The following discussion should be read in conjunction with Item 1, "Condensed
Consolidated 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, 2011 (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 over 84%
of our revenue for the six months ended July 1, 2012 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 growth. Specifically,
several of our key transportation clients have continued to exercise a
significant amount of caution in granting new infrastructure projects or
entering into extensions of existing commitments, as well as placing certain
funded projects on hold. These 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. We are cautiously
optimistic that MAP-21 will result in our key Transportation clients granting
new infrastructure projects and entering into extensions of existing projects;
however, to date we have yet to observe any significant change in contracting
activity as a result of this legislation.
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"). As the U.S. Federal Government
continues to attempt to address the U.S. Federal deficit there are concerns our
Federal business may be impacted, particularly with our support of the United
States Army Corps of Engineers ("USACE") operating in Afghanistan given the
recent draw downs in the U.S. military efforts there. Additionally, while
proposal activity on U.S. Federal projects remains steady, in our view the pace
of project award activity has significantly waned in the first half of 2012,
impacting our results of operations in our Federal segment.
Portions of our business also rely heavily 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 gives the FAA its
first long-term operating authority since 2007, ending a string of 23 stop-gap
operating authorization measures. The bill has authorized $13.4 billion in
Airport Improvement Program funding which increases project opportunities at
existing and future air traffic facilities. This bill provides funding for
aviation transportation infrastructure projects through 2015, and we expect to
benefit from work that the Federal government as well as state and local
governments will procure as part of this legislation, particularly in the
aviation planning & design and construction management phase services.
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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 and Water
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 2012 include:
• A $25.8 million, two year Indefinite Delivery/Indefinite Quality ("IDIQ")
contract to provide geotechnical engineering training to the Federal
Highway Administration.
• A $16.0 million bridge design contract with the Kentucky Transportation
Cabinet for two crossings, one over Kentucky Lake located in Marshall
County, and one over Lake Barkley located in Trigg County, both in western
Kentucky.
• A $10.7 million, one year contract with the USACE - Middle East District
to provide construction management support to the Afghanistan Engineering
District.
• A $7.0 million architecture contract with the Connecticut Department of
Transportation to develop final design plans for the New
Haven-Hartford-Springfield Commuter Rail Station.
• A $5.8 million architecture and engineering contract as a subcontractor to
perform petroleum pipeline and tank leak and pressure testing for the
Department of Defense.
• A $5.1 million contract with the South Carolina Department of
Transportation to develop final construction plans for a new 5.7 mile
section of Interstate 73 between I-95 and U.S. Route 501 in Dillon County,
South Carolina.
• A $4.5 million design services contract with the New Jersey Turnpike
Authority for guide sign improvements.
• A $4.3 million contract with the Pennsylvania Department of Transportation
to provide construction management support and construction inspection
services on four construction projects in central Pennsylvania.
• A $4.1 million design-build contract as a subcontractor for the Georgia
Department of Transportation to prepare the technical proposal and
preliminary design documents for the Jimmy Deloach Connector from SR
307/Bourne Avenue to the existing eastern end of the Jimmy Deloach Parkway
near Savanna, Georgia.
In addition, we have been awarded by the General Services Administration an IDIQ
contract for the DHS's United States Visitor and Immigrant Status Information
Technology Program to provide program and project management and internal
logistics support services. The IDIQ contract includes a one-year base period
with four, one-year options and a maximum ordering limitation of $50 million for
the entire contract period. To date we have been awarded one task order that was
received in February 2012 to provide a range of technical support services for
$3.6 million.
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Acquisitions and Divestitures
On October 3, 2011, we entered into a Stock Purchase Agreement ("SPA") to
acquire 100% of the outstanding shares of RBF Consulting ("RBF"), an
engineering, planning, surveying and environmental firm based in Irvine,
California. As of the date of acquisition, RBF had a total of 17 offices located
in California, Nevada and Arizona. RBF provides comprehensive planning, design
and construction management and inspection services for its clients, including
public and governmental agencies, the development community, private enterprise
and non-profit agencies. The acquisition contributes to our long-term strategic
plan by enabling us to expand geographically into the western United States and,
through RBF's water resource experience and expertise, provides a platform for
us to build a national water and wastewater practice. The results of operations
for RBF are included in our Federal and Transportation segments for the three
and six months ended July 1, 2012.
In our 2009 filings, we presented an Energy business segment. Our former Energy
segment ("Baker Energy") provided a full range of services for operating
third-party oil and gas production facilities worldwide. On September 30, 2009,
we divested substantially all of our subsidiaries that pertained to our former
Energy segment (the "Energy sale"). Additionally, we sold our interest in B.E.S.
Energy Resources Company, Ltd. ("B.E.S."), an Energy company, on December 18,
2009 to J.S. Technical Services Co., LTD., which is owned by our former minority
partner in B.E.S. As such, the Energy business has been reclassified into
"discontinued operations" in our accompanying condensed consolidated financial
statements. The results for the three and six months ended July 1, 2012 and
June 30, 2011 give effect to the dispositions.
Executive Overview
Our earnings per diluted common share for continuing operations were $0.38 for
the six months ended July 1, 2012, compared to $0.61 per diluted common share
reported for the six months ended June 30, 2011. Our total earnings per diluted
common share were $0.43 for the six months ended July 1, 2012, compared to $0.61
per diluted common share reported for the six months ended June 30, 2011.
Our revenues from continuing operations were $307.0 million for the six months
ended July 1, 2012, a 22% increase from the $251.1 million reported for the six
months ended June 30, 2011. This increase in revenues was primarily driven by
the addition of $50.3 million in revenues from RBF, which was acquired in the
fourth quarter of 2011, and increases in certain key Transportation segment
projects.
Income from continuing operations for the six months ended July 1, 2012 was $3.6
million compared to $5.7 million for the six months ended June 30, 2011. These
results were driven by a decrease in our Federal segment's operating income,
primarily as a result of increased costs related to pursuing international work,
a decrease in work performed for Federal Emergency Management Agency ("FEMA")
and a decrease in work performed for USACE - Middle East District, as well as an
increase in amortization expenses and selling, general and administrative
expenses driven by the acquisition of RBF. These unfavorable results were offset
by an increase in operating income in our Transportation segment primarily as a
result of increases in revenue volume and an increase in equity income from our
unconsolidated subsidiaries.
We had net income from discontinued operations related to our former Energy
segment of $0.5 million for the six months ended July 1, 2012, as compared to a
nominal loss for the six months ended June 30, 2011. These results were
primarily attributable to adjustments of foreign tax accruals related to our
former Energy business, partially offset by changes in our reserves for legacy
insurance liabilities.
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Results of Operations
Effective January 1, 2012, certain services that were previously managed by our
Transportation segment have been transferred to the Federal segment.
Reclassifications have been made to the prior year business segment results to
reflect the current year presentation.
On January 1, 2012, we changed from a traditional month-end calendar close cycle
to a 4-4-5 calendar close methodology. Under this new methodology, each quarter
is comprised of 13 weeks, which includes two 4-week months and one 5-week month.
This change in methodology facilitates accelerating our monthly close, is common
in our industry and did not have a material impact on our period-over-period
comparisons.
Comparisons of the Three Months Ended July 1, 2012 and June 30, 2011
In this three-month discussion, unless specified otherwise, all references to
2012 and 2011 relate to the three-month periods ended July 1, 2012 and June 30,
2011, respectively.
Revenues
Our revenues totaled $155.3 million for 2012 compared to $130.1 million for
2011, reflecting an increase of $25.2 million or 19%. This increase in revenues
was primarily driven by the addition of $24.4 million in revenues from RBF,
which was acquired in the fourth quarter of 2011, and increases in certain key
Transportation segment projects, partially offset by a decrease in work
performed for FEMA.
Transportation. Revenues were $83.8 million for 2012 compared to $75.6 million
for 2011, reflecting an increase of $8.2 million or 11%. The following table
presents Transportation revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 1.8 2 % $ 2.3 3 %
State and local government 73.7 88 % 58.7 78 %
Domestic private industry 8.3 10 % 14.6 19 %
Total revenues $ 83.8 100 % $ 75.6 100 %
The increase in our Transportation segment's revenues for 2012 was driven
primarily by an increase in revenue associated with the Wisconsin, Indiana,
Colorado, Virginia, New Jersey and New York City Departments of Transportation
totaling $8.4 million, the addition of $4.7 million in revenues from RBF, and
work performed for the Maryland Aviation Administration of $1.1 million. This
was partially offset by decreases in work performed for the Central Texas
Mobility Constructors on U.S. Highway 290 ("US 290") in Central Texas of $2.4
million, decreases in services provided to the Pennsylvania Department of
Transportation totaling $1.8 million and a decrease in design work performed as
a subcontractor for various projects related to the Utah Department of
Transportation I-15 Corridor Reconstruction project totaling $1.6 million.
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Federal. Revenues were $71.5 million for 2012 compared to $54.5 million for
2011, reflecting an increase of $17.0 million or 31%. The following table
presents Federal revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 38.6 54 % $ 41.7 77 %
State and local government 18.9 26 % 6.9 12 %
Domestic private industry 14.0 20 % 5.9 11 %
Total revenues $ 71.5 100 % $ 54.5 100 %
The increase in our Federal segment's revenues for 2012 was primarily driven by
the addition of RBF's revenues totaling $19.7 million and an increase of $2.2
million in work performed as a subcontractor for architecture and design work
for the Department of Defense. These increases were partially offset by the net
decreases in work performed for FEMA of $2.2 million as compared to 2011 coupled
with a period-over-period decrease of $1.2 million related to services provided
for the USACE - Middle East District, a decrease of $0.8 million for work
performed related to the Alaska gasline development and a decrease of $0.5
million for oil and gas pipeline related work performed for one of our private
sector clients.
Gross Profit
Our gross profit totaled $25.5 million for 2012 compared to $27.4 million for
2011, reflecting a decrease of $1.9 million or 7%. Gross profit expressed as a
percentage of revenues was 16.4% for 2012 compared to 21.1% for 2011. The
decrease in gross profit for 2012 is primarily attributable to decreased
utilization, unfavorable project mix and an increase in amortization expenses of
$0.8 million related to our recent acquisitions, partially offset by the
addition of RBF's gross profit of $1.4 million. Total gross profit includes
nominal Corporate expenses for 2012 and Corporate income of $0.1 million in 2011
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 26.4% for 2012 compared
to 26.6% for 2011, while subcontractor costs expressed as a percentage of
revenues were 23.8% and 21.5% for 2012 and 2011, respectively. Expressed as a
percentage of revenues, direct labor costs remained relatively unchanged in both
segments, while subcontractor costs increased in both our Federal and
Transportation segments period over period.
Transportation. Gross profit was $14.5 million for 2012 compared to $14.9
million for 2011 reflecting a decrease of $0.4 million or 2%. The decrease in
gross profit for 2012 is primarily attributable to decreased utilization and an
increase in design-build pursuit efforts, which traditionally have a lower
margin until the primary design-build project is awarded. Additionally, in 2011
we received a one-time award fee of $1.1 million for work related to the US 290
project in Central Texas. These decreases were partially offset by the impact of
the increase in revenues for 2012. Transportation's gross profit expressed as a
percentage of revenues was 17.3% in 2012 compared to 19.7% in 2011. Gross profit
expressed as a percentage of revenues decreased as a result of lower utilization
and the aforementioned impact of the US 290 award fee on 2011 results.
Federal. Gross profit was $11.0 million for 2012 compared to $12.4 million for
2011, reflecting a decrease of $1.4 million or 12%. Gross profit decreased
period over period as a result of increased costs related to pursuing
international work, lower utilization and less favorable project mix, which was
partially offset by the addition of RBF's gross profit of $1.5 million, net of
acquisition related amortization expense of $1.0 million. Gross profit expressed
as a percentage of revenues decreased to 15.4% in 2012 from 22.8% in 2011. Gross
profit expressed as a percentage of revenues was unfavorably impacted by the
increase in acquisition related amortization expense, lower utilization and less
favorable project mix.
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Selling, General and Administrative Expenses
Our SG&A expenses totaled $22.3 million for 2012 compared to $19.5 million for
2011, reflecting an increase of $2.8 million or 14%. Our SG&A expenses expressed
as a percentage of revenues decreased to 14.3% for 2012 from 15.0% for 2011.
SG&A expenses for the Transportation segment were $12.6 million for 2012
compared to $12.0 million for 2011, reflecting an increase of $0.6 million or
5%. SG&A expenses for the Transportation segment expressed as a percentage of
revenues decreased to 15.0% for 2012 from 15.9% for 2011. SG&A expenses for the
Federal segment were $9.7 million for 2012 compared to $7.5 million for 2011,
reflecting an increase of $2.2 million or 30%. SG&A expenses for the Federal
segment expressed as a percentage of revenues decreased to 13.6% for 2012 from
13.7% for 2011.
Overhead costs are primarily 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 directly fluctuated in relation to
the increases or decreases in the Transportation and Federal segments' direct
labor as a percentage of total direct labor. Also included in total SG&A
expenses for 2012 were nominal Corporate-related costs, which were not allocated
to our segments.
SG&A expenses increased period over period primarily due to additional SG&A
expenses of $3.7 million from RBF, which includes $0.2 million of intangible
asset amortization, partially offset by the period-over-period decrease in SG&A
personnel, excluding the impact of RBF.
Other Income/(Expense)
"Other income/(expense)" aggregated to income of $1.3 million for 2012 compared
to income of $0.1 million for 2011. "Other income/(expense)" is primarily
comprised of equity income from our unconsolidated subsidiaries, interest
income, interest expense and realized gains and losses on investments. In 2012,
the equity income from our unconsolidated subsidiaries was primarily driven by
$1.3 million from our Louisiana TIMED Managers ("LTM") joint venture. We do not
anticipate LTM to maintain this level of income in future periods.
Income Taxes
Our provisions for income taxes from continuing operations resulted in effective
income tax rates of approximately 42% and 40% for the three months ended July 1,
2012 and June 30, 2011, 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 differences between the effective income
tax rates and the calculated rates relate to statute expirations totaling $0.1
million and $0.2 million for the three months ended July 1, 2012 and June 30,
2011, respectively.
Income from Discontinued Operations
As a result of the sale of our Energy business, we have presented those results
on a discontinued operations basis. Reflected in our unaudited Condensed
Consolidated Balance Sheets are both liabilities and assets primarily related to
Baker Energy's workers' compensation insurance through September 30, 2009. As
part of the sale of Baker Energy, the buyer agreed to assume the liabilities
associated with the workers' compensation insurance, subject to certain
indemnifications, as of September 30, 2009. However, corresponding liabilities
representing the reserves associated with this insurance are included in our
unaudited Condensed Consolidated Balance Sheets as this insurance is written to
us, rather than to a Baker Energy entity. As such, we are required to maintain
reserves for this insurance in our unaudited
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Condensed Consolidated Balance Sheets. As the buyer assumed the liabilities
associated with this insurance as of the closing balance sheet, we have also
recorded a corresponding receivable from the buyer representing the amount of
the aggregate insurance liabilities as of September 30, 2009 for the Energy
Business, less reimbursements made to us through July 1, 2012. We have also
indemnified the buyer for any taxes in excess of the amounts accrued as of
September 30, 2009.
Net losses from discontinued operations were $0.2 million for 2012 and $0.1
million in 2011. The 2012 and 2011 results of discontinued operations are
primarily driven by changes in our reserves for legacy insurance liabilities.
The income tax benefit attributable to discontinued operations was $0.2 million
in 2012 and was nominal in 2011.
Comparisons of the Six Months Ended July 1, 2012 and June 30, 2011
In this six-month discussion, unless specified otherwise, all references to 2012
and 2011 relate to the six-month periods ended July 1, 2012 and June 30, 2011,
respectively.
Revenues
Our revenues totaled $307.0 million for 2012 compared to $251.1 million for
2011, reflecting an increase of $55.9 million or 22%. This increase in revenues
was primarily driven by the addition of $50.3 million in revenues from RBF,
which was acquired in the fourth quarter of 2011, and increases in certain key
Transportation segment projects, partially offset by a decrease in work
performed for FEMA.
Transportation. Revenues were $164.4 million for 2012 compared to $143.2 million
for 2011, reflecting an increase of $21.2 million or 15%. The following table
presents Transportation revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 3.9 2 % $ 4.8 3 %
State and local government 142.8 87 % 113.0 79 %
Domestic private industry 17.7 11 % 25.4 18 %
Total revenues $ 164.4 100 % $ 143.2 100 %
The increase in our Transportation segment's revenues for 2012 was driven
primarily by period over period increases in services provided for the
Wisconsin, Virginia and Indiana Departments of Transportation totaling $11.6
million, the addition of $10.6 million in revenues from RBF and an increase in
work performed for the Maryland Aviation Administration of $2.5 million. The
increase in revenues was partially offset by decreases in services provided for
the Pennsylvania Department of Transportation totaling $2.3 million and a
decrease in design work performed as a subcontractor for various projects
related to the Utah Department of Transportation I-15 Corridor Reconstruction
project totaling $1.8 million.
Federal. Revenues were $142.6 million for 2012 compared to $107.9 million for
2011, reflecting an increase of $34.7 million or 32%. The following table
presents Federal revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 75.5 53 % $ 82.9 77 %
State and local government 37.0 26 % 13.9 13 %
Domestic private industry 30.1 21 % 11.1 10 %
Total revenues $ 142.6 100 % $ 107.9 100 %
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The increase in our Federal segment's revenues for 2012 was primarily driven by
the addition of RBF's revenues totaling $39.7 million, coupled with $3.3 million
in work performed as a subcontractor for architecture and design work for the
Department of Defense. These increases were partially offset by the net
decreases in work performed for FEMA of $4.6 million as compared to 2011, a
period-over-period decrease of $2.7 million related to services provided for the
USACE - Middle East District and a decrease of $1.3 million for work performed
related to the Alaska gasline development.
Gross Profit
Our gross profit totaled $49.3 million for 2012 compared to $48.5 million for
2011, reflecting an increase of $0.8 million or 2%. Gross profit expressed as a
percentage of revenues was 16.1% for 2012 compared to 19.3% for 2011. The
increase in gross profit for 2012 is primarily attributable to an increase in
our Transportation segment's revenue volume, the addition of RBF's gross profit
of $4.9 million and a recovery of $1.1 million related to claims due from a
professional liability insurer that is in liquidation, partially offset by an
increase in amortization expenses of $1.7 million related to our recent
acquisitions, lower utilization and the impact of unfavorable project mix. Total
gross profit includes Corporate expenses of $0.9 million for 2012 compared to
$0.4 million in 2011 that were not allocated to our segments. These corporate
expenses 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 26.1% for 2012 compared
to 27.0% for 2011, while subcontractor costs expressed as a percentage of
revenues were 24.1% and 20.4% for 2012 and 2011, respectively. Direct labor
costs were primarily affected by decreases on various projects in both our
Transportation and Federal segments. Expressed as a percentage of revenues,
direct labor costs decreased in both our Transportation and Federal segments,
while subcontractor costs increased in both our Transportation and Federal
segments period over period.
Transportation. Gross profit was $27.9 million for 2012 compared to $24.4
million for 2011 reflecting an increase of $3.5 million or 14%. The increase in
gross profit for 2012 is primarily attributable to increased revenue volume
compared to 2011, a recovery of $0.6 million related to claims due from a
professional liability insurer that is in liquidation and a decrease in
amortization expense of $0.3 million. The increase in gross profit was partially
offset by an increase in design-build pursuit efforts, which traditionally have
a lower margin until the primary design-build project is awarded and a one-time
award fee of $1.1 million for work related to the US 290 project in Central
Texas that we received in 2011. Transportation's gross profit expressed as a
percentage of revenues was 17.0% in both 2012 and 2011. Gross profit expressed
as a percentage of revenues remained flat period over period as a result of the
aforementioned impact of the US 290 award fee on 2011 results, partially offset
by the professional liability claims recovery.
Federal. Gross profit was $22.3 million for 2012 compared to $24.5 million for
2011, reflecting a decrease of $2.2 million or 9%. Gross profit decreased as a
result of increased costs related to pursuing international work, lower
utilization and less favorable project mix. The decreases were partially offset
by the addition of RBF's gross profit of $4.4 million, net of acquisition
related amortization expense of $2.0 million, and a recovery of $0.5 million
related to claims due from a professional liability insurer that is in
liquidation. Gross profit expressed as a percentage of revenues decreased to
15.7% in 2012 from 22.7% in 2011. Gross profit expressed as a percentage of
revenues was unfavorably impacted by the increase in acquisition related
amortization expense, lower utilization and less favorable project mix partially
offset by the aforementioned recovery from a professional liability insurer that
is in liquidation.
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Selling, General and Administrative Expenses
Our SG&A expenses totaled $44.7 million for 2012 compared to $39.2 million for
2011, reflecting an increase of $5.5 million or 14%. Our SG&A expenses expressed
as a percentage of revenues decreased to 14.6% for 2012 from 15.6% for 2011.
SG&A expenses for the Transportation segment were $24.8 million for 2012
compared to $24.0 million for 2011, reflecting an increase of $0.8 million or
3%. SG&A expenses for the Transportation segment expressed as a percentage of
revenues decreased to 15.1% for 2012 from 16.8% for 2011. SG&A expenses for the
Federal segment were $19.9 million for 2012 compared to $15.2 million for 2011,
reflecting an increase of $4.7 million or 31%. SG&A expenses for the Federal
segment expressed as a percentage of revenues decreased slightly to 14.0% for
2012 from 14.1% for 2011.
Overhead costs are primarily 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 directly 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 increased period over period primarily due to additional SG&A
expenses of $8.3 million from RBF, which includes $0.3 million of intangible
asset amortization, partially offset by the period-over-period decrease in SG&A
personnel, excluding the impact of RBF.
Other Income/(Expense)
"Other income/(expense)" aggregated to income of $1.7 million for 2012 compared
to income of $0.3 million for 2011. "Other income/(expense)" is primarily
comprised of equity income from our unconsolidated subsidiaries, interest
income, interest expense and realized gains and losses on investments. In 2012,
the equity income from our unconsolidated subsidiaries was primarily driven by
$1.5 million from our LTM joint venture. We do not anticipate LTM to maintain
this level of income in future periods.
Income Taxes
Our provisions for income taxes from continuing operations resulted in effective
income tax rates of approximately 40.5% and 39.5% for the six months ended
July 1, 2012 and June 30, 2011, 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 differences between the effective
income tax rates and the calculated rates relate to statute expirations totaling
$0.1 million and $0.2 million for the six months ended July 1, 2012 and June 30,
2011, respectively. In addition, $0.1 million of forecasted foreign tax credits
were also included in the June 30, 2011 calculated rate.
Income from Discontinued Operations
As a result of the sale of our Energy business, we have presented those results
on a discontinued operations basis. Net income from discontinued operations was
$0.5 million for 2012 compared to a nominal net loss in 2011. As part of the
Energy sale, we have indemnified the buyer for certain legacy costs related to
our former Energy segment in excess of amounts accrued as of the transaction
date. These costs include but are not limited to insurance and taxes. The 2012
results of discontinued operations are primarily attributable to adjustments of
foreign tax accruals related to the Energy business due to statute of limitation
expirations during the period, partially offset by changes in our reserves for
legacy insurance liabilities. The income tax benefit attributable to
discontinued operations was $0.1 million in 2012 and was nominal in 2011.
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Contract Backlog
Funded backlog consists of that portion of uncompleted work represented by
signed contracts and/or approved task orders, and for which the procuring agency
has appropriated and allocated the funds to pay for the work. Total backlog
incrementally includes that portion of contract value for which options have not
yet been exercised or task orders have not been approved. We refer to this
incremental contract value as unfunded backlog. U.S. government agencies and
many state and local governmental agencies operate under annual fiscal
appropriations and fund various contracts only on an incremental basis. In
addition, our clients may terminate contracts at will or not exercise option
years. Our ability to realize revenues from our backlog depends on the
availability of funding for various federal, state and local government
agencies; therefore, no assurance can be given that all backlog will be
realized.
The following table presents our contract backlog:
As of
July 1, December 31,
(In millions) 2012 2011
Funded $ 652.0 $ 684.6
Unfunded 957.2 908.6
Total $ 1,609.2 $ 1,593.2
As of July 1, 2012, our funded backlog consisted of $401.9 million for our
Transportation segment and $250.1 million for the Federal segment. Of our total
funded backlog as of July 1, 2012, approximately $323 million is expected to be
recognized as revenue within the next year. Additionally, we expect our sources
of revenue within the next year to include recognized unfunded backlog and new
work added. Due to the nature of unfunded backlog, consisting of options that
have not yet been exercised or task orders that have not yet been approved, we
are unable to reasonably estimate what, if any, portion of our unfunded backlog
will be realized within the next year.
Liquidity and Capital Resources
We have three principal sources of liquidity to fund our operations: our
existing cash and cash equivalents; cash generated by operations; and our
available capacity under our Unsecured Credit Agreement ("Credit Agreement"),
which is with a consortium of financial institutions and provides for a
commitment of $125.0 million through September 30, 2015.
The following table reflects our available funding capacity as of July 1, 2012:
(In millions)
Available Funding Capacity
Cash & Cash Equivalents $ 63.1
Credit agreement:
Revolving credit facility 125.0
Outstanding borrowings -
Issued letters of credit (8.3 )
Net credit agreement capacity available 116.7
Total available funding capacity $ 179.8Our cash flows are primarily impacted from period to period by fluctuations in
working capital. Factors such as our contract mix, commercial terms, days sales
outstanding ("DSO") and delays in the start of projects may impact our working
capital. In line with industry practice, we accumulate costs during a given
month then bill those costs in the following month for many of our contracts.
While salary costs
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associated with the contracts are paid on a bi-weekly basis, certain
subcontractor costs are generally not paid until we receive payment from our
customers. As of July 1, 2012 and December 31, 2011, $23.0 million and $23.7
million, respectively, of our accounts payable balance was comprised of invoices
with "pay-when-paid" terms. As a substantial portion of our customer base is
with public sector clients, such as agencies of the U.S. Federal Government as
well as Departments of Transportation for various states, we have not
historically experienced a large volume of write-offs related to our receivables
and our unbilled revenues on contracts in progress. We regularly assess our
receivables and costs in excess of billings for collectability and provide
allowances for doubtful accounts where appropriate. We believe that our reserves
for doubtful accounts are appropriate as of July 1, 2012, but adverse changes in
the economic environment may impact certain of our customers' ability to access
capital and compensate us for our services, as well as impact project activity
for 2012.
The following table represents our summarized working capital information:
As of
July 1, December 31,
(In millions, except ratios) 2012 2011
Current assets $ 253.1 $ 246.3
Current liabilities (126.3 ) (132.5 )
Working capital $ 126.8 $ 113.8
Current Ratio* 2.00 1.86
* Current ratio is calculated by dividing current assets by current liabilities.
Cash Provided by Operating Activities
Cash provided by operating activities was $17.2 million and $7.2 million for the
six months ended July 1, 2012 and June 30, 2011, respectively. Non-cash charges
for depreciation and amortization increased by $2.7 million to $8.9 million in
2012 from $6.2 million in 2011 due primarily to the amortization of intangible
assets acquired as part of the acquisition of RBF in the fourth quarter of 2011.
Our cash provided by operating activities for 2012 increased compared to 2011,
as a result of a decrease in accounts receivable and unbilled revenues, net of
billings in excess. Our total DSO in receivables and unbilled revenues, net of
billings in excess, was 87 as of July 1, 2012 compared to 90 days as of
December 31, 2011.
Cash Provided by/Used in Investing Activities
Cash provided by investing activities was $9.9 million for the six months ended
July 1, 2012, primarily as a result of cash inflows of $12.3 million related to
the net sales of available-for-sale securities, offset by cash outflows of $1.4
million related to capital expenditures and the payment of the remaining balance
of the Net Working Capital adjustment of $1.0 million related to the RBF
acquisition.
Cash used in investing activities was $9.7 million for the six months ended
June 30, 2011, primarily as a result of cash outflows of $4.2 million related to
the net purchase of available-for-sale securities and $2.3 million for the
capital expenditures, as well as $3.1 million of net cash used to acquire JMA
Architects, Inc. ("JMA").
The majority of our 2012 capital additions pertain to computer software
purchases, office furniture and office related leasehold improvements. We also
obtained the use of various assets through operating leases, which reduced the
level of capital expenditures that would have otherwise been necessary to
operate our business.
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Cash Used in Financing Activities
Our cash used in financing activities is primarily related to treasury stock
purchases related to tax withholdings for participants in our Long-Term
Incentive Plan and non-controlling interest distributions to our partners in the
BakerAECOM, LLC, partially offset by proceeds from Employee Stock Purchase Plan
purchases and stock option exercises.
Credit Agreement
On September 30, 2010, we entered into a revolving credit facility with a
consortium of financial institutions that provides for an aggregate commitment
of $125.0 million revolving credit facility with a $50 million accordion option
through September 30, 2015. The Credit Agreement includes a $5.0 million swing
line facility and $20.0 million sub-facility for the issuance of letters of
credit ("LOCs"). As of July 1, 2012 and December 31, 2011, there were no
borrowings outstanding under the Credit Agreement and outstanding LOCs were $8.3
million and $8.4 million, respectively.
The Credit Agreement provides pricing options for us to borrow at the bank's
prime interest rate or at LIBOR plus an applicable margin determined by our
leverage ratio based on a measure of indebtedness to earnings before interest,
taxes, depreciation and amortization ("EBITDA"). Our Credit Agreement also
contains usual and customary negative covenants for transactions of this type
and requires us to meet minimum leverage and interest and rent coverage ratio
covenants. Our Credit Agreement also contains usual and customary provisions
regarding acceleration. In the event of certain defaults by us under the credit
facility, the lenders will have no further obligation to extend credit and, in
some cases, any amounts owed by us under the Credit Agreement will automatically
become immediately due and payable.
Although only $8.3 million of our credit capacity was utilized under this
facility as of July 1, 2012, in future periods we may leverage our Credit
Agreement to facilitate our growth strategy, specifically utilizing our
available credit to fund strategic acquisitions or to take other actions. The
inability of one or more financial institutions in the consortium to meet its
commitment under our Credit Agreement could impact that growth strategy.
Currently, we believe that we will be able to readily access our Credit
Agreement as necessary.
Financial Condition & Liquidity
As of July 1, 2012, we had $63.1 million of cash and cash equivalents. We
principally maintain our cash and cash equivalents in accounts held by major
banks and financial institutions. The majority of our funds are held in accounts
in which the amounts on deposit are not covered by or exceed available insurance
by the Federal Deposit Insurance Corporation. Although there is no assurance
that one or more institutions in which we hold our cash and cash equivalents
will not fail, we currently believe that we will be able to readily access our
funds when needed.
We utilize our cash and borrowing capacity under the Credit Agreement for, among
other things, short-term working capital needs, including the satisfaction of
contractual obligations and payment of taxes, to fund capital expenditures, and
to support strategic opportunities that management identifies. We continue to
pursue growth in our core businesses and seek to expand our engineering
operations through organic growth and strategic acquisitions that align with our
core competencies. Our strategy has been acquisitions, or related investments,
for the purposes of geographic expansion and/or improving our market share as
key components of our growth strategy and we are able to utilize some
combination of our existing cash and the Credit Agreement to fund such
endeavors. Additionally, in February 2011, we filed a shelf registration with
the Securities & Exchange Commission, which was subsequently declared effective
in April 2011. Under the shelf registration, we may sell, from time to time, up
to $125 million of our common stock or debt securities, either individually or
in units, in one or more offerings. While we have no specific plans to offer the
securities covered by the registration statement, and are not required to offer
the securities in the future, we believe an offering under our existing shelf
registration will provide
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us with additional financial flexibility to fund our growth objectives, if
necessary. We also periodically review our business and our service offerings
within our business for financial performance and growth potential. As such, we
may consider realigning our current organizational structure if we conclude that
such actions would further increase our operating efficiency and strengthen our
competitive position over the long term.
If we commit to funding future acquisitions, we may need to issue debt or equity
securities (including raising capital by conducting an offering under our
existing shelf registration), add a temporary credit facility and/or pursue
other financing vehicles in order to execute such transactions. We believe that
the combination of our cash and cash equivalents, cash generated from operations
and our existing Credit Agreement will be sufficient to meet our operating and
capital expenditure requirements for the next twelve months and beyond.
Contractual Obligations and Off-Balance Sheet Arrangements
There were no material changes in the contractual obligations and off-balance
sheet arrangements disclosed in our 2011 Form 10-K.
Critical Accounting Estimates
There were no material changes in the critical accounting estimates disclosed in
our 2011 Form 10-K.
Recent Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board ("FASB") issued
changes to Accounting Standards Codification ("ASC") Topic 350, Intangibles -
Goodwill and Others, to simplify how entities, both public and non public, test
goodwill for impairment. The change provides an entity with an option to first
assess qualitative factors to determine whether it is more likely than not that
the fair value of a reporting unit is less than the carrying amount as a basis
for determining whether it is necessary to perform the two-step goodwill
impairment test described in ASC Topic 350. The amended guidance is effective
for annual and interim goodwill impairment tests performed for fiscal years
beginning after December 15, 2011. We adopted this standard on January 1, 2012,
and it did not have a material impact on our unaudited condensed consolidated
financial statements.
In June 2011, the FASB issued changes to ASC Topic 220, Presentation of
Comprehensive Income, to require companies to present the components of net
income and other comprehensive income either as one continuous statement or as
two consecutive statements. The change eliminates the option to present
components of other comprehensive income as part of the statement of changes in
stockholders' equity. The items that must be reported in other comprehensive
income and when an item of other comprehensive income must be reclassified to
net income were not changed. The amended guidance must be applied retroactively,
and is effective for interim and annual periods beginning after December 15,
2011, with earlier adoption permitted. We adopted this standard on January 1,
2012, and it had no impact on our unaudited condensed consolidated financial
statements, as we already presented one of the options that is acceptable under
ASC Topic 220.
In May 2011, the FASB issued changes to ASC Topic 820, Fair Value Measurement to
conform existing guidance regarding fair value measurement and disclosure
between Generally Accepted Accounting Principles and International Financial
Reporting Standards. These changes clarify the application of existing fair
value measurements and disclosures, and change certain principles or
requirements for fair value measurements and disclosures. The adoption of
changes to ASC Topic 820 is effective for interim and annual periods beginning
after December 15, 2011. We adopted this standard on January 1, 2012 and it did
not have a material impact on our unaudited condensed consolidated financial
statements.
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