|Shares Out. (in M):||9||P/E||11.4x||8.7x|
|Market Cap (in M):||180||P/FCF||7.2x||6.0x|
|Net Debt (in M):||0||EBIT||0||0|
Founded in 1940, Michael Baker Corporation provides engineering, design, planning and construction services mainly in the United States. The company operates in two defined business segments: Transportation (civil infrastructure engineering) and Federal (Departments of Defense & Homeland Security). Michael Baker specializes in projects in the fields of aviation, defense, environmental, geospatial IT, homeland security, municipal & civil, oil & gas, rail & transit, telecommunications & utilities, and water resourcing.
The engineering and construction industry is dominated by a handful of large firms operating worldwide. Michael Baker, with its $180 million market capitalization, focuses solely on engineering and design, which is a niche segment within the industry. Most engineering and design firms tend to be small regional companies, bidding on projects that are within their municipality or state. From its beginnings, Michael Baker formed a strong relationship with the US military and to this day continues to serve both the Department of Defense and the Department of Homeland Security (FEMA). This has helped the company expand beyond its home base in Pennsylvania. Over the last two years, Michael Baker has actively expanded its revenues and national footprint through the acquisition of LPA Group in May of 2010, JMA Architects in June of 2011 and RBF Consulting in October 2011. LPA Group added the expertise of aviation, highway & bridge design, and transportation infrastructure while at the same time expanding Michael Baker’s reach into the lower eastern states such as Florida, Alabama, Tennessee, Arkansas, and Midwestern states like Missouri. The JMA purchase was a bolt on acquisition to transition Michael Baker into the growing market for healthcare and hospitality design. RBF Consulting helped expand Michael Baker’s western footprint and diversify its revenue base into land development, municipal works, and water resources. Except for a handful of states where the firm has very little representation, Michael Baker has developed into a national engineering and design firm.
Even with all the positive expansion within the company, Michael Baker has currently struggled to grow its revenue base. The company is highly levered to the public sector, generating approximately 85% of its revenue from federal, state and local projects. All of these projects require legislative approval, which in turn has created a significant amount of uncertainty. Recently, the Moving Ahead for Progress in the 21st Century Act (MAP-21 – surface transportation bill) and the FAA Modernization and Reform Act of 2012 were signed into law providing $105 billion and $63 billion in funding respectively. However, the funding from these acts pales in comparison to the looming Budget Control Act of 2011 which slashes the Federal Government’s budget by $2 trillion over a 10 year period if a compromise cannot be reached on the current “fiscal cliff.” Even if a compromise can be reached, it is just as likely that federal construction projects and state funding may be delayed or sidelined because of the reduction in government expenditures. In total, Michael Baker is carrying a contract backlog of engineering and design projects that total $1.65 billion ($635 million funded and $1.015 billion unfunded). A funded backlog is uncompleted work represented by signed contracts and/or approved task order where funds have been allocated and work is expected to be completed within the year. An unfunded contract backlog is represented by a signed and/or approved task order where the funds have not been allocated to pay for the project and a start date remains undetermined.
Michael Baker has witnessed revenue from the Federal Government fall from 49% to just 27% of its overall revenue from 2009 to its most recent quarter. This is due, in part, to reduced spending by the Federal Government on defense infrastructure (draw down of oversees troop deployment and defense construction within the US) combined with an increase in revenues from acquisitions (LPA Group and RBF Consulting) that focuses primarily on state and local government projects. In addition, because of the slowdown in projects from both revenue segments, Michael Baker’s gross margins have fallen nearly 400 basis points in the past 18 months. Management continues to search for the correct balance of staff needed to fulfill funded, unfunded and future projects vs. managing the company’s margins and utilization rate. Of the two revenue segments, Federal continues to maintain a higher margin and utilization rate mostly because the projects have a longer duration, a larger revenue base and can be more actively managed. Transportation margins have been lower as staff continues to be under utilized by comparison.
Since early 2010, Michael Baker focused on growing revenue and earnings through strategic and bolt-on acquisitions. In its most recent quarterly results, management announced that it will change course; focusing on organic growth through integration and optimization of operations through work sharing and enhanced cross-selling. Past acquisitions inflated the company’s amortization expense, which will decline and be worked off over the next five years, especially if no new acquisitions are added. As part of a campaign to align expenses with revenues, Michael Baker announced an $18-$20 million cut in expenses over the next fiscal year. Additionally, management initiated a quarterly dividend (currently yielding 3%) and a $10 million share repurchase program. Guidelines surrounding company stock ownership has been adopted and will be implemented over the next five years. The guideline calls for the CEO and management team to hold 5x and 3x their base salaries in company stock respectively. The board of directors will be required to own 4x their cash retainer in stock.
The transformation from acquisition to organic growth, initiation of both a quarterly dividend and a share repurchase program, and stock ownership guidelines, directly answers recent criticism surrounding the alignment of Baker’s management with its shareholders and the best use of the company’s cash. The money to be spent on share repurchases and dividends will not negatively impact the balance sheet and can more than easily be covered by the yearly production of free cash flow.
FEMA (Federal Emergency Management Agency) represented 8% of Michael Bakers’s revenue in the past year. Expectations are that FEMA’s revenue contribution will continue to grow in size and scope as Hurricane Sandy laid a clear path of destruction in the company’s back yard on the eastern Seaboard. FEMA projects fall under the auspices of the Department of Homeland Security. As such, these projects are often fast tracked and take a higher priority than maintenance or renovation projects. New Jersey Governor, Chris Christie, has asked FEMA for $37 billion to cover the damage created by the storm. New York Governor, Andrew Cuomo, has separately petitioned FEMA for $33 billion for storm damages and another $9 billion to build infrastructure to prevent future storm damage from escalating. Between the two states it is estimated that $15 billion will be needed to repair roads, bridges, water systems, and schools.
Michael Baker’s revenues and earnings have been negatively impacted by the slow down in the scale and number of active projects. This in turn depresses revenues, margins, utilization and profitability for the company. Even with the current backlog of $1.65 billion in both funded and unfunded projects, continued uncertainty surrounds the economic recovery. Earnings growth in the short-term will depend on how quickly Michael Baker can restore its margins. Some of the margin erosion can be addressed by management’s $18-$20 million reduction in planned expenses, as-well-as continued decline in amortization expenses. However, real operational leverage and earnings power will only come from restoring the company’s utilization rate, and that will be achieved when federal, state and local governments begin to address their decaying infrastructure in a meaningful way. Unfortunately, there is no clear indication of when that might occur.
Taking the lower end revenue guidance for fiscal year 2013 of $583 million and applying conservative measures for gross margins, SG&A and reduced expenses, yields an EBITDA number of $36.3 million. Applying amortization and taxes, produces a net income number of $15.8 million or $1.65 EPS. If Michael Baker were able to achieve $610 million (the higher end of the range) in revenue and assuming that the increase in revenue benefits staff utilization and margins by 50 basis points, than the resulting net income number would be $20.6 million or $2.15 EPS.
Michael Baker’s robust balance sheet with no debt, $67 million in cash (~ $7.00/share) and a line of credit of $50 million (recently reduced from $125 million) provides significant downside protection for the company. The yearly free cash flow generated will more than cover the dividend and share repurchases, assuming all $10 million worth of shares are repurchased.
Michael Baker is positioned to benefit from a rebound in infrastructure spending. The company focuses solely on engineering and design, which is a niche segment of the much larger engineering and construction industry. Although “shovel-ready” projects have been touted and promised by many politicians as a way to jump start the economy, they have yet to appear in a meaningful way. Legislative acts that promise funds for infrastructure and renovation, like MAP-21 and the FAA Modernization and Reform Act of 2012, can easily be overshadowed by the looming fiscal cliff and the Budget Control Act of 2011. Continued neglect, delayed maintenance repair and upgrades will eventually force federal, state and local municipalities to take action regardless of their budget conditions. The real question is: Will Michael Baker be able to sustain its current revenues and/or improve profitability while it waits?Through its recent acquisitions, management has diversified and expanded the company’s footprint as well as gained an expertise in growing engineering segments. Given Michael Baker’s balance sheet and operational leverage, it will not take a significant growth in revenue for their profitability to be positively impacted. An increase in projects will bolster revenue, increase staff utilization as well as margins and be reflected in greater profitability. A 4.6% growth in revenue can easily be manifested in a 30% growth to earnings. With its initiation of a 3% dividend and $10 million share repurchase, Michael Baker is trying to reward its share holders and implicitly ask for their patience.
|Subject||BKR: Scenarios point to significant upside|
|Entry||12/05/2012 03:10 PM|
I was going to post this idea but you beat me to it! Good writeup.
I see BKR as having several two possible outcomes in 2013, both of which represent significant upside to shareholders from current levels:
Scenario #1: Revenues hold, company achieves cost savings and margin goals
Management is aiming to take $18mm to $20mm of SG&A out of the business and also expects a few million of synergies from the RPF acquisition. They put their necks out there recently by pulling their poison pill and making statements on November 9th like "and our performance, candidly, will be in the vicinity of our better years -- one of the top three or four years, probably, for the Company. If we don't, I think there are a lot of fair questions that need to be asked (translation: does BKR need to be independent?). THIS IMPLIES 6.0% TO 7.0% MARGINS IN CALENDAR 2013 --> EQUATING TO $2.30 - $2.70 OF EPS. Apply a 10-14x multiple to this earnings stream and add back the $7/share of net cash and you get a valuation range of $30 -$45, or 54% to 130% upside.
Scenario #2: BKR misses its margin targets and the lurking activist takes them out.
In early 2012, Thomas Campbell, a private equity guy who happens to run a company similar to BKR (albeit one that focuses on the international market), acquired a 5.2% position using $10mm of his personal cash. He subsequently filed a 13D and noted that he has attempted to contact the company to discuss his investment.
See the Pittsburgh Post Gazette article below for more backstory on this investment. He bought his initial stub at $22 to $25 -- and he clearly would like to buy BKR. This coupled with the cost savings would seem to put a very solid floor under BKR's stock price while we wait for good things to happen.
March 2012 – June 2012
Since June 2012
Since November 9, 2012 (just several weeks ago)
Commentary from November 9, 2012 Earnings Call
“We just shared with you the harsh realities of our disappointing third quarter. As a result, we need to improve performance dramatically and immediately, and deliver more value to shareholders. To that end, in the third quarter, we completed a realignment of our operations with an eye toward increasing work sharing, enhancing cross-selling, and improving our utilization rate.”
“We have addressed our strategic expansion needs with the acquisition of LPA in the Southeast, and RBF in the West and Southwest, which effectively fill in the national map and position us for growth as the market improves. The Company is focusing squarely on improving its operating results, and we are not pursuing additional major acquisitions at this time. This will enable the Company's management to concentrate all of its efforts on improving internal operations for the next 12 to 18 months.”
“The simple truth is that cost-cutting is the only way to dramatically improve performance of an engineering services consulting firm in the short-term. And to that end, we are formulated, and are in the process already of implementing, approximately $18 million -- between $18 million and $20 million in cost cuts. To be specific, that will result in a $18 million to $20 million in savings total next year, net. It's not going to be partially realized over the course of the year. And by the end of the year, we'll be at about $18 million or $20 million -- we will realize between $18 million and $20 million in cost cuts, net, next year.”
“There are several components to this plan. First, reductions in force and some retirements. We are reducing roughly 130 positions, half or more of which have already been accomplished; and the remainder, with the exception of one or two or three, will be accomplished by year's end. We set a 10% reduction target for corporate overhead and exceeded it. We're in the process of reducing occupancy costs. We have a large number of offices across the country now. We have many storage facilities. We are in the process of reviewing the entire physical plan. We will, in fact, close or consolidate a handful of offices, and we will reduce square footage in many more. The reductions in force and retirements will generate roughly $1 million in cash costs in Q4 of this year. And, once again, the $18 million to $20
million in cost savings will be net positive next year. We have established a special Board Committee, a Performance Improvement Plan Committee, which will monitor and help us accomplish these ends.”
“In summary, we are redoubling our focus on improving business results. We are not pursuing major acquisitions at this time. We are focused squarely on growth opportunities. We have already begun cutting costs, which will result in between $18 million and $20 million in net cost reductions in 2013. We have initiated a quarterly dividend of $0.14 per share. We have authorized a potential share repurchase of up to $10 million of our shares. And we have implemented stock ownership guidelines for the Board and top management -- all in order to do what we must do, which is improve performance dramatically and immediately, and deliver more value to our shareholders.”
|Subject||BKR's CEO is out|
|Entry||12/13/2012 04:56 PM|
Michael Baker Corporation (NYSE MKT:BKR) announced today that, at the request of its Board of Directors, Bradley L. Mallory has stepped down as president and chief executive officer and director of the Company, effective immediately. The Company has created an Office of the Chief Executive, composed of Michael J. Zugay, chief financial officer, and H. James McKnight, chief legal officer, to lead the Company on an interim basis. Supporting this office will be an Operations Committee consisting of senior operating executives representing the Company’s business segments. The Board has designated Dr. Robert N. Bontempo, lead independent director, to provide oversight.
The Board of Directors will retain an executive search firm to assist it in conducting a national search for a successor. The Board does not intend to place any limitations on the search, which will include internal candidates, and intends to identify the most highly qualified candidate in a timely manner.
Mr. Zugay joined Baker in 2009 as executive vice president and chief financial officer. He previously was senior vice president and chief financial officer of iGate Corporation, and prior to that served as president and chief executive officer of Bliss-Salem, Inc. Mr. McKnight joined Baker in 1995 as vice president, general counsel and secretary. In 2000, he was named executive vice president and continues to serve as the Company’s chief legal officer.
Michael Baker Corporation (www.mbakercorp.com) provides engineering, design, planning and construction services for its clients’ most complex challenges worldwide. The firm's primary business areas are architecture, aviation, defense, environmental, geospatial, homeland security, municipal & civil, oil & gas, rail & transit, telecommunications & utilities, transportation, urban development and water. With more than 3,000 employees in over 100 offices across the United States, Baker is focused on creating value by delivering innovative and sustainable solutions for infrastructure and the environment.
|Subject||Activist bid is too low and opportunistic|
|Entry||12/22/2012 09:53 AM|
On Wednesday of this week, Thomas Campbell, the activist that has owned BKR since at least July 2012, sent a letter to BKR's Board of Directors indicating that he would like to acquire the entire company for $24.25 in an all-cash deal, although it does not appear as though he has the financing lined up yet. In his letter to management, he indicates that he was surprised by the firing of the CEO (apparently the two of them had met recently, according to the letter). In my view, Mr. Campbell is trying to take advantage of a company with "no CEO" and has put a low-ball bid on the table. I do not believe the Board will accept this bid nor should shareholders accept this price. Why?
If BKR can achieve $18-$20mm of annual cost savings (which appear achievable), it can earn at least $2.50 per share. Assume a 12x multiple on this and then add back the $7/share of net cash and you a $37 stock price. 2012 is a temporary blip in a long-term solid record of earnings. Why should investors accept $24? In my view, several things can happen from here:
1) The Board of Directors turns down the bid and says it is opportunistic;
2) They decide to conduct an auction to see if others are interested;
3) They put a vote to shareholders;
4) They negotiate a higher price from the activist.
Any of these should be favorable for the stock price longer-term, and ultimately, I don't think that BKR's Board is going to let this activist "steal" the company for $24.25 per share. At least, I hope not.
|Subject||RE: Updated thoughts|
|Entry||04/12/2013 03:27 PM|
It has been nearly four months since BKR was put into play. I did not expect this buyout to gain the attention of the Dell LBO, but I am surprised that Flour, Jacobs Engineering, Aecom or URS Corp have not stated that they would have interest in BKR, instead of sitting calmly on the sidelines. Perhaps a lot more discussion is happening than we are aware of but since this is not a well followed stock, those "rumors" do not hit the newspapers.
Unfortuantely, I do not think we are going to hear anything significant before their earnings release in early May. And even then I am not confident that the board will have finished its due diligence. The focus then becomes on whether BKR has been able to fufill its cost cutting strategy, and maintain both its revenues and margins.
|Subject||RE: Author Exit Recommendation|
|Entry||07/30/2013 02:29 PM|
congrats on the great result.