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, 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
approximately 85% of our revenue for the nine months ended September 30, 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. Specifically, several
of our key transportation clients have continued to exercise 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.
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. 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 nine months of
2012, impacting our results of operations in our Federal segment.
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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. If
Congress does not act by December 31, 2012, a number of automatic spending cuts
will begin in January 2013. Among them are approximately $454 billion in
reductions to discretionary Defense spending and an additional $294 billion to
discretionary non-defense spending, which may include infrastructure related
programs. These potential reductions in spending may negatively impact those
portions of our business that rely on federal funding for defense and
infrastructure programs and projects and may have a material adverse impact on
our results of operations and financial condition.
Furthermore, over the past year, we have observed a decrease in the level of
higher margin design services being procured in the markets we serve and expect
this trend to continue for the foreseeable future. As a result, we have seen
decline in our margins over the course of this year. Due to the aforementioned
macroeconomic issues impacting our public sector clients, we are anticipating a
modest deterioration in our revenues for the remainder of 2012 and in 2013. In
light of these circumstances, we completed an organizational realignment in the
third quarter of 2012 that is designed to increase work sharing, enhance
cross-selling and improve utilization. We have also adopted a performance
improvement plan with the objective of reducing our cost structure by
approximately $18.0 to $20.0 million in 2013. Non-recurring expenses to achieve
these cost reductions are estimated at $1.0 million, substantially all of which
are expected to be incurred in the fourth quarter of 2012.
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. 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.
• Two five-year contracts totaling $15.0 million with the PennsylvaniaDepartment of Transportation to provide construction management and other
services for Public Transportation in Pennsylvania.
• A $12.3 million, five-year contract with the Department of General
Services in Montgomery County Maryland to provide planning, design and
construction services on the Montgomery County Multi-Agency Service Park
and Public Safety Training Academy.
• A $10.7 million, one-year contract with the USACE - Middle East District
to provide construction management support to the Afghanistan Engineering
District.
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• A $9.2 million, five-year IDIQ contract with the Federal Highway
Administration to conduct research, develop tools and protocols and engage
in bridge condition assessment and evaluation for its Performance
Management of Bridges Project.
• An $8.9 million contract with the Wisconsin Department of Transportation
for the final design of the Daniel Hoan Bridge and the Interstate Highway
794 Lake Freeway in Milwaukee.
• A $6.9 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.
In September 2012, we were awarded a contract by the U.S. Environmental
Protection Agency ("EPA") to provide technical support for assessments and
watershed protection program activities. Baker was one of five awardees of the
IDIQ contract. The maximum value of the contract for the entire five-year
performance period for all awardees is $107.6 million. We have included $21.6
million in our unfunded backlog at September 30, 2012 for this contract.
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 task orders to provide
a range of technical support services totaling $13.6 million.
Acquisitions and Divestitures
On October 3, 2011, we entered into a Stock Purchase Agreement 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 nine
months ended September 30, 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 nine months ended September 30, 2012
and 2011 give effect to the dispositions.
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Executive Overview
Our earnings per diluted common share for continuing operations were $0.45 for
the nine months ended September 30, 2012, compared to $1.38 per diluted common
share reported for the corresponding period in 2011. Our total earnings per
diluted common share were $0.53 for the nine months ended September 30, 2012,
compared to $1.39 per diluted common share reported for the corresponding period
in 2011.
Our revenues from continuing operations were $452.2 million for the nine months
ended September 30, 2012, an 18% increase from the $382.2 million reported for
the same period in 2011. This increase in revenues was primarily driven by the
addition of $73.4 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 decreases in work performed for Federal Emergency Management
Agency ("FEMA").
Net income from continuing operations for the nine months ended September 30,
2012 was $4.3 million compared to $12.8 million for the same period in 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 and a decrease in work performed for FEMA, as well as an
increase in amortization expenses and selling, general and administrative
expenses driven by the acquisition of RBF. In addition, net income from
continuing operations for 2012 was unfavorably impacted by higher tax expense as
a percentage of taxable income. These unfavorable results were partially 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 $0.8 million for the nine months ended September 30, 2012, as
compared to $0.1 million for the same period in 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.
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 September 30, 2012 and 2011
In this three-month discussion, unless specified otherwise, all references to
2012 and 2011 relate to the three-month periods ended September 30, 2012 and
2011, respectively.
Revenues
Our revenues totaled $145.2 million for 2012 compared to $131.1 million for
2011, reflecting an increase of $14.1 million or 11%. This increase in revenues
was primarily driven by the addition of $23.1 million in revenues from RBF,
which was acquired in the fourth quarter of 2011, partially offset by decreases
in work performed for the DoD and the Central Texas Mobility Constructors.
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Transportation. Revenues were $78.3 million for 2012 compared to $76.2 million
for 2011, reflecting an increase of $2.1 million or 3%. The following table
presents Transportation revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 1.8 2 % $ 2.2 3 %
State and local government 68.4 88 % 60.4 79 %
Domestic private industry 8.1 10 % 13.6 18 %
Total revenues $ 78.3 100 % $ 76.2 100 %
The increase in our Transportation segment's revenues for 2012 was driven
primarily by an increase in work performed for the Wisconsin, Virginia, Indiana
and New Jersey Departments of Transportation totaling $6.2 million and an
increase in revenue associated with the addition of $5.8 million in revenues
from RBF. This was partially offset by decreases in work performed for the
Central Texas Mobility Constructors on U.S. Highway 290 ("US 290") of $4.8
million, decreases in services provided to the Pennsylvania, Louisiana and South
Carolina Departments of Transportation totaling $3.2 million and a decrease in
work performed for the New Jersey Turnpike Authority of $2.0 million.
Federal. Revenues were $66.9 million for 2012 compared to $54.9 million for
2011, reflecting an increase of $12.0 million or 22%. The following table
presents Federal revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 35.4 53 % $ 41.3 75 %
State and local government 17.5 26 % 7.0 13 %
Domestic private industry 14.0 21 % 6.6 12 %
Total revenues $ 66.9 100 % $ 54.9 100 %
The increase in our Federal segment's revenues for 2012 was primarily driven by
the addition of RBF's revenues totaling $17.3 million. This increase was
partially offset by a period-over-period decrease of $2.8 million related to
services provided for the DoD, a decrease of $1.4 million for work performed
related to the Alaska gasline development and a decrease of $0.8 million for oil
and gas pipeline related work performed for one of our private sector clients.
Gross Profit
Our gross profit totaled $22.8 million for 2012 compared to $27.1 million for
2011, reflecting a decrease of $4.3 million or 16%. Gross profit expressed as a
percentage of revenues was 15.7% for 2012 compared to 20.7% for 2011. The
decrease in gross profit for 2012 is primarily attributable to lower
utilization, the impact of 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 $1.7 million, net of
acquisition related amortization expense of $1.3 million and the recognition of
non-recurring overhead adjustments related to our FEMA contracts of $1.0 million
for several prior contract years. In addition, gross profit for 2011 was
favorably impacted by a $1.2 million net benefit related to the recovery of
corporate indirect taxes. Total gross profit includes $0.5 million of Corporate
expense for 2012 compared to $0.4 million of Corporate expense 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
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were 27.8% for 2012 compared to 26.9% for 2011, while subcontractor costs
expressed as a percentage of revenues were 21.7% for 2012 compared to 20.5% for
2011. Expressed as a percentage of revenues, direct labor costs remained
relatively unchanged in the Transportation segment and increased in the Federal
segment, while subcontractor costs increased in both our Federal and
Transportation segments period over period.
Transportation. Gross profit was $13.5 million for 2012 compared to $14.0
million for 2011, reflecting a decrease of $0.5 million or 4%. The decrease in
gross profit for 2012 is primarily attributable to an increase in design-build
pursuit efforts, which traditionally have a lower margin until the primary
design-build project is awarded, partially offset by the increase in revenues
for 2012. Transportation's gross profit expressed as a percentage of revenues
was 17.2% in 2012 compared to 18.4% in 2011. Gross profit expressed as a
percentage of revenues decreased as a result of lower utilization.
Federal. Gross profit was $9.8 million for 2012 compared to $13.5 million for
2011, reflecting a decrease of $3.7 million or 27%. Gross profit decreased
period over period as a result of increased overhead costs related to pursuing
international work, lower utilization, less favorable project mix and a $1.2
million net benefit related to the recovery of corporate indirect taxes that
favorably impacted 2011, which was partially offset by the addition of RBF's
gross profit of $0.3 million, net of acquisition related amortization expense of
$1.0 million and the recognition of non-recurring overhead adjustments related
to our FEMA contracts of $1.0 million for several prior contract years. Gross
profit expressed as a percentage of revenues decreased to 14.7% in 2012 from
24.5% in 2011. Gross profit expressed as a percentage of revenues was
unfavorably impacted by the increase in acquisition related amortization
expense, lower utilization, less favorable project mix and the aforementioned
recovery of corporate indirect taxes in 2011.
Selling, General and Administrative Expenses
Our SG&A expenses totaled $21.4 million for 2012 compared to $17.7 million for
2011, reflecting an increase of $3.7 million or 21%. Our SG&A expenses expressed
as a percentage of revenues increased to 14.7% for 2012 from 13.5% for 2011.
SG&A expenses for the Transportation segment were $11.9 million for 2012
compared to $11.1 million for 2011, reflecting an increase of $0.8 million or
7%. SG&A expenses for the Transportation segment expressed as a percentage of
revenues increased to 15.2% for 2012 from 14.6% for 2011. SG&A expenses for the
Federal segment were $9.5 million for 2012 compared to $6.6 million for 2011,
reflecting an increase of $2.9 million or 43%. SG&A expenses for the Federal
segment expressed as a percentage of revenues increased to 14.2% for 2012 from
12.0% for 2011. SG&A expenses increased period over period primarily due to
additional SG&A expenses of $3.4 million from RBF, which includes $0.2 million
of intangible asset amortization.
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.
Other Income/(Expense)
"Other income/(expense)" aggregated to income of $0.2 million for 2012 compared
to $0.3 million for 2011. "Other income/(expense)" is primarily comprised of
equity income from our unconsolidated subsidiaries, interest income, interest
expense and gains and losses on the sale of fixed assets.
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Income Taxes
Our provisions for income taxes from continuing operations resulted in effective
income tax rates of approximately 56% and 36% for the three months ended
September 30, 2012 and 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. Positively impacting our forecasted effective
income tax rate for the three months ended September 30, 2011 was approximately
$0.8 million of foreign tax credits partially offset by $0.7 million of
non-deductible acquisition related costs.
The difference between our three month effective income tax rate of 36% and our
tax expenses recorded in our Condensed Consolidated Statement of Comprehensive
Income for the three months ended September 30, 2011 related to our ability to
utilize additional foreign tax credits totaling $1.0 million.
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 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 September 30, 2012. We have also indemnified the buyer for any taxes in
excess of the amounts accrued as of September 30, 2009.
Net income from discontinued operations was $0.3 million for 2012 compared to
$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 nominal in
both 2012 and 2011.
Comparisons of the Nine Months Ended September 30, 2012 and 2011
In this nine-month discussion, unless specified otherwise, all references to
2012 and 2011 relate to the nine-month periods ended September 30, 2012 and
2011, respectively.
Revenues
Our revenues totaled $452.2 million for 2012 compared to $382.2 million for
2011, reflecting an increase of $70.0 million or 18%. This increase in revenues
was primarily driven by the addition of $73.4 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 decreases in work performed
for FEMA.
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Transportation. Revenues were $242.7 million for 2012 compared to $219.4 million
for 2011, reflecting an increase of $23.3 million or 11%. The following table
presents Transportation revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 5.7 2 % $ 7.0 3 %
State and local government 211.2 87 % 173.4 79 %
Domestic private industry 25.8 11 % 39.0 18 %
Total revenues $ 242.7 100 % $ 219.4 100 %
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, Indiana, Kentucky and New Jersey Departments of
Transportation totaling $21.8 million, the addition of $16.3 million in revenues
from RBF and an increase in work performed for the Maryland Aviation
Administration of $3.1 million. The increase in revenues was partially offset by
decreases in services provided for the Pennsylvania and Louisiana Departments of
Transportation totaling $5.8 million, work performed for the Central Texas
Mobility Constructors on US 290 of $5.3 million, work performed for the New
Jersey Turnpike Authority of $3.4 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 $2.7 million.
Federal. Revenues were $209.5 million for 2012 compared to $162.8 million for
2011, reflecting an increase of $46.7 million or 29%. The following table
presents Federal revenues by client type:
(In millions) 2012 2011
Revenues by client type
Federal government $ 110.9 53 % $ 124.2 76 %
State and local government 54.5 26 % 20.9 13 %
Domestic private industry 44.1 21 % 17.7 11 %
Total revenues $ 209.5 100 % $ 162.8 100 %
The increase in our Federal segment's revenues for 2012 was primarily driven by
the addition of RBF's revenues totaling $57.1 million. These increases were
partially offset by the net decreases in work performed for FEMA of $5.5 million
as compared to 2011, a decrease of $2.7 million for work performed related to
the Alaska gasline development and a decrease in work performed for the DoD of
$1.0 million.
Gross Profit
Our gross profit totaled $72.1 million for 2012 compared to $75.7 million for
2011, reflecting a decrease of $3.6 million or 5%. Gross profit expressed as a
percentage of revenues was 15.9% for 2012 compared to 19.8% for 2011. The
decrease in gross profit for 2012 is primarily attributable to an increase in
amortization expenses of $2.5 million related to our recent acquisitions, lower
utilization, the impact of unfavorable project mix and a $1.2 million net
benefit related to the recovery of corporate indirect taxes that favorably
impacted 2011. These decreases were partially offset by the addition of RBF's
gross profit of $6.6 million, net of acquisition related amortization expense of
$3.9 million, the recognition of non-recurring overhead adjustments related to
our FEMA contracts of $1.0 million for several prior contract years and a
recovery of $1.1 million related to claims due from a professional liability
insurer that is in liquidation. Total gross profit includes Corporate expenses
of $1.4 million for 2012 compared to Corporate expenses of $0.7 million in 2011
that were not allocated to our segments. These corporate expenses are related to
self-insured professional liability claims activity in our wholly-owned
insurance captive.
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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 2012 compared
to 27.0% for 2011, while subcontractor costs expressed as a percentage of
revenues were 23.3% for 2012 compared to 20.5% for 2011. Expressed as a
percentage of revenues, direct labor costs decreased in our Transportation
segment and increased in our Federal segment, while subcontractor costs
increased in both our Transportation and Federal segments period over period.
Transportation. Gross profit was $41.4 million for 2012 compared to $38.4
million for 2011, reflecting an increase of $3.0 million or 8%. 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 $0.6 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 favorably impacted 2011. Transportation's gross profit expressed as a
percentage of revenues decreased slightly to 17.0% in 2012 from 17.4% in 2011.
Gross profit expressed as a percentage of revenues decreased as a result of the
aforementioned impact of the US 290 award fee on 2011 results, offset by the
professional liability claims recovery and a decrease in amortization expense.
Federal. Gross profit was $32.1 million for 2012 compared to $38.0 million for
2011, reflecting a decrease of $5.9 million or 15%. Gross profit decreased as a
result of increased overhead costs related to pursuing international work, lower
utilization, less favorable project mix and a $1.2 million net benefit related
to the recovery of corporate indirect taxes that favorably impacted 2011. The
decreases were partially offset by the addition of RBF's gross profit of $4.7
million, net of acquisition related amortization expense of $2.9 million, the
recognition of non-recurring overhead adjustments related to our FEMA contracts
of $1.0 million for several prior contract years 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
15.4% in 2012 from 23.4% in 2011. Gross profit expressed as a percentage of
revenues was unfavorably impacted by the aforementioned increase in acquisition
related amortization expense, lower utilization and less favorable project mix
partially offset by the impact of the aforementioned overhead adjustments and
the recovery from a professional liability insurer that is in liquidation. In
addition, gross profit as a percentage of revenues in 2011 benefited from the
recovery of Corporate indirect taxes of $1.2 million.
Selling, General and Administrative Expenses
Our SG&A expenses totaled $66.1 million for 2012 compared to $57.0 million for
2011, reflecting an increase of $9.1 million or 16%. Our SG&A expenses expressed
as a percentage of revenues decreased to 14.6% for 2012 from 14.9% for 2011.
SG&A expenses for the Transportation segment were $36.7 million for 2012
compared to $35.1 million for 2011, reflecting an increase of $1.6 million or
5%. SG&A expenses for the Transportation segment expressed as a percentage of
revenues decreased to 15.1% for 2012 from 16.0% for 2011. SG&A expenses for the
Federal segment were $29.4 million for 2012 compared to $21.9 million for 2011,
reflecting an increase of $7.5 million or 34%. SG&A expenses for the Federal
segment expressed as a percentage of revenues increased to 14.0% for 2012 from
13.5% for 2011. SG&A expenses increased period over period primarily due to
additional SG&A expenses of $11.6 million from RBF, which includes $0.5 million
of intangible asset amortization, partially offset by the period-over-period
decrease in SG&A personnel, excluding the impact of RBF.
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.
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Other Income/(Expense)
"Other income/(expense)" aggregated to income of $1.9 million for 2012 compared
to income of $0.6 million for 2011. "Other income/(expense)" is primarily
comprised of equity income from our unconsolidated subsidiaries, interest
income, interest expense, realized gains and losses on investments and gains and
losses on the sale of fixed assets. In 2012, the equity income from our
unconsolidated subsidiaries was primarily driven by $1.8 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 44% and 37.5% for the nine months ended
September 30, 2012 and 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. Positively impacting our full-year forecasted
effective income tax rate for the nine months ended September 30, 2011 was
approximately $1.0 million of foreign tax credits partially offset by $0.7
million of non-deductible acquisition related costs.
The difference between our September 30, 2012 full-year forecasted effective
income tax rate of 44% and our tax expense recorded in our Condensed
Consolidated Statement of Comprehensive Income for the nine months ended
September 30, 2012 relates to statute expirations totaling $0.2 million. The
difference between our September 30, 2011 full-year forecasted effective income
tax rate of 37.5% and our tax expense recorded in our Condensed Consolidated
Statement of Comprehensive Income for the nine months ended September 30, 2011
related to our ability to utilize our remaining foreign tax credits totaling
$1.1 million in addition to certain statute expirations totaling $0.2 million.
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
$0.8 million for 2012 compared to $0.1 million 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 compared to a nominal expense
in 2011.
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.
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The following table presents our contract backlog:
As of
September 30, December 31,
(In millions) 2012 2011
Funded $ 635.3 $ 684.6
Unfunded 1,010.2 908.6
Total $ 1,645.5 $ 1,593.2
As of September 30, 2012, our funded backlog consisted of $408.4 million for our
Transportation segment and $226.9 million for the Federal segment. Of our total
funded backlog as of September 30, 2012, approximately $307 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. Subsequent to September
30, 2012, we reduced our revolving credit facility capacity to $50.0 million.
The following table reflects our available funding capacity as of September 30,
2012:
(In millions)
Available Funding Capacity
Cash & Cash Equivalents $ 67.1
Credit agreement:
Revolving credit facilty 125.0
Outstanding borrowings -
Issued letters of credit (5.9 )
Net credit agreement capacity available 119.1
Total available funding capacity $ 186.2
Our 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 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 September 30, 2012 and December 31, 2011, $18.9 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 September 30, 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 the foreseeable future.
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The following table represents our summarized working capital information:
As of
September 30, December 31,
(In millions, except ratios) 2012 2011
Current assets $ 260.1 $ 246.3
Current liabilities (127.2 ) (132.5 )
Working capital $ 132.9 $ 113.8
Current Ratio* 2.04 1.86
* Current ratio is calculated by dividing current assets by current liabilities.
Cash Provided by Operating Activities
Cash provided by operating activities was $21.7 million and $15.5 million for
the nine months ended September 30, 2012 and 2011, respectively. Non-cash
charges for depreciation and amortization increased by $3.7 million to $13.1
million in 2012 from $9.4 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,
primarily as a result of a decrease in unbilled revenues and an increase in
billings in excess of revenues. Our total DSO in receivables and unbilled
revenues, net of billings in excess of revenues, was 91 days as of September 30,
2012 compared to 90 days as of December 31, 2011.
Cash Provided by/Used in Investing Activities
Cash provided by investing activities was $9.3 million for the nine months ended
September 30, 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 $2.0 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 $10.7 million for the nine months ended
September 30, 2011, primarily as a result of cash outflows of $4.7 million
related to the net purchases of available-for-sale securities and $2.9 million
for 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 and
hardware 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.
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 with a $50 million accordion option through September 30,
2015. The Credit Agreement includes a $5.0 million swing line facility and a
$20.0 million sub-facility for the issuance of letters of credit ("LOCs"). As of
September 30, 2012 and December 31, 2011, there were no borrowings outstanding
under the Credit Agreement and outstanding LOCs were $5.9 million and $8.4
million, respectively. Subsequent to September 30, 2012, we reduced our
revolving credit facility capacity to $50.0 million.
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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.
The inability of one or more financial institutions in the consortium to meet
its commitment under our Credit Agreement could negatively impact our business.
Currently, we believe that we will be able to readily access our Credit
Agreement as necessary.
Financial Condition & Liquidity
As of September 30, 2012, we had $67.1 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.
Our principal uses of cash in recent years have been to fund our operations,
including capital expenditures and to pay for acquisitions. With the completion
of our acquisitions of The LPA Group Incorporated, ("LPA") in 2010 and RBF in
2011, we successfully expanded our geographic footprint in the United Sates and
intend to focus our efforts on capitalizing on the potential cost and revenue
synergies that we believe they present. While we may consider potentially
accretive add-on acquisitions, we expect to focus primarily on the integration
of LPA and RBF and improving our overall results of operations, rather than
significant additional transactions.
We believe that we have substantial capital resources, with $67.1 million of
cash and cash equivalents and no borrowings at September 30, 2012. On
November 8, 2012, we announced a cash dividend of $0.14 per common share payable
on December 19, 2012 to shareholders of record on November 28, 2012. While we
intend to pay regular cash dividends on a quarterly basis for the foreseeable
future, the payment of dividends is at the discretion of the Board of Directors
and is subject to, among other things, the availability of and needs for our
capital resources, restrictions under our Credit Agreement and other factors. In
addition, on November 8, 2012, we announced that the Board of Directors had
authorized an up to $10.0 million stock repurchase program. Purchases are
expected to be made from time to time in open-market or privately negotiated
transactions as circumstances warrant.
We view our short and long-term liquidity as being dependent upon our results of
operations, changes in working capital and our borrowing capacity. 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.
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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.
