UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
|
ý |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
|
|
|
|
|
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004 |
||
|
|
|
|
|
OR |
||
|
|
|
|
|
o |
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
Commission File Number 000-27261
CH2M HILL Companies, Ltd.
(Exact name of registrant as specified in its charter)
|
Oregon |
|
93-0549963 |
|
(State
or other jurisdiction of |
|
(I.R.S.
Employer |
|
|
|
|
|
9191 South Jamaica Street, |
|
80112-5946 |
|
(Address of principal executive offices) |
|
(Zip Code) |
(303) 771-0900
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý No o
As of April 30, 2004, the registrant had 31,959,230 shares of common stock, $0.01 par value per share, issued and outstanding.
CH2M HILL COMPANIES, LTD.
MARCH 31, 2004
TABLE OF CONTENTS
|
|
|||||
|
|
|
|
|||
|
|
|
||||
|
|
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
||
|
|
|
|
|
||
|
|
|
||||
|
|
|
|
|
||
|
|
|
||||
|
|
|
|
|
||
|
|
|||||
|
|
|
||||
|
|
|
||||
|
|
|
|
|
||
|
|
|
||||
|
|
|
|
|
||
|
|
|
||||
|
|
|
|
|||
|
|
|
||||
Part I - FINANCIAL INFORMATION
Item 1 - Consolidated Condensed Financial Statements
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Balance Sheets
(Unaudited)
(Dollars in thousands)
|
|
|
March 31, 2004 |
|
December 31, 2003 |
|
||
|
ASSETS |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
CURRENT ASSETS: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
19,404 |
|
$ |
30,885 |
|
|
Receivables, net - |
|
|
|
|
|
||
|
Client accounts |
|
284,049 |
|
328,323 |
|
||
|
Unbilled revenue |
|
197,181 |
|
154,141 |
|
||
|
Other |
|
9,920 |
|
8,521 |
|
||
|
Prepaid expenses and other |
|
16,775 |
|
17,799 |
|
||
|
Total current assets |
|
527,329 |
|
539,669 |
|
||
|
PROPERTY, PLANT and EQUIPMENT, net |
|
25,276 |
|
25,695 |
|
||
|
GOODWILL |
|
26,690 |
|
26,690 |
|
||
|
INTANGIBLE ASSETS, net |
|
37,651 |
|
39,676 |
|
||
|
OTHER ASSETS, net |
|
122,637 |
|
116,936 |
|
||
|
TOTAL ASSETS |
|
$ |
739,583 |
|
$ |
748,666 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
CURRENT LIABILITIES: |
|
|
|
|
|
||
|
Accounts payable |
|
$ |
104,758 |
|
$ |
139,000 |
|
|
Billings in excess of revenues |
|
79,107 |
|
84,642 |
|
||
|
Accrued incentive compensation |
|
17,480 |
|
35,289 |
|
||
|
Employee related liabilities |
|
106,189 |
|
100,229 |
|
||
|
Other current liabilities |
|
116,921 |
|
96,238 |
|
||
|
Total current liabilities |
|
424,455 |
|
455,398 |
|
||
|
OTHER LONG-TERM LIABILITIES |
|
91,829 |
|
86,123 |
|
||
|
LINE OF CREDIT |
|
14,300 |
|
— |
|
||
|
LONG-TERM DEBT |
|
5,733 |
|
6,971 |
|
||
|
Total liabilities |
|
536,317 |
|
548,492 |
|
||
|
|
|
|
|
|
|
||
|
COMMITMENTS AND CONTINGENCIES (See Notes) |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
||
|
Common
stock, $0.01 par value, 100,000,000
shares authorized; |
|
320 |
|
310 |
|
||
|
Additional paid-in capital |
|
35,234 |
|
40,976 |
|
||
|
Retained earnings |
|
182,397 |
|
175,681 |
|
||
|
Accumulated other comprehensive loss |
|
(14,685 |
) |
(16,793 |
) |
||
|
Total shareholders’ equity |
|
203,266 |
|
200,174 |
|
||
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
$ |
739,583 |
|
$ |
748,666 |
|
The accompanying notes are an integral part of these consolidated condensed financial statements.
1
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Statements of Income
(Unaudited)
(Dollars in thousands except per share)
|
|
|
Three-Month
Period Ended |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
|
|
|
|
|
|
||
|
Gross revenue |
|
$ |
617,499 |
|
$ |
520,825 |
|
|
|
|
|
|
|
|
||
|
Operating expenses: |
|
|
|
|
|
||
|
Direct cost of services and overhead |
|
(491,190 |
) |
(414,827 |
) |
||
|
General and administrative |
|
(121,134 |
) |
(101,775 |
) |
||
|
|
|
|
|
|
|
||
|
Operating income |
|
5,175 |
|
4,223 |
|
||
|
|
|
|
|
|
|
||
|
Other income (expense): |
|
|
|
|
|
||
|
Equity in earnings of joint ventures and affiliated companies |
|
6,391 |
|
6,216 |
|
||
|
Interest income |
|
82 |
|
475 |
|
||
|
Interest expense |
|
(340 |
) |
(153 |
) |
||
|
Income before provision for income taxes |
|
11,308 |
|
10,761 |
|
||
|
Provision for income taxes |
|
(4,592 |
) |
(4,659 |
) |
||
|
Net income |
|
$ |
6,716 |
|
$ |
6,102 |
|
|
|
|
|
|
|
|
||
|
Net income per common share: |
|
|
|
|
|
||
|
Basic |
|
$ |
0.21 |
|
$ |
0.20 |
|
|
Diluted |
|
$ |
0.21 |
|
$ |
0.19 |
|
|
Weighted average number of common shares: |
|
|
|
|
|
||
|
Basic |
|
31,635,300 |
|
30,658,612 |
|
||
|
Diluted |
|
32,065,933 |
|
31,881,403 |
|
||
The accompanying notes are an integral part of these consolidated condensed financial statements.
2
CH2M HILL COMPANIES, LTD.
Consolidated Condensed Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
Three-Month Period Ended March 31, |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
Cash flows from operating activities: |
|
|
|
|
|
||
|
Net income |
|
$ |
6,716 |
|
$ |
6,102 |
|
|
Adjustments to reconcile net income to net cash used in operating activities - |
|
|
|
|
|
||
|
Depreciation and amortization |
|
4,061 |
|
2,760 |
|
||
|
Realized gain on sale of investment |
|
(785 |
) |
— |
|
||
|
Stock-based compensation for employees and employee benefit plans |
|
3,664 |
|
5,985 |
|
||
|
Allowance for uncollectible accounts |
|
261 |
|
273 |
|
||
|
Deferred income tax expense |
|
458 |
|
931 |
|
||
|
Equity in undistributed earnings of unconsolidated affiliates |
|
(102 |
) |
(2,668 |
) |
||
|
Change in current assets and liabilities |
|
|
|
|
|
||
|
Receivables and unbilled revenue |
|
(391 |
) |
6,903 |
|
||
|
Prepaid expenses and other |
|
1,661 |
|
679 |
|
||
|
Accounts payable |
|
(34,345 |
) |
(23,894 |
) |
||
|
Billings in excess of revenues |
|
(5,450 |
) |
3,084 |
|
||
|
Accrued incentive compensation |
|
(15,790 |
) |
(21,102 |
) |
||
|
Employee related liabilities |
|
5,984 |
|
10,206 |
|
||
|
Other accrued liabilities |
|
13,577 |
|
(9,379 |
) |
||
|
Current taxes payable |
|
6,102 |
|
(3,630 |
) |
||
|
Other |
|
1,127 |
|
3,767 |
|
||
|
Net cash used in operating activities |
|
(13,252 |
) |
(19,983 |
) |
||
|
|
|
|
|
|
|
||
|
Cash flows from investing activities: |
|
|
|
|
|
||
|
Capital expenditures |
|
(1,351 |
) |
(1,276 |
) |
||
|
Proceeds from investments in affiliates, net |
|
1,054 |
|
931 |
|
||
|
Net cash used in investing activities |
|
(297 |
) |
(345 |
) |
||
|
|
|
|
|
|
|
||
|
Cash flows from financing activities: |
|
|
|
|
|
||
|
Borrowing on line of credit |
|
106,700 |
|
— |
|
||
|
Payments on line of credit and long-term debt |
|
(92,869 |
) |
(941 |
) |
||
|
Purchases and retirements of stock |
|
(12,107 |
) |
(8,940 |
) |
||
|
Net cash provided by (used in) financing activities |
|
1,724 |
|
(9,881 |
) |
||
|
Effect of exchange rate changes on cash |
|
344 |
|
(432 |
) |
||
|
Decrease in cash and cash equivalents |
|
(11,481 |
) |
(30,641 |
) |
||
|
Cash and cash equivalents, beginning of period |
|
30,885 |
|
106,438 |
|
||
|
Cash and cash equivalents, end of period |
|
$ |
19,404 |
|
$ |
75,797 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
CH2M HILL COMPANIES, LTD.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial information has been prepared in accordance with the interim reporting rules and regulations of the U.S. Securities and Exchange Commission and therefore does not necessarily include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States (GAAP). The preparation of financial statements, in conformity with GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingencies at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Estimates have been prepared on the basis of the most current and best available information and actual results could differ from those estimates. Certain amounts in the prior period have been reclassified to conform to current period presentation.
In the opinion of CH2M HILL Companies, Ltd.’s (CH2M HILL) management, the accompanying unaudited consolidated condensed financial statements of the interim periods presented contain all adjustments necessary to present fairly the financial position of CH2M HILL as of March 31, 2004 and the results of operations and cash flows for the periods presented. All such adjustments are of a normal recurring nature. The results of operations for the three-month period ended March 31, 2004 are not necessarily indicative of the results that may be achieved for a full year and cannot be used to indicate financial performance for the entire year. These financial statements should be read in conjunction with the notes to the consolidated financial statements contained in CH2M HILL’s Annual Report on Form 10-K for the year ended December 31, 2003.
Shareholders’ Equity
The significant changes in shareholders’ equity for the three-month period ended March 31, 2004 are as follows:
|
|
|
Shares |
|
Amount |
|
|
|
|
|
|
|
|
|
|
|
Shareholders’ Equity, December 31, 2003 |
|
31,023,886 |
|
$ |
200,174 |
|
|
Net income |
|
— |
|
6,716 |
|
|
|
Shares issued in connection with stock-based compensation and employee benefit plans |
|
1,915,177 |
|
6,375 |
|
|
|
Shares purchased and retired |
|
(980,667 |
) |
(12,107 |
) |
|
|
Unrealized gain on marketable equity securities, net of tax |
|
— |
|
1,859 |
|
|
|
Foreign currency translation adjustment |
|
— |
|
249 |
|
|
|
Shareholders’ Equity, March 31, 2004 |
|
31,958,396 |
|
$ |
203,266 |
|
4
Supplemental Cash Flow Information
|
|
|
Three-Month
Period |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
Cash paid during the period for: |
|
|
|
|
|
||
|
Interest |
|
$ |
100 |
|
$ |
173 |
|
|
Taxes |
|
$ |
(338 |
) |
$ |
5,835 |
|
CH2M HILL recorded a non-cash increase in shareholders’ equity for an unrealized gain on marketable equity securities of $1,859, net of tax, as of March 31, 2004. CH2M HILL holds a common stock investment in a company located in Korea. During the first quarter of 2004, the company became publicly listed on a Korean stock exchange and CH2M HILL has reclassified its investment as available for sale with a corresponding adjustment to accumulated other comprehensive income.
Effective January 2003, CH2M HILL was awarded a new performance-based contract by the U.S. Department of Energy to accelerate the safe closure of the nuclear facilities at the former Mound Plant in Miamisburg, Ohio and to transition the site for industrial use. As part of this non-cash transaction, we assumed $10,962 in current assets and $10,962 in current liabilities from the incumbent contractor related to in-process work and amounts due to subcontractors.
Stock-Based Compensation Plans
CH2M HILL accounts for its stock-based employee compensation plans using the intrinsic value method under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. The following table illustrates the proforma effect on net income and earnings per share if CH2M HILL had applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation. The following proforma disclosures are required under SFAS No. 148, “Accounting for Stock-Based Compensation Transition and Disclosure – an Amendment of SFAS No. 123.”
|
|
|
Three-Month
Period |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
Net income, as reported |
|
$ |
6,716 |
|
$ |
6,102 |
|
|
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
2,242 |
|
3,663 |
|
||
|
Deduct: Stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects |
|
(2,552 |
) |
(3,974 |
) |
||
|
Pro forma net income |
|
$ |
6,406 |
|
$ |
5,791 |
|
|
|
|
|
|
|
|
||
|
Earnings per share: |
|
|
|
|
|
||
|
Basic – as reported |
|
$ |
0.21 |
|
$ |
0.20 |
|
|
Basic – pro forma |
|
$ |
0.20 |
|
$ |
0.19 |
|
|
Diluted – as reported |
|
$ |
0.21 |
|
$ |
0.19 |
|
|
Diluted – pro forma |
|
$ |
0.20 |
|
$ |
0.18 |
|
5
New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) 46, “Consolidation of Variable Interest Entities,” which provides guidance on when to consolidate variable interest entities. In December 2003, the FASB revised FIN 46 with FIN 46R. In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. CH2M HILL will adopt the provisions of FIN 46R immediately for entities created after December 31, 2003. For entities created before December 31, 2003, CH2M HILL will adopt FIN 46R in the first quarter of 2005, as required by FIN 46R.
CH2M HILL has interests in multiple pass through joint ventures, with little or no initial equity, which are considered variable interest entities under FIN 46R. These entities facilitate the completion of service contracts that are jointly owned with our joint venture partners. These joint ventures are formed to leverage the skills of the respective partners, and include consulting, construction, design, project management and operations and maintenance contracts. Typically, CH2M HILL’s losses on these contracts are limited to its portion of the total contract value, but occasionally, CH2M HILL’s exposure can be up to three times the total contract value.
CH2M HILL has an interest in CH2M HILL Canada, Ltd. (Canada), which may be a variable interest entity. Canada represents all of CH2M HILL’s Canadian operations, which consist of consulting in environmental engineering and scientific services. CH2M HILL’s losses are limited to its investment in the entity of approximately $8,154. CH2M HILL has a lease with Meridian 26 Trust (Trust), which may also be a variable interest entity. The Trust is owned by third parties and was formed to fund the construction and own CH2M HILL’s corporate headquarters and another building. The aggregate fair value of the assets held by the Trust is $53,000, for which CH2M HILL’s losses are limited to CH2M HILL’s guaranteed residual value of approximately $42,000.
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits. “ SFAS No. 132(R) increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. The new disclosure requirements required by SFAS No. 132(R) are effective for CH2M HILL for the year ending after June 15, 2004. CH2M HILL will adopt the new SFAS No. 132(R) disclosure requirements for the year ending December 31, 2004.
(2) SEGMENT INFORMATION
During 2003, management reevaluated how the business was organized and announced a new organizational model that became effective on January 1, 2004. This model, recognizing and reflective of the distinct needs of CH2M HILL’s clients, is centered on three Client Groups:
• Civil Infrastructure (state and local governments)
• Federal (U.S. and international governments)
• Industrial (private sector clients)
6
Certain financial information relating to the three-month periods ended March 31, 2004 and 2003 for each segment is provided below. March 31, 2003 financial information for each segment has been restated to conform to current period presentation.
|
Three-Month Period Ended |
|
Federal |
|
Civil |
|
Industrial |
|
Other |
|
Financial |
|
|||||
|
Revenues from external customers |
|
$ |
235,133 |
|
$ |
202,359 |
|
$ |
180,007 |
|
$ |
— |
|
$ |
617,499 |
|
|
Inter-segment sales |
|
3,580 |
|
4,922 |
|
832 |
|
(9,334 |
) |
— |
|
|||||
|
Equity in earnings (losses) of joint ventures and affiliated companies |
|
5,321 |
|
1,079 |
|
(9 |
) |
— |
|
6,391 |
|
|||||
|
Segment profit (loss) |
|
8,876 |
|
4,034 |
|
(67 |
) |
(1,535 |
) |
11,308 |
|
|||||
|
Three-Month Period Ended |
|
Federal |
|
Civil |
|
Industrial |
|
Other |
|
Financial |
|
|||||
|
Revenues from external customers |
|
$ |
219,833 |
|
$ |
218,232 |
|
$ |
82,760 |
|
$ |
— |
|
$ |
520,825 |
|
|
Inter-segment sales |
|
3,475 |
|
4,767 |
|
173 |
|
(8,415 |
) |
— |
|
|||||
|
Equity in earnings of joint ventures |
|
|
|
|
|
|
|
|
|
|
|
|||||
|
and affiliated companies |
|
5,862 |
|
351 |
|
3 |
|
— |
|
6,216 |
|
|||||
|
Segment profit (loss) |
|
7,638 |
|
10,657 |
|
(5,323 |
) |
(2,211 |
) |
10,761 |
|
|||||
(3) COMPREHENSIVE INCOME
Comprehensive income includes unrealized gains on equity investments and foreign currency translation gains or losses that have been reflected as a component of shareholders’ equity and have not impacted net income. The following table summarizes the components of comprehensive income for the three-month periods ended March 31, 2004 and 2003:
|
|
|
Three-Month
Period Ended |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
Net income |
|
$ |
6,716 |
|
$ |
6,102 |
|
|
Unrealized gain on marketable equity securities, net of tax |
|
1,859 |
|
— |
|
||
|
Change in foreign currency translation gains (losses) |
|
249 |
|
(441 |
) |
||
|
Comprehensive income |
|
$ |
8,824 |
|
$ |
5,661 |
|
(4) EARNINGS PER SHARE
Basic earnings per share (EPS) excludes the dilutive effect of common stock equivalents and is computed by dividing net income by the weighted-average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of common stock equivalents, which consist of stock options, and is computed using the weighted-average number of shares and common stock equivalents outstanding during the period.
7
A reconciliation of basic and diluted EPS for the three-month periods ended March 31 follows (in thousands, except per share amounts):
|
|
|
2004 |
|
2003 |
|
||
|
Numerator: |
|
|
|
|
|
||
|
Net Income |
|
$ |
6,716 |
|
$ |
6,102 |
|
|
|
|
|
|
|
|
||
|
Denominator: |
|
|
|
|
|
||
|
Basic income per share- weighted-average shares outstanding |
|
31,635 |
|
30,659 |
|
||
|
Dilutive effect of common stock equivalents |
|
431 |
|
1,222 |
|
||
|
Diluted income per share- adjusted weighted-average shares outstanding, assuming conversion of common stock equivalents |
|
32,066 |
|
31,881 |
|
||
|
Basic net income per share |
|
$ |
0.21 |
|
$ |
0.20 |
|
|
Diluted net income per share |
|
$ |
0.21 |
|
$ |
0.19 |
|
(5) INVESTMENTS IN UNCONSOLIDATED AFFILIATES
CH2M HILL routinely enters into joint ventures to service the needs of its clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. CH2M HILL accounts for its investments in affiliated unconsolidated companies using the equity method of accounting. As of March 31, 2004 and December 31, 2003, the investments in unconsolidated affiliates were approximately $56,335 and $53,492, respectively, and are reflected in the accompanying consolidated condensed balance sheets in other assets. CH2M HILL’s proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies on the accompanying consolidated condensed statements of income.
CH2M HILL’s largest joint venture is Kaiser-Hill Company, LLC (Kaiser-Hill), in which we own a 50% interest. Kaiser-Hill’s revenues are derived from the U.S. Department of Energy’s (DOE) Performance Based Integrating Management Contract for the Rocky Flats Closure Project in Golden, Colorado. Kaiser-Hill is compensated through a base fee affected, up or down, by its performance against the agreed site target closure costs. The ultimate fee will also be impacted by the schedule to achieve site closure and the safety of our performance.
During the three-month periods ended March 31, 2004 and 2003, CH2M HILL recognized undistributed earnings from Kaiser-Hill of $1,665 and $2,246, respectively. Kaiser-Hill’s ability to distribute cash is based on pre-negotiated payment terms in accordance with its contract with the DOE and can be different from the earnings recognized for accounting purposes. As the cleanup of the site progresses toward the targeted closure date of 2006, undistributed earnings, and therefore the investment balance, could continue to increase if Kaiser-Hill continues to perform at better than cost and schedule targets. As of March 31, 2004 and December 31, 2003, the investment in Kaiser-Hill was $34,081 and $32,416, respectively.
8
Summarized financial information for the three-month periods ended March 31, 2004 and 2003, for CH2M HILL’s unconsolidated affiliates is as follows:
|
|
|
Three-Month
Period Ended |
|
||||
|
|
|
2004 |
|
2003 |
|
||
|
RESULTS OF OPERATIONS: |
|
|
|
|
|
||
|
Revenues |
|
$ |
195,378 |
|
$ |
218,025 |
|
|
Direct costs |
|
176,202 |
|
201,774 |
|
||
|
Gross margin |
|
19,176 |
|
16,251 |
|
||
|
General and administrative expenses |
|
5,502 |
|
3,946 |
|
||
|
Operating income |
|
13,674 |
|
12,305 |
|
||
|
Other income |
|
44 |
|
82 |
|
||
|
Net income |
|
$ |
13,718 |
|
$ |
12,387 |
|
(6) GOODWILL AND INTANGIBLE ASSETS
Intangible assets with finite lives consist of the following:
|
|
|
Cost |
|
Accumulated |
|
Net finite-lived |
|
|||
|
March 31, 2004 |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Contract-in-place |
|
$ |
24,081 |
|
$ |
(14,178 |
) |
$ |
9,903 |
|
|
Patents and trademarks |
|
5,196 |
|
(1,182 |
) |
4,014 |
|
|||
|
Contracted backlog |
|
4,058 |
|
(1,320 |
) |
2,738 |
|
|||
|
Non-compete agreements and other |
|
1,319 |
|
(1,149 |
) |
170 |
|
|||
|
Total finite-lived intangible assets |
|
$ |
34,654 |
|
$ |
(17,829 |
) |
$ |
16,825 |
|
|
|
|
|
|
|
|
|
|
|||
|
December 31, 2003 |
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|
|||
|
Contract-in-place |
|
$ |
24,081 |
|
$ |
(13,565 |
) |
$ |
10,516 |
|
|
Patents and trademarks |
|
5,196 |
|
(813 |
) |
4,383 |
|
|||
|
Contracted backlog |
|
4,058 |
|
(830 |
) |
3,228 |
|
|||
|
Non-compete agreements and other |
|
1,319 |
|
(596 |
) |
723 |
|
|||
|
Total finite-lived intangible assets |
|
$ |
34,654 |
|
$ |
(15,804 |
) |
$ |
18,850 |
|
The contract-in-place is being amortized on a straight-line basis over the total life of the contract of seven years. The other intangible assets are being amortized over their expected useful lives of one to six years. The amortization expense reflected in the accompanying consolidated condensed statements of income totaled $2,025 and $1,322 for the three-month periods ended March 31, 2004 and 2003, respectively.
Indefinite-lived intangible assets consist of the following:
|
|
|
March 31, |
|
December
31, |
|
||
|
Goodwill |
|
$ |
26,690 |
|
$ |
26,690 |
|
|
Tradename |
|
20,826 |
|
20,826 |
|
||
|
Total indefinite-lived intangible assets |
|
$ |
47,516 |
|
$ |
47,516 |
|
9
(7) LINE OF CREDIT
CH2M HILL has an unsecured revolving line of credit with a maximum borrowing capacity of $160,000. The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit. During the first quarter of 2004, CH2M HILL borrowed an average of $10,402 under this credit facility for general corporate purposes. The amount outstanding under the line of credit at March 31, 2004 was $14,300 and there were no amounts outstanding at December 31, 2003.
The credit facility, as amended, expires in July 2006, however, with the lender’s consent, the credit facility can be extended for an additional year on the first and second anniversary date, through 2007 and 2008, respectively. At the option of CH2M HILL, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.25% to 2.0%, or the lender’s applicable base rate plus margin of 0.0% to 0.5% based on CH2M HILL’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.2% per year is payable based on CH2M HILL’s ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined.
The agreement requires CH2M HILL to, among other things, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt (all as defined in the agreement). As of March 31, 2004, CH2M HILL was in compliance with the covenants required by the agreement.
The agreement also allows CH2M HILL to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At March 31, 2004 and December 31, 2003, there were $38,782 and $40,680 issued and outstanding letters of credit, respectively.
(8) COMMITMENTS AND CONTINGENCIES
CH2M HILL maintains a variety of commercial commitments that are generally made available to provide support for various provisions in its engineering and construction contracts. Letters of credit are provided to clients in the ordinary course of the contracting business in lieu of retention or for performance and completion guarantees on engineering and construction contracts. CH2M HILL also posts surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts. Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.
CH2M HILL is party to certain contractual guarantees and various legal actions arising in the normal course of its business. From time-to-time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action. Damages assessed in connection with and the cost of defending any such actions could be substantial.
Management believes, after consultation with counsel, that such guarantees, litigation, and U. S. Government contract-related audits, investigations and claims should not have any material adverse effect on CH2M HILL’s consolidated financial statements.
CH2M HILL has presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996 through 1999. Although CH2M HILL is seeking resolution with the IRS, we only recognize tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized. The amount of the tax credit claimed is significant, however, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.
10
The following discussion and analysis explains our general financial condition, changes in financial condition and results of operations as a whole and for each of our operating segments including:
• Factors affecting our business
• Our revenues and profits
• The source of our revenues and profits
• Why those revenues and profits were different from period to period
• Where our cash came from and how it was used
• How all of this affects our overall financial condition
The following discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. As you read this section, you should also refer to our consolidated condensed financial statements and the accompanying notes as well as our Annual Report on Form 10-K for the year ended December 31, 2003. These consolidated financial statements provide additional information regarding our financial activities and condition. This analysis may be important to you in making decisions about your investment in CH2M HILL Companies, Ltd. (CH2M HILL).
Introduction
The engineering and construction industry continues to undergo substantial change as public and private clients privatize and outsource many of the services that were formerly provided internally. Numerous mergers and acquisitions in the industry have resulted in a group of larger firms that offer a full complement of single-source services including studies, designs, construction, operations, maintenance and in some instances, facility ownership. Included in the current trend is the movement towards longer-term contracts for the expanded array of services, e.g., 5 to 20 year contracts. These larger, longer, more full-service contracts require us to have substantially greater financial capital than has historically been necessary to remain competitive.
We believe we provide our clients with innovative project delivery using cost-effective approaches and advanced technologies. We continuously monitor acquisition and investment opportunities that will expand our portfolio of services, add value to the projects undertaken for clients, or enhance capital strength. We believe that we are well positioned geographically, technically and financially to compete worldwide in the markets we have elected to pursue and clients we serve.
Newly Aligned Operating Segments
During 2003, we reevaluated how our business was organized and announced a new organizational model that became effective on January 1, 2004. This model, recognizing and reflective of the distinct needs of our clients, is centered on three Client Groups:
• Civil Infrastructure (state and local governments)
• Federal (U.S. and international governments)
• Industrial (private sector clients)
This change was brought about by discussions among senior management and our Board of Directors, who recognized that our path to success was critically dependent on understanding and meeting the differing needs and requirements of our clients. The new structure allows better decision making on an enterprise-wide basis.
11
Revenues and pre-tax profit or loss for the three-month periods ended March 31, 2004 and 2003 by operating segment were as follows:
Three-Month Period Ended March 31,
(in millions)
|
|
|
Revenues |
|
Pre-Tax Profit (Loss) |
|
||||||||||||
|
|
|
2004 |
|
2003 |
|
2004 |
|
2003 |
|
||||||||
|
Federal |
|
$ |
235.1 |
|
38.1 |
% |
$ |
219.8 |
|
42.2 |
% |
$ |
8.9 |
|
$ |
7.6 |
|
|
Civil Infrastructure |
|
202.4 |
|
32.8 |
% |
218.2 |
|
41.9 |
% |
4.0 |
|
10.7 |
|
||||
|
Industrial |
|
180.0 |
|
29.1 |
% |
82.8 |
|
15.9 |
% |
(0.1 |
) |
(5.3 |
) |
||||
|
Corporate |
|
— |
|
— |
|
— |
|
— |
|
(1.5 |
) |
(2.2 |
) |
||||
|
Total |
|
$ |
617.5 |
|
100 |
% |
$ |
520.8 |
|
100 |
% |
$ |
11.3 |
|
$ |
10.8 |
|
Revenues for the three-month period ended March 31, 2004 were $617.5 million compared to revenues of $520.8 million for the same period in 2003, an increase of $96.7 million, or 18.6%. The Industrial segment reported increased revenues quarter-over-quarter of $97.2 million, or 117.4%, while the Federal segment reported increased revenues for the same period of $15.3 million, or 7.0%. These revenue improvements were offset by a $15.8 million, or 7.2%, decline in revenues for the Civil Infrastructure segment.
Pre-tax profit for the three-month period ended March 31, 2004 was $11.3 million compared to $10.8 million for the same period of 2003, an increase of $0.5 million, or 4.6%. This increase was primarily a result of improvement in the Industrial segment which reported an improvement in its pre-tax loss of $5.2 million, or 98.1%, for the three-month period ended March 31, 2004 compared to the same period last year, while the Federal segment reported an increase of $1.3 million, or 17.1%, for the same periods. These improvements were offset by decreases in the Civil Infrastructure segment of $6.7 million, or 62.6%, for the three-month period ended March 31, 2004 compared to the same period last year.
The Federal segment reported revenues of $235.1 million for the three-month period ended March 31, 2004 compared to $219.8 million for the same period last year, an increase of $15.3 million, or 7.0%. The increase in revenues was primarily attributable to the environmental services and federal outsourcing and privatization business offset by declines in revenue in our nuclear business. Our environmental services business reported increased revenues due to primarily to increased volume from U.S. federal government contracts and delivery orders. Our federal outsourcing and privatization business contributed an increase in revenues as a result of a privatization contract for a U.S. Corps of Engineers site to run its water and wastewater facilities which was awarded to us in August 2003. Our nuclear business reported a decrease in revenues primarily due to timing of certain delivery efforts at the Department of Energy’s (DOE) Hanford River Protection Project.
Pre-tax profit for the federal segment increased $1.3 million, or 17.1%, for the three-month period ended March 31, 2004 compared to the same period last year primarily due to an increase in earnings on projects within our nuclear business and successful administrative cost containment efforts.
12
Revenues in the Civil Infrastructure segment for the three-month period ended March 31, 2004 were $202.4 million compared to $218.2 million for the same period last year, a decrease of $15.8 million, or 7.2%. The decrease in revenues was primarily attributable to the water and operations and maintenance businesses offset by revenue increases in our transportation business. Revenues in the water business decreased due to project delays on North America consulting projects and delays in converting pending awards to signed contracts on design build projects. Our operations and maintenance business revenues decreased primarily as a result of reductions in scope of certain active projects resulting in lower service fees and the lost revenue derived from non-renewed contracts which was not completely offset by newly acquired contracts in this comparison period. In addition, renewed interest in design build services caused by improvements in the economy and increased transportation needs in Canada increased revenues in our transportation business.
Pre-tax profit for the Civil Infrastructure segment for the three-month period ended March 31, 2004 was $4.0 million compared to $10.7 million for the same period last year, a decrease of $6.7 million, or 62.6%. The primary reason for the decline was due to increased legal and technical support provided on certain projects, a deterioration of project margins driven by competition for market share and project delivery challenges on certain projects in our operations and maintenance business. Our transportation business reported a decrease in pre-tax profit due to increased business development costs and costs associated with strengthening our employees technical skills in preparation for business growth. Additionally, the decrease resulted from major business development expenditures, particularly for pursuit of work in Iraq.
Revenues for the Industrial segment for the three-month period ended March 31, 2004 were $180.0 million compared to $82.8 million for the same period last year, an increase of $97.2 million, or 117.4%. The increase in revenues is primarily attributable to our December 2003 acquisition of Lockwood Greene, Engineers, Inc. (Lockwood Greene), an engineering and construction company providing integrated project delivery services to industrial clients. Lockwood Greene contributed revenues of $83.3 million for the three-month period ended March 31, 2004. These revenues were primarily generated in projects related to the power, pharmaceutical, chemicals and general manufacturing sectors.
Additionally, we experienced revenue increases in the energy and industrial systems and communications businesses. Our energy and industrial systems business reported an increase in revenue primarily attributable to an increase in awards under a series of contracts with the U.S. Air Force. While our industrial design business continues to be negatively affected by the depressed level of capital spending in the semiconductor industry, this business reported an increase in revenue. The semiconductor industry is showing signs of improvement resulting in more bid opportunities and a slight firming of workload. Our communications and information services business reported an increase in revenue primarily attributable to a significant stabilization in the domestic wireless market and winning wireless and wire line work in India and Germany.
Pre-tax loss for the Industrial segment for the three-month period ended March 31, 2004 was $0.1 million compared to a pre-tax loss of $5.3 million for the same period last year, a $5.2 million improvement, or 98.1%. The industrial design business reported a decline in pre-tax loss due to a slight improvement in the volume of services sold combined with further administrative cost containment efforts during the three-month period ended March 31, 2004 compared to the same period last year. Additionally, pre-tax loss improved as a result of including the three-month period ended March 31, 2004 pre-tax profit of $1.7 million for Lockwood Greene. The energy business and the communications business both experienced business growth over the same period last year resulting in further improvement.
13
We routinely enter into joint ventures to service the needs of our clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. Our largest joint venture is Kaiser-Hill Company, LLC (Kaiser-Hill), in which we own a 50% interest. This joint venture is included in our Federal operating segment. Kaiser-Hill’s current contract with the DOE, which has been effective since 2000, is a site closure contract and does not have a defined term. We are targeting closure of the site in 2006. Under the contract, Kaiser-Hill is compensated through a base fee affected, up or down, by its performance against the agreed site target closure timetable and costs. For every dollar that the DOE saves, Kaiser-Hill receives a fee increase ranging from 20 to 30 cents. At the same time, for every dollar the cleanup is over budget, the fee is reduced by 20 to 30 cents down to an agreed minimum. The ultimate fee will also be impacted by the schedule to achieve site closure and the safety of our performance. Due to the timing of specific work scopes and the completion of activities, Kaiser-Hill’s earnings may not be comparable from period to period.
The earnings from Kaiser-Hill are reported as equity in earnings of joint ventures and affiliated companies, along with other joint ventures that are individually insignificant. For the three-month periods ended March 31, 2004 and 2003, we reported total equity in earnings of joint ventures and affiliated companies of $6.4 million and $6.2 million, respectively. The earnings from the Kaiser-Hill joint venture for the three-month periods ended March 31, 2004 and 2003 were $5.1 million and $5.2 million, respectively.
During the three-month periods ended March 31, 2004 and 2003, we recognized undistributed earnings from Kaiser-Hill of $1.6 million and $2.3 million, respectively. Kaiser-Hill’s ability to distribute cash is based on pre-negotiated payment terms in accordance with its contract with the DOE and can be different from the earnings recognized for accounting purposes. As the cleanup of the site progresses toward the targeted closure date of 2006, undistributed earnings could continue to increase if Kaiser-Hill continues to perform at better than cost and schedule targets. This could result in an increase in our investment in Kaiser-Hill, which was $34.1 million and $32.4 million as of March 31, 2004 and December 31, 2003, respectively.
Corporate expenses represent centralized management costs that are not allocable to individual operating segments and primarily include expenses associated with administrative compliance functions such as legal, treasury, accounting, tax and general business development efforts. Corporate expenses for the three-month period ended March 31, 2004 were $1.5 million compared to $2.2 million in the same period in 2003. The decrease of $0.7 million from the three-month period ended March 31, 2003 compared to the same period in 2004 was due primarily to reduced incentive compensation costs.
|
Date |
|
Income Tax Provision |
|
Effective Tax Rate |
|
|
|
|
|
(in millions) |
|
|
|
|
|
March 31, 2004 |
|
$ |
4.6 |
|
40.6 |
% |
|
March 31, 2003 |
|
$ |
4.7 |
|
43.3 |
% |
The decrease in the effective tax rate for the three-month period ended March 31, 2004 compared to the same period in 2003 was primarily due to tax benefits realized under the Extraterritorial Income Exclusion (EIE) rules. Under the EIE rules, taxpayers may elect to exclude from taxable income certain foreign-related income. Our effective tax rate continues to be higher than the U.S. statutory income tax rate of 35.0% due to the effect of state income taxes and disallowed portions of meals and entertainment expenses and other permanent differences.
We have presented a claim to the Internal Revenue Service (IRS) relating to the research and experimentation tax credit for the years 1996 through 1999. Although we are seeking resolution with the IRS, we only recognize tax benefits related to these credits for financial statement purposes when it is probable that such benefits will be realized. The amount of the tax credit claimed is significant, however, the ultimate amount to be realized and the timing of the recognition of the tax credit will depend upon the final resolution with the IRS.
14
Our most significant source of cash is historically from operations. If cash flows from operations are insufficient to cover our working capital needs, we have access to our unsecured revolving line of credit. At March 31, 2004, our total cash and credit capacity available for general corporate purposes, acquisitions and letters of credit is as follows (in millions):
|
Cash on hand |
|
|
|
$ |
19.4 |
|
|
Line of credit capacity |
|
160.0 |
|
|
|
|
|
Outstanding borrowing on line of credit |
|
(14.3 |
) |
|
|
|
|
Issued letters of credit |
|
(38.8 |
) |
|
|
|
|
Net credit capacity available |
|
|
|
106.9 |
|
|
|
Total excess capacity |
|
|
|
$ |
126.3 |
|
Over the last several years, we have not used our credit facility except to support the issuance of letters of credit. During the three-month period ended March 31, 2004, we borrowed an average of $10.4 million under our credit facility for general corporate purposes. In late December 2003, we borrowed $47.0 under our credit facility to ensure sufficient liquidity to close our Lockwood Greene acquisition. This borrowing was repaid within approximately 20 days from cash on hand and cash flows from operations. It is likely, but uncertain, that we will continue to utilize our credit facility periodically during 2004 depending on the timing of cash receipts and disbursements. Since our cash inflows and outflows are primarily a function of our operations, we cannot predict with any certainty the timing of such cash receipts and disbursements.
Based upon our cash flow from operations and our credit capacity discussed above, we believe that we have access to adequate financial resources to fund these contractual obligations and fund our operations in 2004 and beyond, including working capital requirements, capital expenditures and potential future acquisitions or strategic investments.
For the three-month period ended March 31, 2004, we generated $1.7 million of cash in financing activities. The amount outstanding under our line of credit at March 31, 2004 was $14.3 million compared to no amounts outstanding last year. We used $12.1 million in existing cash to purchase stock presented on our internal market. This compares to $9.9 million of cash used in financing activities for the three-month period ended March 31, 2003, of which $8.9 million in existing cash was used to purchase stock presented on our internal market.
Our unsecured revolving line of credit has a maximum borrowing capacity of $160.0 million. The credit facility may be used for general corporate purposes, permitted acquisitions and to support letters of credit. The credit facility, as amended, expires in July 2006, however, with the lender’s consent, the credit facility can be extended for an additional year on the first and second anniversary date, through 2007 and 2008, respectively. At our option, the credit facility bears interest at a rate equal to either the London InterBank Offered Rate plus 1.25% to 2.0%, or the lender’s applicable base rate plus margin of 0.0% to 0.5% based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined. A commitment fee of approximately 0.2% per year is payable based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization, as defined.
The agreement requires us to, among other things, maintain minimum levels of net worth, a minimum coverage ratio of certain fixed charges, and a minimum leverage ratio of earnings before interest, taxes, depreciation and amortization to funded debt (all as defined in the agreement). As of March 31, 2004 we were in compliance with the covenants required by the agreement.
The agreement also allows us to issue letters of credit to support various trade activities. Issued letters of credit are reserved against the borrowing base of the line of credit. At March 31, 2004 and December 31, 2003, there were $38.8 million and $40.7 million issued and outstanding letters of credit, respectively.
15
Off-Balance Sheet Arrangements
During 2001, CH2M HILL and Meridian 26 Trust (Trust) entered into an agreement whereby the Trust acquired land in Englewood, Colorado for the purpose of constructing and owning our new corporate headquarters and another building. The construction of these two buildings was completed in October 2002. The Trust was formed to fund the construction, own the land and the two buildings and subsequently lease the facilities to us. The Trust was funded by equity and debt investments from independent third parties. The lease agreement was effective upon completion of construction. The lease agreement calls for monthly lease payments of approximately $0.4 million through March 3, 2013 and requires that we guarantee a residual value of the facilities for approximately $42.0 million. Upon completion of the lease term, subject to certain limitations, we have the option to purchase the facilities from the Trust at fair market value, which is currently estimated to be $53.0 million.
We are party to another lease agreement that calls for monthly lease payments at a variable interest rate, estimated to be approximately $0.1 million per month, based on current interest rates. The lease agreement requires that we guarantee a residual value of the additional building of approximately $17.6 million. Upon completion of the lease term, subject to certain limitations, we have the option to purchase the additional building from the lessor at fair market value, which is currently estimated to be $20.8 million. The lease matures on September 28, 2008 and provides for five one year renewal options.
Aggregate Commercial Commitments
We maintain a variety of commercial commitments that are generally made available to provide support for various provisions in engineering and construction contracts. Letters of credit are provided to clients in the ordinary course of the contracting business in lieu of retention or for performance and completion guarantees on engineering and construction contracts. We also post surety bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts. Bid bonds are also issued by a surety to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect both the results of operations as well as the carrying values of our assets and liabilities. Some of our accounting policies require us to make difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities as of the date of the financial statements that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The accounting policies that we believe are most critical to your understanding of our financial results and condition and require complex management judgment are summarized below. Further detail and information regarding our other accounting policies is included in our Annual Report on Form 10-K for the year ended December 31, 2003.
We earn our revenues from different types of services under a variety of different types of contracts, including cost-plus, firm fixed-price and time-and-materials. To properly recognize revenue, we evaluate each contractual arrangement to determine the appropriate authoritative literature to apply. We recognize revenue and profit for most of our contracts on the percentage-of-completion method where progress towards completion is measured by relating the actual cost of work performed to date to the current estimated total cost of the respective contracts. In making such estimates, judgments are required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes, or achievement of contract performance standards.
16
Change orders are included in total estimated contract revenue when it is probable that the change order will result in an addition to contract value and can be reliably estimated. Losses on contracts in process are recognized in their entirety when the loss becomes evident and the amount of loss can be reasonably estimated.
We have a history of making reasonable estimates of the extent of progress towards completion, total contract revenue and total contract costs on our engineering and construction contracts. However, due to uncertainties inherent in the estimation process, it is possible that actual total contract revenue and completion costs may vary from estimates.
In determining net income for financial statement purposes, we must make estimates and judgments in the calculation of tax assets and liabilities and in the determination of the recoverability of the deferred tax assets. The tax assets and liabilities arise from temporary differences between the tax return and the financial statement recognition of revenues and expenses.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our tax provision by recording a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable.
In addition, the calculation of our tax assets and liabilities involves dealing with uncertainties in the application of complex tax regulations. We may recognize a tax asset or adjust taxes payable for anticipated state or federal tax credits, such as those relating to the research and experimentation tax credit.
We have two frozen and one active noncontributory defined benefit pension plans. Our earnings and shareholders’ equity may be impacted by these qualified defined benefit plans because Statement of Financial Accounting Standard (SFAS) No. 87, “Employers’ Accounting for Pensions,” requires that the amounts we record be computed using actuarial valuations. These valuations include many assumptions, but the two most critical assumptions are the discount rate and the expected long-term rate of return on plan assets. We use judgment in selecting these assumptions each year because we have to consider not only current market conditions, but also make judgments about future market trends, changes in the interest rates and equity market performance. We also have to consider factors like the timing and amounts of expected contributions to the plans and benefit payments to plan participants.
New Accounting Standards
In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation (FIN) 46, “Consolidation of Variable Interest Entities,” which provides guidance on when to consolidate variable interest entities. In December 2003, the FASB revised FIN 46 with FIN 46R. In addition to conforming to previously issued FASB Staff Positions, FIN 46R deferred the implementation date for certain variable interest entities. We will adopt the provisions of FIN 46R immediately for entities created after December 31, 2003. For entities created before December 31, 2003, we will adopt FIN 46R in the first quarter of 2005, as required by FIN 46R.
We have interests in multiple pass through joint ventures, with little or no initial equity, which are considered variable interest entities under FIN 46R. These entities facilitate the completion of service contracts that are jointly owned with our joint venture partners. These joint ventures are formed to leverage the skills of the respective partners, and include consulting, construction, design, project management and operations and maintenance contracts. Typically, our losses on these contracts are limited to our portion of the total contract value, but occasionally, our exposure can be up to three times the total contract value.
We have an interest in CH2M HILL Canada, Ltd. (Canada), which may be a variable interest entity. Canada represents all of our Canadian operations, which consist of consulting in environmental engineering and scientific services. Our losses are limited to our investment in the entity of approximately $8.2 million. We have a lease with the Trust, which may also be a variable interest entity. The Trust is owned by third parties and was formed to fund the construction and own our corporate headquarters and another building. The aggregate fair value of the assets held by the Trust is approximately $53.0 million, for which our losses are limited to our guaranteed residual value of approximately $42.0 million.
17
In December 2003, the FASB issued SFAS No. 132 (Revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” SFAS No. 132(R) increases the existing disclosure requirements by requiring more details about pension plan assets, benefit obligations, cash flows, benefit costs and related information. Companies will be required to segregate plan assets by category, such as debt, equity and real estate, and to provide certain expected rates of return and other informational disclosures. The new disclosure requirements required by SFAS No. 132(R) are effective for us for the year ending after June 15, 2004. We will adopt the new SFAS No. 132(R) disclosure requirements for the year ending December 31, 2004.
We are exposed to market risk from changes in interest rates and foreign exchange rates. This risk is monitored to limit the effect of interest rate and foreign exchange rate fluctuations on earnings and cash flows. Our interest rate exposure is generally limited to our unsecured revolving credit agreement and to our notes payable to former shareholders. Historically, we have used short-term variable rate borrowings under the revolving credit agreement on a limited basis. During the first quarter of 2004, we borrowed an average of $10.4 million under our revolving credit agreement.
The interest rate on the notes payable to former shareholders is variable and fluctuates annually based on the U.S. Federal Reserve Discount Rate. These notes have varying maturities through 2009. We also have two notes payable related to an acquisition in 2002, which have fixed interest rates of 9.4% and 5.0% and maturity dates in 2010 and 2005, respectively. Collectively, the amounts outstanding under these notes were $8.5 million and $8.7 million as of March 31, 2004 and December 31, 2003, respectively.
We are also exposed to interest rate risk related to lease payments on a building, as our monthly lease payment is based on a variable interest rate. We have assessed the market risk exposure on these financial instruments and determined that any significant changes to the fair value of these instruments would not have a material impact on our financial position or results of operations.
We are exposed to foreign exchange risks in the normal course of our international business operations. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. Accordingly, we do not hedge the foreign exchange risks related to these net investments. We do not consider the foreign exchange risk to be significant. However, we may engage in forward foreign exchange contracts on a limited basis to reduce our economic exposure to changes in exchange rates. Generally, any forward contracts are entered into to hedge specific commitments and anticipated transactions but not for speculative or trading purposes. We do not currently have any derivative financial instruments outstanding.
We carried out an evaluation as of the last day of the period covered by this Quarterly Report on Form 10-Q, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a – 15(e) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no changes in our internal control over financial reporting during the three-month period ended March 31, 2004 that have materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
18
We are party to certain contractual guarantees and various legal actions arising in the normal course of our business. From time-to-time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with applicable regulatory requirements. U.S. Government investigations, whether relating to government contracts or conducted for other reasons, could result in administrative, civil or criminal liabilities, including repayments, fines or penalties, or could lead to suspension or debarment from future U.S. Government contracting. U.S. Government investigations often take years to complete and many result in no adverse action. Damages assessed in connection with and the cost of defending any such actions could be substantial.
The following table covers the purchases of our securities by CH2M HILL during the period covered by this report.
|
Period |
|
Total
Number of |
|
Average
Price Paid |
|
Total
Number of Shares |
|
Maximum
Number of Shares |
|
|
|
January (a) |
|
213,087 |
|
$ |
11.88 |
|
— |
|
— |
|
|
February (a) |
|
68,566 |
|
$ |
11.90 |
|
— |
|
— |
|
|
March (b) |
|
745,602 |
|
$ |
12.07 |
|
— |
|
— |
|
|
Total |
|
1,027,255 |
|
$ |
12.02 |
|
— |
|
— |
|
(a) Shares repurchased pursuant to a surrender by shareholders of previously owned shares in payment of the option exercise price.
(b) Includes shares purchased by CH2M HILL in the Internal Market and surrender by shareholders of previously owned shares in payment of the option exercise price.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1 Written Statement of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Written Statement of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
32.2 Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
(b) Reports on Form 8-K
On February 24, 2004, we filed a Current Report on Form 8-K/A under Items 2 and 7 to amend the Current Report on Form 8-K of CH2M HILL Companies, Ltd. dated December 12, 2003 (filed December 29, 2003) to include the financial statements of the business acquired as required by Item 7(a) and the pro-forma financial information required by Item 7(b).
On February 13, 2004, we filed a Current Report on Form 8-K under Item 5. Other Events to communicate to our shareholders a new price for our common stock and the trade date on which this stock price would be effective. This stock price was established by the Board of Directors at its February 13, 2004 meeting.
19
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
CH2M HILL Companies, Ltd. |
|
|
|
||
|
|
||
|
Date: May 6, 2004 |
/c/ Samuel H. Iapalucci |
|
|
|
Samuel H. Iapalucci |
|
|
|
Executive Vice President and Chief Financial Officer |
|
20