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Table of Contents

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 September 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 No.)

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 October 28, 2010 was 31,180,449.


Table of Contents

CH2M HILL COMPANIES, LTD.

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

       

Item 1.

 

FINANCIAL STATEMENTS

       

 

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

    3  

 

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

    4  

 

Consolidated Statements of Cash Flows for the Nine Months Ended September 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

   
18
 

Item 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   
26
 

Item 4.

 

CONTROLS AND PROCEDURES

   
26
 

 

PART II. OTHER INFORMATION

       

Item 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

   
27
 

Item 6.

 

EXHIBITS

   
27
 

SIGNATURES

   
28
 

2


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CH2M HILL COMPANIES, LTD.

Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data)

 
  September 30,
2010
  December 31,
2009
 

ASSETS

             

Current assets:

             
 

Cash and cash equivalents

  $ 181,744   $ 169,717  
 

Marketable securities

    2,249     1,966  
 

Receivables, net—

             
   

Client accounts

    597,791     611,634  
   

Unbilled revenue

    391,439     416,927  
   

Other

    25,138     20,882  
 

Deferred income taxes

    45,881     47,964  
 

Prepaid expenses and other current assets

    46,369     64,510  
           
     

Total current assets

    1,290,611     1,333,600  

Investments in unconsolidated affiliates

    83,426     78,053  

Property, plant and equipment, net

    173,574     197,152  

Goodwill

    130,354     130,354  

Intangible assets, net

    53,601     61,275  

Deferred income taxes

    137,586     109,438  

Employee benefit plan assets and other

    45,616     38,150  
           
   

Total assets

  $ 1,914,768   $ 1,948,022  
           

LIABILITIES AND SHAREHOLDERS' EQUITY

             

Current liabilities:

             
 

Current portion of long-term debt

  $ 14,158   $ 14,396  
 

Accounts payable and accrued subcontractor costs

    376,265     407,222  
 

Billings in excess of revenue

    243,475     292,280  
 

Accrued payroll and employee related liabilities

    268,729     259,798  
 

Current income tax payable

    18,886      
 

Other accrued liabilities

    137,376     134,763  
           
     

Total current liabilities

    1,058,889     1,108,459  

Long-term employee related liabilities and other

    267,966     276,811  

Long-term debt

    27,192     37,943  
           
   

Total liabilities

    1,354,047     1 ,423,213  

Commitments and contingencies (Note 13)

             

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; 31,031,549 and 31,373,955 issued and outstanding at September 30, 2010 and December 31, 2009, respectively

    310     314  
 

Additional paid-in capital

        12,803  
 

Retained earnings

    581,033     531,796  
 

Accumulated other comprehensive loss

    (33,073 )   (32,743 )
           
   

Total CH2M HILL common shareholders' equity

    548,270     512,170  
 

Noncontrolling interests

    12,451     12,639  
           
   

Total equity

    560,721     524,809  
           
     

Total liabilities and shareholders' equity

  $ 1,914,768   $ 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 September 30,   Nine Months Ended September 30,  
 
  2010   2009   2010   2009  

Gross revenue

  $ 1,399,063   $ 1,441,281   $ 3,975,730   $ 4,148,958  

Equity in earnings of joint ventures and affiliated companies

    15,468     18,469     50,454     45,997  

Operating expenses:

                         
 

Direct cost of services and overhead

    (1,153,371 )   (1,187,643 )   (3,244,784 )   (3,367,925 )
 

General and administrative

    (214,798 )   (248,244 )   (646,163 )   (750,517 )

Gain on sale of operating assets

        58,235         58,235  
                   

Operating income

    46,362     82,098     135,237     134,748  

Other income (expense):

                         
 

Interest income

    234     506     1,010     952  
 

Interest expense

    (1,224 )   (1,228 )   (3,769 )   (5,922 )
                   

Income before provision for income taxes

    45,372     81,376     132,478     129,778  

Provision for income taxes

    (16,034 )   (24,614 )   (41,879 )   (34,964 )
                   
 

Net income

    29,338     56,762     90,599     94,814  
 

Less: (Income) loss attributable to noncontrolling interests

    (4,045 )   1,505     (19,242 )   (12,633 )
                   

Net income attributable to CH2M HILL

  $ 25,293   $ 58,267   $ 71,357   $ 82,181  
                   

Net income attributable to CH2M HILL per common share:

                         
   

Basic

  $ 0.81   $ 1.82   $ 2.26   $ 2.58  
                   
   

Diluted

  $ 0.79   $ 1.78   $ 2.21   $ 2.52  
                   

Weighted average number of common shares:

                         
 

Basic

    31,413,671     31,985,190     31,566,027     31,903,629  
                   
 

Diluted

    32,095,646     32,673,958     32,270,432     32,576,869  
                   

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)

 
  Nine Months Ended September 30,  
 
  2010   2009  

Cash flows from operating activities:

             
 

Net income

    90,599   $ 94,814  
 

Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:

             
   

Depreciation and amortization

    47,204     64,555  
   

Gain on sale of operating assets

        (58,235 )
   

Stock-based employee compensation expense

    51,366     55,828  
   

Loss on disposal of property, plant and equipment

    810     2,234  
   

Allowance for uncollectible accounts

    795     8,798  
   

Deferred income taxes

    (26,176 )   (8,663 )
   

Gain on sale of investments

    (6,494 )    
   

Undistributed earnings from unconsolidated affiliates

    (50,454 )   (45,997 )
   

Distributions from unconsolidated affiliates

    53,826     28,760  
   

Change in assets and liabilities, net of businesses acquired:

             
     

Receivables and unbilled revenue

    34,194     64,762  
     

Prepaid expenses and other

    1,947     13,816  
     

Accounts payable and accrued subcontractor costs

    (48,753 )   (51,629 )
     

Billings in excess of revenue

    (55,852 )   19,283  
     

Employee related liabilities

    7,596     (14,126 )
     

Other accrued liabilities

    (568 )   11,590  
     

Income taxes payable

    45,974     (4,811 )
     

Long term employee related liabilities and other

    (21,173 )   22,722  
           
       

Net cash provided by operating activities

    124,841     203,701  

Cash flows from investing activities:

             
 

Capital expenditures

    (18,663 )   (27,775 )
 

Investments in unconsolidated affiliates

    (36,990 )   (62,462 )
 

Distributions of capital from unconsolidated affiliates

    22,324     29,512  
 

Purchases of investments

    (37,079 )    
 

Proceeds from sale of investments

    43,573      
 

Cash increase from consolidation of variable interest entities

    32,651      
 

Proceeds from sale of operating assets

        70,971  
 

Proceeds from sale of property, plant and equipment

    2,240     61  
           
     

Net cash provided by investing activities

    8,056     10,307  

Cash flows from financing activities:

             
 

Borrowings on line of credit and long-term debt

    404,856     746,110  
 

Payments on line of credit and long-term debt

    (415,808 )   (867,196 )
 

Repurchases and retirements of stock

    (96,364 )   (55,650 )
 

Excess tax benefits from stock-based compensation

    5,340     4,806  
 

Net distributions to noncontrolling interests

    (23,699 )   (1,487 )
           
     

Net cash used in financing activities

    (125,675 )   (173,417 )

Effect of exchange rates on cash

    4,805     11,691  
           

Increase in cash and cash equivalents

    12,027     52,282  

Cash and cash equivalents, beginning of period

    169,717     114,282  
           

Cash and cash equivalents, end of period

  $ 181,744   $ 166,564  
           

Supplemental disclosures:

             
 

Cash paid for interest

  $ 2,728   $ 3,852  
 

Cash paid for income taxes

  $ 41,695   $ 29,798  

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

September 30, 2010

(Unaudited)

(1) SUMMARY OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES

Summary of Business

        CH2M HILL Companies, Ltd. and subsidiaries (CH2M HILL) is a project delivery firm that was founded in 1946. CH2M HILL provides engineering, construction, consulting, design, design-build, procurement, operations and maintenance, program management, and technical services to U.S. federal, state, municipal and local government agencies, and national governments, as well as private industry, around the world. CH2M HILL is an employee-owned Oregon, USA corporation. A substantial portion of CH2M HILL's revenues arise 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 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 making such estimates, judgments are required to

6


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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

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


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 or the customer's written approval of such changes. 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, and their cost basis is 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.

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)

September 30, 2010

(Unaudited)

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

Shareholders' Equity

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

 
  Shares   Amount  

Shareholders' equity, December 31, 2009

    31,374   $ 524,809  

Net income attributable to CH2M HILL

        71,357  

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

    1,892     61,438  

Shares and share equivalents purchased, retired and cancelled

    (2,234 )   (96,364 )

Effect of consolidation of variable interest entities

        4,088  

Other comprehensive income

        (150 )

Net income from noncontrolling interests

        19,242  

Net distributions to noncontrolling interests

        (23,699 )
           

Shareholders' equity, September 30, 2010

    31,032   $ 560,721  
           

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 nine months ended September 30, 2010 was $6.63 and $6.29, respectively, compared to $5.80 and $5.58 for the same periods in the prior year.

        CH2M HILL estimates the expected term of options granted by taking the average of the vesting term and the contractual term of the option. 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 U.S. Treasury bill issues for the risk-free interest rate in the option valuation model with original 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 record stock-based compensation expense only for those awards that are expected to vest. The fair value of stock-based payment awards is amortized into stock-based compensation on a straight-line basis over the requisite service periods of the awards, which are generally the vesting periods.

        The total compensation cost recognized for share-based payments for stock options during the three and nine months ended September 30, 2010 was $1.3 million and $3.4 million, respectively, compared to $1.0 million and $3.1 million for the three and nine months ended September 30, 2009.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

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

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, 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 an entity to continually assess any significant changes in risk exposure as well as an entity's assessment of the primary beneficiary of the entity. ASC 810-10 became effective for CH2M HILL beginning January 1, 2010. For further discussion of the effect of the adoption, see Note 6.

        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 nine months ended September 30, 2010 and 2009 for each segment is provided below (in thousands):

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

Revenue from external customers

  $ 612,829   $ 494,625   $ 291,609   $   $ 1,399,063  

Equity in earnings of joint ventures and affiliated companies

    10,659     3,287     1,522         15,468  

Operating income (loss)

    21,162     17,383     11,781     (3,964 )   46,362  

 

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

Revenue from external customers

  $ 549,437   $ 478,372   $ 413,472   $   $ 1,441,281  

Equity in earnings of joint ventures and affiliated companies

    14,843     3,291     335         18,469  

Operating income (loss)

    84,239     14,706     (5,488 )   (11,359 )   82,098  

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

(2) SEGMENT INFORMATION (Continued)

 

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

Revenue from external customers

  $ 1,621,438   $ 1,444,960   $ 909,332   $   $ 3,975,730  

Equity in earnings of joint ventures and affiliated companies

    40,778     6,939     2,737         50,454  

Operating income (loss)

    65,655     70,791     12,299     (13,508 )   135,237  

 

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

Revenue from external customers

  $ 1,423,685   $ 1,456,021   $ 1,269,252   $   $ 4,148,958  

Equity in earnings of joint ventures and affiliated companies

    29,868     15,162     967         45,997  

Operating income (loss)

    107,852     42,894     17,069     (33,067 )   134,748  

        In addition to the operating segments, the Other category 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, human resources, 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 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 for the three and nine months ended September 30, 2010 and 2009 (in thousands):

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2010   2009   2010   2009  

Net income attributable to CH2M HILL

  $ 25,293   $ 58,267   $ 71,357   $ 82,181  

Other comprehensive income attributable to CH2M HILL:

                         

Foreign currency translation adjustments

    3,288     7,854     (507 )   13,802  

Benefit plan adjustments

                (419 )

Unrealized (losses) gains on available-for-sale investments and other, net of tax

    (589 )   381     176     959  
                   

Comprehensive income attributable to CH2M HILL

  $ 27,992   $ 66,502   $ 71,026   $ 96,523  
                   

(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

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

(4) EARNINGS PER SHARE (Continued)


period. Diluted EPS includes the dilutive effect of common stock equivalents, which consist primarily of 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 nine months ended September 30, 2010 and 2009 (in thousands, except per share amounts):

 
  Three Months Ended
September 30,
  Nine Months Ended
September 30,
 
 
  2010   2009   2010   2009  

Numerator:

                         
 

Net income attributable to CH2M HILL

  $ 25,293   $ 58,267   $ 71,357   $ 82,181  

Denominator:

                         
 

Basic income per share—weighted average shares outstanding

    31,414     31,985     31,566     31,904  
 

Dilutive effect of common stock equivalents

    682     689     704     673  
                   
 

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

    32,096     32,674     32,270     32,577  
                   

Basic net income attributable to CH2M HILL per common share

  $ 0.81   $ 1.82   $ 2.26   $ 2.58  
                   

Diluted net income attributable to CH2M HILL per common share

  $ 0.79   $ 1.78   $ 2.21   $ 2.52  
                   

(5) SALE OF OPERATING ASSETS

        During the third quarter of 2009, the Company completed the sale of certain assets and liabilities of its Enterprise Management Solutions (EMS) operating assets. The selling price was $86.6 million, net of amounts due for estimated working capital adjustments of $12.7 million. The Company recorded a pre-tax gain of approximately $58.2 million during the three months ended September 30, 2009.

(6) 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 contracted with CH2M HILL's partners. These arrangements are formed to leverage the skills of the respective partners and include consulting, construction, design, program management and operations and maintenance contracts. CH2M HILL's risk of loss on these arrangements is usually shared with CH2M HILLs' partners. 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.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

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

        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 the Company is involved have relatively few variable 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 cash 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 September 30, 2010, total assets of VIEs that were consolidated were $126.1 million and total liabilities were $81.4 million.

        As of September 30, 2010 and December 31, 2009, CH2M HILL recorded investments in unconsolidated affiliates of $83.4 million and $78.1 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 September 30, 2010, the total assets of VIEs that were not consolidated were $357.4 million and total liabilities were $267.5 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)

September 30, 2010

(Unaudited)

(7) GOODWILL AND INTANGIBLE ASSETS

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

 
  Cost   Accumulated
Amortization
  Net finite-lived
intangible assets
 

September 30, 2010

                   

Contracted backlog

  $ 58,871   $ (58,386 ) $ 485  

Customer relationships

    57,922     (25,132 )   32,790  

Non-compete agreements and other

    902     (902 )    
               

  $ 117,695   $ (84,420 ) $ 33,275  
               

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):

 
  September 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 $2.6 million and $7.3 million for the three months ended September 30, 2010 and 2009, respectively, and $7.7 million and $24.8, million for the nine months ended September 30, 2010 and 2009, respectively. These intangible assets are expected to be fully amortized in 2014. The majority of goodwill, intangible assets and associated amortization expense are held in the Energy segment.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

(8) PROPERTY, PLANT AND EQUIPMENT

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

 
  September 30, 2010   December 31, 2009  

Land

  $ 26,780   $ 26,516  

Buildings

    77,565     72,280  

Furniture, fixtures and equipment

    199,203     196,511  

Leasehold improvements

    65,361     65,023  
           

    368,909     360,330  

Less: Accumulated depreciation

    (195,335 )   (163,178 )
           
 

Property, plant and equipment, net

  $ 173,574   $ 197,152  
           

        Depreciation expense reflected in the consolidated statements of income was $12.8 million and $13.4 million for the three months ended September 30, 2010 and 2009, respectively, and $39.5 million and $39.8 million for the nine months ended September 30, 2010 and 2009, respectively. The majority of depreciation expense relates to property, plant and equipment held in the Energy segment.

(9) 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 $2.2 million and $2.0 million at September 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. The estimated fair values of CH2M HILL's financial instruments where carrying values do not approximate fair value are as follows:

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

Mortgage notes payable

  $ 15,616   $ 13,219   $ 16,672   $ 13,627  
 

Equipment financing

    25,602     24,839     35,572     33,951  

(10) 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 primarily using Level 2 inputs. The assets are invested in various non-exchange traded mutual funds, which are measured using quoted market prices of underlying assets in accessible active markets. As of September 30, 2010 and

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

(10) EMPLOYEE BENEFIT PLAN ASSETS (Continued)


December 31, 2009, the fair market value of these assets were $43.7 million and $36.2 million, respectively.

(11) LINE OF CREDIT

        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 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 September 30, 2010, CH2M HILL did not have any borrowings against the RLOC. Additionally, as of September 30, 2010, issued and outstanding letters of credit of $79.7 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 September 30, 2010, CH2M HILL was in compliance with the covenants required by the credit agreement.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

(11) LINE OF CREDIT (Continued)

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

($ in thousands)
  September 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%

  $ 12,672   $ 13,379  
 

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

    2,944     3,293  
           

    15,616     16,672  

Other:

             
 

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

    25,602     35,572  
 

Shareholder notes payable

    132     95  
           

Total debt

    41,350     52,339  

Less current portion of debt

    14,158     14,396  
           

Total long-term portion of debt

  $ 27,192   $ 37,943  
           

(12) PROVISION FOR INCOME TAXES

        The effective tax rate for the three months ended September 30, 2010 was 38.8% compared to 29.7% for the same period in the prior year. The effective tax rate for the nine months ended September 30, 2010 was 37.0% compared to 29.9% 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 at the end of 2009 as well as negative impacts caused by certain foreign operating results. In addition, the effective rates in 2009 were favorably impacted by the recognition of federal and state research and experimentation credits, which were finalized in the quarter ended September 30, 2009. CH2M HILL's effective tax rate continues to be negatively impacted in comparison to the statutory rates 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 September 30, 2010 and December 31, 2009, we had $14.2 million and $28.2 million, respectively, 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 September 30, 2010 and December 31, 2009, CH2M HILL had approximately $2.0 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.

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CH2M HILL COMPANIES, LTD.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

September 30, 2010

(Unaudited)

(12) PROVISION FOR INCOME TAXES (Continued)


With few exceptions, CH2M HILL is no longer subject to income tax examinations by tax authorities for years before 2003.

(13) 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 and certain other practices at times are subject to review and investigation 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 or alternatively could result in settlement. 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 a material adverse effect on CH2M HILL's results of operations or financial condition 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.

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

        Certain statements throughout Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this report are forward looking and thus reflect our current expectations and beliefs with respect to certain current and future events and financial performance. Such forward looking statements are and will be subject to many risks and uncertainties relating to our operations and business environment that may cause actual results to differ materially from any future results expressed or implied in such forward looking statements. Words such as "believes," "anticipates," "expects," "will," "plans" and similar expressions are intended to identify forward looking statements.

        Additionally, forward looking statements include statements that do not relate solely to historical facts, such as statements which identify uncertainties or trends, discuss the possible future effects of current known trends or uncertainties, or which indicate that the future effects of known trends or uncertainties cannot be predicted, guaranteed or assured. All forward looking statements in this report are based upon information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward looking statement, whether as a result of new information, future events, changed circumstances or otherwise, except as required by applicable law.

        The Company's actual results could differ materially from these forward looking statements due to numerous factors including, without limitation, the following: the continuance of, and funding for certain governmental regulation and enforcement programs which create demand for our services; our ability to attract and perform large, longer-term projects; our ability to insure against or otherwise cover the liability risks inherent in our business including environmental liabilities and professional engineering liabilities; our ability to manage the risks inherent in the government contracting business and the delivery of lump sum projects; our ability to manage the costs associated with our fixed price contracts; our ability to manage the risks inherent in international operations, including operations in war and conflict zones, our ability to identify and successfully integrate acquisitions; our ability to attract and retain professional personnel; changes in global business, economic, political and social conditions; intense competition in the global engineering, procurement and construction industry; civil unrest, security issues and other unforeseeable events in countries in which we do business; our failure to receive anticipated new contract awards; difficulties or delays incurred in the execution of contracts; and other risks and uncertainties set forth under Item 1A., Risk Factors in the Annual Report on Form 10-K for the year ended December 31, 2009, as well as other risks and uncertainties set forth from time to time in the reports the Company files with the SEC. Consequently, forward looking statements should not be regarded as representation or warranties by the Company that such matters will be realized.

Overview

        We are a large employee-owned professional engineering services firm providing engineering, construction, consulting, design, design-build, procurement, operations and maintenance, program management and technical services to U.S. federal, state, municipal and local government agencies, national governments, as well as private industry, around the world. Founded in 1946, we have approximately 23,000 employees in offices worldwide.

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        Our revenues are dependent upon our ability to attract and retain qualified and productive employees, identify business opportunities, allocate our labor resources to profitable markets, secure new contracts, execute existing contracts, and maintain existing client relationships. Moreover, as a professional services company, the quality of the work generated by our employees is integral to our revenue generation.

        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, markets and geographic reach, 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, longer, full-service contracts require us to have substantially greater financial capital than has historically been necessary to remain competitive. There can be no assurances that we can continue to be successful when competing against public companies in our industry who have access to additional capital.

        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 nine months ended September 30, 2010 and 2009 by operating segment were as follows (in millions):


Three Months Ended September 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

  $ 612.9   $ 10.7   $ 21.2   $ 549.4   $ 14.8   $ 84.2   $ 63.5     11.6 % $ (4.1 ) $ (63.0 )   (74.8 )%

Facilities and Infrastructure

    494.6     3.3     17.4     478.4     3.3     14.7     16.2     3.4 %       2.7     18.4 %

Energy

    291.6     1.5     11.8     413.5     0.4     (5.5 )   (121.9 )   (29.5 )%   1.1     17.3     %

Other

            (4.0 )           (11.3 )                 7.3     64.6 %
                                               

Total

  $ 1,399.1   $ 15.5   $ 46.4   $ 1,441.3   $ 18.5   $ 82.1   $ (42.2 )   (2.9 )% $ (3.0 ) $ (35.7 )   (43.5 )%
                                               

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Nine Months Ended September 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

  $ 1,621.4   $ 40.8   $ 65.6   $ 1,423.7   $ 29.9   $ 107.8   $ 197.7     13.9 % $ 10.9   $ (42.2 )   (39.1 )%

Facilities and Infrastructure

    1,445.0     6.9     70.8     1,456.0     15.1     42.9     (11.0 )   %   (8.2 )   27.9     65.0 %

Energy

    909.3     2.8     12.3     1,269.3     1.0     17.1     (360.0 )   (28.4 )%   1.8     (4.8 )   (28.1 )%

Other

            (13.5 )           (33.1 )                 19.6     59.2 %
                                               

Total

  $ 3,975.7   $ 50.5   $ 135.2   $ 4,149.0   $ 46.0   $ 134.7   $ (173.3 )   (4.2 )% $ 4.5   $ 0.5     %
                                               

Government, Environment and Nuclear

        Revenue from our Government, Environment and Nuclear segment increased for the three and nine months ended September 30, 2010, compared to the same periods in the prior year by $63.5 million or 11.6%, and $197.7 million or 13.9%, 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 decreased for the three months and nine months ended September 30, 2010 compared to the same periods in the prior year by $63.0 million and $42.2 million, respectively. The decrease for the three and nine months ended September 30, 2010 compared to the same periods in the prior year is primarily attributable to the gain of $58.2 million on the sale of EMS during the third quarter of 2009. The decrease in operating income is also attributable to 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 as discussed above. The decrease is partially offset by the increase in volume as a result of the American Recovery and Reinvestment Act to accelerate environmental cleanups.

Facilities and Infrastructure

        Revenue from our Facilities and Infrastructure segment increased $16.2 million for the three months ended September 30, 2010 compared to the same period in the prior year and remained relatively unchanged for the nine months ended September 30, 2010 compared to the same period in the prior year. The increase is primarily attributable to the growing demand in our water consulting business in North America, the Middle East, and Europe in addition to 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. The increase is partially offset by reduced workload in our transportation consulting markets due to the economic environment. Our manufacturing and life sciences business also have continued to experience a decline in volumes in both domestic and international markets.

        Operating income increased for the three and nine months ended September 30, 2010, compared to the same periods in the prior year by $2.7 million and $27.9 million, respectively. The increase in operating income compared to the prior year is primarily associated with the increased revenues discussed above as well as the successful implementation of overhead cost controls within the segment

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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 write offs of uncollectible receivables on two projects in the Middle East which did not re-occur in 2010.

Energy

        Revenue from our Energy segment decreased for the three and nine months ended September 30, 2010, compared to the same periods in 2009 by $121.9 million or 29.5%, and $360.0 million or 28.4%, respectively. The decrease in revenue is primarily attributable to a decrease in activity within the oil and gas businesses due primarily to constrained capital spending within the oil and gas industry and a continued highly competitive market. 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.

        Operating income increased for the three months ended September 30, 2010 compared to the same period in the prior year by $17.3 million, and decreased for the nine months ended September 30, 2010 compared to the same period in the prior year by $4.8 million. In response to the decline in market conditions, our Energy segment reduced overhead spending and implemented cost control measures which significantly decreased the impact on our operating income.

Other

        The Other category 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, human resources, legal, treasury, accounting and tax, and general business development efforts. The decrease of $7.3 million and $19.6 million for the three and nine months ended September 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 September 30, 2010 was 38.8% compared to 29.7% for the same period in the prior year. The effective tax rate for the nine months ended September 30, 2010 was 37.0% compared to 29.9% 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 at the end of 2009 as well as negative impacts caused by certain foreign operating results. In addition, the effective rates in 2009 were favorably impacted by the recognition of federal and state research and experimentation credits, which were finalized in the quarter ended September 30, 2009. 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 September 30, 2010 and December 31, 2009, we had $14.2 million and $28.2 million, respectively, recorded as a liability for uncertain tax positions. We recognize interest and penalties related to unrecognized tax benefits in income tax expense. As of September 30, 2010 and December 31, 2009, we had approximately $2.0 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

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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 nine months ended September 30, 2010, we generated $124.8 million of cash from our operations compared to $203.7 million in the same period last year. The decrease in operating cash flow during the current period was partially attributable to the timing of income tax payments in addition to a decrease in collections on accounts receivable and a decrease in advance billings to customers. The decrease in operating cash flow is partially offset by an increase in distributions from unconsolidated affiliates as well as a decrease in cash contributions to employee benefit plans.

        We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on our assessment at September 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.

        Cash provided by investing activities was $8.1 million in the nine months ended September 30, 2010 compared to $10.3 million provided by investing activities for the same period in 2009. The cash provided by investing activities during the nine months ended September 30, 2010 totaled $100.8 million compared to $92.7 million used in investing activities. The majority of the cash used in 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). The majority of the cash provided by our investing activities relates to the increase of cash upon the consolidation of variable interest entities that we previously accounted for as unconsolidated affiliates as well as the cash from the proceeds on the sale of the marketable securities of Scott Wilson Group plc mentioned above. Additionally, during the nine months ended September 30, 2009, a significant portion of the cash provided by our investing activities was attributable to the proceeds from the sale of operating assets from our EMS business within our GEN segment.

        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

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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 September 30, 2010, we did not have any borrowings against the RLOC. During 2010, 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 subsequently declined to match a higher offer submitted by another bidder and, in July 2010, repaid the borrowings under the RLOC related to this potential acquisition. As of September 30, 2010, we had issued and outstanding letters of credit of $79.7 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 September 30, 2010, we were in compliance with the covenants required by the credit agreement.

        Based on our total cash and credit capacity at September 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 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, program 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 nine months ended September 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 are committed to 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

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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 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.

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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.

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 6.

        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.

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 and certain other practices at times are subject to review and investigation 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 or alternatively could result in settlement. Damages assessed in connection with and the cost of defending any such actions could be substantial.

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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 a material adverse effect on CH2M HILL's results of operations or financial condition 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.

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 U.S. 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. As of September, 30, 2010 there was not a balance on the unsecured revolving credit agreement, but there was approximately $47.1 million outstanding on the holdback contingency. 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 $0.5 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 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 September 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 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
 

July(a)

    972   $ 40.66          

August

                 

September(b)

    626,041     45.49          
                     
 

Total

    627,013     45.48          
                     

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

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

Item 6.    EXHIBITS

Exhibit Index

  +*10.1   Form of Change of Control Agreement between CH2M HILL Companies, Ltd. and employee directors and executive officers effective as of July 1, 2010

 

*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

+
Indicates management contract or compensatory arrangement

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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: November 8, 2010

 

/s/ MICHAEL A. LUCKI

Michael A. Lucki
Senior Vice President and Chief Financial Officer
(principal financial officer)

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