.3 million, two-year contract with the Eastside Limited Partnership, in conjunction with the Urban Redevelopment Authority and Port Authority of Allegheny County for the East Liberty Transit Center/Transit Oriented Development Project in Pittsburgh, Pennsylvania.

A $2.1 million, one-year contract as a sub-contractor for the Utah Department of Transportation for design-build services on a seven mile roadway widening and reconstruction project on Interstate 15 in Payson, Utah.

A $2.0 million, eight-month contract as a sub-contractor for Henningson, Durhan & Richardson, Inc. for the design of a portion of the Tappan Zee Bridge replacement project in Rockland/Westchester Counties, New York.

Agreement and Plan of Merger

We have entered into an Agreement and Plan of Merger by and among us, Integrated Mission Solutions, LLC, a Delaware limited liability company ("IMS"), and a wholly owned subsidiary of IMS ("Merger Sub"), dated as of July 29, 2013 (the "Merger Agreement"), providing for the merger of Merger Sub with and into us, with us as the surviving corporation and a wholly owned subsidiary of IMS. IMS and Merger Sub are affiliates of DC Capital Partners, LLC. Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, Merger Sub will commence a cash tender offer to purchase all of the outstanding shares of our common stock at a price per share of $40.50.

Executive Overview

Our earnings per diluted common share were $1.06 for the six months ended June 30, 2013, compared to $0.43 per diluted common share reported for the six months ended July 1, 2012.

Our revenues were $290.1 million for the six months ended June 30, 2013, a 6% decrease from the $307.0 million reported for the six months ended July 1, 2012. This decrease in revenues was primarily driven by decreases in work performed for the DoD, certain states' Departments of Transportation and the Central Texas Mobility Constructors, partially offset by an increase in work performed for Montgomery County, Maryland.

Net income for the six months ended June 30, 2013 was $10.3 million compared to $4.1 million for the six months ended July 1, 2012. These results were driven by an increase in both our Transportation and Federal segments' operating income, primarily as a result of the timing of revenue recognition on certain projects in our Transportation segment, as well as a decrease in acquisition-related intangible asset amortization expenses and a reduction in overhead costs related to our performance improvement plan.

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Results of Operations

Comparisons of the Three Months Ended June 30, 2013 and July 1, 2012

In this three-month discussion, unless specified otherwise, all references to 2013 and 2012 relate to the three-month periods ended June 30, 2013 and July 1, 2012, respectively.

Revenues

Our revenues totaled $146.1 million for 2013 compared to $155.3 million for 2012, reflecting a decrease of $9.2 million or 6%.

Transportation. Revenues were $80.0 million for 2013 compared to $83.8 million for 2012, reflecting a decrease of $3.8 million or 5%. The following table presents Transportation revenues by client type:

             (In millions)                      2013                  2012
             Revenues by client type
             Federal government           $  1.5         2 %    $  1.8         2 %
             State and local government     69.4        87 %      73.7        88 %
             Domestic private industry       9.1        11 %       8.3        10 %

             Total revenues               $ 80.0       100 %    $ 83.8       100 %

The decrease in our Transportation segment's revenues for 2013 was driven primarily by a decrease in work performed for the Wisconsin, South Carolina, New York City, Indiana and Mississippi Departments of Transportation totaling $6.8 million and a decrease in construction management and inspection services related to roadways for Marcellus Shale drilling activity in Pennsylvania of $1.2 million. This was partially offset by increases in services provided to the Pennsylvania and Connecticut Departments of Transportation totaling $4.1 million.

Federal. Revenues were $66.1 million for 2013 compared to $71.5 million for 2012, reflecting a decrease of $5.4 million or 8%. The following table presents Federal revenues by client type:

             (In millions)                      2013                  2012
             Revenues by client type
             Federal government           $ 27.8        42 %    $ 38.6        54 %
             State and local government     20.7        31 %      18.9        26 %
             Domestic private industry      17.6        27 %      14.0        20 %

             Total revenues               $ 66.1       100 %    $ 71.5       100 %

The decrease in our Federal segment's revenues for 2013 was primarily driven by a period-over-period decrease of $6.2 million in services provided for the DoD and a decrease in construction management services for the City of Avalon in Southern California of $0.8 million. This was partially offset by increases in work performed for Montgomery County, Maryland of $1.3 million for architectural and engineering services for a Multi-Agency Service Park and a net increase in work performed for Federal Emergency Management Agency ("FEMA") of $0.6 million.

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Gross Profit

Our gross profit totaled $25.3 million for 2013 compared to $25.5 million for 2012, reflecting a decrease of $0.2 million or 1%. Gross profit expressed as a percentage of revenues was 17.3% for 2013 compared to 16.4% for 2012. Gross profit remained relatively flat period-over-period which is primarily attributable to the decrease in revenue volume, offset by higher utilization and a decrease in acquisition-related intangible asset amortization expenses of $0.8 million. Total gross profit includes $0.3 million corporate expense for 2013 compared to nominal corporate expense in 2012 that were not allocated to our segments. These unallocated corporate amounts are related to our self-insured professional liability claims activity in our wholly-owned insurance captive.

Direct labor and subcontractor costs are major components in our cost of work performed due to the project-related nature of our service businesses. Direct labor costs expressed as a percentage of revenues were 26.7% for 2013 compared to 26.4% for 2012, while subcontractor costs expressed as a percentage of revenues were 22.7% for 2013 compared to 23.8% for 2012. Expressed as a percentage of revenues, direct labor costs increased in both the Transportation and Federal segments, while subcontractor costs decreased in both our Transportation and Federal segments period over period, contributing to the margin improvement.

Transportation. Gross profit was $13.7 million for 2013 compared to $14.5 million for 2012, reflecting a decrease of $0.8 million or 6%. The decrease in gross profit for 2013 is primarily attributable to a decrease in revenue volume and a less favorable project mix, which was partially offset by a decrease in amortization expense of $0.5 million. Transportation's gross profit expressed as a percentage of revenues was 17.0% in 2013 compared to 17.3% in 2012. Gross profit expressed as a percentage of revenues decreased as a result of the aforementioned decrease in revenue volume, partially offset by a decrease in acquisition-related amortization expense and higher utilization.

Federal. Gross profit was $11.9 million for 2013 compared to $11.0 million for 2012, reflecting an increase of $0.9 million or 8%. Gross profit increased as a result of a reduction in pursuit costs related to international work of $0.4 million and a decrease in amortization expense of $0.3 million, which was partially offset by the impact of the decrease in revenue in 2013. Federal's gross profit expressed as a percentage of revenues increased to 17.9% in 2013 from 15.4% in 2012. Gross profit expressed as a percentage of revenues was favorably impacted by the decreases in acquisition related amortization expense and international pursuit costs.

Selling, General and Administrative ("SG&A") Expenses

Our SG&A expenses totaled $17.9 million for 2013 compared to $22.3 million for 2012, reflecting a decrease of $4.4 million or 20%. Our SG&A expenses expressed as a percentage of revenues decreased to 12.2% for 2013 from 14.3% for 2012. SG&A expenses for the Transportation segment were $10.2 million for 2013 compared to $12.6 million for 2012, reflecting a decrease of $2.4 million or 19%. SG&A expenses for the Transportation segment expressed as a percentage of revenues decreased to 12.7% for 2013 from 15.0% for 2012. SG&A expenses for the Federal segment were $7.7 million for 2013 compared to $9.7 million for 2012, reflecting a decrease of $2.0 million or 21%. SG&A expenses for the Federal segment expressed as a percentage of revenues decreased to 11.7% for 2013 from 13.6% for 2012.

Certain departmental costs are allocated between the Transportation and Federal segments based on that segment's percentage of total direct labor. As a result of the allocation, SG&A expenses by segment fluctuated in relation to the increases or decreases in the Transportation and Federal segments' direct labor as a percentage of total direct labor. SG&A expenses decreased period over period primarily due to the performance improvement plan implemented in the 4th quarter of 2012, which included a reduction in force and a reduction in occupancy and travel costs.

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Other Income/(Expense)

Other income/(expense) aggregated to income of $0.5 million for 2013 compared to income of $1.3 million for 2012. Other income/(expense) is primarily comprised of equity income from our unconsolidated subsidiaries, interest income, interest expense, and investment income, which is included in "Other, net" in the unaudited Condensed Consolidated Statements of Comprehensive Income. Equity income from our unconsolidated subsidiaries primarily relates to our Louisiana TIMED Managers ("LTM") joint venture. We are projecting that the remaining work to be performed by LTM will be substantially completed by the third quarter of 2013.

Income Taxes

Our provisions for income taxes resulted in effective income tax rates of approximately 37% and 42% for 2013 and 2012, respectively. The variance between the U.S. federal statutory rate of 35% and our forecasted effective income tax rate for these periods is primarily due to state income taxes and permanent items that are not deductible for U.S. tax purposes.

The difference between our effective income tax rate of 40.5% and the tax expense recorded in our unaudited Condensed Consolidated Statement of Comprehensive Income for 2012 related to statute expirations totaling $0.1 million.

Comparisons of the Six Months Ended June 30, 2013 and July 1, 2012

In this six-month discussion, unless specified otherwise, all references to 2013 and 2012 relate to the six-month periods ended June 30, 2013 and July 1, 2012, respectively.

Revenues

Our revenues totaled $290.1 million for 2013 compared to $307.0 million for 2012, reflecting a decrease of $16.9 million or 6%.

Transportation. Revenues were $155.1 million for 2013 compared to $164.4 million for 2012, reflecting a decrease of $9.3 million or 6%. The following table presents Transportation revenues by client type:

            (In millions)                      2013                   2012
            Revenues by client type
            Federal government           $   2.9         2 %    $   3.9         2 %
            State and local government     134.8        87 %      142.8        87 %
            Domestic private industry       17.4        11 %       17.7        11 %

            Total revenues               $ 155.1       100 %    $ 164.4       100 %

The decrease in our Transportation segment's revenues for 2013 was driven primarily by period over period decreases in services provided for the South Carolina, Indiana, Wisconsin, Louisiana and Florida Departments of Transportation totaling $9.5 million, coupled with a decrease in work performed for the Central Texas Mobility Constructors on U.S. Highway 290 of $2.6 million, a decrease in construction management and inspection services related to roadways for Marcellus Shale drilling activity in Pennsylvania of $1.8 million and a decrease in work performed for the Los Angeles County Metropolitan Transportation Authority of $1.4 million. The decrease in revenues was partially offset by increases in services provided for the Connecticut and Pennsylvania Departments of Transportation totaling $6.3 million.

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Federal. Revenues were $135.0 million for 2013 compared to $142.6 million for 2012, reflecting a decrease of $7.6 million or 5%. The following table presents Federal revenues by client type:

            (In millions)                      2013                   2012
            Revenues by client type
            Federal government           $  58.7        44 %    $  75.5        53 %
            State and local government      41.1        30 %       37.0        26 %
            Domestic private industry       35.2        26 %       30.1        21 %

            Total revenues               $ 135.0       100 %    $ 142.6       100 %

The decrease in our Federal segment's revenues for 2013 was primarily driven by a period-over-period decrease of $11.3 million in services provided for the DoD and a decrease in construction management services for the City of Avalon in Southern California of $1.3 million. This was partially offset by increases in work performed for Montgomery County, Maryland of $4.2 million for architectural and engineering services for a Multi-Agency Service Park and an increase in work for the DHS's U.S. Visitor and Immigrant Status Information Technology Program of $1.3 million

Gross Profit

Our gross profit totaled $52.1 million for 2013 compared to $49.3 million for 2012, reflecting an increase of $2.8 million or 6%. Gross profit expressed as a percentage of revenues was 18.0% for 2013 compared to 16.1% for 2012. The increase in gross profit for 2013 is primarily attributable to the timing of revenue recognition on certain projects in our Transportation segment, higher utilization, and a decrease in acquisition-related intangible asset amortization expenses of $1.6 million The gross profit increases were partially offset by the decrease in revenue volume and the favorable impact of a recovery of $1.1 million in 2012 related to claims due from a professional liability insurer that is in liquidation. Total gross profit includes $0.3 million of corporate expense for 2013 compared to $0.9 million of corporate expense in 2012 that were not allocated to our segments. These unallocated corporate amounts are related to self-insured professional liability claims activity in our wholly-owned insurance captive and to adjustments of certain indirect tax accruals.

Direct labor and subcontractor costs are major components in our cost of work performed due to the project-related nature of our service businesses. Direct labor costs expressed as a percentage of revenues were 26.7% for 2013 compared to 26.1% for 2012, while subcontractor costs expressed as a percentage of revenues were 22.2% and 24.1% for 2013 and 2012, respectively. Direct labor costs were primarily affected by increases on various projects in both our Transportation and Federal segments. Expressed as a percentage of revenues, direct labor costs increased in both our Transportation and Federal segments, while subcontractor costs decreased in both our Transportation and Federal segments period over period.

Transportation. Gross profit was $29.1 million for 2013 compared to $27.9 million for 2012 reflecting an increase of $1.2 million or 4%. The increase in gross profit for 2013 is primarily attributable to recognizing revenue of $2.4 million on certain projects for which the related expenses had been incurred in 2012. This favorable impact occurred as we had provided services to certain clients without a fully executed contract or change order, which precluded revenue recognition until sufficient documentation was obtained. The revenue primarily relates to emergency repair work performed in response to Hurricane Sandy in New York and work performed on Interstate 69 in Indiana and Interstate 880 in California. The appropriate executed documentation was obtained in 2013, allowing us to recognize the related revenue. Additionally, a decrease in amortization expense of $1.1 million contributed to the increase in 2013 gross profit. The gross profit increases were partially offset by the decrease in revenue volume for 2013 and the impact of a recovery in 2012 of $0.6 million for claims due from a professional liability insurer that is in liquidation. Transportation's gross profit expressed as a percentage of revenues was 18.7% in 2013 and 17.0% in 2012. Gross profit expressed as a percentage of revenues increased period over period as a result of the aforementioned timing of revenue recognition for certain projects, a

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decrease in acquisition-related amortization expense and higher utilization, offset by the aforementioned 2012 recovery from a professional liability insurer that is in liquidation.

Federal. Gross profit was $23.3 million for 2013 compared to $22.3 million for 2012, reflecting an increase of $1.0 million or 4%. Gross profit increased as a result of a more favorable project mix, a reduction in pursuit costs related to international work of $0.8 million and a decrease in amortization expense of $0.6 million. The increases were partially offset by a recovery in 2012 of $0.5 million related to claims due from a professional liability insurer that is in liquidation and a decrease in revenue volume for 2013. Gross profit expressed as a percentage of revenues increased to 17.2% in 2013 from 15.7% in 2012. Gross profit expressed as a percentage of revenues was favorably impacted by the . . .

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