Attached files
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EX-10.1 - EX-10.1 - CH2M HILL COMPANIES LTD | a2202161zex-10_1.htm |
EX-23.1 - EX-23.1 - CH2M HILL COMPANIES LTD | a2202161zex-23_1.htm |
EX-10.5 - EX-10.5 - CH2M HILL COMPANIES LTD | a2202161zex-10_5.htm |
EX-32.2 - EX-32.2 - CH2M HILL COMPANIES LTD | a2202161zex-32_2.htm |
EX-10.6 - EX-10.6 - CH2M HILL COMPANIES LTD | a2202161zex-10_6.htm |
EX-10.3 - EX-10.3 - CH2M HILL COMPANIES LTD | a2202161zex-10_3.htm |
EX-10.2 - EX-10.2 - CH2M HILL COMPANIES LTD | a2202161zex-10_2.htm |
EX-24.1 - EX-24.1 - CH2M HILL COMPANIES LTD | a2202161zex-24_1.htm |
EX-31.1 - EX-31.1 - CH2M HILL COMPANIES LTD | a2202161zex-31_1.htm |
EX-10.4 - EX-10.4 - CH2M HILL COMPANIES LTD | a2202161zex-10_4.htm |
EX-21.1 - EX-21.1 - CH2M HILL COMPANIES LTD | a2202161zex-21_1.htm |
EX-31.2 - EX-31.2 - CH2M HILL COMPANIES LTD | a2202161zex-31_2.htm |
EX-32.1 - EX-32.1 - CH2M HILL COMPANIES LTD | a2202161zex-32_1.htm |
EX-10.13 - EX-10.13 - CH2M HILL COMPANIES LTD | a2202161zex-10_13.htm |
EX-10.12 - EX-10.12 - CH2M HILL COMPANIES LTD | a2202161zex-10_12.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(MARK ONE) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010 |
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OR |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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FOR THE TRANSITION PERIOD FROM TO |
Commission File Number 000-27261
CH2M HILL Companies, Ltd.
(Exact name of registrant as specified in its charter)
Oregon | 93-0549963 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |
9191 South Jamaica Street, Englewood, CO |
80112-5946 | |
(Address of principal executive offices) | (Zip Code) |
(303) 771-0900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act:
CH2M HILL common stock, par value $0.01 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý
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 checkmark whether the registrant has submitted electronically and posted on its corporate Website, 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | 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 aggregate value of common stock held by non-affiliates computed by reference to the price as of June 30, 2010 was approximately $1.2 billion.
As of February 15, 2011, there were 30,696,136 shares of the registrant's common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Information, required by Items 10, 11, 12, 13 and 14 of Part III of this Form 10-K are incorporated by reference from the CH2M HILL definitive proxy statement for its 2011 Annual Meeting of Shareholders to be held on May 2, 2011.
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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This Form 10-K contains various "forward-looking statements "within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company's expectations and beliefs concerning future events, based on information available to the Company on the date of the filing of this Form 10-K, and are subject to various risks and uncertainties. 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. Factors that could cause actual results to differ materially from those referenced in the forward-looking statements are listed in Item 1A, Risk Factors. The Company disclaims any intent or obligation to update or revise any of the forward-looking statements, whether in response to new information, unforeseen events, changed circumstances or otherwise.
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Summary
CH2M HILL Companies, Ltd. was founded in 1946 and incorporated under the laws of the State of Oregon on November 9, 1965. 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 sector clients worldwide. We have 23,000 employees in offices worldwide.
Our Operating Segments
We provide services to our clients through three operating segments: Government, Environment and Nuclear (GEN), Facilities and Infrastructure, and Energy.
Our GEN segment provides a comprehensive range of services to various U.S. federal government agencies as well as services to foreign governments and private industry. Our Facilities and Infrastructure segment provides a comprehensive range of services to various private industry segments, and state, local and provincial governments. Our Energy segment provides a comprehensive range of services to private sector clients. Financial information for each segment for each of the last three years, including 2010, is included in Note 16 of the Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
In order to improve our competitiveness, client service, and financial strength, effective January 1, 2011, we have reorganized our reporting structure under which our chief operating decision maker will be making strategic and operating decisions with regards to assessing performance and allocating resources. We believe this new organizational structure will help us deal with global economic and industry challenges, and better position us for a solid future. As a result, our water business will be reported with the Energy segment creating the Energy and Water segment. Additionally, our Industrial Systems business will be split based upon its operations and combined within our Environmental Services business and Water business and thus reflected in the GEN and Energy and Water segments, respectively. These changes began on January 1, 2011.
Our Clients and Key Markets
We provide services to a diverse customer base including the U.S. federal and foreign governments and governmental authorities, various U.S. federal government agencies, provincial, state and local municipal government, major oil and gas companies, refiners and pipeline operators, metal and mining, automotive, food and beverage and consumer products manufacturers, microelectronics, pharmaceuticals and biotechnology companies. In 2010, we derived approximately 37% of our total revenues from contracts with the U.S. federal government.
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The following table summarizes our primary client types, revenues and key markets served by each of our operating segments.
Operating Segment
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Client Type | % of 2010 Revenues |
Key Markets | |||||||
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Government, Environment and Nuclear |
U.S. Federal and | 41 | % | |
Nuclear | |||||
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Foreign | |
Environmental Services | |||||||
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Governments, Governmental Authorities and Utilities | |
Government Facilities and Infrastructure |
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Facilities and Infrastructure |
State and Local Governments and | 37 | % | |
Water, Wastewater and Water Resources |
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Private Sectors | |
Transportation | |||||||
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Operations Management | ||||||||
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Industrial and Advanced Technology |
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Energy |
Private Sectors and | 22 | % | |
Energy and Chemicals | |||||
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Utilities | |
Industrial Systems | |||||||
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Power |
Clients
We provide our services to a broad range of domestic and international clients, including federal governments, state, local and provincial governments and private sector businesses. We perform services as the prime contractor, as subcontractors, or through joint ventures or partnership agreements with other service providers. The demand for our services generally comes from budgeting and capital
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spending decisions made by our clients. The following table provides a summary of representative clients:
Public Sector Clients | Private Sector Clients | ||||||||||||
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U.S. Department of Energy | |
United Kingdom Atomic | |
Major oil and gas companies, | ||||||||
(DOE) | Energy Authority | refiners and pipeline | |||||||||||
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U.S. Department | |
United Kingdom | operators | |||||||||
of Defense | Nuclear Decommissioning | |
Power utilities | ||||||||||
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U.S. Department of | Authority | |
Chemicals, bioprocessing | |||||||||
the Interior | |
Republic of Korea Ministry | and refining companies | ||||||||||
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U.S. Air Force | of Defense | |
Metals and mining | |||||||||
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U.S. Navy | |
U.S. cities | |
Microelectronics | ||||||||
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U.S. Army Corps of | |
Foreign cities | manufacturers | |||||||||
Engineers | |
U.S. airports and seaports | |
Pharmaceutical and | |||||||||
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Federal Emergency | |
U.S. and State Departments | biotechnology companies | |||||||||
Management Agency | of Transportation | |
Automotive, food and | ||||||||||
(FEMA) | |
State Transit | beverage, metals and | ||||||||||
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Department of | Authorities | consumer product | ||||||||||
Homeland Security | |
Water and Wastewater | manufacturers | ||||||||||
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U.S. Agency for | Municipalities | |
Renewable energy | |||||||||
International Development | |
Panama Canal Authority | companies | ||||||||||
(USAID) | |
London 2012 Olympic | |||||||||||
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U.S. Environmental | Delivery Authority | |||||||||||
Protection Agency | |||||||||||||
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U.S. Federal Emergency | ||||||||||||
Management Agency |
Key Markets
The following is a description of each of our key markets within our operating segments and the services we provide.
Government, Environment & Nuclear Division
The GEN operating division comprises three businessesGovernment Facilities and Infrastructure (GF&I), Environmental Services, and Nuclear. GEN provides a full range of servicesprogram management, engineering, design, construction, environmental remediation, operation and maintenance, decontamination and decommissioning, facility closure, sustainable solutions, and consulting servicesto clients worldwide, including our largest client, the U.S. federal government.
Government Facilities and InfrastructureOur GF&I business ensures value-added mission success for our government clients globally by safely delivering flexible and sustainable facilities, infrastructure, and contingency solutions on any scale worldwide. GF&I designs, constructs, operates, or maintains various categories of facility and infrastructure at all types of government and military installations. In addition, GF&I maintains a focus on sustainability to optimize client goals while minimizing impacts and costs. GF&I service offerings include contingency and logistics, design-build services, engineering and design, operations and maintenance, planning and consulting, and program management. The U.S. Department of Defense is GF&I's largest client. We also provide a multitude of services to other government agencies such as the Federal Emergency Management Agency, U.S. Agency for International Development, Department of Energy, and Department of Homeland Security. We continue to expand our U.S. government client base, both within the U.S. and internationally.
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Environmental ServicesThe Environmental Services business is dedicated to protecting public health, preserving the environment, and restoring impacted natural resources. We achieve this mission by offering services within five market segments: integrated waste solutions, munitions response, natural resources planning and management, sediment management and remediation, and site remediation and revitalization. Clients include a broad spectrum of U.S. government agencies and departments; multi-national industrial clients; numerous U.S. municipalities and port authorities; and international clients in both the public and private sector. Beginning in 2011, the life cycle services for the industrial market from the Industrial Systems business was combined with the Environmental Services business to bring all our industrial environmental services capabilities under the same management. A key differentiator for us with both our government and multinational clients is project delivery with a global footprintour ability to effectively and consistently deploy our systems and processes (especially safety, environmental compliance, and project management) throughout the world with little deviation.
NuclearThe Nuclear business specializes in the management of complex nuclear programs and projects around the globe. Our experience includes more than two decades of managing and operating nuclear facilities and providing innovative cleanup and environmental remediation for commercial and government facilities and sites worldwide. A key strength is our ability to manage large nuclear projects with inherent radiological, chemical, and industrial safety challengescomplex challenges that few companies can manage successfully. CH2M HILL provides innovative cleanup and closure solutions for contaminated sites in the U.S. Department of Energy (DOE) nuclear weapons complex and at United Kingdom Nuclear Decommissioning Authority sites in Great Britain. In the commercial nuclear sector, we provide program management and program advisory services, as well as planning, permitting, and licensing of new nuclear generating stations in compliance with current international regulatory requirements. Additional service offerings at government and commercial nuclear sites are: program management and owner's engineer services; decommissioning; waste management; waste fuel strategies; support service operations; and planning, permitting, and licensing of new nuclear generating stations. With a solid record of successfully mitigating the risks and hazards on environmental management programs, CH2M HILL has completed a significant amount of decommissioning as a contractor in the DOE complex (nearly 9.1 million square feet). We continue to build our commercial nuclear offerings while maintaining our preeminent position in liabilities management.
Facilities & Infrastructure Division
The Facilities and Infrastructure (F&I) Division comprises four businesses: Water, Industrial and Advanced Technology, Transportation, and Operations and Maintenance (O&M). The Division also provides enterprise stewardship for the development of our facilities market penetration strategy, the urban development practice, and the O&M collaborative working group, which is responsible for identifying ways to better leverage our O&M capabilities that reside in various businesses. F&I's portfolio of services include: consulting, design, design-build, operations and maintenance, construction management, and program management.
WaterIn the Water business, we serve the water resources and ecosystem management; water treatment; conveyance and collection; wastewater treatment and reuse; and utility management market segments. We support the water-related needs of clients in the utility, industrial, government, energy, and agricultural sectors. Our broad portfolio of water solutions helps clients address the complex challenges related to population growth, water supply uncertainty, global climate change, regulatory changes, and increasing demand. Beginning in 2011, the industrial water capability from the Industrial Systems business was combined with the Water business to pursue the large and growing energy-related water market. Addressing the impacts of global climate change requires the ability to create solutions for the energy-water-carbon Nexus. Energy production requires a reliable, abundant, and predictable source of water, a resource that is already in short supply throughout much of the world. We work with clients to identify solutions for water and energy conservation, and to re-evaluate processes to achieve
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cost savings and reduce environmental impacts. Our geographic strategy is to expand market reach in North America, Europe, the Middle East, Singapore, and Australia. We will continue to capitalize on market drivers such as drought/water scarcity, aging infrastructure, global climate change, and regulatory requirements.
Industrial and Advanced TechnologyIn our Industrial and Advanced Technology business, we serve the pharmaceutical, food processing, aerospace, automobile, metals, building materials, semiconductor, photovoltaic, flat panel, and life science manufacturing sectors. In addition, our IDC Architects group services the data center, nanotechnology, and university research sectors, as well as special economic zone developments. In addition, we serve the automobile and aerospace manufacturing segments. As the economy recovers, we will continue to expand market reach in Asia, North America, South America, and the Middle East. We are leveraging our strategic business planning capabilities to help clients structure and plan their high-volume manufacturing projects, and to provide follow-on design and construction services.
TransportationIn the Transportation business, we serve the aviation, highway/bridge, ports and maritime, and transit and rail segments with both horizontal and vertical infrastructure development. For all of our clients, we provide design, value engineering, design-build, project/program management, construction management, feasibility studies, public involvement/community management, environmental, and sustainability planning. Airport services include airfield design, airfield infrastructure, airspace obstruction analysis, and noise analyses. For our highway and bridge clients, we provide corridor location studies, traffic engineering, intelligent transportation systems, bridge condition assessment and load ratings, and structural seismic analysis and retrofit design. Ports and maritime client services include architecture, commercial, and owner's representative. Transit and rail services include alternatives analysis, and security services for light rail, commuter rail, freight rail, bus rapid transit, and fleet maintenance facilities.
Operations and MaintenanceIn our Operations and Maintenance ("O&M") business, we provide communities and private companies with a broad range of tailored solutions. Our services include water and wastewater system and staff optimization; contract operations and maintenance of water, wastewater, and other municipal functions such as public works, and community development; facilities management; and O&M consulting. The geographic strategy is to expand market reach in North America, and we are positioning for growth in Australia, the Middle East, and Brazil. We see an increase in public-private partnerships for both full and customized service selection, as municipal and private entities continue to look for more ways to increase revenues and reduce costs through efficiency gains. Our O&M Collaborative Working Group combines established O&M services across our Energy, Environmental, Facilities, Transportation, Resources, and Water markets. We will continue to expand our consulting business and leverage cross-market synergies around design-build-operate, remediation, produced water, and manufacturing.
Energy Division
The Energy Division is comprised of the Energy and Chemicals, Industrial Systems and Power businesses. The Energy Division also serves as the corporate steward of our Sustainability and Climate Change practice, and as the nexus of energy-water-carbon solutions to address emerging market needs. The portfolio of services include: consulting, design, design-build, operations, construction management, and program management.
Energy and ChemicalsIn the Energy and Chemicals business, we serve the upstream, midstream, and downstream sectors of the oil and gas industry. For the upstream sector, we perform modular fabrication, erection, and operations and maintenance services for oil and gas fields. In the midstream sector, we gather, store, and transport oil, natural gas, refined products, carbon dioxide, and other related hydrocarbons, liquids, and gases via pipelines, compression, pump stations, metering, tank
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farms, terminals, and related facilities. In the downstream sector, we provide technology evaluation and feasibility studies; design and construction of refinery units, terminals, pipelines, pump stations, and cogeneration facilities; design, fabrication, and installation of modules and pipe racks; turnarounds and revamps; effluent treatment; refinery conversion to heavy crude oil processing; flue gas scrubbing; and process safety management. We look to expand our business in Alaska, Canada, and the Middle East. In Chemicals, we serve all segments of the industry, including petrochemicals and derivatives, inorganics, specialties, and agricultural chemicals, with a specialization in "first of kind" processes. We provide a full-suite of solutions for polysilicon, chemicals from alternative feedstocks, alkalis and chlorine, synthetic performance fibers, monomers and polymers, and resins and plastics plants. Our services cover the entire lifecycle from green field, design, construction, operations and maintenance, and retrofit, to decommissioning and remediation. We serve clients in North and South America, China, and Europe.
Industrial SystemsIn our Industrial Systems business, we provide a broad array of life cycle services to industrial markets to improve the performance and operations of industrial facilities. These services typically include consulting, design, project, licensing, air quality management, environmental, health and safety auditing and performance, regulatory compliance, renewable energy and facility sustainability analysis, risk assessment and ecosystems management.
PowerIn our Power business, we design and build power generation facilities that produce energy from natural gas, coal, oil, solar, wind, biomass, and geothermal sources. Our portfolio includes coal/integrated gasification, combined-cycle, simple-cycle, clean air, alternative/waste fuels, and cogeneration projects. We also repower, upgrade, or modify existing plants to improve performance and achieve clean air standards. Our delivery of full-service engineer-procure-construct services helps clients craft long-term strategies while addressing the ongoing market challenges around unpredictable and changing electricity demand, transmission capacity constraints, changing environmental regulations and policies, aging infrastructure, outdated technologies, water constraints, and fuel diversification.
Our Sustainability and Climate Change practice encompasses facilities and land development, sustainable cities, carbon and energy management, natural resources planning and management, and site remediation. We bring together strategists, scientists, architects, engineers, technologists, and economists to evaluate opportunities and work collaboratively to deliver lasting solutions that benefit our clients, their communities, and the environment. We also have a diverse platform of tools, technology, and best practices to help clients make well informed decisions and to evaluate the overall sustainability of various options.
Competition
The market for our design, consulting, engineering construction, operations and maintenance, and program management services is highly competitive. We compete with large multinational firms as well as smaller firms with less resources who offer lower prices for particular services. In addition, some of our clients, including government agencies, occasionally utilize their own internal resources to perform design, engineering and construction services where we might have been the service provider.
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Numerous mergers and acquisitions in the engineering services industry have resulted in a group of large 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 movement towards larger program and contract awards and longer-term contract periods for a full suite of services, (e.g., 5 to 20 year full-service contracts). While these larger, longer, more comprehensive contracts require us to have substantially greater financial and human capital than in the past, we compete effectively for these full service programs.
To our knowledge, no single company or group of companies currently dominates any significant portion of the engineering services markets. Competition in the engineering services industry is based on quality of performance, reputation, expertise, price, technology, customer relationships, range of service offerings and domestic and international office networks. For additional information regarding competition, see "Risk FactorsOur industry is highly competitive" in Item 1A of this Annual Report on Form 10-K.
Backlog
We define backlog as signed contracts and task orders less previously recognized revenue on such contracts and task orders. In addition, we also include amounts under notices to proceed that have been received from clients and are expected to be recognized as revenues when future services are performed. Our operations and maintance contracts are included for the non-cancellable term of the contract. Unexercised options under any contract are not included in our backlog. Our backlog also reflects our proportionate share of future activities related to consolidated and unconsolidated joint ventures. Many of our contracts require us to provide services that span over a number of fiscal years. U.S. government agencies operate under annual fiscal appropriations by Congress and fund various federal contracts only on an incremental basis. The same is true of many state, local and foreign contracts.
The following table provides backlog revenues by operating segment for the years ended December 31:
($ in millions) |
2010 | 2009 | |||||
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Government, Environment and Nuclear |
$ | 3,304.5 | $ | 4,629.3 | |||
Facilities and Infrastructure |
2,186.8 | 2,237.4 | |||||
Energy |
746.5 | 772.3 | |||||
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$ | 6,237.8 | $ | 7,639.0 | |||
The decrease in the GEN segment backlog is due to a decrease in the American Recovery and Reinvestment Act (ARRA) funding.
For more information on backlog, see "Risk FactorsOur backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future performance" in Item 1A of this Annual Report on Form 10-K.
Available Information
In addition, for information regarding CH2M HILL, including free copies of filings with the Securities and Exchange Commission (SEC), please visit our web site at www.ch2m.com. The SEC filings, which include our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K are located in the About Us/Employee Ownership section of our web site and are made available as soon as practicable after they are filed with the SEC.
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You should carefully consider the following factors and other information contained in this Annual Report on Form 10-K before deciding to invest in our common stock.
Risks Related to Our Business
Unpredictable economic cycles, uncertain demand for our engineering and related services, and failure by our major customers to pay our fees, could cause our revenue to fluctuate or be uncollectible.
Demand for our engineering and other services is affected by the general level of economic activity in the markets in which we operate, both in and outside of the U.S. Our customers and the markets in which we compete to provide services are likely to experience periods of economic decline from time-to-time. In particular, the recent global economic downturn and governmental tax revenue declines resulted in a slowdown in demand for our services in oil and gas, state and municipal infrastructure, manufacturing and industrial clients.
Adverse economic conditions may decrease our customers' willingness to make capital expenditures or otherwise reduce their spending to purchase our services, which could result in diminished revenues and margins for our business. The demand for services depends on the demand and capital spending of our customers in their target markets, some of which are cyclical in nature. Adverse economic conditions could alter the overall mix of services that our customers seek to purchase, and increased competition during a period of economic decline could force us to accept contract terms that are less favorable to us than we might be able to negotiate under other circumstances. Changes in our mix of services or a less favorable contracting environment may cause our revenues and margins to decline. Moreover, our customers impacted by the economic downturn could delay or fail to pay our fees. If a customer failed to pay a significant outstanding fee, our financial results could be adversely affected and our stock price could be reduced. Adverse credit market conditions could negatively impact our customers' ability to fund their projects and therefore utilize our services; they can also impact subcontractors' and suppliers' ability to deliver work. These credit disruptions could negatively impact our backlog and profits, and could increase our costs or adversely impact project schedules.
The uncertainties involved in prolonged procurement processes associated with our projects make it particularly difficult to predict whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size with our project needs. If an expected project award is delayed or not received, we could incur costs resulting from idle workforce reductions in staff, or redundancy of facilities that would have the effect of reducing our profits.
Changes and fluctuations in government's spending priorities could adversely affect our revenue expectations.
Because a substantial part of our overall business is generated either directly or indirectly as a result of U.S. federal, state and local government regulatory and infrastructure priorities, shifts in these priorities due to changes in policy imperatives or economic conditions are often unpredictable and may affect our revenues. Significant government budget deficits may result in delays or cancellations for some of our projects. In addition, any government shutdown could have an impact on our government projects including our ability to earn revenue on those projects, and could have an adverse impact on our financial condition.
Political instability in key regions around the world coupled with the U.S. federal government's commitment to the war on terror put U.S. federal discretionary spending at risk, including spending on infrastructure projects that are of particular importance to our business. At the state and local levels, the need to compensate for reductions in the federal matching funds, as well as financing of federal unfunded mandates, creates pressures to cut back on infrastructure project expenditures. While we have won and are continuing to seek federal contracts related to changing U.S. federal government
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priorities, such as unforeseen disaster response, rebuilding efforts in countries impacted by war on terror, and other projects that reflect current U.S. government focus, there can be no assurances that changing U.S. government priorities and spending would not adversely affect our business.
Government contracts present risks of termination for convenience, adjustment of payments received, restrictions on ability to compete for government work and funding constraints.
In 2010, we derived approximately 37% of our total revenues from contracts with the U.S. federal government. The following risks are inherent in U.S. federal government contracts:
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- Because U.S. federal laws permit government agencies to terminate a contract for convenience, our U.S. government clients
may terminate or decide not to renew our contracts with little or no prior notice.
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- Payments we receive from our U.S. government clients, our books, records and processes are subject to audit by various
U.S. governmental agencies for several years after these payments are made. Based on these audits, the U.S. government may adjust or demand repayment of payments we previously received, or withhold a
portion of fees due to us because of unsatisfactory audit outcomes. Audits have been completed on our U.S. federal contracts through December 31, 2006, and are continuing for subsequent
periods. Audits performed to date have not resulted in material adjustments to our financial statements. Unsatisfactory audit results may impact our ability to bid or win future U.S. government
contract work. In addition, as a government contractor, we are subject to increased risks of investigation, criminal prosecution and other legal actions and liabilities to which purely private sector
companies are not. The results of any such actions could adversely impact our business and have an adverse effect on our consolidated financial statements.
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- Our ability to earn revenues from our existing and future U.S. federal government projects will depend upon the
availability of funding from U.S. federal government agencies. We cannot control whether those clients will fund or continue funding our existing projects.
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- In years when the U.S. federal government does not complete its budget process before the end of its fiscal year on
September 30, government operations are typically funded pursuant to a "continuing resolution" that authorizes agencies of the U.S. government to continue to operate, but does not authorize new
spending initiatives, which can delay the award of new contracts. These delays could have an adverse effect on our operating results.
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- Many U.S. federal government programs in which we work require security clearances. Security clearances can be difficult and time-consuming to obtain. If we or our employees are unable to obtain or retain necessary security clearances, we may not be able to win new business or will not be able to renew existing contracts. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue anticipated from the contract, which could adversely affect our business and results of operations.
Our ability to secure new government contracts and our revenues from existing government contracts could be adversely affected by any one or a combination of the factors listed above.
Many of our projects are funded by U.S. federal, state and local governments and if we violate applicable law governing this work, we are subject to the risk of suspension or debarment from government contracting activities, which could have a material adverse affect on our business and results of operations.
If we fail to comply with the terms of one or more of our government contracts or statutes and regulations that govern this type of work, or if we or our employees are indicted or convicted on criminal charges (including misdemeanors) relating to any of our government contracts, in addition to
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any civil or criminal penalties and costs we may incur, we could be suspended or debarred from government contracting activities for a period of time. Some U.S. federal and state statutes and regulations provide for automatic debarment in certain circumstances. The suspension or debarment in any particular case may be limited to the facility, contract or subsidiary involved in the violation or could be applied to the entire CH2M HILL family of companies in certain severe circumstances. Even a narrow scope suspension or debarment could result in negative publicity that could adversely affect our ability to renew contracts and to secure new contracts, both with governments and private customers, which could materially and adversely affect our business and results of operations.
Our industry is highly competitive.
We are engaged in a highly competitive business in which most of our contracts with public sector clients are awarded through a competitive bidding process that places no limit on the number or type of potential service providers. The process usually begins with a government agency request for proposal that delineates the size and scope of the proposed contract. The government agency evaluates the proposals on the basis of technical merit and cost.
In both the private and public sectors, acting either as a prime contractor or as a subcontractor, we may join with other firms that we otherwise compete with to form a team to compete for a single contract. Because a team can often offer stronger combined qualifications than any firm standing alone, these teaming arrangements can be very important to the success of a particular contract competition or proposal. Consequently, we maintain a network of relationships with other companies to form teams that compete for particular contracts and projects. Failure to maintain technical and price competitiveness, as well as failure to maintain access to strong teaming partners may impact our ability to win work.
Our backlog is subject to unexpected adjustments and cancellations and is, therefore, an uncertain indicator of our future performance.
Our backlog at December 31, 2010 was $6.2 billion. We cannot assure that the revenues projected in our backlog will be realized or, if realized, will result in profits. Projects may remain in our backlog for an extended period of time prior to project execution and, once project execution begins, it may occur unevenly over the current and multiple future periods. In addition, our ability to earn revenues from our backlog depends on the availability of funding for various government and private clients. Most of our industrial clients have termination for convenience provisions in their contracts. Therefore, project terminations, suspensions or reductions in scope may occur from time-to-time with respect to contracts reflected in our backlog. Some backlog reductions would adversely affect the revenue and profit we actually receive from contracts reflected in our backlog. Future project cancellations and scope adjustments could further reduce the dollar amount of our backlog and the revenues and profits that we actually earn.
Our inability to attract and retain professional personnel could adversely affect our business.
Our ability to attract, retain and expand our staff of qualified engineers and technical professionals will be an important factor in determining our future success and growth. The market for these professionals is competitive in and outside the U.S. As some of our key personnel approach retirement age, we are developing and implementing proactive succession plans. If we cannot attract and effectively implement our succession plans, we could have a material adverse impact on our business, financial condition, and results of operations. Since we derive a significant part of our revenues from services performed by our professional staff, our failure to retain and attract professional staff could adversely affect our business by impacting our ability to complete our projects and secure new contracts.
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Our projects may result in liability for faulty engineering services.
Our engineering practice involves professional judgments regarding the planning, design, development, construction, operations and management of industrial facilities and public infrastructure projects. Because our projects are often large and can affect many people, our failure to make judgments and recommendations in accordance with applicable professional standards could result in large damages and, perhaps, punitive damages. Although we have adopted quality control, risk management and risk avoidance programs designed to reduce potential liabilities, and carry professional liability to set off this risk, there can be no assurance that such programs will protect us fully from all risks and liabilities.
We could sustain losses on contracts that contain "fixed price" or "not to exceed" pricing provisions if our costs exceed the fixed or maximum prices.
In 2010, we derived approximately 29% of our revenues from "fixed price" contracts and approximately 41% of our revenues from time-and-materials contracts, most of which had "not to exceed" price limits. Under "fixed price" contracts, we agree to deliver projects for a definite, predetermined price regardless of our actual costs incurred over the life of the project. Under time-and-materials contracts with "not to exceed" provisions, we are compensated for the labor hours expended at agreed-upon hourly rates plus cost of materials used; however, there is a stated maximum compensation for the services to be provided under the contract. Many fixed price and "not to exceed" contracts involve large industrial facilities and public infrastructure projects and present the risk that our costs to complete a project may exceed the fixed price or "not to exceed" price agreed upon with the client. The fixed or maximum fees negotiated for such projects may not cover our actual costs and desired profit margins. If our actual costs for a fixed or "not to exceed" price project are higher than we expect, our profit margins on the project will be reduced or we could suffer a loss.
Percentage-of-completion accounting used for our engineering and construction contracts can result in overstated or understated profits or losses.
The revenue for our engineering and construction contracts is accounted for on the percentage-of-completion method of accounting. This method of accounting requires us to calculate revenues and profit to be recognized in each reporting period based on our predictions of future outcomes, including our estimates of the total cost to complete the project, project schedule and completion date, the percentage of the project that is completed and the amounts of any probable unapproved change orders. Our failure to accurately estimate these often subjective factors could result in reduced profits or losses.
Environmental regulations and related compliance investigations may adversely impact our project performance, expose us to liability and could adversely affect our revenues.
A substantial portion of our business is generated either directly or indirectly as a result of laws and regulations related to environmental matters. In particular, our business involves significant risks including the assessment, analysis, remediation, handling, management and disposal of hazardous substances. As a result, we are subject to a variety of environmental laws and regulations governing, among other things, discharges of pollutants and hazardous substances into the air and water and the handling and disposal of hazardous waste including nuclear materials and related record keeping requirements. These laws and regulations and related investigations into our compliance, as it pertains to facility operations and remediation of hazardous substances, can cause project delays and, substantial management time commitment and may significantly add to our costs. Violations of these environmental laws and regulations could subject us to civil and criminal penalties and other liabilities, which can be very large. Although we have not been subject to any material civil or criminal penalties for violations of these laws to date, we have incurred costs and diverted resources to respond to reviews
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that have negatively impacted the profitability of some of our projects. While the costs of these reviews have not been material to our consolidated results of operations in the past, additional or expanded reviews or proceedings on environmental compliance, or any substantial fines or penalties, could affect our profitability and our stock price in the future, or could adversely affect our ability to compete for new business. Changes in environmental regulations could affect our business more significantly than other engineering firms. Accordingly, a reduction in the number or scope of these laws and regulations, or changes in government policies regarding the funding, implementation or enforcement of such laws and regulations, could significantly reduce one of our most important markets and limit our opportunities for growth or reduce our revenues. In addition, any effort by government agencies to reduce the role of private contractors in regulatory programs, including environmental compliance projects, could have material adverse effects on our business.
We may not be successful in growing through acquisitions or integrating effectively any businesses and operations we may acquire.
Our success depends on our ability to continually enhance and broaden our service offerings and our service delivery footprint in response to changing customer demands, technology, and competitive pressures. Numerous 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, design, engineering, procurement, construction, operations, maintenance, and facility ownership. To remain competitive, we may acquire new and complementary businesses to expand our portfolio of services, add value to the projects undertaken for clients or enhance our capital strength. We do not know if we will be able to complete any future acquisitions or whether we will be able to successfully integrate any acquired businesses, operate them profitably, or retain their key employees.
When suitable acquisition candidates are identified, we anticipate significant competition when trying to acquire these companies, and there can be no assurance that we will be able to acquire such acquisition targets at reasonable prices or on favorable terms. If we cannot identify or successfully acquire suitable acquisition candidates, we may not be able to successfully expand our operations. Further, there can be no assurance that we will be able to generate sufficient cash flow from an acquisition to service any indebtedness incurred to finance such acquisitions or realize any other anticipated benefits. Nor can there be any assurance that our profitability will be improved as a result of these acquisitions. Any acquisition may involve operating risks, such as:
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- the difficulty of assimilating the acquired operations and personnel and integrating them into our current business;
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- the potential impairment of employee morale;
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- the potential disruption of our ongoing business;
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- preserving important strategic and customer relationships;
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- the diversion of management's attention and other resources;
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- the risks of entering markets in which we have little or no experience;
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- the possibility that acquisition related liabilities that we incur or assume may prove to be more burdensome than
anticipated;
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- the risks associated with possible violations of the Foreign Corrupt Practices Act and other anti-corruption
laws as a result of any acquisition; and
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- the possibility that any acquired firms do not perform as expected.
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The success of our joint ventures depends on the satisfactory performance by our joint venture partners. The failure of our joint venture partners to perform their obligations could impose on us additional financial and performance obligations that could result in reduced profits or significant losses on the projects that our joint ventures undertake.
We routinely enter into joint ventures as part of our business. The success of these joint ventures depends, in large part, on the satisfactory performance of our joint venture partners. If our joint venture partners fail to satisfactorily perform their joint venture obligations as a result of financial or other difficulties, the joint venture may be unable to adequately perform or deliver its contracted services. Under these circumstances, we may be required to make additional investments and provide additional services to ensure the adequate performance and project delivery. These additional obligations could result in reduced profits or, in some cases, significant losses for us with respect to the joint venture.
Occasionally, we participate in joint ventures where we are not a controlling party. In such instances we may have limited control over joint venture decisions and actions, including internal controls and financial reporting, which may have an impact on our business.
We may be restricted in our ability to access the cash flows or assets from our subsidiaries and joint venture partners upon which we are substantially dependent.
We are dependent on the cash flows generated by our subsidiaries and, consequently, on their ability to collect on their respective accounts receivables. Substantially all of our cash flows necessary to meet our operating expenditures are generated by our subsidiaries. The financial condition and operational requirements of our foreign subsidiaries may limit our ability to obtain cash from them. In addition, we conduct some operations through joint ventures. We do not manage all of these entities. Even in those joint ventures that we manage, we are often required to consider the interests of our joint venture partners in connection with decisions concerning the operations of the joint ventures. Arrangements involving our foreign subsidiaries and joint ventures may restrict us from gaining access to the cash flows or assets of these entities. In addition, our foreign subsidiaries sometimes face governmentally imposed restrictions on their abilities to transfer funds to us.
Our dependence on subcontractors and equipment manufacturers could adversely affect us.
We rely on third party subcontractors as well as third party equipment manufacturers to complete our projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed price contracts, we could experience losses in the performance of these contracts. In addition, if a subcontractor or a manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. These risks are potentially more significant in the current economic downturn if financial difficulties in our supply chain cause our services or equipment suppliers not to be able to support the demands and schedules of our business. This may reduce the profit we expect to realize or result in a loss on a project for which the services, equipment or materials were needed.
We face special risks associated with our international business.
In 2010 and 2009, we derived approximately 21% and 18%, respectively, of our revenues from operations outside of the U.S. Conducting business abroad is subject to a variety of risks including:
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- Because our financial results are reported in U.S. dollars, currency exchange rate fluctuations, restrictions on currency movement and impact of international tax laws could adversely affect
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- Political and economic instability and unexpected changes in regulatory environment in countries outside the U.S. could
adversely affect our projects overseas and our ability to repatriate cash.
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- Inconsistent and diverse regulations, licensing and legal requirements may increase our costs because our operations must
comply with a variety of laws that differ from one country to another.
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- Terrorist attacks and civil unrest in some of the countries where we do business may delay project schedules, threaten the
health and safety of our employees and increase our cost of operations.
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- Challenges in managing risks inherent in international operations, such as unique labor rules and corrupt business environments may cause inadvertent violations of laws that we may not immediately detect or correct.
our results of operations, if we are forced to maintain assets in currencies other than the U.S. dollar.
While we are monitoring such regulatory, geopolitical and other factors, we cannot assess with certainty what impact they may have over time on our business.
Special risks associated with doing business in highly corrupt environments.
The global nature of our business creates various domestic and local regulatory challenges. Our operations include projects in developing countries and countries torn by war and conflict. Many of these countries are rated poorly by Transparency International, the independent watchdog organization for government and institutional corruption around the world. Our operations outside of the U.S. are subject to the Foreign Corrupt Practices Act (FCPA) and similar anti-bribery laws in other jurisdictions which generally prohibit companies and their intermediaries from paying or offering anything of value to foreign government officials for the purpose of obtaining or retaining business, or otherwise receiving discretionary favorable treatment of any kind. In particular, we may be held liable for actions taken by our local partners, subcontractors and agents even though such parties are not always subject to our control. Any determination that we have violated the FCPA or any similar anti-bribery laws in other jurisdictions (whether directly or through acts of others, intentionally or through inadvertence) could result in sanctions that could have a material adverse effect on our business and our reputation and on our ability to secure U.S. federal government and other contracts. While our staff is trained on FCPA and other anti-corruption laws and we have procedures and controls in place to monitor compliance, situations outside of our control may arise that could potentially put us in violation of the these regulations and thus negatively impact our business. In addition, we are also subject to various international trade and export laws. Any misconduct, fraud, non-compliance with applicable governmental laws and regulations, or other improper activities by our employees, agents or partners could have a significant impact on our business, financial results and reputation and could subject us to criminal and civil enforcement actions.
We face risks associated with working in locations where there are high security risks.
Some of our projects are performed in locations known for their high security risks. In these high risk locations, we may incur substantial security costs to maintain the safety of our employees and work sites. Despite our best efforts, we cannot guarantee the safety of our employees and we may suffer future losses of employees and subcontractors.
We face risks associated with our work sites and the maintenance of adequate safety standards.
Construction and maintenance sites are inherently dangerous workplaces and place our employees in close proximity to dangers of the work site, such as mechanized equipment, moving vehicles,
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chemical and manufacturing process and materials. Our failure to maintain and implement adequate safety standards and procedures could have a material adverse impact on our business, financial condition and results of operations.
Systems failures could disrupt our business and impair our ability to effectively provide our services to our customers, which could damage our reputation and adversely affect our operating results.
As a global company, we are heavily reliant on computer, information and communications technology and related systems. From time to time, we may be subject to systems failures, including network, software or hardware failures, whether caused by us, third party service providers, intruders or hackers, computer viruses, natural disasters, power shortages or terrorist attacks. Such failures could cause loss of data and interruptions or delays in our or our customers' businesses and could damage our reputation. In addition, the failure or disruption of our communications or utilities could cause us to interrupt or suspend our operations or otherwise adversely affect our business. Losses that may occur as a result of any system or operational failure or disruption may cause our actual results to differ materially from those anticipated.
Our businesses could be materially and adversely affected by severe weather.
Repercussions of severe weather conditions may include:
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- Evacuation of personnel and curtailment of services which may be temporary in nature;
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- Increased labor and materials costs in areas impacted by weather and subsequent increased demand for labor and materials
for repairing and rebuilding;
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- Weather related damage to our jobsites or facilities;
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- Inability to deliver materials to jobsites in accordance with contract schedules; and
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- Loss of productivity.
We typically remain obligated to perform our services after a natural disaster unless the contract contains a force majeure clause relieving us of our contractual obligations in such an extraordinary event. If we are not able to react quickly to force majeure, our operations may be affected significantly, which would have a negative impact on our financial condition, results of operations or cash flows.
Rising inflation, interest rates and/or construction costs could reduce the demand for our services as well as decrease our profit on our existing contracts.
Because a significant portion of our revenues is earned from time-and-materials type contracts, guaranteed maximum price contracts and fixed price contracts, as well as contracts that base significant financial incentives on our ability to keep costs down, we bear some or all of the risk of rising inflation with respect to those contracts. In addition, if we expand our business into markets and geographic areas where "fixed price" work is more prevalent, inflation may have a larger impact on our results of operations in the future. Therefore, increases in inflation, interest rates and/or construction costs could have a material adverse impact on our business and financial results.
Inability to secure adequate bonding would impact our ability to win projects.
As is customary in our industry, we are often required to provide performance and surety bonds to customers in connection with our construction, EPC and fixed price projects. These bonds indemnify the customer if we fail to perform our obligations under the contract. Failure to provide a bond on terms and conditions desired by a customer may result in an inability to compete for or win projects. Historically, we have had and continue to have good relationships with our sureties and have a strong bonding capacity. The issuance of bonds under any bonding facilities, however, is at the sureties' sole
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discretion. There can be no assurance that bonds will continue to be available to us on reasonable terms. Our inability to obtain adequate bonding may result in our ineligibility to bid for construction, EPC and fixed price projects, which could have a material adverse effect on our growth and financial condition.
It can be difficult or expensive to obtain the insurance we need for our business operations.
As part of our business operations, we maintain insurance both as a corporate risk management strategy and to satisfy the requirements of many of our contracts. Insurance products go through market fluctuations and can become expensive and sometimes very difficult to obtain. We work with a diversified team of insurers to reduce our risk of available capacity. There can be no assurances, however, that we can secure all necessary or appropriate insurance in the future at an affordable price for the required limits. Our failure to obtain such insurance could lead to uninsured losses that could materially adversely affect our results of operations or financial condition.
Our present assessment of the insurance market is that there is adequate capacity to cover our insurance needs at reasonable cost. Currently our insurance and bonds are purchased from several of the world's leading and financially stable providers often in layered insurance or co-surety arrangements. The built-in redundancy of such arrangements usually enables us to call upon existing insurance and surety suppliers to fill gaps that may arise if other such suppliers become financially unstable. Our risk management personnel continuously monitor the developments in the insurance market and financial stability of the insurance providers.
Actual results could differ from the estimates and assumptions used to prepare our financial statements.
In order to prepare financial statements in conformity with generally accepted accounting principles in the U.S., we are required to make estimates and assumptions as of the date of the financial statements which affect the reported values of our assets, liabilities, revenues and expenses, and disclosures of contingent assets and liabilities. Areas requiring significant estimates by us include:
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- Recognition of contract revenues, costs, profit or losses in applying the percentage-of-completion
method of accounting;
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- Recognition of recoveries under contract change orders or claims;
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- Collectability of billed and work-in-process unbilled accounts receivables and the need for and
the amount of allowances for problematic accounts;
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- Estimated amounts for anticipated project losses, warranty costs and contract close-out costs;
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- Determination of potential liabilities under pension and other post-retirement benefit programs;
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- Accruals for self insurance programs for medical, workers compensation, general liability and professional liability;
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- Recoverability of deferred tax assets and the related valuation allowances, and accruals for uncertain tax positions;
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- Stock option valuation model assumptions;
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- Accruals for other estimated liabilities;
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- Employee incentive plans and stock valuation;
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- Variable interest entities; and
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- Asset valuations.
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We face risks associated with preserving data privacy.
Because of recent advancements in technology and well-known efforts on the part of various organizations to breach data security of large companies, we face risks associated with potential failure to adequately protect critical corporate, client, and employee data which, if released, could adversely impact our client relationships, our reputation, and even violate privacy laws. As part of our business, we develop, receive and retain confidential data about our company and our clients including the U.S. federal and other governments' classified or sensitive information. Our failure to adequately protect such data and keep the information confidential could result in significant damage to our company and our clients, and have a financial impact on our results of operations and financial condition.
Risks Related to Our Internal Market
Absence of a public market may prevent you from selling your stock and cause you to lose all or part of your investment.
There is no public market for our common stock. While we intend the internal market to provide liquidity to shareholders, there can be no assurance that there will be enough orders to purchase shares to permit shareholders to sell their shares on the internal market, or that our internal trading market will be sustained in the future. The price in effect on any trade date may not be attractive enough to buyers and sellers to result in a balanced market because the price is determined by our Board of Directors based on their judgment of fair value, and not by actual market trading activity. Moreover, although CH2M HILL may participate in the internal market as a buyer of common stock if there are more sell orders than buy orders in the market, we have no obligation to engage in internal market transactions and will not guarantee market liquidity. Consequently, insufficient buyer demand could cause sell orders to be prorated, or could prevent the internal market from opening on any particular trade date. Insufficient buyer demand could cause shareholders to suffer a total loss of investment or substantial delay in their ability to sell their common stock. No assurance can be given that shareholders desiring to sell all or a portion of their shares of common stock will be able to do so.
Transfer restrictions on our common stock could prevent you from selling your common stock and cause you to lose all or part of your investment.
Since all of the shares of our common stock are subject to transfer restrictions, you will generally only be able to sell your common stock through our internal market on the scheduled trade dates each year. Unlike shares that are actively traded in public markets, you will not be able to sell your shares on demand. Our common stock price could decline between the time you want to sell and the time you become able to sell. For a detailed discussion of the transfer restrictions on our common stock, see "Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" in Item 5 of this Annual Report on Form 10-K.
Our stock prices are and will continue to be determined by our Board of Directors' judgment of fair value and not by market trading activity.
The prices of our common stock at each trade date are established by our Board of Directors based on the factors that are described in Item 5 of this Annual Report on Form 10-K. Our Board of Directors sets the stock price in advance of each trade date, and all trades on our internal market are transacted at the price established by our Board. The market trading activity on any given trade date, therefore, cannot affect the price on that trade date. This is a risk to you because our common stock price will not change to reflect supply of and demand for shares on a given trade date as it would in a public market. You may not be able to sell shares or you may have to sell your shares at a price that is lower than the price that would prevail if the internal market price could change on a given trade date to reflect supply and demand. Our Board of Directors endeavors to use the common stock valuation
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methodology that results in the stock price that represents fair value. The valuation methodology used to determine fair value is subject to change at the discretion of our Board of Directors.
The limited market and transfer restrictions on our common stock, as well as restrictions in our restated articles of incorporation and bylaws, will likely have anti-takeover effects.
Only our active and retired employees, directors, eligible consultants, and employee benefit plans may own our common stock and participate in our internal market. We also have significant restrictions on the transfer of our common stock other than through sales on our internal market. These limitations make it extremely difficult for a potential acquirer who does not have the prior consent of our Board of Directors to attain control of our company, regardless of the price per share an acquirer might be willing to pay and whether or not our shareholders would be willing to sell at that price. In addition, restrictions in our restated articles of incorporation and bylaws may make it more difficult for our stockholders to elect directors not endorsed by management.
Future returns on our common stock may be significantly lower than historical returns.
We cannot assure you that our common stock will provide returns in the future comparable to those achieved historically or that the price will not decline.
Item 1B. Unresolved Staff Comments
None
Our operations are conducted at both owned and leased properties in over 35 countries throughout the world. Our corporate headquarters are located in Englewood, Colorado, where we lease approximately 155,000 square feet of space. The lease on our corporate headquarters building expires in 2017, with an option to extend the term twice for either a ten or five year term. We believe that our existing facilities are adequate for the present needs of our business and that suitable additional or substitute space will be available as needed to accommodate any expansion of operations.
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. government 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 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, our management believes that proceedings and legal actions currently pending would not result in a material adverse on our results of operations or financial condition even if the final outcome is adverse to CH2M HILL.
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Item 5. Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
We are employee owned. As a result, our stock is only available to certain active and retired employees, directors, eligible consultants and benefit plans. There is no market for our stock with the general public. In order to provide liquidity for our shareholders, an internal market (Internal Market) is maintained through an independent broker, currently Neidiger, Tucker and Bruner, Inc. (NTB).
The Internal Market enables eligible participants to offer to sell or purchase shares of our common stock on predetermined days (each, a Trade Date). The Trade Dates are determined by our Board. Generally, there are four Trade Dates each year. Currently our Board of Directors meetings are scheduled quarterly. All sales of our common stock are made at the price determined by our Board of Directors pursuant to the valuation methodology described below.
All sales of common stock on the Internal Market are restricted to the following authorized buyers:
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- Our employees, directors and eligible consultants
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- Trustees of the benefit plans
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- Administrator of the Payroll Deduction Stock Purchase Plan (PDSPP)
We may impose limitations on the number of shares that an individual may purchase when there are more buy orders than sell orders for a particular Trade Date. After our Board of Directors determines the stock price for use on the next Trade Date, all shareholders, employees, directors and eligible consultants will be advised as to the new stock price and the next Trade Date.
Our Internal Market is managed through an independent broker, currently NTB, which acts upon instructions from the buyers and sellers to affect trades at the stock price set by our Board of Directors and in accordance with the Internal Market rules. NTB does not play a role in determining the price of our common stock and is not affiliated with us. Individual stock ownership account records are currently maintained by our in-house transfer agent.
We may purchase shares if the Internal Market is under-subscribed. We may, but are not obligated to, purchase shares of common stock on the Internal Market on any Trade Date at the price in effect on that Trade Date, but only to the extent that the number of shares offered for sale by shareholders exceeds the number of shares sought to be purchased by authorized buyers. The decision as to whether or not we will purchase shares in the Internal Market, if the Internal Market is under-subscribed, is solely within our discretion and we will not notify investors as to whether or not we will participate prior to the Trade Date. Investors should understand that there can be no assurance that they will be able to sell their CH2M HILL stock without substantial delay or that their stock will be able to be sold at all on the Internal Market. We will consider a variety of factors including our cash position, financial performance and number of shares outstanding in making the determination as to whether to participate in an under-subscribed market. The terms of our existing unsecured revolving line of credit do not play a role in the decision as to whether to buy shares in the Internal Market. To date, no other factors have been considered by us in our decisions as to whether or not to participate in an under-subscribed market.
If the aggregate number of shares offered for sale on the Internal Market on any Trade Date is greater than the number of shares sought to be purchased, shareholder offers to sell will be accepted as follows:
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- If enough orders to buy are received to purchase all the shares offered by each seller selling fewer than 500 shares and at least 500 shares from each other seller, then all sell orders will be
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- If not enough orders to buy are received to purchase all the shares offered by each seller selling fewer than 500 shares and at least 500 shares from each other seller, then the purchase orders will be allocated equally to each seller
accepted up to the first 500 shares and the portion of any sell orders exceeding 500 shares will be accepted on a pro-rata basis
We may sell shares if the Internal Market is over-subscribed. To the extent that the aggregate number of shares sought to be purchased exceeds the aggregate number of shares offered for sale, we may, but are not obligated to, sell authorized but unissued shares of common stock on the Internal Market at the price in effect on that Trade Date to satisfy purchase demands. The decision as to whether or not we will sell shares in the Internal Market, if the Internal Market is over-subscribed, is solely within our discretion and we will not notify investors as to whether or not we will participate prior to the Trade Date. Investors should understand that there can be no assurance that they will be able to buy as many shares as they would like on a given Trade Date. We will consider a variety of factors including our cash position, financial performance and number of shares outstanding in making the determination as to whether to participate in an over-subscribed market. The terms of our existing unsecured revolving line of credit do not play a role in the decision as to whether to sell shares in the Internal Market. To date, no other factors have been considered by us in our decisions as to whether or not to participate in an over-subscribed market.
If the aggregate purchase orders exceed the number of shares available for sale and we choose not to issue additional shares, the following prospective purchasers will have priority to purchase shares, in the order listed:
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- Administrator of the PDSPP
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- Trustees of the 401(k) Plan
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- Internal Market participants on a pro-rata basis (including purchases through pre-tax and after-tax deferred compensation plans)
In 2010, all sellers on the Internal Market, other than us and the trustees of the 401(k) Plan, paid NTB a commission equal to two percent of the proceeds from such sales. The commission rate changed effective on February 11, 2011, to 3 tenths of one percent (.3%) of proceeds from such sales. Employees who sell their common stock upon retirement from CH2M HILL will have the option to sell the common stock they own on the Internal Market and pay a commission on the sale or to sell to us without paying a commission. In the latter case, the employee will sell their common stock to us at the price in effect on the date of their termination in exchange for a four-year note at a market interest rate determined biannually. No commission is paid by buyers on the Internal Market.
Our Board of Directors will determine the price, which is intended to be the fair value, of the shares of our common stock to be used for buys and sells on each Trade Date pursuant to the valuation methodology described below. The price per share of our common stock generally is set as follows:
Share Price = [(7.8 × M × P) + (SE)] / CS
In order to determine the fair value of the common stock in the absence of a public trading market, our Board of Directors felt it appropriate to develop a valuation methodology to use as a tool to determine a price that would be a valid approximation of the fair value. In determining the fair value stock price, our Board of Directors believes that the use of a going concern component (i.e., net income, which we call profit after tax, as adjusted by the market factor) and a book value component (i.e., total shareholders' equity) is important. Our Board of Directors believes that the process we have
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developed reflects modern equity valuation techniques and is based on those factors that are generally used in the valuation of equity securities.
The existence of an over-subscribed or under-subscribed market on any given Trade Date will not affect the stock price on that Trade Date. However, our Board of Directors, when determining the stock price for a future Trade Date, may take into account the fact that there have been under-subscribed or over-subscribed markets on prior Trade Dates.
Market Factor ("M"). "M" is the market factor, which is subjectively determined in the sole discretion of our Board of Directors. In determining the market factor, our Board of Directors will take into account factors the directors considered to be relevant in determining the fair value of our common stock, including:
-
- The market for publicly traded equity securities of companies comparable to us
-
- The merger and acquisition market for companies comparable to us
-
- The prospects for our future performance
-
- General economic conditions
-
- General capital market conditions
-
- Other factors our Board of Directors deem appropriate
Our Board of Directors has not assigned predetermined weights to the various factors it may consider in determining the market factor. A market factor greater than one would increase the price per share and a market factor less than one would decrease the price per share.
In its discretion, our Board of Directors may change, from time-to-time, the market factor used in the valuation process. Our Board of Directors could change the market factor, for example, following a change in general market conditions that either increased or decreased stock market equity values for companies comparable to us, if our Board of Directors felt that the market change was applicable to our common stock as well. Our Board of Directors will not make any other changes in the method of determining the price per share of common stock unless in the good faith exercise of its fiduciary duties and, if appropriate, after consultation with its professional advisors, our Board of Directors determines that the method for determining the price per share of common stock no longer results in a stock price that reasonably reflects our fair value on a per share basis.
As part of the total mix of information that our Board of Directors considers in determining the "M" factor, our Board of Directors also may take into account company appraisal information prepared by The Environmental Financial Consulting Group, Inc. (EFCG), an independent appraiser engaged by the trustees of our benefit plans. In setting the stock price, our Board of Directors compares the total of the going concern and book value components used in the valuation methodology to the enterprise value of the Company in the appraisal provided by EFCG. If, after such comparison, our Board of Directors concludes that its initial determination of the "M" factor should be re-examined, our Board of Directors may review, and if appropriate, adjust the "M" factor. Since the inception of the program on January 1, 2000, the total of the going concern and book value components used by our Board of Directors in setting the price for our stock has always been within the enterprise appraisal range provided quarterly by EFCG.
This "M" component of our stock price valuation remained unchanged since the inception of the current ownership program in 2000 until the November 9, 2007 valuation, when it was changed by the Board of Directors from 1.0 to 1.2.
Profit After Tax ("P"). "P" is profit after tax, otherwise referred to as net income, for the four fiscal quarters immediately preceding the Trade Date. Our Board of Directors, at its discretion, may
24
exclude nonrecurring or unusual transactions from the calculation. Nonrecurring or unusual transactions are developments that the market would not generally take into account in valuing an equity security. A change in accounting rules, for example, could increase or decrease net income without changing the fair value of our common stock. Similarly, such a change could fail to have an immediate impact on the value of our common stock, but still have an impact on the value of our common stock over time. As a result, our Board of Directors believes that in order to determine the fair value of our common stock, it needs the ability to review unusual events that affect net income. In the past, our Board of Directors has excluded unusual items from the calculation of "P", including nonrecurring revenue from Kaiser-Hill Company, LLC and a write off of an investment in an international telecommunications company. Because "P" is calculated on a four quarter basis, an exclusion impacts the calculation of fair value for four consecutive quarters. Our Board of Directors may determine to exclude other future unusual or non-recurring items from the calculation of "P".
Total Shareholders' Equity ("SE"). "SE" is total shareholders' equity, which includes intangible items, as set forth on our most recent available quarterly or annual financial statements. Our Board of Directors, at its discretion, may exclude from the Shareholders' Equity parameter nonrecurring or unusual transactions that the market would not generally take into account in valuing an equity security. The exclusions from Shareholders' Equity will generally be those transactions that are non-cash and are reported as "accumulated other comprehensive income (loss)" on the face of our consolidated balance sheet. For example, our Board of Directors excluded, and will continue to exclude, a non-cash adjustment to shareholders' equity related to the accounting for our defined benefit pension and other postretirement plans. Because this adjustment is unusual and will fluctuate from period to period, our Board of Directors excluded it from the "SE" parameter for stock valuation purposes. Similarly, other items that are reported as components of "accumulated other comprehensive income (loss)" are excluded from "SE" and include items such as unrealized gains/losses on securities and foreign currency translation adjustments.
Common Stock Outstanding ("CS"). "CS" is the weighted-average number of shares of our common stock outstanding during the four fiscal quarters immediately preceding the Trade Date, calculated on a fully-diluted basis. By "fully-diluted" we mean that the calculations are made as if all outstanding options to purchase our common stock had been exercised and other "dilutive" securities were converted into shares of our common stock. In addition, an estimate of the weighted-average number of shares that we reasonably anticipate will be issued under our stock-based compensation programs and employee benefit plans is included in this calculation.
The "CS" calculation is done on a fully-diluted basis since we believe that taking into account the issuance of all securities that will affect the per share value is a better representation of the share value over time. We have more than a 30-year history in making annual grants of stock-based compensation. Therefore, we believe that we have sufficient information to reasonably estimate the number of such "to be issued" shares. This approach avoids an artificial variance in share value during the first calendar quarter of each year when the bulk of shares of our common stock are issued by us pursuant to our stock-based compensation programs.
The following table shows a comparison of the "CS" value actually used by our Board of Directors to calculate stock prices on the dates indicated versus the year-to-date weighted-average number of
25
shares of common stock as reflected in the diluted earnings per share calculation in our financial statements for the past three years.
(in thousands) Effective Date |
CS | YTD Weighted- Average Number of Shares as reflected in Diluted EPS calculation |
|||||
---|---|---|---|---|---|---|---|
May 8, 2008 |
35,617 | 34,440 | |||||
August 15, 2008 |
35,858 | 34,568 | |||||
November 7, 2008 |
35,929 | 34,545 | |||||
February 13, 2009 |
35,735 | 34,376 | |||||
May 7, 2009 |
35,314 | 32,396 | |||||
August 7, 2009 |
34,931 | 32,533 | |||||
November 6, 2009 |
34,608 | 32,577 | |||||
February 12, 2010 |
34,424 | 32,599 | |||||
May 6, 2010 |
34,353 | 32,305 | |||||
August 13, 2010 |
34,178 | 32,356 | |||||
November 12, 2010 |
33,903 | 32,270 | |||||
February 11, 2011 |
33,450 | 32,163 |
Constant 7.8. In the course of developing this valuation methodology, it became apparent to our Board of Directors that a multiple would be required in order for the stock price derived by this methodology to approximate our historical, pre-Internal Market stock price. Another objective of our Board of Directors when developing the valuation methodology was to establish the fair value of our common stock using a market factor of 1.0. We believe that it was important to begin the Internal Market program with an "M" factor equal to 1.0 in order to make it easier for shareholders to understand future changes, if any, to the market factor.
Therefore, the constant 7.8 was introduced into the formula. The constant 7.8 is the multiple that our Board of Directors determined necessary (i) for the new stock price to approximate our historical stock price derived using the pre-Internal Market formula as well as (ii) to allow the use of the market factor of 1.0 at the beginning of the Internal Market program.
We intend to announce the new stock price and the Trade Date approximately four weeks prior to each Trade Date. The information will be delivered by the broker to all employees, eligible consultants and eligible participants in the internal market. In addition, we will file a Current Report on Form 8-K disclosing the new stock price and all components used by our Board of Directors in determining such price in accordance with the valuation methodology described above.
We will also distribute the most current prospectus for our common stock and our audited annual financial statements to all shareholders, as well as other employees and eligible consultants, and to participants in the Internal Market through the employee benefit plans. Such information will be distributed at the same time as our annual reports and proxy information. Solicitations are distributed for voting instructions from shareholders and participants in the employee benefit plans each year.
Current Price of Our Common Stock
Starting in 2000, with the introduction of the Internal Market and its quarterly trades, our Board of Directors reviews the common stock price quarterly using the valuation methodology described above to set the price for the common stock. The prices of our common stock for the past three years,
26
along with the various factors and values used by our Board of Directors to determine such stock prices on each date, are as follows:
Effective Date
|
M | P | SE | CS | Price Per Share |
Percentage Price Increase (Decrease) |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
(in thousands) |
(in thousands) |
(in thousands) |
|
|
|||||||||||||
May 8, 2008 |
1.2 | 69,624 | 463,434 | 35,617 | 31.31 | 3.3 | % | ||||||||||||
August 15, 2008 |
1.2 | 68,031 | 464,561 | 35,858 | 30.71 | (1.9 | )% | ||||||||||||
November 7, 2008 |
1.2 | 66,816 | 480,313 | 35,929 | 30.77 | 0.2 | % | ||||||||||||
February 13, 2009 |
1.2 | 71,918 | 438,318 | 35,735 | 31.10 | 1.1 | % | ||||||||||||
May 7, 2009 |
1.2 | 74,295 | 453,760 | 35,314 | 32.54 | 4.6 | % | ||||||||||||
August 7, 2009 |
1.2 | 82,561 | 474,858 | 34,931 | 35.72 | 9.8 | % | ||||||||||||
November 6, 2009 |
1.2 | 93,047 | 544,759 | 34,608 | 40.91 | 14.5 | % | ||||||||||||
February 12, 2010 |
1.2 | 90,816 | 544,913 | 34,424 | 40.52 | (1.0 | )% | ||||||||||||
May 6, 2010 |
1.2 | 93,067 | 541,940 | 34,353 | 41.13 | 1.5 | % | ||||||||||||
August 13, 2010 |
1.2 | 105,385 | 568,233 | 34,178 | 45.49 | 10.6 | % | ||||||||||||
November 12, 2010 |
1.2 | 106,297 | 581,344 | 33,903 | 46.49 | 2.2 | % | ||||||||||||
February 11, 2011 |
1.2 | 106,848 | 563,649 | 33,450 | 46.75 | 0.6 | % |
Changes to Commission Charged to Sellers on the Internal Market
Effective February 11, 2011, CH2M HILL and Neidiger Tucker Bruner ("NTB") agreed that all sellers on the internal market, other than CH2M HILL and the trustees of CH2M HILL's benefit plans will pay NTB a commission equal to 3 tenths of one percent (.3%) of proceeds from such sales. It is a reduction from the previous commission level of two percent (2%). No commission is paid by buyers on the internal market.
As of February 11, 2011, there were 8,069 holders of record of our common stock. As of such date, all of our common stock of record was owned by our current and retired employees, directors, eligible consultants, and by our various employee benefit plans. Common stock is held in a trust for each of our employee benefit plans and each trust is considered one holder of record of our common stock.
We have never declared or paid any cash dividends on our common stock and no cash dividends are contemplated on our common stock in the foreseeable future.
27
Issuer Purchases of Equity Securities
The following table covers the purchases of our securities by CH2M HILL during the quarter ended December 31, 2010:
Period
|
Total Number of Shares |
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 |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
October(a) |
1,983 | $ | 43.53 | | | |||||||||
November |
| | | | ||||||||||
December(a)(b) |
742,964 | $ | 46.49 | | | |||||||||
Total |
744,947 | $ | 46.48 | | | |||||||||
- (a)
- Shares
purchased by CH2M HILL from terminated employees.
- (b)
- Shares purchased by CH2M HILL in the Internal Market.
Item 6. Selected Financial Data
The selected financial data presented below under the captions "Selected Statement of Operations Data" and "Selected Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 2010, are derived from the consolidated financial statements of CH2M HILL Companies, Ltd. and subsidiaries, which consolidated financial statements have been audited by KPMG LLP, an independent registered public accounting firm. The consolidated financial statements as of December 31, 2010 and 2009, and for each of the years in the three-year period ended December 31, 2010, and the report thereon, are included in Item 15 of this Annual Report on Form 10-K. The following information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Item 7, and the consolidated financial statements and related notes thereto, included in this Annual Report on Form 10-K.
The consolidated financial statements and selected financial data below reflect the adoption of new accounting standards related to variable interest entities; accounting for non-controlling interests in consolidated financial statements; employee benefit plan expenses; income taxes; and acquisitions which
28
affect the comparability of information presented. Certain prior years' amounts have been reclassified to conform to the current year presentation.
|
Years Ended December 31, | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions, except per share data) |
2010 | 2009 | 2008 | 2007 | 2006 | ||||||||||||
Selected Statement of Operations Data: |
|||||||||||||||||
Revenues |
$ | 5,422.8 | $ | 5,499.3 | $ | 5,589.9 | (a) | $ | 4,376.2 | $ | 4,006.9 | ||||||
Operating income |
174.8 | 174.5 | (c) | 89.2 | 77.2 | 64.2 | |||||||||||
Net income attributable to CH2M HILL |
93.7 | 103.7 | 32.1 | 66.0 | 38.9 | ||||||||||||
Net income per common share |
|||||||||||||||||
Basic |
$ | 2.98 | $ | 3.25 | $ | 0.96 | $ | 2.01 | $ | 1.20 | |||||||
Diluted |
$ | 2.91 | $ | 3.18 | $ | 0.93 | $ | 1.97 | $ | 1.18 | |||||||
Selected Balance Sheet Data: |
|||||||||||||||||
Total assets |
$ | 1,967.1 | $ | 1,948.0 | $ | 1,971.8 | $ | 1,909.9 | $ | 1,279.5 | |||||||
Long-term debt, including current maturities |
37.6 | 52.3 | (d) | 175.9 | 197.8 | (b) | 0.6 | ||||||||||
Total shareholders' equity |
554.2 | 524.8 | 386.7 | 464.5 | 368.9 |
- (a)
- The
majority of the increase in revenues for the year ended December 31, 2008 relates to a full year of revenue recognized from the operations
acquired of VECO Corporation (VECO) and Trigon EPC, LLC (Trigon).
- (b)
- The
majority of the increase in long-term debt outstanding at December 31, 2007 relates to the debt incurred to fund the acquisitions of
VECO and Trigon and the debt assumed in those business combinations.
- (c)
- The
increase in 2009 was primarily attributable to the gain of $58.2 million on the sale of certain assets of our Enterprise Management Solutions
(EMS) business.
- (d)
- During 2009, the net repayments of debt were approximately $123.5 million.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Business Summary
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.
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,
29
technically and financially to compete anywhere in the world in the key markets we have elected to pursue.
We provide services to our clients through three operating segmentsGovernment, 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 various U.S. federal government agencies, 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.
In order to improve our competitiveness, client service, and financial strength, effective January 1, 2011, we have reorganized our reporting structure under which our chief operating decision maker will be making strategic and operating decisions with regard to assessing performance and allocating resources. We believe this new organizational structure will help us deal with global economic and industry challenges, and better position us for a solid future. As a result, our water business will be reported with the Energy segment creating the Energy and Water segment. Additionally, our Industrial Systems business will be split based upon its operations and combined within our Environmental Services business and Water business and thus reflected in the GEN and Energy and Water segments, respectively. These changes will be reflected beginning January 1, 2011.
Acquisitions
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. 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. We have also seen 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 companies in our industry who have greater access to capital. We expect to continue to see consolidation of our competitors which may result in challenges for our business in the future.
Sale of Operating Assets
During the third quarter of 2009, we completed the sale of certain assets of our Enterprise Management Solutions (EMS) business. We recorded a pre-tax gain of $58.2 million. The operating results of our EMS business are reflected in the GEN operating segment until the date of sale.
Summary of Operations
Results of Operations for the Year Ended December 31, 2010 Compared to 2009
|
2010 | 2009 | Change | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) |
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 |
$ | 2,197.6 | $ | 46.9 | $ | 87.7 | $ | 1,939.1 | $ | 44.8 | $ | 136.0 | $ | 258.5 | 13.3 | % | $ | 2.1 | $ | (48.3 | ) | (35.5 | )% | |||||||||||
Facilities and Infrastructure |
2,004.3 | 16.6 | 91.6 | 1,947.4 | 18.5 | 71.0 | 56.9 | 2.9 | % | (1.9 | ) | 20.6 | 29.0 | % | ||||||||||||||||||||
Energy |
1,220.9 | 5.0 | 25.5 | 1,612.8 | 2.2 | 14.5 | (391.9 | ) | (24.3 | )% | 2.8 | 11.0 | 75.9 | % | ||||||||||||||||||||
Other |
| | (30.0 | ) | | | (47.0 | ) | | | 17.0 | (36.2 | )% | |||||||||||||||||||||
Total |
$ | 5,422.8 | $ | 68.5 | $ | 174.8 | $ | 5,499.3 | $ | 65.5 | $ | 174.5 | $ | (76.5 | ) | $ | 3.0 | $ | 0.3 | |||||||||||||||
30
Government, Environment and Nuclear
Revenue increased for the year ended December 31, 2010, compared to the same period in the prior year by $258.5 million or 13.3%. The increase in revenue is primarily due to an increased volume of contracts in our nuclear business 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 2009 and thus volumes increased in 2010 in comparison to 2009. The increase is partially offset by lower volumes in our GF&I business due to increased domestic competition, a decrease in federal spending internationally and 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 year ended December 31, 2010 compared to the same period in the prior year by $48.3 million or 35.5%. During 2009, we recognized a $58.2 million gain on the sale of EMS. Excluding the sale of EMS, the operating income increased approximately $9.9 million. The increase is primarily due to the fluctuations in revenues discussed above. In addition, we reduced our overhead spending significantly as well as general and administrative costs associated with managing our major projects within the segment.
Facilities and Infrastructure
Revenue increased for the year ended December 31, 2010, compared to last year by $56.9 million. The increase is primarily attributable to the growing demand in our water design build business in North America, Australia and Europe. Additionally, we have experienced increased volumes in our operations and management business due to the transition of certain design-build-operate water projects into the operation phases of the projects and increased scope at certain of our facility services projects. Our Industrial and Advanced Technology business experienced revenue growth primarily as a result of a large construction project in Malaysia. These increases were partially offset by reduced workload in our transportation consulting markets due to the economic environment and delays in project awards.
Operating income increased for the year ended December 31, 2010, compared to the prior year by $20.6 million or 29.0%. The increase is primarily associated with the increased revenues discussed above. Operating margins were also positively impacted by the successful negotiation of change orders during 2010 on a transportation construction project and a design-build-operate water project. Additionally, our operating income in 2009 was negatively impacted by significant write offs of uncollectible receivables on two projects in the Middle East. These increases to 2010 operating income were partially offset by a decrease in our Industrial and Advanced Technology business margins; however, we underwent significant overhead cost reduction efforts throughout 2010 to better align our overhead structure within this business to its current backlog.
31
Energy
Revenue decreased for the year ended December 31, 2010, compared to last year by $391.9 million or 24.3%. The decrease in revenue is primarily attributable to a decrease in activity within the oil and gas businesses due primarily to constrained capital spending and a continued highly competitive market. In addition, certain Alaska construction activities neared completion in 2010 and thus experienced a decrease in revenues from 2009. Revenues within our power business have slowed as large projects also have been completed or are nearing completion during 2010 as well as an overall decline in the number of contract awards in this business sector. These decreases were slightly offset by an increase in our industrial systems business volumes.
Operating income increased for the year ended December 31, 2010 compared to 2009 by $11.0 million, or 75.9%. Although our operating income was negatively impacted by the overall decline in our revenues discussed above, we were successful in the settlement of change orders within our power business during 2010 which offset this decline. In addition, our Energy business had $17.2 million less of amortization expense from intangibles related to the VECO acquisition, significantly reduced overhead spending in response to the decline in market conditions and implemented cost control measures which increased our operating income from the prior year.
Results of Operations for the Year Ended December 31, 2009 Compared to 2008
|
2009 | 2008 | Change | |||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) |
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 |
$ | 1,939.1 | $ | 44.8 | $ | 136.0 | 1,668.9 | $ | 41.3 | $ | 80.6 | $ | 270.2 | 16.2 | % | $ | 3.5 | $ | 55.4 | 68.7 | % | |||||||||||||
Facilities and Infrastructure |
1,947.4 | 18.5 | 71.0 | 1,986.6 | (12.1 | ) | 31.9 | (39.2 | ) | (2.0 | )% | 30.6 | 39.1 | 122.6 | % | |||||||||||||||||||
Energy |
1,612.8 | 2.2 | 14.5 | 1,934.4 | 5.0 | 50.9 | (321.6 | ) | (16.6 | )% | (2.8 | ) | (36.4 | ) | (71.5 | )% | ||||||||||||||||||
Other |
| | (47.0 | ) | | | (74.2 | ) | | | 27.2 | 36.7 | % | |||||||||||||||||||||
Total |
$ | 5,499.3 | $ | 65.5 | $ | 174.5 | $ | 5,589.9 | $ | 34.2 | $ | 89.2 | $ | (90.6 | ) | $ | 31.3 | $ | 85.3 | |||||||||||||||
Government, Environment and Nuclear
Revenue increased for the year ended December 31, 2009, compared to the same period in the prior year by $270.2 million or 16.2%. The increase in revenue is substantially due to higher volume of work in Texas supporting Hurricane Ike recovery. Also contributing to the increase in revenues is the award of a domestic nuclear contract and the award of a program management project in the United Arab Emirates, partially offset by delays in finalizing newly awarded governmental contracts in our continental U.S. design build markets. Additionally, the revenue increase was partially offset by decreased revenues in the enterprise management solutions business due to the sale of certain assets of the business during the second quarter 2009.
Operating income increased during the year ended December 31, 2009, compared to last year, by $55.4 million or 68.7%. The increase is due to the $58.2 million gain on the sale of certain operating assets of our EMS business. Excluding this gain, operating income decreased slightly from the prior year due to the completion of two major nuclear projects in the second half of 2009 which generated operating income during the full year in 2008. This decrease was partially offset by the startup of a domestic and an international nuclear project associated with the revenues discussed above.
Facilities and Infrastructure
Revenue decreased for the year ended December 31, 2009, compared to last year by $39.2 million or 2%. The decrease is largely attributable to significant decreases in both full service and traditional
32
service revenue in the manufacturing and life sciences markets. Additionally, the operations and maintenance business experienced delays and scope reductions on several projects as a result of budget constraints at municipal clients. The decrease is partially offset by growth in our North American consulting and international markets. North American consulting growth is due in part to design and program management services for municipal clients in the northeast and southwest United States, while international growth was driven primarily by large program management projects located in the United Kingdom and United Arab Emirates.
Operating income increased significantly for the year ended December 31, 2009 compared to the prior year by $39.1 million or 122.6%. During the second quarter of 2008, a significant loss was recognized on a transportation project within one of its joint ventures that is now substantially complete. The increase is also attributable to the increased volume within our transportation business discussed above. The increase in operating income is partially offset by schedule and cost impacts on two projects in the Middle East within our transportation and water businesses.
Energy
Revenue decreased for the year ended December 31, 2009, compared to last year by $321.6 million or 16.6%. The decrease in revenue is primarily attributable to a decrease in full service revenue due to a slow down in economic activity and depressed oil and gas prices. Also contributing to the decrease were delays and contract value reductions in certain businesses and the cancellation of a project in Canada. The decrease is partially offset by increased volume in Alaska and the related work on the North Slope within our energy and chemicals business as well as two engineering-procurement-construction (EPC) power projects awarded during 2007 that are now in the peak of their construction cycles.
Operating income decreased for the year ended December 31, 2009 compared to 2008 by $36.4 million, or 71.5%. The decrease in operating income is primarily attributable to the delays, contract value reduction and the project cancellation as discussed above which was partially offset by income derived from the two engineering, procurement and construction (EPC) projects discussed above.
Other
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, tax, and general business development efforts. Corporate expenses for the year ended December 31, 2010 were $30.0 million compared to $47.0 million at December 31, 2009, and $74.2 million in 2008. The overall decrease is primarily attributable to our continued overhead cost reduction efforts that began in the fourth quarter of 2008.
Income Taxes
The income tax provisions for the years ended December 31, 2010, 2009 and 2008 are as follows:
($ in millions) |
Income Tax Provision |
Effective Tax Rate |
|||||
---|---|---|---|---|---|---|---|
2010 |
$ | 53.8 | 36.5 | % | |||
2009 |
$ | 46.4 | 30.9 | % | |||
2008 |
$ | 27.5 | 46.2 | % |
The effective tax rate for the year ended December 31, 2010 was 36.5% compared to 30.9% for the same period in the prior year. The current year rate was negatively impacted by a decrease in the
33
Section 199 domestic production deduction, a significant decrease in research and experimentation credit impacts, and a decrease in officer's life insurance benefits when compared to the prior year. These negative impacts were partially offset by a decrease in valuation allowances when compared to 2009, due to improved operating results of foreign operations. The significant decrease in the effective tax rate for the year ended December 31, 2009 compared to 2008 was primarily due to recognition of benefits from statute expirations, taxing jurisdiction settlements and by improved foreign operating results in 2009. Our effective tax rate continues to be impacted by deferred compensation, unrealized foreign net operating losses in selected countries, and disallowed portions of meals and entertainment expenses.
We must assess the likelihood that we will be able to recover our deferred tax assets. If recovery is not likely, we must increase our tax provision by recording a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable. As of December 31, 2010 and 2009, we reported a valuation allowance of $27.7 million and $26.0 million, respectively, related primarily to the reserve of certain foreign net loss carryforwards.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and borrowings under our unsecured revolving line of credit. Our primary uses of cash are to fund our working capital, capital expenditures and purchases of common stock presented on our internal market. Based on our total cash and credit capacity available at December 31, 2010 of $803.4 million, we believe that we have sufficient resources to fund our operations, any future acquisition and capital expenditure requirements, as well as purchases of common stock presented on our internal market, should we choose to do so, for the next 12 months and beyond.
The following table reflects our available capacity as of December 31, 2010 (in millions):
Cash on hand |
$ | 290.4 | ||||||
Available for sale securities |
2.4 | |||||||
Line of credit capacity |
$ | 600.0 | ||||||
Outstanding borrowings |
| |||||||
Issued letters of credit |
(89.4 | ) | ||||||
Net credit capacity available |
510.6 | |||||||
Total available capacity |
$ | 803.4 | ||||||
Billings and collections on accounts receivable can impact our operating cash flows. We continuously monitor collection efforts and assess the allowance for doubtful accounts. Based on this assessment at December 31, 2010, we have deemed the allowance for uncollectible accounts to be adequate; however, future economic conditions may adversely impact some of our clients' ability to pay our bills or the timeliness of their payments. Consequently, it may also impact our timing of cash receipts necessary to meet our operating needs.
Cash generated in investing activities was $1.7 million in the twelve months ended December 31, 2010 compared to $16.2 million generated in investing activities for the same period in 2009. The major uses of cash in investing activities relate to payments made for the purchase of property, plant, and equipment and investments in our joint ventures. We spent $26.9 million and $37.7 million on capital expenditures in 2010 and 2009, respectively. The net cash flows invested in our unconsolidated affiliates decreased $13.2 million from December 31, 2009 to December 31, 2010. The cash increase as a result of the consolidation of variable interest entities was $32.7 million. During 2010 we purchased $37.1 million of marketable securities of Scott Wilson Group plc, a design and engineering firm headquartered in the United Kingdom. We subsequently sold the securities for $43.6 million. In
34
addition, during 2009, we received proceeds of $71.0 million for the sale of certain operating assets from our EMS business in the GEN segment.
In connection with the acquisition of VECO, the purchase agreement established a holdback contingency of $70.0 million for tax indemnifications and the potential future payment of certain contingencies that may arise within three years after the date of acquisition. Any amounts remaining after payments for these indemnifications and contingencies are payable to the sellers of VECO. Since the date of acquisition, we have made distributions to the sellers of VECO and paid expenses on their behalf which were deemed distributions of the holdback contingency. At December 31, 2010 and 2009, the outstanding balance payable under the holdback contingency was $46.7 million and $49.1 million, respectively. Amounts outstanding under the holdback contingency as of December 31, 2010 represent disputed contingent claims and tax indemnifications which have not been resolved. Upon resolution of the outstanding items, we will likely incur costs which will be paid out of the holdback funds with any remaining amount being remitted to the sellers.
We finance our operations, acquisitions and capital expenditures using a variety of capital vehicles. On December 6, 2010, we entered into a Credit Agreement (the "Credit Agreement") providing for an unsecured revolving credit facility in an amount of up to $600 million. Subject to certain conditions, at any time prior to the date that is thirty days before the maturity date of the Credit Agreement, we will be able to invite existing and new lenders to increase the size of the revolving credit facility by up to $100 million, for a maximum aggregate revolving credit facility of $700 million. The revolving credit facility has a subfacility for the issuance of standby letters of credit in a face amount up to $300 million, a subfacility of up to $300 million for multicurrency borrowings and a subfacility of up to $20 million for swingline loans. Revolving loans under the Credit Agreement bear interest, at the Company's option, at a rate equal to either (i) the base rate plus a margin based on the ratio of CH2M HILL's consolidated leverage ratio or (ii) the LIBOR rate, based interest periods of one, two, three or six months, plus a margin based on the ratio of our consolidated leverage ratio. The base rate is equal to the greater of (i) the Federal Funds Rate, as published from time to time by the Federal Reserve Bank of New York, plus 0.5%, (ii) the swingline lender's prime rate in effect from time to time, or (iii) the one-month LIBOR rate in effect from time to time, plus 1.0%. Our consolidated leverage ratio on any date is the ratio of our consolidated total funded debt to our consolidated earnings before interest, taxes, depreciation and amortization for the preceding four fiscal quarters. There can be no assurance that the capacity under the credit facility will be adequate to fund future operations or acquisitions the Company may pursue from time to time.
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 our Credit Agreement, or other debt. In some instances we may use a combination of one or more of these financing mechanisms. As of December 31, 2010, our total outstanding debt obligations were approximately $37.6 million. There was not an outstanding balance on the Credit Agreement. The majority of these obligations relate to the issuance of notes payable and mortgages related to property, plant and equipment.
At December 31, 2010, issued and outstanding letters of credit of $89.4 million were reserved against the borrowing base of the Credit Agreement, compared to $78.4 million at December 31, 2009.
For the twelve months ended December 31, 2010, repurchases of stock were $137.2 million compared to $91.3 million for the same period in the prior year. Additionally, the net repayments of debt were approximately $14.2 million during 2010 compared to approximately $123.5 million during 2009. For additional information regarding repurchases of stock and our Internal Market, see "Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities" in Item 5 of this Annual Report on Form 10-K.
35
Depreciation and Amortization
Depreciation and amortization expense for the year ended December 31, 2010 of $62.3 million was $18.6 million less than the same period in 2009. We recognized $52.1 million and $53.5 million of depreciation expense related to fixed assets during 2010 and 2009, respectively. We recognized $10.2 million and $27.4 million of amortization expense related to intangible assets during 2010 and 2009, respectively. A significant amount of the depreciation and amortization expense is attributable to fixed assets and intangible assets held in our Energy segment.
Off-Balance Sheet Arrangements
We have interests in multiple joint ventures, some of which are considered variable interest entities. These entities facilitate the completion of contracts that are jointly owned with our joint venture partners. These joint ventures are formed to leverage the skills of the respective partners and include consulting, construction, design, project management and operations and maintenance contracts. Our risk of loss on joint ventures is similar to what the risk of loss would be if the project was self-performed, other than the fact that the risk is shared with our partners.
There were no substantial changes to other off-balance sheet arrangements or contractual commitments during the twelve months ended December 31, 2010.
Aggregate Commercial Commitments
We maintain a variety of commercial commitments that are generally made available to provide support for various provisions in engineering and construction contracts. Letters of credit are provided to clients in the ordinary course of the contracting business in lieu of retention or for performance and completion guarantees on engineering and construction contracts. We post surety and bid bonds, which are contractual agreements issued by a surety, for the purpose of guaranteeing our performance on contracts and to protect owners and are subject to full or partial forfeiture for failure to perform obligations arising from a successful bid. We also carry substantial premium paid, traditional insurance for our business risks including professional liability and general casualty insurance and other coverage which is customary in our industry.
We believe that we will be able to continue to have access to professional liability and general casualty insurance, as well as bonds, with sufficient coverage limits, and on acceptable financial terms necessary to support our business. The cost of such coverage has remained stable during 2010 and is expected to continue to be stable in the foreseeable future. See "Risk FactorsIt can be difficult or expensive to obtain the insurance we need for our business operations" in Item 1A of this Annual Report on Form 10-K for additional information.
Our risk management personnel continuously monitor the developments in the insurance market. The financial stability of the insurance and surety providers is one of the major factors that we take into account when buying our insurance coverage. Currently our insurance and bonds are purchased from several of the world's leading and financially stable providers often in layered insurance or co-surety arrangements. The built-in redundancy of such arrangements usually enables us to call upon existing insurance and surety suppliers to fill gaps that may arise if other such suppliers become financially unstable.
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Contractual Obligations
Contractual obligations outstanding as of December 31, 2010 are summarized below:
|
Amount of Commitment Expiration Per Period | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
($ in millions) Contractual Obligations |
Less than 1 Year |
1-3 Years | 4-5 Years | Over 5 Years | Total Amount Committed |
||||||||||||
Letters of credit |
$ | 67.5 | $ | 21.2 | $ | 0.7 | $ | | $ | 89.4 | |||||||
Total debt |
13.9 | 13.0 | 3.9 | 6.8 | 37.6 | ||||||||||||
Interest payments |
1.9 | 1.8 | 1.1 | 1.0 | 5.8 | ||||||||||||
Operating lease obligations |
115.3 | 184.3 | 129.2 | 102.6 | 531.4 | ||||||||||||
Surety and bid bonds |
1,019.4 | 327.2 | 164.0 | | 1,510.6 | ||||||||||||
Total |
$ | 1,218.0 | $ | 547.5 | $ | 298.9 | $ | 110.4 | $ | 2,174.8 | |||||||
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 U.S. generally accepted accounting principles (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.
Although our significant accounting policies are described in the Notes to Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K, below is a summary of our most critical accounting policies.
Revenue Recognition
We earn our revenues from different types of services under a variety of different types of contracts, including cost-plus, fixed-price and time-and-materials. We evaluate contractual arrangements to determine how to recognize revenue. We recognize revenue and profit for most of our contracts on the percentage-of-completion method where progress towards completion is measured by relating the actual cost of work performed to date to the current estimated total cost of the respective 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, 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 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, actual total contract revenue and completion costs can vary from estimates.
37
Below is a description of the three basic types of contracts from which we may earn revenues using the percentage-of-completion method.
Cost-Plus Contracts. Cost-plus contracts can be cost plus a fixed fee or rate, or cost plus an award fee. Under these types of contracts, we charge our clients for our costs, including both direct and indirect costs, plus a fixed negotiated fee or award fee. We generally recognize revenue based on the actual labor costs and non-labor costs we incur, plus the portion of the fixed fee or award fee we have earned to date. If the actual labor hours and other costs we expend are lower than the total number of hours and other costs we have estimated, our revenues related to cost recoveries from the project will be lower than originally estimated. If the actual labor hours and other costs we expend exceed the original estimate, we must obtain a change order, contract modification, or successfully prevail in a claim in order to receive payment for the additional costs.
In the case of a cost-plus award fee, we include in the total contract value the portion of the fee that we are probable of receiving. Award fees are influenced by the achievement of contract milestones, cost savings and other factors.
Fixed Price Contracts. Under fixed price contracts, our clients pay us an agreed amount negotiated in advance for a specified scope of work. For engineering and construction contracts, we recognize revenue on fixed price contracts using the percentage-of-completion method where costs incurred to date are compared to total projected costs at contract completion. Prior to completion, our recognized profit margins on any fixed price contract depend on the accuracy of our estimates and will increase to the extent that our actual costs are below the original estimated amounts. Conversely, if our costs exceed these estimates, our profit margins will decrease and we may realize a loss on a project. If our actual costs exceed the original estimate, we attempt to obtain a change order or contract modification.
Time-and-Materials Contracts. Under our time-and-materials contracts, we negotiate hourly billing rates and charge our clients based on the actual time that we expend on a project. In addition, clients reimburse us for our actual out-of-pocket costs of materials and other direct expenditures that we incur in connection with our performance under the contract. Our profit margins on time-and-materials contracts fluctuate based on actual labor and overhead costs that we directly charge or allocate to contracts compared with the negotiated billing rate and markup on other direct costs. Some of our time-and-materials contracts are subject to maximum contract values, and accordingly, revenue under these contracts are recognized under the percentage-of-completion method where costs incurred to date are compared to total projected costs at contract completion. Revenue on contracts that are not subject to maximum contract values are recognized based on the actual number of hours we spend on the projects plus any actual out-of-pocket costs of materials and other direct expenditures that we incur on the projects. Our time-and-materials contracts generally include annual billing rate escalation provisions.
Operations and Maintenance Contracts. 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 the deferred tax assets. The 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 must
38
increase our tax provision by recording a valuation allowance for the deferred tax assets that we estimate will not ultimately be recoverable.
In addition, the calculation of our income tax provision involves 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.
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 should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the 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 3 of the footnotes to the consolidated financial statements.
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.
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
39
government and various federal agencies, 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. federal 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. federal 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, after retentions and deductibles. Management estimates that the levels of insurance coverage 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.
In 2010, we were notified that the U.S. Attorney's Office is investigating potential overtime irregularities on our DOE Hanford tank farms contract which we completed in 2008. We are cooperating with the investigation but given its early stages are not yet in a position to ascertain the strength of potential claims or quantify their possible impact. Based on currently available information, CH2M HILL's management believes that the investigation would not result in a material impact on CH2M HILL's results of operations or financial condition, even if the final outcome is adverse to CH2M HILL.
Item 7A. 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. The majority of our transactions are in U.S. dollars; however, our foreign subsidiaries conduct business in various foreign currencies. As a result, we are exposed to foreign currency exchange rate risk on transactions in some foreign countries. We do not comprehensively hedge our exposure to currency rate changes; however, our exposure to foreign currency fluctuations is limited in that most of our contracts require client payments to be in currencies corresponding to the currency in which costs are incurred. As a result, we do not need to hedge foreign currency cash flows for contract work performed.
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 December 31, 2010 there was not a balance on the unsecured revolving credit agreement, but there was approximately $46.7 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 holdback contingency, a one percentage point change in the assumed interest rate would change our annual interest expense by approximately $0.5 million.
Item 8. Financial Statements and Supplementary Data
Reference is made to the information set forth beginning on page F-1.
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Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We carried out an evaluation as of the last day of the period covered by this Annual Report on Form 10-K, 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 Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (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 December 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management's Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our evaluation under the framework in Internal ControlIntegrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2010.
The effectiveness of our internal control over financial reporting as of December 31, 2010 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein on page F-2.
Not applicable.
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Item 10. Directors, Executive Officers and Corporate Governance
Certain information required by this item is incorporated by reference from CH2M HILL's definitive proxy statement for its 2011 Annual Meeting of Shareholders. Information regarding the executive officers of CH2M HILL is presented below:
EXECUTIVE OFFICERS OF CH2M HILL
The executive officers of CH2M HILL are listed below, along with their ages, tenure as officer and business background for at least the last five years.
Frederick M. Brune. Age 59. Mr. Brune has served as the President of CH2M HILL International since January 1, 2011. He previously served as President of the Government Facilities and Infrastructure business at CH2M HILL from 2006 to 2010. Between 1999 and 2005, Mr. Brune served as the President and Chief Executive Officer of Lockwood Greene, a company CH2M HILL acquired in 2003. He also served as Lockwood Greene's Chief Financial Officer between 1987 and 1999.
Robert G. Card. Age 58. Mr. Card has served as Senior Vice President of CH2M HILL and the President of the Energy and Water Division since January 1, 2011. Prior to his current role, Mr. Card has served in many senior executive positions, including Chief Executive Officer of Kaiser-Hill Company between 1996 and 2001, President for International Operations from 2004 through 2006, President of the Government, Environment and Nuclear Division from 2008 to 2009 and the Facilities and Infrastructure Division between 2009 and 2010. Between 2001 and 2004, Mr. Card served as the undersecretary for the US Department of Energy.
Michael A. Lucki. Age 54. Mr. Lucki joined CH2M HILL as Senior Vice President and Chief Financial Officer in November of 2010. Mr. Lucki came to CH2M HILL from Ernst & Young LLP where he was a partner and led the firm's Global Engineering and Construction (E&C) Industry Practice since 1994 and the firm's Global Infrastructure Practice since 2008.
John A. Madia. Age 55. Mr. Madia has served as Chief Human Resources Officer of CH2M HILL since November 2009. In May 2009 he joined CH2M HILL as Senior Vice President of Human Resources. Mr. Madia came to CH2M HILL from Dow Chemical Company where he was Vice President of Human Resources from 2006 to 2009.
Lee A. McIntire. Age 62. Mr. McIntire has been the Chairman of the Board of Directors of CH2M HILL since 2010 and the Chief Executive Officer since 2009. He joined CH2M HILL as the President and Chief Operating Officer in 2006. Before joining CH2M HILL, Mr. McIntire was a Professor and Executive-in-Residence at the Graduate School of Management, University of California, Davis (UC Davis). Prior to that, Mr. McIntire spent more than 15 years with Bechtel Group in various executive leadership positions.
Michael E. McKelvy. Age 52. Mr. McKelvy has served as Senior Vice President and the President of the Government, Environment and Nuclear Division of CH2M HILL since 2009. Prior to his current role, Mr. McKelvy was the President for the Industrial Client business between 2006 and 2009, and President for the Manufacturing and Life Sciences business of CH2M HILL since 2005. Prior to CH2M HILL, Mr. McKelvy held executive leadership positions within Lockwood Greene, a company CH2M HILL acquired in 2003.
Margaret B. McLean. Age 47. Ms. McLean has served as CH2M HILL's Chief Legal Officer and Chief Ethics & Compliance officer since 2007. Ms. McLean was appointed as CH2M HILL's Corporate Secretary and Senior Vice President in 2009. From 1998 to 2007, she was CH2M HILL's International, M&A and Securities Counsel. Prior to joining CH2M HILL, Ms. McLean was a Partner at the law firm of Holme Roberts & Owens LLP.
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Jacqueline C. Rast. Age 49. Ms. Rast has served as Senior Vice President and the President of the Facilities and Infrastructure Division of CH2M HILL as of January 1, 2011 and previously served as the Vice President, Major Programs and Executive Director for Mergers and Acquisitions since 2009. Between 2007 and 2009, she led our Center for Project Excellence and has worked for CH2M HILL since 1988 in various senior technical and executive positions. Ms. Rast left CH2M HILL in 1997 to form her own consulting company, Talisman Partners, and returned to CH2M HILL in 2005 after successfully selling her business to an industry competitor.
JoAnn Shea. Age 46. Ms. Shea has served as Chief Accounting Officer of CH2M HILL since 2006 and as Vice President and Controller since 2003. She also served as acting Chief Financial Officer of CH2M HILL from May to November of 2010. Ms. Shea joined CH2M HILL in 1998 as Assistant Controller.
There are no family relationships among the executive officers or directors of CH2M HILL. The executive officers are elected by the Board of Directors each year and hold office until the organizational meeting of the Board in the next subsequent year and until his or her successor is chosen or until his or her earlier death, resignation or removal.
Item 11. Executive Compensation
Information required by this item is incorporated by reference from CH2M HILL's definitive proxy statement for its 2011 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
Information required by this item is incorporated by reference from CH2M HILL's definitive proxy statement for its 2011 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Information required by this item is incorporated by reference from CH2M HILL's definitive proxy statement for its 2011 Annual Meeting of Shareholders.
Item 14. Principal Accounting Fees and Services
Information required by this item is incorporated by reference from CH2M HILL's definitive proxy statement for its 2011 Annual Meeting of Shareholders.
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Item 15. Exhibits and Financial Statement Schedules
Documents Filed as Part of this Report
- 1.
- Financial Statements
Report of Independent Registered Public Accounting Firm |
F-1 | |
Report on Internal Control Over Financial Reporting |
F-2 | |
Consolidated Balance Sheets at December 31, 2010 and 2009 |
F-3 | |
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008 |
F-4 | |
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the Years Ended December 31, 2010, 2009 and 2008 |
F-5 | |
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008 |
F-6 | |
Notes to Consolidated Financial Statements |
F-7 |
- 2.
- Financial Statement Schedules and Other
In accordance with Regulation S-X Rule 3.09, we furnish separate financial statements of significant subsidiaries not consolidated and 50% or less owned persons. We are required to include the balance sheets of Golden Crossing Constructors Joint Venture and CLM Delivery Partner, Limited as of December 31, 2010 and 2009, and the related statements of income, partners' equity, and cash flows for each of the years in the three-year period ended December 31, 2010. In accordance with Regulation S-X Rule 3.09, as the unconsolidated subsidiaries are foreign filers and are private entities, the financial statements of these entities will be filed as an amendment to this periodic report by June 30, 2011.
All financial statement schedules have been omitted because the required information is included in the consolidated financial statements or notes thereto, or because such schedules are not applicable.
- 3.
- Exhibits
The Exhibits required by this item are listed in the Exhibit Index. Each management contract and compensatory plan or arrangement is denoted with a "+" in the Exhibit Index.
Exhibit Number
|
Description | ||
---|---|---|---|
3.1 | Restated Articles of Incorporation of CH2M HILL Companies, Ltd. (filed as Exhibit A to CH2M HILL's Definitive Proxy Statement on Schedule 14A on November 13, 2009 (Commission File No. 333-60700) , and incorporated herein by reference) | ||
3.2 |
Restated Bylaws of CH2M HILL Companies, Ltd. (filed as Exhibit 3.1 to CH2M HILL's Form 8-K, on November 12, 2009 (Commission File No. 000-27261), and incorporated herein by reference) |
||
*+10.1 |
CH2M HILL Retirement and Tax-Deferred Savings Plan, as amended and restated effective June 1, 2000 (Commission File No. 000-27261) |
||
*+10.2 |
CH2M HILL Companies, Ltd. Supplemental Executive Retirement and Retention Plan effective February 11, 2010 (Commission File No. 000-27261) |
||
*+10.3 |
CH2M HILL Companies, Ltd. Deferred Compensation Plan effective January 1, 2001(Commission File No. 000-27261) |
||
*+10.4 |
CH2M HILL Companies, Ltd. Restricted Stock Policy and Administration Plan effective January 1, 2000 as amended and restated on February 11, 2011 (Commission File No. 000-27261) |
44
Exhibit Number
|
Description | ||
---|---|---|---|
*+10.5 | CH2M HILL Companies, Ltd. Short Term Incentive Plan effective January 1, 2000 (Commission File No. 000-27261) | ||
*+10.6 |
CH2M HILL Companies, Ltd. 2004 Stock Option Plan (Commission File No. 000-27261) |
||
+10.7 |
CH2M HILL Companies, Ltd. Payroll Deduction Stock Purchase Plan as amended and restated effective January 1, 2004 (filed as Appendix B to CH2M HILL's Definitive Proxy Statement on Schedule 14A on March 26, 2004 (Commission File No. 000-27261), and incorporated herein by reference) |
||
+10.8 |
CH2M HILL Companies, Ltd. Amended and Restated Executive Officers Long Term Incentive Plan effective January 1, 2005, as amended and restated on May 8, 2008 (filed as Exhibit 10.1 to CH2M HILL's Form 10-Q for the quarter ended March 31, 2008 (Commission File No. 000-27261), and incorporated herein by reference) |
||
+10.9 |
CH2M HILL Companies, Ltd. Amended and Restated Long Term Incentive Plan effective January 1, 2005 (filed as Exhibit 10.15 to CH2M HILL's Form 10-K for the year ended December 31, 2006 (Commission File No. 000-27261), and incorporated herein by reference) |
||
+10.10 |
Form of Change of Control Agreement between CH2M HILL Companies, Ltd. and employee directors and executive officers, effective as of July 1, 2010 (filed as Exhibit 10.1 to CH2M HILL's Form 10-Q for the quarter ended September 30, 2010, (Commission File No. 002-27261), and incorporated herein by reference) |
||
+10.11 |
CH2M HILL Companies, Ltd. 2009 Stock Option Plan, effective January 1, 2009 (filed as Exhibit 10.24 on Form 10-K on February 24, 2009 (Commission File No. 000-27261), and incorporated herein by reference) |
||
*10.12 |
Contract with Neidiger, Tucker, Bruner, Inc. dated as of July 1, 2006 (Commission File No. 000-27261) |
||
*10.13 |
Credit Agreement dated as of December 6, 2010, by and among CH2M HILL Companies, Ltd. and certain of its subsidiaries, Wells Fargo Bank, National Association and other lenders (Commission File No. 000-27261) |
||
10.14 |
Amended and Restated Credit Facility closed on September 6, 2007, by and among CH2M HILL Companies, Ltd. and certain of its wholly owned subsidiaries. Wells Fargo Bank, National Association, as agent and sole arranger, and other lenders as party thereto (certain portions of this exhibit have been omitted and filed separately with the Commission pursuant to a request for confidential treatment under Rule 24b-2 as promulgated under the Securities Exchange Act of 1934) (filed as Exhibit 10.1 to CH2M HILL's Form 8-K on September 13, 2007 (Commission File No. 000-27261), and incorporated herein by reference) |
||
10.15 |
Agreement of Purchase and Sale executed on September 26, 2007 (dated September 11, 2007) by and between CH2M HILL, Inc. and WELLS REIT IISouth Jamaica Street, LLC (filed as Exhibit 10.44 to CH2M HILL's Form 8-K on September 27, 2007 (Commission File No. 000-27261), and incorporated herein by reference) |
||
10.16 |
Lease Agreement dated as of September 26, 2007, by and between CH2M HILL, Inc. and WELLS REIT IISouth Jamaica Street, LLC (filed as Exhibit 10.43 to CH2M HILL's Form 8-K on September 27, 2007 (Commission File No. 000-27261), and incorporated herein by reference) |
45
Exhibit Number
|
Description | ||
---|---|---|---|
14.1 | CH2M HILL Companies, Ltd. Ethics Code for Executive and Financial Officers (filed as Exhibit 14.1 to CH2M HILL's Form 10-K for the year ended December 31, 2009(Commission File No. 000-27261), and incorporated herein by reference) | ||
*21.1 |
Subsidiaries of CH2M HILL Companies, Ltd. |
||
*23.1 |
Consent of KPMG LLP, Independent Registered Public Accounting Firm |
||
*24.1 |
Power of Attorney authorizing signature |
||
*31.1 |
Written Statement of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
*31.2 |
Written Statement of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
||
*32.1 |
Written Statement of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
||
*32.2 |
Written Statement of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) |
||
99.1 |
Internal Market Rules, (filed as Exhibit 99.1 to CH2M HILL's Form 8-K on February 11, 2011 (Commission File No. 000-27261), and incorporated herein by reference) |
- *
- Filed
herewith
- +
- Indicates management contract or compensatory plan or arrangement
46
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
CH2M HILL Companies, Ltd.:
We have audited the accompanying consolidated balance sheets of CH2M HILL Companies, Ltd. and subsidiaries (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CH2M HILL Companies, Ltd. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.
As discussed in note 1 to the accompanying consolidated financial statements, the Company adopted new accounting standards relating to variable interest entities on January 1, 2010 and to noncontrolling interests in consolidated financial statements on January 1, 2009.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CH2M HILL Companies, Ltd. and subsidiaries' internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 1, 2011 expressed an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
KPMG LLP | ||
Denver, Colorado March 1, 2011 |
F-1
Report of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
CH2M HILL Companies, Ltd.:
We have audited CH2M HILL Companies, Ltd. and subsidiaries (the Company) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, CH2M HILL Companies Ltd. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal ControlIntegrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CH2M HILL Companies, Ltd. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of income, shareholders' equity and comprehensive income, and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 1, 2011 expressed an unqualified opinion on those consolidated financial statements.
KPMG LLP | ||
Denver, Colorado March 1, 2011 |
F-2
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
|
December 31, 2010 | December 31, 2009 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
ASSETS |
|||||||||||
Current assets: |
|||||||||||
Cash and cash equivalents |
$ | 290,405 | $ | 169,717 | |||||||
Available-for-sale securities |
2,412 | 1,966 | |||||||||
Receivables, net |
|||||||||||
Client accounts |
558,734 | 611,634 | |||||||||
Unbilled revenue |
389,353 | 416,927 | |||||||||
Other |
21,264 | 20,882 | |||||||||
Deferred income taxes |
62,007 | 47,964 | |||||||||
Prepaid expenses and other current assets |
44,498 | 64,510 | |||||||||
Total current assets |
1,368,673 | 1,333,600 | |||||||||
Investments in unconsolidated affiliates |
82,982 | 78,053 | |||||||||
Property, plant and equipment, net |
169,261 | 197,152 | |||||||||
Goodwill |
130,354 | 130,354 | |||||||||
Intangible assets, net |
51,048 | 61,275 | |||||||||
Deferred income taxes |
112,919 | 109,438 | |||||||||
Employee benefit plan assets and other |
51,843 | 38,150 | |||||||||
Total assets |
$ | 1,967,080 | $ | 1,948,022 | |||||||
LIABILITIES AND SHAREHOLDERS' EQUITY |
|||||||||||
Current liabilities: |
|||||||||||
Current portion of long-term debt |
$ | 13,934 | $ | 14,396 | |||||||
Accounts payable and accrued subcontractor costs |
407,694 | 407,222 | |||||||||
Billings in excess of revenue |
237,053 | 292,280 | |||||||||
Accrued payroll and employee related liabilities |
291,713 | 259,798 | |||||||||
Income tax payable |
20,010 | | |||||||||
Other accrued liabilities |
163,396 | 134,763 | |||||||||
Total current liabilities |
1,133,800 | 1,108,459 | |||||||||
Long-term employee related liabilities and other |
255,425 | 276,811 | |||||||||
Long-term debt |
23,687 | 37,943 | |||||||||
Total liabilities |
1,412,912 | 1,423,213 | |||||||||
Commitments and contingencies (Note 17) |
|||||||||||
Shareholders' equity: |
|||||||||||
Preferred stock, Class A $0.02 par value, 50,000,000 shares authorized; none issued |
| | |||||||||
Common stock, $0.01 par value, 100,000,000 shares authorized; 30,527,473 and 31,373,955 issued and outstanding at December 31, 2010 and 2009, respectively |
305 | 314 | |||||||||
Additional paid-in capital |
| 12,803 | |||||||||
Retained earnings |
563,343 | 531,796 | |||||||||
Accumulated other comprehensive loss |
(18,768 | ) | (32,743 | ) | |||||||
Total CH2M HILL common shareholders' equity |
544,880 | 512,170 | |||||||||
Noncontrolling interests |
9,288 | 12,639 | |||||||||
Total equity |
554,168 | 524,809 | |||||||||
Total liabilities and shareholders' equity |
$ | 1,967,080 | $ | 1,948,022 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-3
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Statements of Income
(Dollars in thousands except per share amounts)
|
For The Years Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2010 | December 31, 2009 | December 31, 2008 | |||||||||
Gross revenue |
$ | 5,422,801 | $ | 5,499,318 | $ | 5,589,906 | ||||||
Equity in earnings of joint ventures and affiliated companies |
68,513 | 65,539 | 34,232 | |||||||||
Operating expenses: |
||||||||||||
Direct cost of services and overhead |
(4,426,352 | ) | (4,478,884 | ) | (4,507,738 | ) | ||||||
General and administrative |
(890,199 | ) | (969,677 | ) | (1,027,225 | ) | ||||||
Gain on sale of operating assets |
| 58,235 | | |||||||||
Operating income |
174,763 | 174,531 | 89,175 | |||||||||
Other income (expense): |
||||||||||||
Interest income |
1,372 | 1,474 | 2,405 | |||||||||
Interest expense |
(4,616 | ) | (7,487 | ) | (15,833 | ) | ||||||
Income before provision for income taxes |
171,519 | 168,518 | 75,747 | |||||||||
Provision for income taxes |
(53,804 | ) | (46,420 | ) | (27,497 | ) | ||||||
Net income |
117,715 | 122,098 | 48,250 | |||||||||
Less: Income attributable to noncontrolling interests |
(24,020 | ) | (18,356 | ) | (16,194 | ) | ||||||
Net income attributable to CH2M HILL |
$ | 93,695 | $ | 103,742 | $ | 32,056 | ||||||
Net income per common share: |
||||||||||||
Basic |
$ | 2.98 | $ | 3.25 | $ | 0.96 | ||||||
Diluted |
$ | 2.91 | $ | 3.18 | $ | 0.93 | ||||||
Weighted average number of common shares: |
||||||||||||
Basic |
31,458,126 | 31,907,861 | 33,486,512 | |||||||||
Diluted |
32,163,093 | 32,598,509 | 34,376,259 |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Dollars in thousands)
|
Common Stock | |
|
Accumulated Other Comprehensive Loss |
|
|
|||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Additional Paid-In Capital |
Retained Earnings |
Noncontrolling Interest |
Total Shareholders' Equity |
|||||||||||||||||||||
|
Shares | Amount | |||||||||||||||||||||||
Balance at December 31, 2007 |
33,158,068 | $ | 332 | $ | 70,596 | $ | 395,998 | $ | (3,393 | ) | $ | 964 | $ | 464,497 | |||||||||||
Net income |
| | 32,056 | | 16,194 | 48,250 | |||||||||||||||||||
Other comprehensive loss: |
|||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | (17,269 | ) | (923 | ) | (18,192 | ) | ||||||||||||||||
Benefit plan adjustments |
| | | (32,125 | ) | | (32,125 | ) | |||||||||||||||||
Unrealized loss on equity investments |
| | | (1,299 | ) | | (1,299 | ) | |||||||||||||||||
Comprehensive loss |
(3,366 | ) | |||||||||||||||||||||||
Distributions to affiliates, net |
| | | | (13,717 | ) | (13,717 | ) | |||||||||||||||||
Shares issued in connection with stock based compensation and employee benefit plans |
1,512,164 | 15 | 31,520 | | | | 31,535 | ||||||||||||||||||
Shares purchased and retired |
(3,065,896 | ) | (31 | ) | (92,169 | ) | | | | (92,200 | ) | ||||||||||||||
Balance at December 31, 2008 |
31,604,336 | 316 | 9,947 | 428,054 | (54,086 | ) | 2,518 | 386,749 | |||||||||||||||||
Net income |
| | 103,742 | | 18,356 | 122,098 | |||||||||||||||||||
Other comprehensive income: |
|||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | 16,426 | 1,145 | 17,571 | |||||||||||||||||||
Benefit plan adjustments |
| | | 3,925 | | 3,925 | |||||||||||||||||||
Unrealized gain on equity investments |
| | | 992 | | 992 | |||||||||||||||||||
Comprehensive income |
144,586 | ||||||||||||||||||||||||
Distributions to affiliates, net |
| | | | (9,380 | ) | (9,380 | ) | |||||||||||||||||
Shares issued in connection with stock based compensation and employee benefit plans |
1,973,413 | 20 | 81,564 | | | | 81,584 | ||||||||||||||||||
Shares purchased and retired |
(2,203,794 | ) | (22 | ) | (78,708 | ) | | | | (78,730 | ) | ||||||||||||||
Balance at December 31, 2009 |
31,373,955 | 314 | 12,803 | 531,796 | (32,743 | ) | 12,639 | 524,809 | |||||||||||||||||
Net income |
93,695 | 24,020 | 117,715 | ||||||||||||||||||||||
Other comprehensive income: |
|||||||||||||||||||||||||
Foreign currency translation adjustments |
| | | | 3,831 | 347 | 4,178 | ||||||||||||||||||
Benefit plan adjustments |
| | | | 9,869 | 9,869 | |||||||||||||||||||
Unrealized gain on equity investments |
| | | | 275 | | 275 | ||||||||||||||||||
Comprehensive income |
| | | | | | 132,037 | ||||||||||||||||||
Distributions to affiliates, net |
| | | | | (31,806 | ) | (31,806 | ) | ||||||||||||||||
Impact of adoption of ASC 810 |
| | | | | 4,088 | 4,088 | ||||||||||||||||||
Shares issued in connection with stock based compensation and employee benefit plans |
1,857,418 | 18 | 43,776 | | | | 43,794 | ||||||||||||||||||
Shares purchased and retired |
(2,703,900 | ) | (27 | ) | (56,579 | ) | (62,148 | ) | | | (118,754 | ) | |||||||||||||
Balance at December 31, 2010 |
30,527,473 | $ | 305 | $ | | $ | 563,343 | $ | (18,768 | ) | $ | 9,288 | $ | 554,168 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
F-5
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
For The Years Ended | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
December 31, 2010 |
December 31, 2009 |
December 31, 2008 |
|||||||||||
Cash flows from operating activities: |
||||||||||||||
Net income |
$ | 117,715 | $ | 122,098 | $ | 48,250 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||
Depreciation and amortization |
62,311 | 80,889 | 92,022 | |||||||||||
Gain on sale of operating assets |
| (58,235 | ) | | ||||||||||
Stock-based employee compensation |
50,603 | 67,738 | 43,654 | |||||||||||
Loss on disposal of property, plant and equipment |
1,266 | 3,570 | 249 | |||||||||||
Allowance for uncollectible accounts |
3,521 | 11,115 | 2,172 | |||||||||||
Deferred income taxes |
(24,699 | ) | (29,289 | ) | (24,789 | ) | ||||||||
Gain on sale of investments |
(6,495 | ) | | | ||||||||||
Undistributed earnings from unconsolidated affiliates |
(68,513 | ) | (65,539 | ) | (34,232 | ) | ||||||||
Distributions of income from unconsolidated affiliates |
71,181 | 52,808 | 55,407 | |||||||||||
Changes in current assets and liabilities, net of businesses acquired: |
||||||||||||||
Receivables and unbilled revenue |
72,921 | 40,748 | 18,783 | |||||||||||
Prepaid expenses and other |
(2,465 | ) | 13,510 | 22,376 | ||||||||||
Accounts payable and accrued subcontractor costs |
(16,558 | ) | (29,470 | ) | 3,670 | |||||||||
Billings in excess of revenues |
(61,950 | ) | 9,331 | 24,613 | ||||||||||
Accrued payroll and employee related liabilities |
29,517 | 3,631 | 4,447 | |||||||||||
Other accrued liabilities |
32,530 | 8,089 | (4,860 | ) | ||||||||||
Current income taxes receivable (payable) |
41,486 | (10,268 | ) | (83 | ) | |||||||||
Long-term employee related liabilities and other |
(15,802 | ) | 19,755 | 7,817 | ||||||||||
Net cash provided by operating activities |
286,569 | 240,481 | 259,496 | |||||||||||
Cash flows from investing activities: |
||||||||||||||
Capital expenditures |
(26,884 | ) | (37,663 | ) | (50,622 | ) | ||||||||
Acquisitions and earnout payments, net of cash acquired |
| (1,186 | ) | (24,570 | ) | |||||||||
Investments in unconsolidated affiliates |
(49,133 | ) | (68,366 | ) | (78,632 | ) | ||||||||
Distributions of capital from unconsolidated affiliates |
35,601 | 41,597 | 54,858 | |||||||||||
Consolidation of previously unconsolidated variable interest entities |
32,651 | | | |||||||||||
Proceeds from sale of operating assets |
| 70,971 | | |||||||||||
Purchases of investments |
(37,079 | ) | | (6,975 | ) | |||||||||
Proceeds from sale of investments |
43,573 | 10,741 | 8,032 | |||||||||||
Other |
2,961 | 65 | 1,124 | |||||||||||
Net cash provided by (used in) investing activities |
1,690 | 16,159 | (96,785 | ) | ||||||||||
Cash flows from financing activities: |
||||||||||||||
Borrowings on long-term debt |
404,827 | 747,349 | 1,072,318 | |||||||||||
Payments on long-term debt |
(419,056 | ) | (870,885 | ) | (1,101,998 | ) | ||||||||
Repurchases and retirements of common stock |
(137,208 | ) | (91,253 | ) | (109,395 | ) | ||||||||
Excess tax benefits from stock-based compensation |
14,968 | 6,431 | 6,881 | |||||||||||
Net distributions to noncontrolling interests |
(31,806 | ) | (9,379 | ) | (13,717 | ) | ||||||||
Net cash used in financing activities |
(168,275 | ) | (217,737 | ) | (145,911 | ) | ||||||||
Effect of exchange rate changes on cash |
704 | 16,532 | (26,623 | ) | ||||||||||
Increase (decrease) in cash and cash equivalents |
120,688 | 55,435 | (9,823 | ) | ||||||||||
Cash and cash equivalents, beginning of year |
169,717 | 114,282 | 124,105 | |||||||||||
Cash and cash equivalents, end of year |
$ | 290,405 | $ | 169,717 | $ | 114,282 | ||||||||
Supplemental disclosures: |
||||||||||||||
Cash paid for interest |
$ | 4,708 | $ | 7,793 | $ | 14,860 | ||||||||
Cash paid for income taxes |
$ | 43,714 | $ | 50,910 | $ | 48,295 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) Summary of Business and Significant Accounting Policies
Summary of Business
CH2M HILL Companies, Ltd. and subsidiaries (CH2M HILL) is a project delivery firm founded in 1946. CH2M HILL provides engineering, consulting, design, construction, procurement, operations and maintenance, and program management services to U.S. federal government agencies, state, municipal and local government entities and foreign government agencies, as well as private industry, in the U.S. and internationally. CH2M HILL is an employee owned corporation. A substantial portion of CH2M HILL's professional fees are derived from projects that are funded directly or indirectly by government entities.
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of CH2M HILL and all of its wholly owned subsidiaries after elimination of all intercompany accounts and transactions. Partially owned affiliates and joint ventures are evaluated for consolidation. The consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP). Certain amounts in prior years' consolidated financial statements have been reclassified to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates, judgments, and assumptions. CH2M HILL believes that the estimates, judgments and assumptions made when accounting for items and matters such as, but not limited to, revenue recognition, self insurance accruals, employee benefits, legal and tax reserves, allowance for doubtful accounts, depreciation, amortization, asset valuations and contingencies are reasonable, based on information available at the time they are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the consolidated financial statements, as well as the reported amounts of revenue and expenses during the periods presented. See Note 17Commitments and Contingencies. Actual results could differ from our estimates.
Capital Structure
CH2M HILL has authorized 100,000,000 shares of common stock, par value $0.01 per share, and 50,000,000 shares of Class A preferred stock, par value $0.02 per share. CH2M HILL's Restated Bylaws and Articles of Incorporation provide for the imposition of certain restrictions on the stock including, but not limited to, the right but not the obligation to repurchase shares upon termination of employment or affiliation, the right of first refusal and ownership limits.
Foreign Currency Translation
All assets and liabilities of CH2M HILL's foreign subsidiaries are translated into U.S. dollars as of each balance sheet date. Translation gains and losses related to permanent investments in foreign subsidiaries are reflected in shareholders' equity as part of accumulated other comprehensive loss. Revenues and expenses are translated at the average exchange rate for the period and included in the consolidated statements of income. Foreign currency transaction gains and losses are recognized as incurred in the consolidated statements of income.
F-7
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Summary of Business and Significant Accounting Policies (Continued)
Subsequent Events
CH2M HILL has 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 contractual arrangements to determine how 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 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, delivery has occurred, the price is fixed or determinable and collectability is reasonably assured.
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.
Allowance for Uncollectible Accounts Receivable
CH2M HILL reduces accounts receivable by estimating an allowance for amounts that may become uncollectible in the future. Management determines the estimated allowance for uncollectible amounts based on their judgments in evaluating the aging of the receivables and the financial condition of CH2M HILL's clients, which may be dependent on the type of client and the client's current economic conditions.
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
F-8
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Summary of Business and Significant Accounting Policies (Continued)
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.
Income Taxes
CH2M HILL accounts for income taxes utilizing an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax effects of events that have been recognized in the financial statements or tax returns. In estimating future tax consequences, CH2M HILL generally considers all expected future events other than enactment of changes in the tax laws or rates. Deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which differences are expected to reverse. Annually, CH2M HILL determines the amount of undistributed foreign earnings invested indefinitely in its foreign operations. Deferred taxes are not provided on those earnings. In addition, the calculation of tax assets and liabilities involves 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 examination by taxing authorities.
Cash and Cash Equivalents
CH2M HILL maintains a cash management system which provides for cash in the bank sufficient to pay checks as they are submitted for payment and invests cash in excess of this amount in interest bearing short-term investments such as certificates of deposit and commercial paper. Investments with original short-term maturities of less than three months are considered cash equivalents in the consolidated balance sheets and statements of cash flows. In addition, cash and cash equivalents on our consolidated balance sheets include cash held within our consolidated joint venture entities which is used for operating activities of those joint ventures. As of December 31, 2010 and 2009, cash and cash equivalents held in our consolidated joint ventures and reflected on the consolidated balance sheets totaled $60.3 million and $43.7 million, respectively.
Available-for-Sale Securities
Available-for-sale securities are carried at fair value, with unrecognized gains and losses reported in accumulated other comprehensive loss, net of taxes. Losses on available-for-sale securities are recognized when a loss is determined to be other than temporary or when realized. Fair values are estimated based on market prices, where available, or dealer quotes.
Property, Plant and Equipment
All additions, including betterments to existing facilities, are recorded at cost. Maintenance and repairs are charged to expense as incurred. When assets are retired or otherwise disposed of, the cost of the assets and the related accumulated depreciation are removed from the accounts. Any gain or loss on retirements is reflected in operating income in the year of disposition.
Depreciation for owned property is based on the estimated useful lives of the assets using the straight-line method for financial statement purposes. Useful lives for buildings range from 12 to
F-9
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Summary of Business and Significant Accounting Policies (Continued)
20 years. Furniture, fixtures and equipment are depreciated over their useful lives from 2 to 10 years. Leasehold improvements are depreciated over the shorter of their estimated useful life or the remaining term of the associated lease up to 12 years.
Other Long-Lived Assets
CH2M HILL may acquire goodwill or other intangible assets in business combinations. Intangible assets are stated at fair value as of the date acquired in a business combination. CH2M HILL amortizes intangible assets with finite lives on a straight-line basis over their expected useful lives, currently up to seven years. Where there are no legal, regulatory, contractual or other factors that would reasonably limit the useful life of the intangible asset, such as goodwill or tradenames, management has determined that those intangible assets have an indefinite life and therefore are not amortized.
CH2M HILL reviews its finite-lived intangibles and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Assets which are held and used in operations are considered impaired if the undiscounted future cash flows from the asset do not exceed the net book value. If impaired, the assets are written down to their estimated fair value. CH2M HILL generally measures fair value by considering sale prices for similar assets or by discounting estimated future cash flows from the asset group using an appropriate discount rate.
Goodwill and intangible assets with indefinite lives are tested for impairment on an annual basis, or on an interim basis if events or circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment charge is recognized for any amount by which the carrying amount of goodwill or intangible assets with indefinite lives exceeds their fair value. Management performs its impairment tests of goodwill at the reporting unit level, which is one level below the operating segments. Management's review of goodwill and the tradename indicated that there was no impairment during the years ended December 31, 2010, 2009 and 2008.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss consists of foreign currency translation adjustments, benefit plan adjustments, and unrealized gains/losses on equity investments. These components are included in the consolidated statements of shareholders' equity and comprehensive income. Taxes are not provided on the foreign currency translation gains and losses as deferred taxes are not provided on the unremitted earnings of the foreign subsidiaries to which they relate.
The composition of accumulated other comprehensive loss consists of the following at December 31:
($ in thousands) |
2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Foreign currency translation adjustments |
$ | 13,449 | $ | 9,618 | |||
Benefit plan adjustments, net of tax |
(33,239 | ) | (43,108 | ) | |||
Unrealized gain on equity investments, net of tax |
1,022 | 747 | |||||
|
$ | (18,768 | ) | $ | (32,743 | ) | |
F-10
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(1) Summary of Business and Significant Accounting Policies (Continued)
Concentrations of Credit Risk
Financial instruments which potentially subject CH2M HILL to concentrations of credit risk consist principally of cash and cash equivalents, short term investments and trade receivables. CH2M HILL's cash and cash equivalents and short term investments are maintained in accounts held primarily in the U.S. with some accounts held by major banks and financial institutions located in Europe, Canada and Asia. Concentrations of credit risk relative to trade receivables are limited due to our diverse client base, which includes the U.S. federal government, various states and municipalities, foreign government agencies, and a variety of U.S. and foreign corporations operating in a broad range of industries and geographic areas.
Contracts with the U.S. federal government and its prime contractors usually contain standard provisions for permitting the government to modify, curtail or terminate the contract for convenience of the government or such prime contractors if program requirements or budgetary constraints change. Upon such a termination, CH2M HILL is generally entitled to recover costs incurred, settlement expenses and profit on work completed prior to termination.
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 should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the 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 3.
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 or disclosures.
(2) Receivables, net
Receivables are stated at net realizable values and consist of receivables billed to clients as well as receivables for which revenue has been earned but has not yet been billed. The U.S. federal government accounted for approximately 20% and 13% of CH2M HILL's net receivables at December 31, 2010 and 2009, respectively. No other customers exceeded 10% of total receivables at December 31, 2010 or 2009.
F-11
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(2) Receivables, net (Continued)
The change in the allowance for uncollectible accounts consists of the following for the years ended December 31:
($ in thousands) |
2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Balance at beginning of year |
$ | 13,190 | $ | 4,183 | $ | 6,963 | |||||
Provision charged to expense |
3,521 | 11,115 | 2,172 | ||||||||
Accounts written off |
(3,614 | ) | (2,049 | ) | (4,344 | ) | |||||
Other |
(1,021 | ) | (59 | ) | (608 | ) | |||||
Balance at end of year |
$ | 12,076 | $ | 13,190 | $ | 4,183 | |||||
(3) 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.
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 December 31, 2010, total assets of VIEs that were consolidated were $108.7 million and liabilities were $70.1 million.
CH2M HILL recorded investments in unconsolidated affiliates of $83.0 million and $78.1 million for the years ended December 31, 2010 and 2009, respectively. CH2M HILL's proportionate share of
F-12
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(3) Variable Interest Entities and Equity Method Investments (Continued)
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.
As of December 31, 2010, the total assets of VIEs that were not consolidated were $388.7 million and total liabilities were $292.5 million. The maximum exposure to losses is limited to the funding of any future losses incurred by those entities under their respective contracts with the project company.
Summarized financial information for CH2M HILL's unconsolidated VIEs and equity method investments as of and for the years ended December 31 is as follows:
($ in thousands) |
2010 | 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|
FINANCIAL POSITION: |
|||||||||
Current assets |
$ | 677,638 | $ | 665,068 | |||||
Noncurrent assets |
84,042 | 82,408 | |||||||
Total assets |
$ | 761,680 | $ | 747,476 | |||||
Current liabilities |
$ | 497,338 | $ | 480,668 | |||||
Noncurrent liabilities |
26,486 | 31,711 | |||||||
Partners'/Owners' equity |
237,856 | 235,097 | |||||||
Total liabilities and equity |
$ | 761,680 | $ | 747,476 | |||||
CH2M HILL's share of equity |
$ | 82,982 | $ | 78,053 | |||||
($ in thousands) |
2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
RESULTS OF OPERATIONS: |
|||||||||||
Revenue |
$ | 2,814,824 | $ | 2,426,505 | $ | 2,370,361 | |||||
Direct costs |
2,598,872 | 2,250,752 | 2,273,332 | ||||||||
Gross margin |
215,952 | 175,753 | 97,029 | ||||||||
General and administrative expenses |
13,603 | 3,228 | 5,901 | ||||||||
Operating income |
202,349 | 172,525 | 91,128 | ||||||||
Other income, net |
458 | 479 | 2,790 | ||||||||
Net income |
$ | 202,807 | $ | 173,004 | $ | 93,918 | |||||
CH2M HILL's share of net income |
$ | 68,513 | $ | 65,539 | $ | 34,232 | |||||
F-13
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(3) Variable Interest Entities and Equity Method Investments (Continued)
CH2M HILL has the following significant investments in affiliated unconsolidated companies:
|
%Ownership | ||||
---|---|---|---|---|---|
Domestic: |
|||||
AGVIQCH2M HILL Joint Venture II |
49.0 | % | |||
AGVIQCH2M HILL Joint Venture III |
49.0 | % | |||
Americas Gateway Builders |
40.0 | % | |||
CH2M HILL/URS Team, a Joint Venture |
50.0 | % | |||
CH2MWG Idaho, LLC |
50.5 | % | |||
Clark-Nexsen/CH2M HILLNorfolk |
50.0 | % | |||
Coastal Estuary Services |
49.9 | % | |||
Connecting Idaho Partners |
49.0 | % | |||
HEBL, Inc. |
100.0 | % | |||
IAP-Hill, LLC |
25.0 | % | |||
Kaiser-Hill Company, LLC |
50.0 | % | |||
National Security Technologies, LLC |
10.0 | % | |||
OMI/Thames Water Stockton, Inc. |
50.0 | % | |||
Parsons CH2M HILL Program Management Consultants, Joint Venture |
47.5 | % | |||
Savannah River Remediation LLC |
15.0 | % | |||
TIC/CH2M Culbertson Unit #1 Joint Venture |
25.0 | % | |||
Washington Closure, LLC |
30.0 | % | |||
Foreign: |
|||||
CH2M HILL BECA, Ltd. |
50.0 | % | |||
CH2M HILLKunwon PMC |
54.0 | % | |||
CHBM Water Joint Venture |
50.0 | % | |||
CH2M Olayan |
49.0 | % | |||
CLM Delivery Partner, Limited |
37.5 | % | |||
Coniisa |
33.3 | % | |||
CPG ConsultantsCH2M HILL NIP Joint Venture |
50.0 | % | |||
ECC-VECO, LLC |
50.0 | % | |||
Golden Crossing Constructors Joint Venture |
33.3 | % | |||
HWC Treatment Program Alliance Joint Venture |
50.0 | % | |||
Luggage Point Alliance |
50.0 | % | |||
OMI BECA, Ltd. |
50.0 | % | |||
SMNM/VECO Joint Venture. |
50.0 | % | |||
Transcend Partners, Ltd |
40.0 | % |
F-14
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(4) Property, Plant and Equipment
Property, plant and equipment consists of the following as of December 31:
($ in thousands) |
2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
Land |
$ | 27,337 | $ | 26,516 | ||||
Building and land improvements |
80,183 | 72,280 | ||||||
Furniture, fixtures and equipment |
199,199 | 196,511 | ||||||
Leasehold improvements |
67,690 | 65,023 | ||||||
|
374,409 | 360,330 | ||||||
Less: Accumulated depreciation |
(205,148 | ) | (163,178 | ) | ||||
Net property, plant and equipment |
$ | 169,261 | $ | 197,152 | ||||
The depreciation expense is reflected in the consolidated statements of income in direct costs and general and administrative costs depending on the intended use of the asset and totaled $52.1 million, $53.5 million and $55.2 million for the years ended December 31, 2010, 2009 and 2008, respectively.
(5) 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. As of December 31, 2010 and 2009, the fair market value of these assets was $47.0 million and $36.2 million, respectively.
(6) Acquisitions
On September 7, 2007, CH2M HILL purchased all of the outstanding stock of VECO and substantially all of VECO's operating businesses as part of a strategic initiative to expand operations into the energy industry. In connection with the acquisition of VECO, the purchase agreement established a holdback contingency of $70.0 million for tax indemnifications and the potential future payment of certain contingencies that may arise within three years after the date of acquisition. Any amounts remaining after payments for these indemnifications and contingencies are payable to the sellers of VECO. Since the date of acquisition, CH2M HILL has made distributions to the sellers of VECO and paid expenses on their behalf which were deemed distributions of the holdback contingency. At December 31, 2010 and 2009, the outstanding balance payable under the holdback contingency was $46.7 million and $49.1 million, respectively. Amounts outstanding under the holdback contingency as of December 31, 2010 represent disputed contingent claims and tax indemnifications which have not been resolved. Upon resolution of the outstanding items, CH2M HILL will likely incur costs which will be paid out of the holdback funds with any remaining amounts being remitted to the sellers.
(7) Sale of Operating Assets
In September 2009, CH2M HILL completed the sale of certain assets and liabilities of its Enterprise Management Solutions (EMS) business. The selling price was $86.6 million, net of amounts due for estimated working capital adjustments of $13.5 million. CH2M HILL recorded a pre-tax gain of $58.2 million during 2009. As part of the EMS sale, CH2M HILL and the purchasers entered into a preferred provider agreement whereby CH2M HILL guaranteed an annual volume of revenues of
F-15
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(7) Sale of Operating Assets (Continued)
$42.5 million to be provided to the purchasers for each of the five years through September 2014. To the extent CH2M HILL does not reach this volume of revenues, it must compensate the purchasers. As of the first anniversary date of the sale, CH2M HILL met its annual guaranteed level of revenues and thus no compensation was required to be paid to the purchasers.
The results of operations for EMS prior to disposition were recorded in the Facilities and Infrastructure operating segment.
(8) Goodwill and Intangible Assets
Goodwill and the tradename as of December 31 consist of the following:
($ in thousands) |
2010 | 2009 | |||||
---|---|---|---|---|---|---|---|
Goodwill |
$ | 130,354 | $ | 130,354 | |||
Tradename |
20,326 | 20,326 | |||||
|
$ | 150,680 | $ | 150,680 | |||
Intangible assets with finite lives consist of the following:
($ in thousands) |
Cost | Accumulated Amortization |
Net finite-lived intangible assets |
||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
December 31, 2010 |
|||||||||||
Contracted backlog |
$ | 58,871 | $ | (58,871 | ) | $ | | ||||
Customer relationships |
57,922 | (27,200 | ) | 30,722 | |||||||
Non-compete agreements and other |
902 | (902 | ) | | |||||||
Total finite-lived intangible assets |
$ | 117,695 | $ | (86,973 | ) | $ | 30,722 | ||||
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 | |||||||
Total finite-lived intangible assets |
$ | 117,695 | $ | (76,746 | ) | $ | 40,949 | ||||
All intangible assets are being amortized over their expected lives up to seven years. The amortization expense reflected in the consolidated statements of income totaled $10.2 million, $27.4 million and $36.8 million for the years ended December 31, 2010, 2009 and 2008, respectively. These intangible assets are expected to be fully amortized in 2014. At December 31, 2010, the future estimated amortization expense related to these intangible assets is (in thousands):
Year Ending:
|
|
|||
---|---|---|---|---|
2011 |
$ | 8,275 | ||
2012 |
8,275 | |||
2013 |
8,275 | |||
2014 |
5,897 | |||
|
$ | 30,722 | ||
F-16
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(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 $2.4 million and $2.0 million at December 31, 2010 and December 31, 2009, respectively, were valued based on Level 1 inputs whereby a readily determinable market value exists for the specific asset. There were no transfers between fair value hierarchy levels during the years ended December 31, 2010 and 2009. The estimated fair values of CH2M HILL's financial instruments where carrying values do not approximate fair value are as follows:
|
2010 | 2009 | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Amount | Fair Value | Carrying Amount | Fair Value | ||||||||||
($ in thousands) |
|
|
|
|
||||||||||
Mortgage notes payable |
$ | 15,253 | $ | 12,403 | $ | 16,672 | $ | 13,627 | ||||||
Equipment financing |
$ | 22,227 | $ | 21,439 | $ | 35,572 | $ | 33,951 | ||||||
Shareholder notes payable |
$ | 141 | $ | 98 | $ | 95 | $ | 61 |
(10) Line of Credit and Long-term Debt
On December 6, 2010, CH2M HILL entered into a Credit Agreement (the "Credit Agreement") providing for an unsecured revolving credit facility in an amount of up to $600.0 million. Subject to certain conditions, at any time prior to the date that is thirty days before the maturity date of the Credit Agreement, CH2M HILL will be able to invite existing and new lenders to increase the size of the revolving credit facility by up to $100.0 million, for a maximum aggregate revolving credit facility of $700.0 million. The revolving credit facility has a subfacility for the issuance of standby letters of credit in a face amount up to $300.0 million, a subfacility of up to $300.0 million for multicurrency borrowings and a subfacility of up to $20.0 million for swingline loans. Revolving loans under the Credit Agreement bear interest, at CH2M HILL's option, at a rate equal to either (i) the base rate plus a margin based on the ratio of CH2M HILL's consolidated leverage ratio or (ii) the LIBOR rate, based on interest periods of one, two, three or six months, plus a margin based on the ratio of CH2M HILL's consolidated leverage ratio. The base rate is equal to the greater of (i) the Federal Funds Rate, as published from time to time by the Federal Reserve Bank of New York, plus 0.5%, (ii) the swingline lender's prime rate in effect from time to time, or (iii) the one-month LIBOR rate in effect from time to time, plus 1.0%. CH2M HILL's consolidated leverage ratio on any date is the ratio of CH2M HILL's consolidated total funded debt to its consolidated earnings before interest, taxes, depreciation and amortization for the preceding four fiscal quarters. There were no outstanding borrowings on the Credit Agreement as of December 31, 2010 or December 31, 2009. If CH2M HILL had borrowed under the Credit Agreement on December 31, 2010 the rate of interest charged on that balance would have been 1.76%.
Prior to entering into the Credit Agreement, CH2M HILL was party to a credit agreement which provided for a $500.0 million revolving credit facility with an option to increase the initial borrowing capacity by up to an additional $250.0 million. It also provided that up to $250.0 million be available for the issuance of letters of credit to support various trade activities. At December 31, 2010, issued
F-17
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(10) Line of Credit and Long-term Debt (Continued)
and outstanding letters of credit of $89.4 million were reserved against the borrowing base of the Credit Agreement, compared to $78.4 million at December 31, 2009.
The Credit Agreement contains customary representations and warranties and conditions to borrowing. The Credit Agreement also includes customary affirmative and negative covenants, including covenants that limit or restrict CH2M HILL's and its subsidiaries' ability to incur indebtedness and other obligations, grant liens to secure their obligations, make investments, merge or consolidate, dispose of assets outside the ordinary course of business, enter into transactions with affiliates, and make certain kinds of payments, in each case subject to customary exceptions for a credit facility of this size and type. CH2M HILL is also required to comply with a minimum consolidated fixed charge coverage ratio and a maximum consolidated leverage ratio. As of December 31, 2010, CH2M HILL was in compliance with the covenants required by the Credit Agreement.
CH2M HILL's nonrecourse and other long-term debt, as of December 31 consist of the following:
($ in thousands) |
2010 | 2009 | ||||||
---|---|---|---|---|---|---|---|---|
Nonrecourse: |
||||||||
Mortgage payable in monthly installments to July 2020, secured by real estate, rents and leases. The note bears interest at 5.35% |
$ | 12,430 | $ | 13,379 | ||||
Mortgage payable in monthly installments to December 2015, secured by real estate. The note bears interest at 6.59% |
2,823 | 3,293 | ||||||
|
15,253 | 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% |
22,227 | 35,572 | ||||||
Shareholder notes payable |
141 | 95 | ||||||
Total debt |
37,621 | 52,339 | ||||||
Less current portion of debt |
13,934 | 14,396 | ||||||
Total long-term portion of debt |
$ | 23,687 | $ | 37,943 | ||||
At December 31, 2010, future principal payments on long-term debt are as follows (in thousands):
Year Ending:
|
|
|||
---|---|---|---|---|
2011 |
$ | 13,934 | ||
2012 |
10,382 | |||
2013 |
2,576 | |||
2014 |
2,047 | |||
2015 |
1,844 | |||
Thereafter |
6,838 | |||
|
$ | 37,621 | ||
F-18
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(11) Operating Lease Obligations
CH2M HILL has entered into certain noncancellable leases, which are being accounted for as operating leases. At December 31, 2010, future minimum lease payments are as follows (in thousands):
Year Ending:
|
|
|||
---|---|---|---|---|
2011 |
$ | 115,254 | ||
2012 |
99,680 | |||
2013 |
84,655 | |||
2014 |
69,375 | |||
2015 |
59,868 | |||
Thereafter |
102,592 | |||
|
$ | 531,424 | ||
Rental expense charged to operations was $126.7 million, $138.9 million and $121.2 million during the years ended December 31, 2010, 2009 and 2008, respectively, including amortization of a deferred gain of $4.3 million in the years ended December 31, 2010 and 2009, and 2008 related to the sale-leaseback of our corporate offices. Certain of CH2M HILL's operating leases contain provisions for a specific rent-free period. CH2M HILL accrues rental expense during the rent-free period based on total expected rent payments to be made over the life of the related lease.
(12) Income Taxes
Income before provision for income taxes for the years ended December 31 consists of the following:
($ in thousands) |
2010 | 2009 | 2008 | |||||||
---|---|---|---|---|---|---|---|---|---|---|
U.S. income |
$ | 102,047 | $ | 143,190 | $ | 55,891 | ||||
Foreign income |
45,452 | 6,972 | 3,662 | |||||||
Income before taxes |
$ | 147,499 | $ | 150,162 | $ | 59,553 | ||||
F-19
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(12) Income Taxes (Continued)
The provision for income taxes for the years ended December 31 consists of the following:
($ in thousands) |
2010 | 2009 | 2008 | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current income tax expense: |
|||||||||||||
Federal |
$ | 55,835 | $ | 49,035 | $ | 38,715 | |||||||
Foreign |
11,729 | 14,138 | (1,154 | ) | |||||||||
State and local |
10,939 | 12,653 | 14,725 | ||||||||||
Total current income tax expense |
78,503 | 75,826 | 52,286 | ||||||||||
Deferred income tax benefit: |
|||||||||||||
Federal |
(17,280 | ) | (23,291 | ) | (22,507 | ) | |||||||
Foreign |
(4,771 | ) | (2,646 | ) | 2,462 | ||||||||
State |
(2,648 | ) | (3,469 | ) | (4,744 | ) | |||||||
Total deferred income tax benefit |
(24,699 | ) | (29,406 | ) | (24,789 | ) | |||||||
Total income tax expense |
$ | 53,804 | $ | 46,420 | $ | 27,497 | |||||||
The reconciliations of income tax computed at the U.S. federal statutory tax rate to CH2M HILL's effective income tax rate for the years ended December 31 are as follows:
($ in thousands) |
2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Pretax income |
$ | 147,499 | $ | 150,162 | $ | 59,553 | |||||
Federal statutory rate |
35 | % | 35 | % | 35 | % | |||||
Expected tax expense |
51,625 | 52,556 | 20,844 | ||||||||
Reconciling items: |
|||||||||||
State income taxes, net of federal benefit |
5,640 | 7,763 | 5,620 | ||||||||
Nondeductible meals and entertainment |
3,082 | 3,035 | 3,563 | ||||||||
Section 199Domestic manufacturer deduction |
(3,686 | ) | (4,515 | ) | (2,737 | ) | |||||
Compensation |
(1,804 | ) | (6,114 | ) | 1,483 | ||||||
Subsidiary earnings |
(5,358 | ) | (7,520 | ) | (6,610 | ) | |||||
Permanent expenses, exclusions and credits |
2,108 | (6,660 | ) | (2,743 | ) | ||||||
Foreign permanent expenses, taxes, credits and other |
2,835 | 8,442 | 7,136 | ||||||||
Other |
(638 | ) | (567 | ) | 941 | ||||||
Provision for income taxes |
$ | 53,804 | $ | 46,420 | $ | 27,497 | |||||
F-20
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(12) Income Taxes (Continued)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31 are as follows:
($ in thousands) |
2010 | 2009 | |||||||
---|---|---|---|---|---|---|---|---|---|
Deferred tax assets: |
|||||||||
Net foreign operating loss carryforwards |
$ | 23,050 | $ | 23,143 | |||||
Deferred gain, insurance and other |
24,758 | 18,397 | |||||||
Accrued employee benefits |
180,055 | 176,586 | |||||||
Total deferred tax assets |
227,863 | 218,126 | |||||||
Valuation allowance |
(27,712 | ) | (26,019 | ) | |||||
Net deferred tax assets |
200,151 | 192,107 | |||||||
Deferred tax liabilities: |
|||||||||
Investments in affiliates |
2,871 | 6,192 | |||||||
Depreciation and amortization |
22,354 | 28,513 | |||||||
Net deferred tax liabilities |
25,225 | 34,705 | |||||||
Net deferred tax assets |
$ | 174,926 | $ | 157,402 | |||||
A valuation allowance is required to be established for those deferred tax assets where it is more likely than not that they will not be realized. The above valuation allowances relate primarily to operating loss carryforwards from foreign operations of $86.9 million and $77.4 million for the years ended December 31, 2010 and 2009, respectively. Taxable income within the applicable foreign subsidiary must be reported in order for the deferred tax asset to be realized. The foreign net operating losses can be carried forward for varying terms depending on the foreign jurisdiction between three years and an unlimited carry forward period.
Undistributed earnings of CH2M HILL's foreign subsidiaries amounted to approximately $75.3 million at December 31, 2010. These earnings are considered to be permanently reinvested. Accordingly, no provision for U.S. federal and state income taxes or foreign withholding taxes has been made. Upon distribution of those earnings, CH2M HILL would be subject to U.S. income taxes (subject to a reduction for foreign tax credits) and withholding taxes payable to the various foreign countries. If these earnings were repatriated as of December 31, 2010, approximately $16.3 million of income tax expense would be incurred.
The tax benefit from share-based compensation awards for the years ended December 31, 2010, 2009 and 2008 was $14.0 million, $6.4 million and $6.9 million, respectively. These amounts are reflected as additional paid-in capital in the consolidated statements of shareholders' equity and comprehensive income and are reported as financing activities in the 2010 and 2009 consolidated statements of cash flows.
F-21
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
(12) Income Taxes (Continued)
A reconciliation of the beginning and ending amount of uncertain tax positions as of December 31, 2010 is as follows (in thousands):
Balance at December 31, 2009 |
$ | 23,752 | ||
Additions for current year tax positions |
2,591 | |||
Additions for prior year tax positions |
3,882 | |||
Reductions for prior year tax positions |
(7,725 | ) | ||
Settlement with taxing authorities |
(777 | ) | ||
Reductions as a result of lapse of applicable statue of expirations |
(6,385 | ) | ||
Balance at December 31, 2010 |
$ | 15,338 | ||
CH2M HILL also recognizes interest and penalties related to uncertain tax positions in income tax expense. As of December 31, 2010 and 2009, CH2M HILL had approximately $3.0 million and $4.5 million, respectively, of accrued interest and penalties related to uncertain tax positions.
CH2M HILL files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, CH2M HILL is subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S. and Canada. With few exceptions, CH2M HILL is no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations by tax authorities in major tax jurisdictions for years before 2003.
(13) Earnings Per Share
Basic earnings per share (EPS) excludes the dilutive effect of common stock equivalents and is computed by dividing net income by the weighted-average number of common shares outstanding during the period. Diluted EPS includes the dilutive effect of common stock equivalents, which consists of stock options, and is computed using the weighted-average number of common shares and common stock equivalents outstanding during the period.
Reconciliations of basic and diluted EPS for the years ended December 31 are as follows:
($ in thousands) |
2010 | 2009 | 2008 | ||||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Numerator: |
|||||||||||
Net income attributable to CH2M HILL |
$ | 93,695 | $ | 103,742 | $ | 32,056 | |||||
Denominator: |
|||||||||||
Basic weighted-average common shares outstanding |
31,458 | 31,908 | 33,487 | ||||||||
Dilutive effect of common stock equivalents |
705 | 691 | 889 | ||||||||
Diluted adjusted weighted-average common shares outstanding, assuming conversion of common stock equivalents |
32,163 | 32,599 | 34,376 | ||||||||
Basic net income per common share |
$ | 2.98 | $ | 3.25 | $ | 0.96 | |||||
Diluted net income per common share |
$ | 2.91 | $ | 3.18 | $ | 0.93 | |||||
F-22
CH2M HILL COMPANIES, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)