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TABLE OF CONTENTS

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549



Form 10-Q


ý

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010

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
(State or other jurisdiction of
incorporation or organization)
  93-0549963
(I.R.S. Employer
Identification Number)

9191 South Jamaica Street,
Englewood, CO

(Address of principal executive offices)

 


80112-5946

(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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer", "accelerated filer", and "small reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer o   Accelerated filer ý   Non-accelerated filer o
(Do not check if a
smaller reporting company)
  Smaller reporting company o

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        The number of shares outstanding of the registrant's common stock as of August 3, 2010 was 31,476,333.


Table of Contents

CH2M HILL COMPANIES, LTD.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

       

Item 1.

 

FINANCIAL STATEMENTS

       

 

Consolidated Balance Sheets as of June 30, 2010 and December 31, 2009 (unaudited)

    3  

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2010 and 2009 (unaudited)

    4  

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2010 and 2009 (unaudited)

    5  

 

Notes to Consolidated Financial Statements (unaudited)

    6  

Item 2.

 

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

   
17
 

Item 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   
24
 

Item 4.

 

CONTROLS AND PROCEDURES

   
24
 

 

PART II. OTHER INFORMATION

       

Item 1.

 

LEGAL PROCEEDINGS

   
26
 

Item 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   
26
 

Item 6.

 

EXHIBITS

   
26
 

SIGNATURES

   
27
 

2


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CH2M HILL COMPANIES, LTD.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 
  June 30,
2010
  December 31,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 405,681   $ 169,717  
 

Marketable securities

    46,796     1,966  
 

Receivables, net—

             
   

Client accounts

    546,373     611,634  
   

Unbilled revenue

    410,640     416,927  
   

Other

    25,050     20,882  
 

Deferred income taxes

    55,779     47,964  
 

Prepaid expenses and other current assets

    54,270     64,510  
           
       

Total current assets

    1,544,589     1,333,600  

Investments in unconsolidated affiliates

    77,087     78,053  

Property, plant and equipment, net

    179,958     197,152  

Goodwill

    130,354     130,354  

Intangible assets, net

    56,154     61,275  

Deferred income taxes

    126,206     109,438  

Employee benefit plan assets and other

    43,257     38,150  
           
   

Total assets

  $ 2,157,605   $ 1,948,022  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current liabilities:

             
 

Current portion of long-term debt

  $ 14,416   $ 14,396  
 

Accounts payable and accrued subcontractor costs

    335,042     407,222  
 

Billings in excess of revenue

    265,633     292,280  
 

Accrued payroll and employee related liabilities

    255,760     259,798  
 

Other accrued liabilities

    144,636     134,763  
           
     

Total current liabilities

    1,015,487     1,108,459  

Long-term employee related liabilities and other

    272,819     276,811  

Long-term debt

    325,990     37,943  
           
   

Total liabilities

    1,614,296     1,423,213  

Commitments and contingencies (Note 12)

             

Shareholders' equity:

             
 

Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued

         
 

Common stock, $0.01 par value, 100,000,000 shares authorized; 31,470,746 and 31,373,955 issued and outstanding at June 30, 2010 and December 31, 2009, respectively

    315     314  
 

Additional paid-in capital

        12,803  
 

Retained earnings

    567,918     531,796  
 

Accumulated other comprehensive loss

    (35,772 )   (32,743 )
           
   

Total CH2M HILL common shareholders' equity

    532,461     512,170  
 

Noncontrolling interests

    10,848     12,639  
           
   

Total equity

    543,309     524,809  
           
     

Total liabilities and shareholders' equity

  $ 2,157,605   $ 1,948,022  
           

The accompanying notes are an integral part of these consolidated financial statements.

3


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CH2M HILL COMPANIES, LTD.

Consolidated Statements of Income

(Unaudited)

(In thousands, except share and per share data)

 
  Three Months Ended June 30,   Six Months Ended June 30,  
 
  2010   2009   2010   2009  

Gross revenue

  $ 1,341,088   $ 1,373,594   $ 2,576,667   $ 2,707,677  

Equity in earnings of joint ventures and affiliated companies

    20,610     16,660     34,986     27,528  

Operating expenses:

                         
 

Direct cost of services and overhead

    (1,088,458 )   (1,111,415 )   (2,091,413 )   (2,180,282 )
 

General and administrative

    (211,224 )   (247,528 )   (431,365 )   (502,273 )
                   

Operating income

    62,016     31,311     88,875     52,650  

Other income (expense):

                         
 

Interest income

    538     250     776     446  
 

Interest expense

    (1,192 )   (2,496 )   (2,545 )   (4,694 )
                   

Income before provision for income taxes

    61,362     29,065     87,106     48,402  

Provision for income taxes

    (19,709 )   (4,861 )   (25,845 )   (10,350 )
                   
 

Net income

    41,653     24,204     61,261     38,052  
 

Less: Income attributable to noncontrolling interests

    (9,921 )   (8,619 )   (15,197 )   (14,138 )
                   

Net income attributable to CH2M HILL

  $ 31,732   $ 15,585   $ 46,064   $ 23,914  
                   

Net income attributable to CH2M HILL per common share:

                         
 

Basic:

                         
   

Basic

  $ 1.00   $ 0.49   $ 1.46   $ 0.75  
                   
   

Diluted

  $ 0.98   $ 0.48   $ 1.42   $ 0.74  
                   

Weighted average number of common shares:

                         
 

Basic

    31,739,782     31,759,779     31,642,204     31,862,078  
                   
 

Diluted

    32,407,735     32,408,799     32,356,194     32,533,341  
                   

The accompanying notes are an integral part of these consolidated financial statements.

4


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CH2M HILL COMPANIES, LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 
  Six Months Ended
June 30,
 
 
  2010   2009  

Cash flows from operating activities:

             
 

Net income

  $ 61,261   $ 38,052  
 

Adjustments to reconcile net income to net cash provided by operating activities:

             
   

Depreciation and amortization

    31,833     43,847  
   

Stock-based employee compensation expense

    34,269     32,597  
   

Loss on disposal of property, plant and equipment

    918     2,132  
   

Allowance for uncollectible accounts

    1,531     8,885  
   

Deferred income taxes

    (25,074 )   (8,274 )
   

Unrealized gain on investments

    (6,494 )    
   

Undistributed earnings from unconsolidated affiliates

    (34,986 )   (27,528 )
   

Distributions of income from unconsolidated affiliates

    44,048     17,765  
   

Change in assets and liabilities, net of businesses acquired:

             
     

Receivables and unbilled revenue

    66,782     66,514  
     

Prepaid expenses and other

    (3,134 )   (7,970 )
     

Accounts payable and accrued subcontractor costs

    (88,830 )   (61,169 )
     

Billings in excess of revenue

    (35,836 )   (252 )
     

Employee related liabilities

    (5,372 )   (11,336 )
     

Other accrued liabilities

    10,231     11,302  
     

Income taxes receivable

    10,499     (42,936 )
     

Long term employee related liabilities and other

    (3,993 )   29,573  
           
       

Net cash provided by operating activities

    57,653     91,202  

Cash flows from investing activities:

             
 

Capital expenditures

    (11,942 )   (13,308 )
 

Investments in unconsolidated affiliates

    (26,542 )   (35,543 )
 

Distributions of capital from unconsolidated affiliates

    12,203     27,426  
 

Purchase of investments

    (37,079 )    
 

Cash increase from consolidation of variable interest entities

    32,651      
 

Proceeds from sale of property, plant and equipment

    1,335     48  
           
     

Net cash provided by (used in) investing activities

    (29,374 )   (21,377 )

Cash flows from financing activities:

             
 

Borrowings on line of credit and long-term debt

    329,616     532,610  
 

Payments on line of credit and long-term debt

    (41,503 )   (570,254 )
 

Repurchases and retirements of stock

    (62,738 )   (43,107 )
 

Excess tax benefits from stock-based compensation

    4,581     3,875  
 

Net (distributions to) contributions from noncontrolling interests

    (21,022 )   15  
           
     

Net cash provided by (used in) financing activities

    208,934     (76,861 )

Effect of exchange rates on cash

    (1,249 )   1,563  
           

Increase (decrease) in cash and cash equivalents

    235,964     (5,473 )

Cash and cash equivalents, beginning of period

    169,717     114,282  
           

Cash and cash equivalents, end of period

  $ 405,681   $ 108,809  
           

Supplemental disclosures:

             
 

Cash paid for interest

  $ 1,935   $ 5,146  
 

Cash paid for income taxes

  $ 41,195   $ 33,402  

The accompanying notes are an integral part of these consolidated financial statements.

5


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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2010

(Unaudited)

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Summary of Business

        Founded in 1946, CH2M HILL Companies, Ltd. and subsidiaries (CH2M HILL) provides engineering, consulting, design, construction, procurement, operations and maintenance, and project management services to U.S. federal, state, municipal and local government agencies, as well as private industry, around the world. CH2M HILL is an employee-owned Oregon, USA corporation. A substantial portion of CH2M HILL's professional fees arises from projects that are funded directly or indirectly by government entities.

Basis of Presentation

        The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial statements. Accordingly, these statements do not include all of the information required by GAAP or the Securities and Exchange Commission (SEC) rules and regulations for complete financial statements. 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 at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Estimates and assumptions have been prepared on the basis of the most current and best available information. Actual results could differ from those estimates. Certain prior period amounts have been reclassified to conform to the current presentation.

        In the opinion of CH2M HILL's management, the accompanying unaudited interim consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with our consolidated financial statements and notes thereto included in CH2M HILL's Annual Report on Form 10-K for the year ended December 31, 2009. In the following text, the terms "we," "our," "our company," and "us" may refer to CH2M HILL.

Subsequent Events

        We have evaluated subsequent events and transactions for potential recognition or disclosure in the financial statements through the day the financial statements were issued.

Revenue Recognition

        CH2M HILL earns its revenue from different types of contracts, including cost-plus, fixed-price and time-and-materials. CH2M HILL evaluates each contractual arrangement to determine the appropriate authoritative literature to apply to recognize revenue. CH2M HILL primarily performs engineering and construction related services and recognizes revenue for these 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

6


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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)


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.

        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 estimated. Management evaluates when a change order is probable based upon its experience in negotiating change orders, the customer's written approval of such changes or separate documentation of change order costs that are identifiable. Losses on construction and engineering contracts in process are recognized in their entirety when the loss becomes evident and the amount of loss can be reasonably estimated.

        CH2M HILL also performs operations and maintenance services. Revenue is recognized on operations and maintenance contracts on a straight-line basis over the life of the contract once CH2M HILL has an arrangement, service has begun, the price is fixed or determinable and collectability is reasonably assured.

Marketable Securities

        Investments in debt and marketable equity securities, other than investments accounted for under the equity method, are categorized as trading, available-for-sale or held-to-maturity. Marketable equity investments are categorized as trading or available-for-sale with their cost basis determined by the specific identification method. Realized and unrealized gains and losses on trading securities and realized gains and losses on available-for-sale securities are included in net income. Unrealized gains and losses, net of deferred taxes, on available-for-sale securities are included in the consolidated balance sheets as a component of accumulated other comprehensive income (loss).

Unbilled Revenue and Billings in Excess of Revenue

        Unbilled revenue represents the excess of contract revenue recognized over billings to date on contracts in process. These amounts become billable according to the contract terms, which usually consider the passage of time, achievement of certain milestones or completion of the project.

        Billings in excess of revenue represent the excess of billings to date, per the contract terms, over revenue recognized on contracts in process.

Fair Value Measurements

        Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. CH2M HILL uses a three-tier valuation hierarchy based upon observable and non-observable inputs. The three levels are as follows: Level 1, unadjusted quoted prices that are available in active markets for the identical assets or liabilities at the measurement date; Level 2, significant other observable inputs available at the measurement date, other than quoted prices included in Level 1, either directly or indirectly; and Level 3, significant unobservable inputs that cannot be corroborated by observable market data and reflect the use of significant management judgment.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)

Shareholders' Equity

        The changes in shareholders' equity for the six months ended June 30, 2010 are as follows (in thousands):

 
  Shares   Amount  

Shareholders' equity, December 31, 2009

    31,374   $ 524,809  

Net income attributable to CH2M HILL

        46,064  

Shares issued and to be issued in connection with stock-based compensation and employee benefit plans

    1,685     39,994  

Shares and share equivalents purchased, retired and cancelled

    (1,588 )   (62,738 )

Effect of consolidation of variable interest entities

        4,088  

Other comprehensive loss

        (3,083 )

Net income from noncontrolling interests

        15,197  

Net distributions from noncontrolling interests

        (21,022 )
           

Shareholders' equity, June 30, 2010

    31,471   $ 543,309  
           

Stock-Based Compensation Plans

        CH2M HILL measures the fair value of each stock option grant at the date of grant using a Black-Scholes option pricing model. The weighted-average grant date fair value of options granted during the three and six months ended June 30, 2010 was $6.19 and $6.29, respectively, compared to $5.32 and $4.67 for the same periods in the prior year.

        CH2M HILL estimates the expected term of options granted based on historical experience of employee exercise behavior. CH2M HILL estimates the volatility of its common stock by using a weighted-average of historical volatility over the same period as the expected term of the option. CH2M HILL uses the Treasury Yield Curve rates for the risk-free interest rate in the option valuation model with maturities similar to the expected term of the options. CH2M HILL does not anticipate paying any cash dividends in the foreseeable future and therefore uses an expected dividend yield of zero in the option valuation model. CH2M HILL is required to estimate forfeitures at the time of grant and revise those estimates in subsequent periods if actual forfeitures differ from those estimates. CH2M HILL uses historical data to estimate option forfeitures and records stock-based compensation expense only for those awards that are expected to vest. All stock-based payment awards are amortized on a straight-line basis over the requisite service period of the awards.

        The total compensation cost recognized for share-based payments for stock options during the three and six months ended June 30, 2010 was $1.3 million and $2.7 million, respectively, compared to $1.0 million and $2.0 million for the three and six months ended June 30, 2009, respectively.

Recently Adopted Accounting Standards

        In June 2009, the FASB issued Accounting Standards Update (ASU) No. 2009-17, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)


revising the existing guidance on the consolidation and disclosures of variable interest entities (VIEs) which was codified in Accounting Standards Codification (ASC) 810-10. Specifically, it changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting rights (or similar) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. The guidance also requires additional disclosures about a company's involvement with VIEs and requires us to continually assess any significant changes in risk exposure as well as our assessment of the primary beneficiary of the entity. ASC 810-10 is effective for CH2M HILL beginning January 1, 2010. For further discussion of the effect of the adoption, see Note 5.

        In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires expanded fair value disclosures about transfers into and out of Levels 1 and 2 fair value measurements and clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for CH2M HILL beginning January 1, 2010. The adoption of this accounting standard update did not have a material impact on CH2M HILL's financial position, results of operations, cash flows and disclosures.

(2) SEGMENT INFORMATION

        Certain financial information relating to the three and six months ended June 30, 2010 and 2009 for each segment is provided below (in thousands):

Three Months Ended June 30, 2010
  Government,
Environment
and Nuclear
  Facilities and
Infrastructure
  Energy   Other   Financial
Statement
Balances
 

Revenue from external customers

  $ 533,384   $ 464,849   $ 342,855   $   $ 1,341,088  

Equity in earnings of joint ventures and affiliated companies

    17,083     2,750     777         20,610  

Operating income (loss)

    23,853     35,061     8,403     (5,301 )   62,016  

 

Three Months Ended June 30, 2009
  Government,
Environment
and Nuclear
  Facilities and
Infrastructure
  Energy   Other   Financial
Statement
Balances
 

Revenue from external customers

  $ 454,344   $ 494,915   $ 424,335   $   $ 1,373,594  

Equity in earnings (losses) of joint ventures and affiliated companies

    7,809     9,153     (302 )       16,660  

Operating income (loss)

    9,155     18,217     14,436     (10,497 )   31,311  

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(2) SEGMENT INFORMATION (Continued)

 

Six Months Ended June 30, 2010
  Government,
Environment
and Nuclear
  Facilities and
Infrastructure
  Energy   Other   Financial
Statement
Balances
 

Revenue from external customers

  $ 1,008,609   $ 950,335   $ 617,723   $   $ 2,576,667  

Equity in earnings of joint ventures and affiliated companies

    30,119     3,652     1,215         34,986  

Operating income (loss)

    44,493     53,408     518     (9,544 )   88,875  

 

Six Months Ended June 30, 2009
  Government,
Environment
and Nuclear
  Facilities and
Infrastructure
  Energy   Other   Financial
Statement
Balances
 

Revenue from external customers

  $ 874,248   $ 977,650   $ 855,779   $   $ 2,707,677  

Equity in earnings of joint ventures and affiliated companies

    15,025     11,871     632         27,528  

Operating income (loss)

    23,613     28,187     22,558     (21,708 )   52,650  

        Other primarily includes corporate expenses which represent centralized management costs that are not allocable to individual operating segments and primarily include expenses associated with administrative functions such as executive management, legal, treasury, accounting and tax, and general business development efforts.

(3) COMPREHENSIVE INCOME

        Comprehensive income includes foreign currency translation adjustments, benefit plan adjustments, and unrealized gains/losses on available-for-sale equity investments 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 attributable to CH2M HILL for the three and six months ended June 30, 2010 and 2009 (in thousands):

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Net income attributable to CH2M HILL

  $ 31,732   $ 15,585   $ 46,064   $ 23,914  

Other comprehensive income attributable to CH2M HILL:

                         

Foreign currency translation adjustments

    (3,445 )   12,757     (3,795 )   5,949  

Unrealized gain on available-for-sale equity investments and other, net of tax

    597     250     765     159  
                   

Comprehensive income attributable to CH2M HILL

  $ 28,884   $ 28,592   $ 43,034   $ 30,022  
                   

(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 primarily of

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(4) EARNINGS PER SHARE (Continued)


stock options, and is computed using the weighted-average number of shares and common stock equivalents outstanding during the period.

        The following table is a reconciliation of basic and diluted EPS for the three and six months ended June 30, 2010 and 2009 (in thousands, except per share amounts):

 
  Three Months Ended
June 30,
  Six Months Ended
June 30,
 
 
  2010   2009   2010   2009  

Numerator:

                         
 

Net income attributable to CH2M HILL

  $ 31,732   $ 15,585   $ 46,064   $ 23,914  

Denominator:

                         
 

Basic net income per share—weighted average shares outstanding

    31,740     31,760     31,642     31,862  
 

Dilutive effect of common stock equivalents

    668     649     714     671  
                   
 

Diluted net income per share—adjusted weighted-average shares outstanding, assuming conversion of common stock equivalents

    32,408     32,409     32,356     32,533  
                   

Basic net income attributable to CH2M HILL per common share

  $ 1.00   $ 0.49   $ 1.46   $ 0.75  
                   

Diluted net income attributable to CH2M HILL per common share

  $ 0.98   $ 0.48   $ 1.42   $ 0.74  
                   

(5) VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS

        CH2M HILL routinely enters into teaming arrangements to perform projects for its clients. Such arrangements are customary in the engineering and construction industry and generally are project specific. The arrangements facilitate the completion of contracts that are jointly owned with CH2M HILL's partners. These arrangements are formed to leverage the skills of the respective partners and include consulting, construction, design, project management and operations and maintenance contracts. CH2M HILL's risk of loss on these arrangements is usually shared with CH2M HILLs' partner. The liability of each partner is usually joint and several, which means that each partner may become liable for the entire risk of loss on the project.

        CH2M HILL performs a qualitative assessment to determine whether CH2M HILL is the primary beneficiary once an entity is identified as a VIE. A qualitative assessment begins with an understanding of the nature of the risks in the entity as well as the nature of the entity's activities including terms of the contracts entered into by the entity, ownership interests issued by the entity and how they were marketed, and the parties involved in the design of the entity. All of the variable interests held by parties involved with the VIE are identified and a determination of which activities are most significant to the economic performance of the entity and which variable interest holder has the power to direct those activities is made. Most of the VIEs with which we are involved have relatively few variable

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(5) VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS (Continued)


interests and are primarily related to our equity investment, subordinated financial support, and subcontracting arrangements. CH2M HILL consolidates those VIEs in which it has both the power to direct the activities of the VIE that most significantly impact the VIEs economic performance and the obligation to absorb losses or the right to receive the benefits from the VIE that could potentially be significant to the VIE.

        Upon adoption of ASC 810-10, CH2M HILL consolidated certain VIEs that were previously unconsolidated. It was determined that CH2M HILL is the primary beneficiary due to the ability to control the activities that most significantly impact the economic performance of the entity. These variable interest entities were previously not consolidated because no party absorbed the majority of the expected losses. Upon consolidation of these joint ventures, consolidated current assets increased by $35.8 million, primarily related to cash and equivalents and accounts receivable. Current liabilities increased by $27.6 million primarily related to accounts payable, accrued subcontractor costs and billings in excess of revenue.

        As of June 30, 2010, total assets of VIEs that were consolidated were $114.3 million and total liabilities were $72.8 million.

        As of June 30, 2010 and December 31, 2009, CH2M HILL recorded investments in unconsolidated affiliates of $77.1 million and $78.0 million, respectively. CH2M HILL's proportionate share of net income or loss is included as equity in earnings of joint ventures and affiliated companies in the consolidated statements of income. In general, the equity investment in our unconsolidated affiliates is equal to our current equity investment plus those entities' undistributed earnings. CH2M HILL provides certain services, including engineering, construction management and computer and telecommunications support, to these unconsolidated entities. These services are billed to the joint ventures in accordance with the provisions of the agreements. The Company has significant variable interests in entities that are not consolidated.

        As of June 30, 2010, the total assets of VIEs that were not consolidated were $351.0 million and total liabilities were $270.5 million. The maximum exposure to losses is limited to the funding of any future losses incurred by those entities under their respective contracts with the project company.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(6) GOODWILL AND INTANGIBLE ASSETS

        Intangible assets with finite lives consist of the following (in thousands):

 
  Cost   Accumulated
Amortization
  Net finite-lived
intangible assets
 

June 30, 2010

                   

Contracted backlog

  $ 58,871   $ (57,902 ) $ 969  

Customer relationships

    57,922     (23,063 )   34,859  

Non-compete agreements and other

    902     (902 )    
               

  $ 117,695   $ (81,867 ) $ 35,828  
               

December 31, 2009

                   

Contracted backlog

  $ 58,871   $ (56,946 ) $ 1,925  

Customer relationships

    57,922     (18,926 )   38,996  

Non-compete agreements and other

    902     (874 )   28  
               

  $ 117,695   $ (76,746 ) $ 40,949  
               

        Indefinite-lived intangible assets consist of the following (in thousands):

 
  June 30, 2010   December 31, 2009  

Goodwill

  $ 130,354   $ 130,354  

Tradename

    20,326     20,326  
           

  $ 150,680   $ 150,680  
           

        All finite-lived intangible assets are being amortized over their expected lives up to seven years. The amortization expense reflected in the accompanying consolidated statements of income was $2.5 million and $8.7 million for the three months ended June 30, 2010 and 2009, respectively, and $5.1 million and $17.5 million for the six months ended June 30, 2010 and 2009, respectively. These intangible assets are expected to be fully amortized in 2014.

(7) PROPERTY, PLANT AND EQUIPMENT

        Property, plant and equipment consists of the following (in thousands):

 
  June 30, 2010   December 31, 2009  

Land

  $ 24,094   $ 23,980  

Buildings

    79,692     74,816  

Furniture, fixtures and equipment

    198,713     196,511  

Leasehold improvements

    62,569     65,023  
           

    365,068     360,330  

Less: Accumulated depreciation

    (185,110 )   (163,178 )
           
 

Property, plant and equipment, net

  $ 179,958   $ 197,152  
           

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(7) PROPERTY, PLANT AND EQUIPMENT (Continued)

        Depreciation expense reflected in the consolidated statements of income was $13.1 million and $12.9 million for the three months ended June 30, 2010 and 2009, respectively, and $26.7 million and $26.3 million for the six months ended June 30, 2010 and 2009, respectively. The majority of depreciation expense relates to property, plant and equipment held in the Energy segment.

(8) FAIR VALUE OF FINANCIAL INSTRUMENTS

        Cash and cash equivalents, receivables, unbilled revenue, accounts payable and billings in excess of revenue are carried at cost, which approximates fair value due to their short maturities. Fair value of long-term debt, including the current portion, is estimated based on Level 2 inputs. Fair value is determined by discounting future cash flows using interest rates available for issues with similar terms and average maturities.

        Fair value of marketable securities classified as available-for-sale, which totaled $4.9 million and $2.0 million at June 30, 2010 and December 31, 2009, respectively, were valued based on Level 1 inputs whereby a readily determinable market value exists for the specific asset. Marketable securities classified as trading securities totaled $41.9 million at June 30, 2010 and were investments in ordinary shares of a publicly held company headquartered in the United Kingdom. These shares were valued based on Level 2 inputs using a cash offer that existed at June 30, 2010 for the purchase of the securities. CH2M HILL subsequently sold these trading securities for the offered amount in July 2010.

        The estimated fair values of CH2M HILL's financial instruments where carrying values do not approximate fair value are as follows:

 
  June 30, 2010   December 31, 2009  
 
  Carrying
Amount
  Fair
Value
  Carrying
Amount
  Fair
Value
 
($ in thousands)
   
   
   
   
 
 

Mortgage notes payable

  $ 15,973   $ 13,716   $ 16,672   $ 13,627  
 

Equipment financing

    28,939     28,165     35,572     33,951  

(9) EMPLOYEE BENEFIT PLAN ASSETS

        CH2M HILL has investments that support deferred compensation arrangements and other employee benefit plans. These assets are recorded at fair market value using Level 2 inputs. The assets are invested in various exchange traded mutual funds, which are measured using quoted market prices in accessible active markets for identical assets. As of June 30, 2010 and December 31, 2009, the fair market value of these assets were $41.5 million and $36.2 million, respectively.

(10) LINE OF CREDIT AND LONG TERM DEBT

        CH2M HILL is party to a credit agreement which provides for a $500.0 million committed revolving credit facility with an option to increase the initial borrowing capacity by up to an additional $250.0 million (RLOC). The RLOC expires on August 31, 2012 and is used for general corporate purposes and acquisitions. It also provides that up to $250.0 million is available for the issuance of

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(10) LINE OF CREDIT AND LONG TERM DEBT (Continued)


letters of credit to support various operating activities. At CH2M HILL's option, the credit agreement bears interest at a rate equal to either the London InterBank Offered Rate (LIBOR) plus 0.75% to 1.50%, or the lender's applicable base rate less a discount rate up to 0.25%, based on CH2M HILL's ratio of funded debt to earnings before interest, taxes, depreciation and amortization. A commitment fee of approximately 0.10% to 0.25% per year on the unused portion of the line of credit is payable, based on CH2M HILL's ratio of funded debt to earnings before interest, taxes, depreciation and amortization. As of June 30, 2010, CH2M HILL had $295.3 million in borrowings outstanding on the RLOC. The majority of the outstanding amounts under the RLOC were borrowed in connection of an offer made to purchase Scott Wilson Group plc, a design and engineering firm headquartered in the United Kingdom. We were subsequently outbid by another bidder and, in July 2010, repaid the borrowings under the RLOC related to this potential acquisition. Additionally, as of June 30, 2010, issued and outstanding letters of credit of $106.4 million were reserved against the borrowing base of the credit agreement, compared to $78.4 million at December 31, 2009.

        The RLOC agreement contains financial and other covenants, as well as limitations on other indebtedness, liens, acquisitions, mergers and dispositions. The credit agreement also contains customary events of default, including a default of covenant, a material inaccuracy of representations or warranties, bankruptcy events, and a change in control. As of June 30, 2010, CH2M HILL was in compliance with the covenants required by the credit agreement.

        CH2M HILL's nonrecourse and other long-term debt consists of the following:

($ in thousands)
  June 30, 2010   December 31, 2009  

Nonrecourse:

             
 

Mortgage payable in monthly installments to July 2020, secured by real estate, rents and leases. The note bears interest at 5.35%

  $ 12,910   $ 13,379  
 

Mortgage payable in monthly installments to December 2015, secured by real estate. The note bears interest at 6.59%

    3,063     3,293  
           

    15,973     16,672  

Other:

             
 

Revolving credit facility

    295,340      
 

Equipment financing, due in monthly installments to December 2014, secured by equipment. These notes bear interest ranging from 6.00% to 8.00%

    28,939     35,572  
 

Shareholder notes payable

    154     95  
           

Total debt

    340,406     52,339  

Less current portion of debt

    14,416     14,396  
           

Total long-term portion of debt

  $ 325,990   $ 37,943  
           

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

June 30, 2010

(Unaudited)

(11) PROVISION FOR INCOME TAXES

        The effective tax rate for the three months ended June 30, 2010 was 38.3% compared to 23.8% for the same period in the prior year. The effective tax rate for the six months ended June 30, 2010 was 35.9% compared to 30.2% for the same period in the prior year. The effective tax rates in 2010 were higher in comparison to the effective rates in 2009 due to the expiration of the research and experimentation credit in 2010 as well as negative impacts caused by certain foreign operating results. In addition, the effective tax rates in 2009 were more favorably impacted by the recognition of domestic production activities deduction from prior periods due to lower income in the period. CH2M HILL's effective tax rate continues to be negatively impacted by the effect of state income taxes, non-deductible foreign net operating losses, the disallowed portion of executive compensation, and disallowed portions of meals and entertainment expenses.

        As of June 30, 2010 and December 31, 2009, we had $28.2 million recorded as a liability for uncertain tax positions. CH2M HILL recognizes interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2010 and December 31, 2009, CH2M HILL had approximately $2.9 million and $4.5 million, respectively, of accrued interest and penalties related to uncertain tax positions.

        CH2M HILL files income tax returns in the U.S. federal and various state jurisdictions and non-U.S. jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States and Canada. With few exceptions, CH2M HILL is no longer subject to income tax examinations by tax authorities for years before 2003.

(12) COMMITMENTS AND CONTINGENCIES

        CH2M HILL is party to various contractual guarantees and legal actions arising in the normal course of business. Because a large portion of CH2M HILL's business comes from the U.S. federal, state and municipal sources, CH2M HILL's procurement practices at times are subject to review and occasional investigations by U.S. and state attorneys offices. Such state and 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. These 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. While the outcomes of pending proceedings and legal actions are often difficult to predict, CH2M HILL's management believes that proceedings and legal actions currently pending would not result in material adverse effects even if the final outcome is adverse to CH2M HILL. Many claims that are currently pending against CH2M HILL are covered by our professional liability insurance. Management estimates that the levels of insurance coverage (after retentions and deductibles) are generally adequate to cover CH2M HILL's liabilities, if any, with regard to such claims. Any amounts that are probable of payment by CH2M HILL are accrued when such amounts are estimable.

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Item 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion and analysis is intended to assist in providing an understanding of our 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 revenue and operating income

    The sources of our revenue and operating income

    Variations of revenue and operating income from period to period

    Cash sources and utilizations

    The impact of the above on our overall financial condition

        In the following text, the terms, "we," "our," "our company," and "us" may refer to CH2M HILL.

        The following discussion and information contains, in addition to historical information, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including without limitation, statements containing the words "believes," "anticipates," "expects" and words of similar import and statements regarding our strategy, financial performance and operations that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those described under Item 1A, Risk Factors (which is expressly incorporated herein by reference) of our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 25, 2010. You should review this section in conjunction with our financial statements and related notes and Management's Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the year ended December 31, 2009.

        Our reports are available free of charge through our website as soon as reasonably practicable after we file them with, or furnish them to, the SEC. Our website address is www.ch2m.com. Our SEC filings, which include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to such filings, are located in the About Us/Employee Ownership section of our website.

Overview

        We are a large employee-owned professional engineering services firm providing engineering, construction, operations, maintenance, major project management and technical services to municipal, state, U.S. federal, other national and provincial governments and private sector clients worldwide. Founded in 1946, we have approximately 23,500 employees in offices worldwide.

        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 our capital strength. We believe that we are well positioned geographically, technically and financially to compete anywhere in the world in the key markets we have elected to pursue and the clients we serve.

        Mergers and acquisitions in our 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,

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longer, full-service contracts require us to have substantially greater financial capital than has historically been necessary to remain competitive. During the second quarter of 2010, we made an offer to purchase Scott Wilson Group plc, a design and engineering firm headquartered in the United Kingdom for 245 pence (UK Sterling) per share. We were subsequently outbid by another bidder and withdrew our offer. As part of our acquisition strategy, we purchased approximately 13% of the equity of Scott Wilson Group plc. which we subsequently sold.

        We provide services to our clients through three operating segments—Government, Environment and Nuclear (GEN), Facilities and Infrastructure (F&I) and Energy, which are aligned with the types of clients we serve. Our GEN segment generally provides a comprehensive range of services to the U.S. federal government and other national governments, and to private sector clients. Our F&I segment generally provides a comprehensive range of services to various industry segments, and U.S. and other countries' state, local and provincial governments. Our Energy segment generally provides a comprehensive range of services to private sector clients.

Results of Operations

Revenue and Operating Income of our Reportable Segments

        The results of operations for the three and six months ended June 30, 2010 and 2009 by operating segment were as follows (in millions):


Three Months Ended June 30, 2010 and 2009

 
  2010   2009   Change  
 
  Revenue   Equity
in
Earnings
  Operating
Income
(Loss)
  Revenue   Equity
in
Earnings
  Operating
Income
(Loss)
  Revenue   Equity
in
Earnings
  Operating
Income (Loss)
 

Government, Environment and Nuclear

  $ 533.4   $ 17.1   $ 23.8   $ 454.3   $ 7.8   $ 9.2   $ 79.1     17.4 % $ 9.3   $ 14.6     n/a  

Facilities and Infrastructure

    464.8     2.7     35.1     494.9     9.2     18.2     (30.1 )   (6.1 )%   (6.5 )   16.9     92.9 %

Energy

    342.9     0.8     8.4     424.3     (0.3 )   14.4     (81.4 )   (19.2 )%   1.1     (6.0 )   (41.7 )%

Other

            (5.3 )           (10.5 )               5.2     49.5 %
                                                   

Total

  $ 1,341.1   $ 20.6   $ 62.0   $ 1,373.5   $ 16.7   $ 31.3   $ (32.4 )       $ 3.9   $ 30.7        
                                                   


Six Months Ended June 30, 2010 and 2009

 
  2010   2009   Change  
 
  Revenue   Equity
in
Earnings
  Operating
Income
(Loss)
  Revenue   Equity
in
Earnings
  Operating
Income
(Loss)
  Revenue   Equity in Earnings   Operating
Income (Loss)
 

Government, Environment and Nuclear

  $ 1,008.6   $ 30.1   $ 44.5   $ 874.2   $ 15.0   $ 23.6   $ 134.4     15.4 % $ 15.1   $ 20.9     88.6 %

Facilities and Infrastructure

    950.3     3.7     53.4     977.7     11.9     28.2     (27.4 )   (2.8 )%   (8.2 )   25.2     89.4 %

Energy

    617.8     1.2     0.5     855.8     0.6     22.6     (238.0 )   (27.8 )%   0.6     (22.1 )   (97.8 )%

Other

            (9.5 )           (21.7 )                 12.2     56.2 %
                                                   

Total

  $ 2,576.7   $ 35.0   $ 88.9   $ 2,707.7   $ 27.5   $ 52.7   $ (131.0 )       $ 7.5   $ 36.2        
                                                   

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Government, Environment and Nuclear

        Revenue from our Government, Environment and Nuclear segment increased for the three and six months ended June 30, 2010, compared to the same periods in the prior year by $79.1 million or 17.4%, and $134.4 million or 15.4%, respectively. The increase in revenue is primarily due to an increased volume of contracts in our nuclear market primarily generated as a result of the American Recovery and Reinvestment Act to accelerate environmental cleanups. In addition, our work under a nuclear remediation project in Washington began during the first half of 2009 and thus volumes increased in 2010 in comparison to 2009. The increase is partially offset by lower design volume due to slow release of work as well as the completion of work we performed on the recovery efforts on Hurricane Ike in 2009. Revenue volumes in our environmental markets remained relatively consistent with those in the prior year.

        Operating income significantly increased for the three and six months ended June 30, 2010 compared to the same period in the prior year by $14.6 million and $20.9 million, respectively. The increase for the three and six months ended June 30, 2010 compared to the same period in the prior year is associated with the increased revenues discussed above as well as the negotiation and award of certain performance based fees within our nuclear markets. Additionally, we had an increase in equity in earnings from a joint venture in the United Kingdom. A reduction in overhead spending, in response to the overall decline in market and economic conditions also contributed to our increased operating income.

Facilities and Infrastructure

        Revenue from our Facilities and Infrastructure segment decreased for the three and six months ended June 30, 2010, compared to the same periods in 2009 by $30.1 million or 6.1%, and $27.4 million or 2.8%, respectively. The decrease is primarily attributable to reduced workload in our transportation consulting markets due to the economic environment. Our manufacturing and life sciences business have also continued to experience the decline in volumes in both domestic and international markets. These decreases were partially offset by growing demand in our water consulting business in North America, the Middle East, and Europe. The decreases were also offset by increased volumes in our operations and management (O&M) business due to the transition of certain design-build-operate water projects into the operation phases of the projects.

        Operating income increased for the three and six months ended June 30, 2010, compared to the same periods in the prior year by $16.9 million and $25.2 million, respectively. The increase in operating income compared to the prior year is primarily attributable to the successful implementation of overhead cost controls within the segment in response to the overall decline in market and economic conditions. Operating income was also positively impacted by the successful negotiation of disputed change orders on a water and O&M project in 2010. Additionally, Facilities and Infrastructure segment operating income in 2009 was negatively impacted by significant losses on two projects in the Middle East which did not recur in 2010.

Energy

        Revenue from our Energy segment decreased for the three and six months ended June 30, 2010, compared to the same periods in 2009 by $81.4 million or 19.2%, and $238.0 million or 27.8%, respectively. The decrease in revenue is primarily attributable to a decrease in overall activity within the oil and gas and chemicals business due to project delays and cancellations driven by constrained capital spending and sustained difficult economic conditions. In addition, we have experienced decreased utilization of our equipment fleet in Alaska. Revenues within our power business have slowed as large projects have been completed or are nearing completion during 2010 as well as an overall decline in the number of contract awards in this business.

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        Operating income decreased for the three months ended June 30, 2010 compared to the same period in the prior year by $6.0 million, and for the six months ended June 30, 2010 compared to the same period in the prior year operating income significantly decreased by $22.1 million. This significant decrease is attributed to the decrease in overall revenues. In response to this overall decline in market and economic conditions, our Energy segment reduced overhead spending and implemented cost control measures which significantly decreased the impact on our operating income. In addition, we have reduced the size of our equipment fleet in Alaska to offset the impact of reduced revenues.

Other

        Other primarily includes corporate expenses which represent centralized management costs that are not allocable to individual operating segments and primarily includes expenses associated with administrative functions such as executive management, legal, treasury, accounting and tax, and general business development efforts. The decrease of $5.2 million and $12.2 million for the three and six months ended June 30, 2010, respectively, compared to the same periods in the prior year is due to our continued overhead cost reduction efforts.

Provision for Income Taxes

        The effective tax rate for the three months ended June 30, 2010 was 38.3% compared to 23.8% for the same period in the prior year. The effective tax rate for the six months ended June 30, 2010 was 35.9% compared to 30.2% for the same period in the prior year. The effective tax rates in 2010 were higher in comparison to the effective rates in 2009 due to the expiration of the research and experimentation credit in 2010 as well as negative impacts caused by certain foreign operating results. In addition, the effective tax rates in 2009 were more favorably impacted by the recognition of domestic production activities deduction from prior periods due to lower income in the period. Our effective tax rate continues to be negatively impacted by the effect of state income taxes, non-deductible foreign net operating losses, the disallowed portion of executive compensation, and disallowed portions of meals and entertainment expenses.

        As of June 30, 2010 and December 31, 2009, we had $28.2 million recorded as a liability for uncertain tax positions. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of June 30, 2010 and December 31, 2009, we had approximately $2.9 million and $4.5 million, respectively, of accrued interest and penalties related to uncertain tax positions.

        We file income tax returns in the U.S. federal and various state jurisdictions and non-U.S. jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the United States and Canada. With few exceptions, we are no longer subject to income tax examinations by tax authorities for years before 2003.

Liquidity and Capital Resources

        Our primary sources of liquidity are cash flows from operations, borrowings under our revolving line of credit and other financing arrangements. Our primary uses of cash are to fund our working capital, acquisitions, capital expenditures and repurchases of stock presented on our internal market. During the six months ended June 30, 2010, we generated $57.7 million of cash from our operations compared to $91.2 million in the same period last year. The decrease in operating cash flow during the current period was partially attributable to a decrease in billings in advance of earned revenues as well as the timing of payments on accounts payable that were made at the beginning of 2010. The decrease in operating cash flow is partially offset by distributions from unconsolidated affiliates as well as a decrease in cash contributions to employee benefit plans. Additionally, the decrease is partially offset by the timing of income tax payments.

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        We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on our assessment at June 30, 2010, we have deemed the allowance for doubtful accounts to be adequate; however, economic conditions may adversely impact some of our clients' ability to pay our bills or the timeliness of their payments. Consequently, the timing of the receipt of cash may impact our ability to meet our operating needs.

        Cash used by investing activities was $29.4 million in the six months ended June 30, 2010 compared to $21.4 million used in investing activities for the same period in 2009. The majority of the increase in cash used by our investing activities relates to the $37.1 million purchase of marketable securities of Scott Wilson Group plc, a design and engineering firm headquartered in the United Kingdom and cash used in our investments in affiliates (net of distributions of capital received) which increased by approximately $6.2 million. These uses of cash were partially offset by the increase of cash upon the consolidation of variable interest entities that we previously accounted for as unconsolidated affiliates.

        We finance our operations, acquisitions and capital expenditures using a variety of capital vehicles including operating leases, long-term debt and other credit arrangements and from cash flow. Depending on the applicable terms and conditions on new debt or equity offerings compared to the opportunity cost of using our internally generated cash we may either choose to finance new opportunities using leverage in the form of credit facilities or other debt. In some instances we may use a combination of one or more of these financing mechanisms. The available terms, the length of time we expect to use the asset and the expected residual value of the asset are factors we evaluate in determining the best ways to finance capital expenditures. In most cases, these notes are secured by the assets purchased. Depending on the conditions of these financing arrangements, if we are in default, the lender may have the right to take control of the collateralized assets or require full payment of the outstanding principal balance owed, or both.

        We have a credit agreement that provides for a $500.0 million revolving line of credit (RLOC) with an option to increase the initial borrowing capacity by up to an additional $250.0 million. The RLOC expires on August 31, 2012 and is used for general corporate purposes and acquisitions. The RLOC also provides that up to $250.0 million is available for the issuance of letters of credit to support various operating activities. At our option, the credit agreement bears interest at a rate equal to either the London InterBank Offered Rate (LIBOR) plus 0.75% to 1.50%, or the lender's applicable base rate less a discount rate up to 0.25%, based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization. A commitment fee of approximately 0.10% to 0.25% per year on the unused portion of the line of credit is payable, based on our ratio of funded debt to earnings before interest, taxes, depreciation and amortization. As of June 30, 2010, we had $295.3 million in borrowings outstanding on the RLOC. The majority of the outstanding amounts under the RLOC were borrowed in connection of an offer made to purchase Scott Wilson Group plc, a design and engineering firm headquartered in the United Kingdom. We were subsequently outbid by another bidder and, in July 2010, repaid the borrowings under the RLOC related to this potential acquisition. Additionally, as of June 30, 2010, we had issued and outstanding letters of credit of $106.4 million reserved against the RLOC's borrowing base.

        Our RLOC agreement contains financial and other covenants, as well as limitations on other indebtedness, liens, acquisitions, mergers and dispositions. The credit agreement also contains customary events of default, including a default of covenant, a material inaccuracy of representations or warranties, bankruptcy events, and a change in control. As of June 30, 2010, we were in compliance with the covenants required by the credit agreement.

        Based on our total cash and credit capacity at June 30, 2010, we believe we have sufficient resources to fund our operations and repurchases of stock presented on our internal market, should we choose to do so, for the next 12 months and beyond. If and when we identify potential business

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acquisition candidates or incur additional capital expenditures, we expect to determine and put in place the combination of financing options that provides us the most efficient cost of capital.

Off-Balance Sheet Arrangements

        We have interests in multiple teaming arrangements, some of which are considered variable interest entities. These entities facilitate the completion of contracts that are jointly owned with our partners. These entities are formed to leverage the skills of the respective partners and include consulting, construction, design, project management and operations and maintenance contracts. Our risk of loss in these arrangements is usually shared with our partners. The liability of each partner usually is joint and several, which means that each joint venture partner may become liable for the entire risk of loss on the project.

        There were no substantial changes to other off-balance sheet arrangements or contractual commitments in the six months ended June 30, 2010, when compared to the disclosures provided in our Annual Report on Form 10-K for the year ended December 31, 2009.

Aggregate Contractual Obligations

        We maintain a variety of commercial commitments that provide support for various provisions in engineering and construction contracts. Letters of credit are available 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 against our failure to perform obligations arising from a successful bid. Bid bonds are subject to full or partial forfeiture if we fail to enter into contracts under terms provided on our bids.

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 GAAP. 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 the understanding of our financial condition and results of operations and require complex management judgment are summarized below. Further detail and information regarding our critical accounting policies and estimates are included in our Annual Report on Form 10-K for the year ended December 31, 2009.

Revenue Recognition

        We earn our revenue from different types of services under a variety of different types of contracts, including cost-plus, firm fixed-price and time-and-materials. In recognizing revenue, we evaluate each contractual arrangement to determine the appropriate authoritative literature to apply. We recognize revenue and profit for a majority 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 contract. In making such estimates, judgments are

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required to evaluate potential variances in schedule, the cost of materials and labor, productivity, liability claims, contract disputes and achievement of contract performance standards.

        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 construction and engineering 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.

        A portion of our contracts are operations and maintenance type contracts. Typically, these contracts may include fixed and variable components along with incentive fees. Revenue is recognized on operations and maintenance contracts on a straight-line basis over the life of the contract once we have an arrangement, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured.

Income Taxes

        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 deferred tax assets. Deferred tax assets and liabilities arise from temporary differences between the tax return and the financial statement recognition of revenue and expenses.

        We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we increase our tax provision by recording a valuation allowance for the deferred tax assets that do not meet the more likely than not recognition criteria.

        In addition, the calculation of our income tax benefits involves dealing with uncertainties in the application of complex tax regulations. For income tax benefits to be recognized, a tax position must be more likely than not to be sustained upon ultimate settlement.

Pension and Postretirement Employee Benefits

        We have two frozen and one active noncontributory defined benefit pension plans, a medical benefit plan for retired employees and other benefit plans. The determination of pension plan expense and the requirements for funding our pension plans are based on a number of actuarial assumptions. 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. For our medical benefit plan, which provides certain health care benefits to qualified retired employees, critical assumptions in determining the employee benefit expense are the discount rate applied to benefit obligations and the assumed health care cost trend rates used in the calculation of benefit obligations. 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.

        The funded status of a benefit plan is measured as the difference between plan assets at fair value and the benefit obligation. We record an asset for overfunded plans and a liability for underfunded plans, with a corresponding entry recorded to accumulated other comprehensive loss, net of tax.

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Recently Adopted Accounting Standards

        In June 2009, the FASB issued ASU 2009-17, Consolidations (Topic 810)—Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, revising the existing guidance on the consolidation and disclosures of variable interest entities which was codified in ASC 810-10. Specifically, it changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting rights (or similar) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's purpose and design and the reporting entity's ability to direct the activities of the other entity that most significantly impact the other entity's economic performance. The guidance also requires additional disclosures about a company's involvement with VIEs and requires us to continually assess any significant changes in risk exposure as well as our assessment of the primary beneficiary of the entity. ASC 810-10 is effective for us beginning January 1, 2010. For further discussion of the effect of the adoption, see Note 5.

        In January 2010, the FASB issued ASU No. 2010-06 (ASU 2010-06), Fair Value Measurements and Disclosures (Topic 820)—Improving Disclosures about Fair Value Measurements. ASU 2010-06 requires expanded fair value disclosures about transfers into and out of Levels 1 and 2 fair value measurements and clarifies existing fair value disclosures about the level of disaggregation and about inputs and valuation techniques used to measure fair value. ASU 2010-06 is effective for us beginning January 1, 2010. The adoption of this accounting standard update did not have a material impact on our financial position, results of operations, cash flows and disclosures.

Item 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        In the ordinary course of our operations we are exposed to certain market risks, primarily changes in foreign currency exchange rates and interest rates. This risk is monitored to limit the effect of foreign currency exchange rate and interest rate fluctuations on earnings and cash flows.

        Foreign currency exchange rates.    We are exposed to foreign currency exchange risks in the normal course of our business operations outside of the United States. Our investments in foreign subsidiaries with a functional currency other than the U.S. dollar are generally considered long-term. From time to time we engage in forward foreign exchange contracts to selectively manage these exposures through the use of derivative instruments to mitigate our market risk from these exposures. The objective of our risk management is to protect our cash flows related to sales of services from market fluctuations in current rates. A five percent change in foreign currency rates would not have a significant impact on our financial position, results of operations or cash flows.

        Interest rates.    Our interest rate exposure is generally limited to our unsecured revolving credit agreement, purchase of interest bearing short-term investments and the holdback contingency balance outstanding related to our acquisition of VECO. There was $295.3 million and approximately $47.7 million outstanding under the unsecured revolving credit agreement and holdback contingency, respectively, at June 30, 2010. 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 consolidated results of operations, financial position or cash flows. Based upon the amount outstanding under the unsecured revolving credit and agreement and the holdback contingency, a one percentage point change in the assumed interest rate would change our annual interest expense by approximately $3.4 million.

Item 4.    CONTROLS AND PROCEDURES

        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

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disclosure controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (Exchange Act). 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 quarter ended June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

        We are a party to various contractual guarantees and legal actions arising in the normal course of our business. From time to time, agencies of the U.S. and certain state governments investigate whether we conduct our operations in accordance with applicable regulatory requirements. Because a large portion of our business comes from U.S. federal, state, and municipal sources, our procurement practices at times are subject to review and occasional investigations by U.S. and state attorneys offices. Such state and 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. These 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. While the outcomes of pending proceedings are often difficult to predict, as of the date of this filing, our management believes that no ongoing litigation or investigation is likely to result in a material adverse impact on our consolidated financial statements.

Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

        The following table covers the purchases of our common shares by CH2M HILL during the period covered by this report.

Period
  Total Number of
Shares Purchased
  Average Price
Paid per Share
  Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
  Maximum Number of Shares
that May Yet Be Purchased
Under the Plans or Programs
 

April(a)

    8,774   $ 37.29          

May(a)

                 

June(b)

    530,307     41.13          
                     
 

Total

    539,081     41.07          
                     

(a)
Shares purchased by CH2M HILL from terminated employees.

(b)
Shares purchased by CH2M HILL in the Internal Market.

Item 6.    EXHIBITS

        

Index of Exhibits

  *31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

*31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

*32.1

 

Certification of Chief Executive Officer pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)

 

*32.2

 

Certification of Chief Financial Officer pursuant to the requirements set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 1350 of Chapter 63 of Title 18 of the United States Code (18 U.S.C. Section 1350)

*
Filed herewith

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SIGNATURES

        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: August 9, 2010

 

/s/ JOANN SHEA

JoAnn Shea
Chief Accounting Officer and
Interim Chief Financial Officer
(Principal Financial Officer)

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